Speaker of the House, Nanacy Pelosi, should have taken the opportunity of the vote yesterday to sound grand-eloquent and all embracing. Instead she ceded both political and strategic ground by taking a side shot at the Administration, the Congressional Republicans and the Republican Party. This was a mistake.
Patently, the Republicans were to blame for the failure of the vote. This is both clear from the breakdown of command of their own party that defied their party lines as well as by the ideological reservation of those that did so. The fact that two thirds of the Democratic Party voted for the bill should have cleared the way for the Democrats to label the Republicans as the ‘wreckers’ of the package.
Instead of this clear cut clarity (that the voters like) Pelosi’s words were enough to muddy the waters. Against charges leveled against the Congressional Republicans, the Republican Party through Rudolf Giuliani and others could point to these very public utterances that it was out of synchronization with at least the spirit of the bill. The worst thing is that her words clearly had no affect i.e. they were not the main driver of the ‘nay’ vote. But it was a pure gift of political capital to the Republicans who can now claim a) to have supported the survival package b) to have rejected unnecessary expense to the tax payer and c) to have attempted to act in a bipartisan manner. The Republicans must be grateful to Nancy Pelosi.
Lawmakers will pay a steep price for the rejection of the bailout package. The financial crisis will now spread throughout the economy and the world, testing even the greatest believers in the free markets. The central problem with the pure movement of the markets in the financial services sector, that economists have long known about, are the ‘externalities’ involved with the failure of a bank and other financial institutions. Failure of these institutions corrodes trust and thus exponentially affects the rest of the economy.
A bank multiplies the amount of money available in the economy by lending more than it receives. It can do this because the majority of people the majority of the time do not need their money. Although this may seem suspicious on an individual basis, without this process we would not have been able to build the society in which we live. Furthermore, even if there is a small decrease in this multiplication process the real economy will pay a big price.
There are other levers at the disposal of the Federal Reserve System as well as the Treasury. Interest rate policy, flooding of the market with treasurys and accommodation of the needs of banking institutions are just some ways of effectively doing the same thing as the bailout package. But no one should be under any illusion that the price will have to be paid one way or another for this systemic failure. This cannot be borne by the financial sector by itself unless we are to send the American economy back to the ice age. More or less it will have to be borne socially. The central bankers will have to try and mitigate the abandonment to which the politicians thought that they were entitled in tackling the problem facing the economy.
Yesterday evening saw a substantive and comprehensive debate. The emphasis was international affairs but the beginning was abruptly changed to include some coverage of the financial crisis engulfing the country. This was a subject that both were happy to give general and non-specific answers to – not wanting to touch such a live issue they dug deep on their respective record on retrenchments in public spending.
This debate, the subject of which was foreign affairs, was always considered McCain happy hunting ground. And he sure commanded the territory, he barrickaded Obama with history lessons, his own longevity in public office, his military expertise, and the names of obscure dictators the world over. As a learned professor teaching his student who has not done the set reading he explained Ronald Reagan’s response to the Soviet Union as well as critiquing the sainted President’s Lebanon policy.
Under such a comprehensive bombardment Obama held up well. He agreed with McCain just enough, drew clear water between their policies just enough and looked professional enough. The foreign policy of the United States, which is so important to outsiders and even an increasing number of US after 9/11, is not going to be the basis on which this election is won. Maybe foreign policy is a sine qua non of being a President, but it is not the ultimate test.
The spirit of bipartisanship has loomed over these elections like few in recent history. Both Obama and McCain have good bipartisan credentials that set them apart from the ‘typical’ products of their party system. Both are independent and have the strength of conviction to go against received wisdom if they think their course of action serves the people better.
There has, however, been a disturbing tendency in recent days for Obama to let his coterie of advisors do the attacking of the opponent for him. As a result news stories brim with sources from the ‘Obama camp’ or ‘spokesman for Obama’ ripping into his opponent in a way that he would never do. This kind of doublespeak, or posturing, is to be expected in modern 24 hour politics. Nevertheless, bipartisanship should not be a pure act, candidates should stand openly and in a straightforward manner for their beliefs and their convictions. More importantly there should be as little difference between what is said and what is done. If the dichotomy between the two gets too large honesty and integrity of the political process will be sullied in the minds of the voters. This is turn means that the candidates will take more than they give from the democratic tradition that has made America great.
The bailout package should be called a survival package. Without it the Federal Reserve system will have limited power to contain the toxic effect of the subprime bubble. By all accounts this pile of instruments is sitting on the books of financial institutions valued at approximately $1.2 trillion. The amount that has been asked for by Hank Paulson is therefore about 58% of the total outstanding. The amount that is authorized is almost as important as the spending of the money itself, indeed, if the market believes that this money might be used it might not have to be used at all. It is, like all of the capital markets an issue of trust, confidence and a measure of risk.
Why bail out these greedy institutions? Because as if the amount outstanding of $1.2 trillion is not a large enough amount, these institutions have multiplied this figure as a normal function of their job. Leaving aside whether they multiplied this by a figure that was too large in a time of plenty, the immediate eradication of this money in the economy would have an abrupt effect on economic activity and jobs. The dual effects of falling stock markets as well as the seizing up of the capital markets will choke off investment in firms, and this will lead to job losses. There is, therefore, no tension between capital and people or between Wall Street and Main Street. The real tension here is between the politicians who try to explain this to the people and those that want to act out partisan, divisive and class theatrics to the people of America. Let us hope that the former politicians prevail over the latter.
