By Mort Kondracke
It’s sad that it’s taken a Wall Street meltdown to do it, but at last the presidential campaign is off trivialities — as in “lipstick on a pig” — and is focused on America’s dire economic problems.
It’s hard to believe the economic issue won’t favor Democratic Sen. Barack Obama (Ill.), especially if Wall Street’s turmoil spreads to Main Street, which seems inevitable.
A week ago, though, the Gallup Poll found that Obama’s lead over Sen. John McCain (R-Ariz.) on economic issues had narrowed from 19 points prior to the two national conventions to just 3 points.
The economy has been Issue No. 1 on the minds of voters for months, but the McCain campaign managed for two weeks — with some mistaken help from Obama — to divert national attention onto GOP vice presidential nominee Sarah Palin and whether she was being treated with the respect due a lady, tough lady though she is.
But this week, as newspapers printed World War III-sized headlines about the collapses of Merrill Lynch, Lehman Brothers and American International Group and the stock market fell more than 700 points, the candidates started talking seriously about the economy.
On the merits, Obama certainly can claim to have been addressing instability in the housing and financial markets long before McCain — on Sept. 17, 2007, in fact, when he spoke to Nasdaq and began calling for a modernized regulatory regime.
With some prescience, Obama declared that “markets can’t thrive without the trust of investors and the public. At the most basic level, capital markets work by steering capital to the place where it is most productive.”
“Without transparency, this can’t happen. If the information is flawed, if there is fraud, or if the risks facing financial institutions are not fully disclosed, people stop investing because they fear they are being had. When public trust is badly abused, it can bring financial markets to their knees.”
Obama’s argument was — and is — that the 1999 deregulation of financial markets, allowing investment banks, insurance companies and hedge funds to get into businesses formerly done by commercial banks, was not accompanied by a new government oversight regime, leading to excesses that brought on the subprime mortgage crisis and a worldwide drying-up of lending.
At that time, McCain was still declaring himself a “deregulator.” He only caught up on March 25 of this year, after the U.S. government brokered the takeover of Bear Stearns, and then his recommendations were general, at best.
Obama was far more detailed two days later in a speech at Cooper Union in New York, expanding at length on the regulatory principles he’d outlined six months before, especially government supervision of firms that require government rescue and enhanced transparency of complicated financial instruments.
This week, amid the meltdown, McCain made the mistake of declaring that “the fundamentals of our economy are sound” even as he said that “the economy is in crisis” — then scrambled to define “fundamentals” as the productivity of American workers and entrepreneurship of small business.
McCain also has reverted to his sometime role of Teddy Roosevelt-style reformer, trashing “greed” on Wall Street and “mismanagement” in Washington, which he vowed to fix.
His campaign adviser, former Hewlett-Packard CEO Carly Fiorina, specifically blamed the Securities and Exchange Commission and the Bush administration for being “asleep at the switch.”
Obama isn’t blaming McCain specifically for the crisis — even though he used to be chairman of the Senate Commerce Committee — but the Bush administration, its (pre-Treasury Secretary Henry Paulson) laissez-faire philosophy and “trickle-down economics,” which McCain also favors.
Neither candidate, though, is offering any brand new solutions to the crisis. Specifically, neither has taken up the proposal of former Federal Reserve Chairman Paul Volcker to create a huge, taxpayer-funded Resolution Trust Corp. to buy up dicey mortgage-backed securities — or, even mortgages — and restore confidence to financial markets.
Neither, either, has taken up the idea of investment guru David Smick, editor of International Economy magazine, for an international summit after the election where heads of state — and the president-elect — would pledge to keep international credit flowing.
Smick, author of the new book, “The World is Curved,” describes international credit as “the lifeblood of the world economy” and warns it’s in danger of shutting down because of collapsing confidence and the short-sightedness of central bankers other than U.S. Fed Chairman Ben Bernanke.
Significantly, even the free-market Wall Street Journal editorial page has endorsed Volcker’s RTC idea — evidence of true panic among conservatives that the financial system may yet crater.
It would be a massive government intervention into the economy, but it worked during the savings and loan crisis of the 1980s. Smick says, though, that unraveling toxic, hard-to-value securities will be harder than selling off S&L assets.
Even though combined high energy prices, sunken home values and the financial crisis have not caused the economy to go into an official recession — the growth rate last quarter was 3.3 percent — it seems likely that conditions will get worse.
Retail sales already are down, indicating that consumers have reached the limit of their borrowing capacity. A dry-up of credit will prevent small businesses from opening or investing, increasing unemployment. And smaller banks may fail if businesses and other borrowers go into default.
All this ought to benefit Obama, as the nominee of the party not in power. If it doesn’t, it will mean that there’s something fundamentally wrong with his candidacy — a failure to connect with average, “Main Street” voters who certainly are suffering from the mistakes of Wall Street and Pennsylvania Avenue.
Mort Kondracke is the Executive Editor of Roll Call, the newspaper of Capitol Hill since 1955. © 2007 Roll Call, Inc.