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Giuliani Prescribes Free-Market Medicine for Subprime Ills

Presidential candidate Rudy Giuliani believes the free market forces can straighten out problems in the mortgage lending market. The former mayor of New York City offered his views on America's economy in an interview with CNBC's Larry Kudlow.

Subprime lending fallout is being felt in overseas markets and seems to have spread to the jumbo mortgage loan area. But Giuliani said that direct bailouts of some now-struggling lenders and borrowers would be a mistake.

"I would do basically what the president did: I'd look at the fundamentals of the economy. And the fundamentals, at least most of them, are very strong," Giuliani said.

"This is something that the market has to straighten out -- and it will," he said.

Giuliani explained his guiding principal: "The market means taking responsibility for the decisions you make. If you invest in something risky, you get a greater return -- so there's a greater risk. Everyone knew that subprime was risky going in."

The former prosecutor and current principal at Bracewell & Giuliani warned legislators not to "succumb to the temptation to manipulate [the mortgage sector] too much, to bail it out. Let the market straighten it out."

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As to the theory that "Main Street" will buoy up Wall Street via consumer investment, Giuliani recommends voters "look into Congress making the Bush tax cuts permanent. And look, two, three years ahead, to more tax cuts -- maybe the death tax."

Huckabee's "Fair Tax" Initiative

Rival GOP presidential candidate Mike Huckabee, former governor of Arkansas, also joined CNBC to discuss his idea for a national sales tax, the so-called "Fair Tax" initiative -- which would abolish all income taxes.

Taxing "any type of earning" only "penalizes" the U.S., Huckabee says. "We essentially say that if you work hard, take risk, we're going to make you sorry you did it."

Huckabee's plan involves a nationwide, 23 percent sales tax on all items purchased new.

"It scares some people, until you realize you'd go to purchase these items with a full paycheck," he pointed out.

"Plus, best of all, it'd take care of the underground economy: (Illegal aliens), drug dealers, pimps, prostitutes, gamblers would all be paying the tax," he said.

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