Obama, McCain, and the Credit Crisis

We join many others in closely following David Merkel's work on The Aleph Blog, one of our featured sites since its inception.  David covers a variety of interesting subjects.  He is authoritative on some and inquisitive on others, and he knows the difference.

Yesterday he cited a Bloomberg article pointing out the failure of candidates to speak out on the credit crisis.  Rich Miller writes as follows:

The U.S. is facing the worst financial crisis since the Depression. You would never know that from the Democrats' platform in Denver or its Republican counterpart, or from listening to Barack Obama or John McCain.

While both candidates have bemoaned the ravages of the subprime crisis, they have yet to spell out steps for tackling it, such as using taxpayer money to shore up banks and housing.

David's take on this (read the entire article) includes the following key observation:

Part of this is the Faustian bargain that politicians of both parties have regarding the economy.  They like to provide the illusion that their policies produce prosperity, and take credit for it, while being quiet when the economy is poor, unless they can blame it on the other party.

 

How to Win Elections

As we often do, we ask readers to try on the moccasins of someone else, a key skill in understanding the policy-making process.

Bloomberg.  The first thing to understand is the premise -- a crisis rivaling the Great Depression.  It is true that voters see the economy as a key issue and the focus is jobs.  Here is a great resource on polling data on this subject.  It is not true that voters recognize this as a depression-era issue.  Many voters have other perspectives as follows:

• Iraq, Afghanistan, and terrorism.  Earth to Bloomberg!  There is a war going on.  Many voters see this as crucial.
• There are many other issues which predominate in voter thought, including
  
  • Gasoline prices
  • Access to health care
  • Immigration
  • Reproductive rights or the right to life, depending upon viewpoint
  • The right to bear arms
  • Gender equality
  • Personal integrity and leadership qualities
• Few see, understand,  and agree with the credit relationship.  And they cannot be taught!

Merkel.  David wants leaders to lead.  He correctly believes that solutions to problems involve recognition and solutions.  What could be wrong with this?

• Candidates must deal with the reality of voter perceptions.  What resonates on Wall Street may not ring true with voters.
• Leadership requires power.  It is better wielded after one has been elected.
• Electoral politics is now reaching out to the least-informed voters, those who react to symbolism and attacks.
• Voters do not understand complex arguments -- especially those where reasonable people may disagree about cause and effect.

Our Take

We could find a number of "crisis" issues that are neglected, starting with the transfer of wealth and obligations from one generation to another.  Young people should care, but they do not see it.

Many years ago the "YoungProf" considered politics as a career.  The credentials were right -- grasp of issues, savvy, and compelling public speaking -- but the mission was wrong.  One must choose whether to make the compromises inherent in running for office or be an advisor, speaking truth to power.

If a Street expert had the job of advising a candidate, he would rapidly recognize a dilemma.  On the one hand, the candidate can try to identify issues and explain complex propositions, hoping that this message gets through.

On the other hand, the candidate, confident that he can best address the key issues after winning, does what is required to win.

For campaigns, it is an easy choice.  This is not Mr. Smith Goes to Washington, where Jimmy Stewart did not actually win an election.  It is more like the West Wing, where candidates are screened in Iowa by taking the "ethanol pledge."

And Finally

Many current officials reject the Bloomberg premise.  Some on Wall Street are trying to dictate public policy, with strong voices insisting that the public policy objectives of GSEs should be sacrificed, with a new emphasis on "private company" accounting standards.

The Street observers are gradually coming to the realization that public officials do not agree.  Several analysts now agree that the GSEs may not need additional capital, at least during 2008.  Lehman (LEH) joined Citi (C) and others taking this perspective:

Lehman's Harting expects Fannie to get through the difficult housing cycle with core capital remaining at or above the 15 percent excess capital requirement.

"In the event that conditions worsen beyond our forecast, the regulator could lower the excess requirement further, such that the minimum requirement again becomes the binding constraint," he said.

As usual, our point is not about who is correct on the merits.  We focus on understanding different perspectives and behavior.  We do not expect candidates to address this issue directly in the campaign.  Moreover, this should not be part of our assessment of their qualifications.

And finally, we do expect the current Administration to avoid a GSE bailout, especially one zeroing out shareholders, it that remains possible.

Disclosure: None

Comments

[whidbey:]

As is your custom too preachy and your conclusions are poorly documented. The GSE may or may not avoid a bail-out involving shareholder wipe-out. That is very much out of the hands of the candidates, or anyone else for that matter. It will turn on the liquidity in the markets and the credibility of the GSE managements. Both are not impressive and we do expect a GSE crash sometime later in the fall. Attempt to get real sometime soon.

2008 Aug 29 09:17 AM

[ArchDukeFer...:]

The common shareholders of FRE and FNM will not fail. Why? The FDIC has now explicitly guarantee the debt of FRE and FNM. The GSE managements can issue debt whenever a contingency requires it.

2008 Aug 29 09:30 AM