Meltdown Politics

According to the latest Gallup poll three quarters of Americans believe the economy is in a recession. It's no surprise respondents tell pollsters the economy has become the dominant political issue. How will the recession play out in the 2008 presidential campaigns?

We are in the middle of an economic meltdown spurred by the bursting of the debt credit bubble. Speaking on the PBS News Hour, noted financial reporter Jane Bryant Quinn described the situation as "the most significant financial crisis we've had since the 1930s." Financial writer David Leonhardt recently wrote, "The crisis isn't close to ending."

Why has the economy turned sour so rapidly? Most observers fault the mortgage credit bubble that saw financial institutions making questionable loans -- sub prime mortgages -- that resulted in their being saddled with vast portfolios of failed mortgages. (One in ten homeowners now have no equity in their homes.) As financial institutions began to report disappointing quarterly results, public confidence plummeted and some Wall Street institutions -- most notably, the venerable Bear Stearns brokerage firm - began to fail. This led to a domino effect: confidence deteriorated, stock prices fell, and more firms were threatened. Recently, New York Times columnist Paul Krugman wrote that Wall Street is facing "a systemic market call," where "the whole financial system is facing demands to come up with cash it doesn't have."

There are four major players in this economic drama: the Federal Reserve Board, large financial institutions, the White House, and Congress. To its credit, the Federal Reserve Board has acted aggressively to stop the erosion of public confidence. They have lowered the discount rate to 2.25 percent, increased the money supply, and bailed out Bear Stearns. While these actions are laudable, the Fed is running out of options.

The financial markets have responded defensively. While the discount rate has fallen by more than 50 percent, the prime rate (5.25 percent) has not decreased as rapidly. And the rates paid by consumers -- mortgage (5.62 percent), automobile loan (7 percent), and credit card (12 percent) -- have remained stationary or, in some cases, increased. As a result, there has been a tightening of credit; it is now more difficult for small and medium-sized businesses to get loans. Therefore, consumer confidence has fallen, inflation has risen, and the total number of jobs in the economy has shrunk.

Sinking to new levels of incompetence, the president doesn't understand the gravity of the situation. In his March 14 speech at the New York Economic Club, Bush promised to veto legislation aimed at ameliorating the recession: "I'm deeply concerned about law and regulation that will make it harder for the markets to recover." His solution was for Congress to make his tax cuts permanent.

While there are many creative ideas floating in the Democratically-controlled Congress -- such as relief for homeowners facing foreclosure -- most of these face Bush vetoes.

Given this situation -- a market paralyzed by fear, a Federal Reserve board with limited options, and a stalemate created by a witless Republican president blocking Congress -- what should we expect from the presidential candidates?

The Republican candidate, John McCain, plans to run as the new, "improved" version of George Bush: I'll follow the same policies, but do a better job of implementing them. McCain doggedly pursues the failed Bush Iraq policy and plans to "deal" with the recession by cutting taxes and trusting the market to do the right thing.

McCain's intransigence is an opportunity for the Democratic presidential candidate, likely to be Senator Barack Obama. Obama should make three broad points: this recession is tied to the war in Iraq; the American public needs immediate assistance; and the president must represent all of the people.

Senator Obama must link the mind-boggling cost of the Iraq war to our current economic woes. According to Nobel-prize-winning economist Joseph Stiglitz: "The spending on Iraq was a hidden cause of the current credit crunch because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit." On March 20th , Obama made this connection, stating the $12 billion per month being expended on the Iraq campaign might better be spent on domestic programs.

His second point should state the obvious: main street needs help as much as Wall Street. Senator Obama has proposed a common-sense economic plan to buoy the confidence of average Americans: a plan that emphasize tax cuts for the working class, protection of homeowners, and massive investment in America's infrastructure.

The final and most critical component of an Obama alternative to the failed Bush-McCain policies is to instill confidence in the American people. Poll after poll has indicated Americans believe the US in headed in the wrong direction and don't approve of the President's handling of the economy. Senator Obama, with his teamwork message, we're all in this together, can both instill confidence in Americans and motivate them to form the new consensus necessary to overcome our nation's daunting problems.

Comments

[Sundialsvc4]

Bob, don't expect a "savior." All three hand-picked so-called "candidates" are basically running for the office of savior, but their own voting histories are public record at the Library of Congress web-site http://thomas.loc.gov. "By their fruits shall ye know them."

