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.
Treasury Secretary Hank Paulsen and Fed Chair Ben Bernanke, at the moment, appear the most credible and trustworthy figures at the center of the crisis, and more credible than either presidential candidate or his spokesperson.Showdown Coming in Debates
Quite soon, Obama-McCain and Biden-Palin nationally televised debates will take place. The present financial crisis, which clearly will carry over into October and beyond, will be Topic One in those debates — unless, before then, some massive terrorist attack or shooting war has seized center stage. The watching TV audience for these debates should be enormous.
Presidential debates normally reinforce supporters of the candidates. Unless one candidate makes a glaring glitch or mistake in a debate, few voters normally make their decisions on the basis of the debates. This time could be different. A relatively large number of independent and undecided voters are out there. A number of big electoral states could tip one way or another.
The nation could decide about the presidency on the basis of these debates. Obama has done well in previous debates, within the Democratic Party, and is at home with the TV medium. McCain, however, has shown himself a fighter and particularly convincing in person-to-person exchanges. Biden is more experienced than Palin, but from time to time, has made damaging foot-in-mouth errors. Palin has become a kind of populist hero but an obvious mistake by her, about a life-and-death issue, would not be forgiven by voters.State and Local Implications
The upside of the present crisis is that voters, at all levels, will be comparing the candidates on the basis of their seriousness and competence. They will be considering ballot measures more carefully than usual. If their own scarce dollars and, in many cases, jobs are at stake, Washington state and Puget Sound-area voters will take more time than usual to inform themselves.
Democrats have a huge registration edge locally and in the region. Yet, depending on how things unfold, Washington state could be in play in the presidential race — not an easy win for Democrats — and Republican gubernatorial challenger Dino Rossi could run more strongly than expected against Gov. Chris Gregoire. Gregoire, at state level, must carry many of the same burdens that President Bush is carrying at national level — except that Bush is not seeking reelection. In other words, the present political setting could give Republicans, statewide and locally, the same short-term edge that it is giving Democrats nationally.
It will be a lifetime until election day in November. Many financial and political surprises no doubt lie ahead. Let us hope that the financial surprises do not continue to be negative. No one wants a Dow at 700, and more financial institutions down, a month from now. Yet it is not unthinkable that such could be the case.