I should note that I'm not a professional nor an expert in economics. However, experts and professionals haven't been doing so hot lately.. so here are my layman's 2 cents anyway...
In early 2008 we've reached a perfect storm of awful financial conditions, both self-created and imposed, prompting talk of a new "Great Depression". While I think that certain people can and will tend to exaggerate this, I don't think its unfair to say that the U.S. really has found itself in a terrible mess financially.
The major influences for the downturn are well known: energy prices, credit and real estate bubbles (collectively the debt bubble,) and public expenditure (social and military expenditure primarily.)
"You can never underestimate the stupidity of the general public." Scott Adams
There absolutely has been discussion of these financial influences in the media, but sadly it has been myopic, and the public (perhaps with good reason,) is treated as if it has A.D.D.
Yes, Gas is expensive because India and China are demanding more oil, the oil producing areas are generally seeing more unstable security situations, and our refining capability has not expanded as much as it could. Does that explain the 400% increase in oil cost in 5 years? Not exactly.
A little known fact is that the U.S. is slowly becoming nationalized... some might say this is a good thing, but sadly the governments doing this are not our own. There are these entities known as Sovereign Wealth Funds, mostly created in the beginning of this century, which have large amounts of excess wealth to invest (trillions of dollars,) in either the stock or commodities markets.
In addition to the pretty disturbing knowledge that Abu Dhabi owns a good sized chunk of America, its been estimated that as much as $30 of the $110/barrel cost of oil comes from non-consumer futures trading, and the bulk of that from these sovereign wealth funds. There is no way to know exactly the scale of their involvement in commodities trading, since they do not have the same reporting requirements a publicly traded company has, however, there are only so many avenues for investment and in large part, stocks are a more risky venture these days.
"There are many methods for predicting the future. For example, you can read horoscopes, tea leaves, tarot cards, or crystal balls. Collectively, these methods are known as "nutty methods." Or you can put well-researched facts into sophisticated computer models, more commonly referred to as "a complete waste of time." Scott Adams
At around the same time that many of these S.W.F's were formed, financial institutions developed Collateralized Debt Obligations. In essence these are public, corporate or consumer debt packaged into a structured credit product... that is, something that can be traded. The markets desire for these products has grown, from a desire to profit from the consumer credit boom in the late 90's to almost present. These are virtualized assets: not a commodity market dealing in a tangible consumable or a stock based on an actual company, but a product based on one or more promises to repay a debt over a period of time.
These virtual products, as has been demonstrated, are exceptionally susceptible to market emotion, rather than actual tangible results. While sub-prime loans only comprise a small percentage of the mortgage backed CDO market, a large increase in foreclosures in sub-prime loans caused a systematic and catastrophic loss of confidence and thus a collapse in value of much of the larger CDO market. This crisis was partially one of the banks own making... in 2006, 61% of all borrowers receiving sub-prime loans had credit scores high enough to qualify for regular prime loans, which are more securely (although not entirely securely) backed.
"If a job's worth doing, it's too hard." Scott Adams
So.. what does this have to do with the upcoming presidential election? Plenty.
Ubiquitous consumer debt is probably the single largest cause of the problems we face, and ultimately tighter access to credit is the solution. This means it will be tougher getting the bigger car or the bigger TV. The U.S. in general is a prosperous nation and we will probably survive, with a few less bells and whistles.
Its been said that the best economic condition is a completely free trading market... Government regulation is the enemy of the consumer. While this is mostly true, where corporations can be immoral, the result is almost uniformly bad for the consumer. Government regulation of loans and credit, specifically the necessary complete disclosure of all credit options and the cost boundaries of those options would have likely lessened the scope of the problem. I also think its important to investigate and thoughtfully regulate the credit card industry, which while not in a crisis at present, has many currently abusive practices and could quickly become a crisis for consumers, and collapse in the same way that companies heavily invested in sub-prime debt did.
Clearly McCain does not favor more government regulation or control (as well as favoring making the Bush tax cuts permanent.) Both Democratic candidates have mixed records and neither they nor Congress has yet done anything concrete to regulate the credit card industries that service more than 80% of the population. Obama did vote against a credit card interest cap, but has recently proposed an informational rating system for credit card consumers. Frankly, information is good but not enough where credit cards are concerned. There needs to be a baseline of behavior by credit card companies to avoid the most abusive practices. Would this mean less access to credit or slightly higher credit rates? Probably, but probably appropriate also.
The last 800 pound gorilla in the room is Iraq. From a pure financial cost perspective $12B a month, and trillions... perhaps as much as $3 trillion when all is said and done. This clearly has a massive negative pull on the U.S. economy. Both Democratic candidates have proposed a Green "New Deal".
This would be conceptually similar, although functionally different... firstly, it would be a reallocation of the military funding rather than pure deficit borrowing... provided the candidates were serious about getting out of Iraq, and secondly creating a new energy independence industry would keep wealth inside the U.S. which has significant effects both on REAL G.D.P. growth and currency strength, as well as hopefully resulting in cheaper energy for all.
It REALLY is (about) the economy, stupid. The Democratic candidates have every opportunity to beat the Republican candidate around the head with these issues... lets hope whoever it is doesn't screw it up.
UPDATE: Jeffersonian Democrat was confused by my reference to social expenditure... which I intended to infer the costs to the public of private medicine, both directly and as a government expense.
and I was off on the cost of the war by a factor of 1x10E9 Ooops. I should apply to the treasury.