While you're surfing, read General "Ike" Eisenhower's prophetic words here: http://en.wikipedia.org/wiki/Military_industrial_complex.

This is the enemy that we face, and the leaders whom we would ask to save us are too busy suckling on that breast of "endless money" to hear us. (You do the math, and it comes down to about $96,000 per second, all of it "magically borrowed.") Life does not wait for you to figure it out, and other nations on this planet do have ways to divert your nation's wagon into the ditch so that you will present no further threat to them while they pursue their own ambitions. The notion of "Superpower" was born on Madison Avenue, and now let it die there. We have met our savior, and it is us alone.

[joebaggadonuts]

The American voter won't notice the economy is failing until it has put him out of a job, cost him his life savings if he has any, and his ear buddies on talk radio admit it too. Until then, Team White House telling him that the state of the economy is sound will determine his vote. Stay the course.

[MilwaukeeDan]

joe, I have been telling the people, for several years now, don't believe their numbers, DC is full of sh*t. David Walker( the resigned comptroller general of the USA) likened the USA to Rome before the fall of the empire, he has all the real numbers, we are headed for third world status, just "stay the course". When the sh*t hits the fan, our "government " will get on their private jets and leave, Dubai is waiting(with our billions).

[Sundialsvc4]

Joebaggadonuts, I have good news for you: that image of "the American voter" and pretty-much all of the other images you hear and see are propaganda. Crowd psychology. A way to convince a majority of a nation of more than 320 million you-and-me's that each one of us alone the pain while everyone around us is clueless. "The better to fleece you with, my dear."

Let us recall that the less-than-­a-thousand Senators and Congressmen and Executives and Justices who were derelict in their duties to the point of court-martial (expulsion, impeachment) ... are outnumbered more than 320,000 to one. Let us also recall that in our own childhoods we remember how it was much better: $35.00 WAS one ounce of real gold. That was (as I struggle to remind myself...) not that long ago. This mess is of our own making... of our own generation's own making... and this is not what we should be leaving to our kids. The industrial infrastructure is still there, merely slumbering. Producers and consumers should be hundreds of miles from each other not tens-of-thousands, and look, here's a railroad that still connects the two. I see R-E-A-L O-P-P-O-R-­T-U-N-I-T-­Y here. Why don't we all stop mewling, "kick the bastards out" (if impeachment is "off the table" then look in the wastebasket) and get busy making some REAL money?

[Novista]

To put the housing bubble in perspective, it started in 1998 and rose to 50% increase in median house price in only three years. Then, easy credit fueled the bubble to the point that median was 70% over the trendline.

Until the country admits that is the crux of the problem, no easy fixes are going to work.

Beyond that, the smoke & mirrors derivatives market will never make sense until some of those 'creative investment vehicles' start being unwound. Right now, no one trusts anyone else on the alleged value of their assets. The Fed now has possibly toxic paper in their paws. Unwind what they have, break out whole mortgages, sell them back to the originating banks, put that money in an escrow account on behalf of the CDO (or whatever) because that is the only way to find the good, the bad, and the ugly.

[WIpatriot]

I agree, Novista, that the solution is to actually roll up the sleeeves and unwind the mess. What is so hard about that? Oh, it's REAL work, and that's not what they do on Wall Street.

[SamThornton]

Bob, thanks for a piece that focuses on issues and policies instead of personalities. Would be interesting to have your take on the Clinton economic policies, as well.

[TinaFreeman]

An important point to remember is that the economy is bad and is practically guaranteed to get worse before November...the dollar is collapsing, and every time the Fed lowers rates it will become worse. The real estate market collapse has a long, long way to play out before it is done. And the effect of higher fuel costs will continue to push consumer prices up as higher costs push their way through the supply chain...Stagflation anyone?

[TinaFreeman]

This will give the Dems a strong case in the fall against the Bush failed economic policies, which McCain will be seen to perpetuate....I don't think they can find enough crazy preachers to override economic reality.

[IsaacKuo]

With Bush so unpopular, it's tempting to call these failed economic policies "Bush's" failed economic policies. But we've got to make sure that Americans understand that it's not JUST Bush's failed economic policies. These are core Republican economic policies. The Republicans are going to keep on repeating these same disastrous policies over and over again.

So we need to not just tie these failed policies to "Bush" while he's unpopular. We need to tie the whole Republican party to Bush's failed policies because the problem isn't just Bush. It's the entire Republican economic ideology.