A Flight to Quality and Stability
The feds midwifed Bear Stearns' sale, with taxpayer exposure; took over Fannie Mae and Freddie Mac; and then took an 80 percent position in American International Group (AIG) after, in between, letting Lehman Brothers go into bankruptcy. As of this writing, Thursday morning, Sept. 18, it seemed certain that other major institutions, including Washington Mutual, would soon be sold or go into bankruptcy — but without further federal backing. Meantime, the Federal Reserve and other central banks have pumped capital into the global financial system so that, quite literally, it will not run out of money. Financial stocks, predictably, have taken a dive.
The next big institutional step, at federal level, is likely to be the constitution of a new Resolution Trust Corporation, such as the one which gradually sold off the assets of failed S&Ls. But a new RTC, today, would face a far broader and more complicated mission. Some of the so-called assets in losers' portfolios will be hard to price and may have no value at all. The selloff task could take many years. Yet financial experts ranging from former Fed Chair Paul Volcker to congressional populists have endorsed the new RTC notion. There is no other big idea around.
By and large, an anxious nation is turning its eyes to look for Joe DiMaggio.
Political Leaders Being Tested
Normally, in a national election year, voters would be blaming any troubles on the incumbent administration and buying into the opposition party's presidential and congressional candidates.
Various surveys to date show Americans, indeed, expressing greater faith in Democrats than in Republicans in handling financial/economic issues. Yet Sens. Barack Obama and John McCain remain in a virtual dead heat in both the popular and electoral votes. And only a few more voters prefer Democratic congressional candidates, at this juncture, than prefer Republicans. Only a month ago, the Democratic advantage was far larger.
Obama's initial reaction to the financial crisis was, predictably, to lay blame on the Bush administration and the culture of greed it supposedly had encouraged. McCain, a notoriously angry guy, got angry — denouncing Wall Street greed and incompetence, calling for the firing of the SEC chairman, and then proposing a new national commission to analyze what happened and to recommend answers. Obama responded that he would not wait for any commission's investigation and recommendations but would act. But his initial proposals — middle-income tax cuts, a new economic stimulus package, and undefined new financial regulation — were not relevant, except for tighter regulation.
The rubber is hitting the road here. McCain, despite having gotten a bounce from Alaska Gov. Sarah Palin's addition to his ticket, must be having second thoughts about her choice. McCain, despite service as Senate Commerce Committee chair, admits to having limited understanding of financial/economic issues. Former Massachusetts Gov. Mitt Romney, by contrast, has long and solid knowledge of economics/finance and could credibly be addressing right now questions McCain and Palin are dodging in town-hall meetings. He, as a veep nominee, would be reassuring anxious voters about the Republican ticket's competence in handling such issues. Will McCain announce, soon, that Romney would be his Treasury Secretary — and send him on the stump to speak authoritatively about them?
Obama made a solid choice in selecting Sen. Joe Biden as his running mate, primarily because Biden brought long experience in foreign affairs, which Obama lacked. But Biden's knowledge of economics/finance is limited. As a Delaware senator, he has championed Delaware-headquartered financial and business entities and also has taken their campaign contributions. Obama, as it turns out, has received far more political money from financial houses than McCain — including big money from Fannie Mae and Lehman executives. (McCain, by contrast, has gotten more money from big oil than Obama). Bob Rubin, President Clinton's Treasury Secretary, who now supports Obama after earlier backing Sen. Hillary Clinton, deserves credit for his stewardship during the Clinton years. But Citigroup, which he now leads, has been a part of the mess-making which must now be sorted out.
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