The prevarication and the politicking surrounding the bailout plan is hurting America. Politics is politics and there can be nothing more at stake than the White House in thirty nine days. But this plan must and should be bipartisan just as much as the problem that is now facing the United States know no political color.
McCain should be told in no uncertain terms to debate on Friday whatever the circumstances. Presidential debates have occurred in 1864 during the civil war and in 1944 during the Second World War. Therefore, there is no reason that the debate should not happen on Friday. There is no reason that during a tense and fierce debate the two candidates should not be able to make common cause on some of the key issues that face the economy. These do not have to be political issues unless the politicians want to make them so.
The Political Season that leads to the elections has started in earnest. On Friday we have the first Presidential debate between Obama and McCain. These duals more than anything have the chance to move the polls either way. It will be on the ability to maneuver and improvise that the American people will judge their future leader. In this media-centric world it will be on these small snap shots complete with all the idiosyncrasies that they might throw up that the commentators and the people of America will pass their judgement.
Obama’s oratory and youthful looks would seemingly give him an impenetrable advantage. Yet the rugged style of McCain is more advantageous to this type of public speaking and debating. The real key to the contest will be who can ‘connect’ with the ordinary voters more. This is more of a feeling than a factual assessment. And the feeling must constitute at least three elements: Security in these troubled times, hope for the future in these uncertain times and ordinariness that eschews flattery. If McCain has the advantage in the first, then Obama holds the lead in the second and the third element is the most important one that is at stake in this debate series. It is this on which the election could well rely.
There is no choice to the recovery plan suggested by Hank Paulson Secretary of the Treasury. The political parties play games with this package at their peril. The price tag of the recovery package standing at $750 billion may seem like a staggering amount, and it may seem as if there is not enough political oversight but now is the time for swift and decisive action if this problem is to be contained. The political debate and the blame game can start in earnest once the situation has stabilized: Indeed, everyone recognizes that there will be more oversight and regulation of the financial services sector hereafter.
But that debate must happen after the brittle fabric of trust in the market has been at least partially mended. The very fear that the package may not go through has let the S&P today drop by more than 3.5% (which constitutes an evaporation from the market of at least four times the cost of the package itself). ‘Political oversight’ of this critical, executive and professional recovery plan is a dangerous thing as it slows down the speed that is required for this operation and it is precisely at this point that special interests and lobbyists climb aboard. It should be remembered that Democratic chairman of the house services committee, Barney Frank, who has been the loudest critic of the plan as it stands has not only been one of the great apologists for Freddie Mac and Fannie Mae, but has presided over the predictable demise of these monsters. The Presidential candidates for their own benefit as well as that of America should side step this issue rather than turn it into a political football. They can start to clean up Washington or change the way it works by signaling that they support this package and thus allowing the Treasury a free hand in cleaning up the financial services sector as they see fit. This is not undemocratic this is a democracy rising to the challenge in the face of a crisis.
Let us all hope that the package of measures proposed by Hank Paulson the Treasury Secretary brings to an end the turbulence and the uncertainty in the markets. The reassurance that the Treasury is going to take proactive measures to protect the fabric and basis of capital markets in America is heartening not only for the financial institutions at stake but also for the wider public: Anyone holding a 401(k) is immediately affected and anyone else in the economy will be effected sooner or later by what is happening now.
Hopefully the financial services industry will have ‘boxed in’ this problem by the time this Treasury guarantee filters through. Although this has been a traumatic two weeks the fact that there is an active response solves two problems. The first problem that this solves is trying to remedy the source of the problem before it infects business levels, jobs and the wider economy, the second is that action is being seen to be taken. This second point cannot be underestimated in the political arena.
The fact the a quasi ‘Resolution Trust’ has been resurrected will give the chance to the financial services sector and the regulator to sort out its own industry. If this fails the resolution of this problem will be the responsibility of the politicians, who, by definition are amateurs. Hopefully this will mean that neither Presidential candidate will have anything left to propose by the time they come up for election in November and even less when they are sworn into office at the beginning of next year.
The Pragmatist versus the idealist. Both are important to America’s self-perception, and both battle with each other in the American’s internal psyche. Americans like the heroism of idealism but they also cherish the security of pragmatism. More than any other candidates in recent history the two presidential candidates have come to personify each of these two traits.
In many ways these are the apex of both the liberal and the conservative traditions. The former will typically offer hope (with charges of hypocrisy and double standards) and the later will offer gentle amelioration (with charges of not being active enough or ambitious enough). In this way this election is a great deal more profound than many people think. Historically in times of trouble people are drawn to the security offered by pragmatism and in times plenty can think a new. The current environment, with the devastation on Wall Street and the bombing of the US embassy in Yemen does not bode well for Obama. On the other hand, perhaps McCain regrets publicizing his ignorance of economics. Only time will tell which recipe the American people believe will take them to a safe haven in these troubled times.
