Emerson's famous aphorism about events being in the saddle and riding humankind was never more true than it has been this week. The complete and utter collapse of economic assumptions that have dominated the debate for the past 28 years has led to a careening from crisis to crisis in the management of our economy.
The idea that the Obama Administration (OA) will be able to engage in an orderly transition that leads to a tweaking of economic policy come January is as obsolete now as the Palin Phenomenon. As Nate Silver confirms, the race has flipped back in Obama's direction in the past few days. Since souffles do not rise twice, odds are very much against the race flipping back again. McCain's inability to coherently address the crisis and the growing public realization that Palin is utterly in over her head have moved the dynamic in the Dems' direction.
As the NYT notes, the latest events have caught McCain utterly flatfooted:
On Tuesday, Mr. McCain said he would oppose a federal bailout of the insurance giant American International Group, only to endorse it as unavoidable the next day when the Federal Reserve took over A.I.G. to prevent its losses from infecting other financial institutions. Also on Tuesday, Mr. McCain proposed a "9/11-style commission" to study the problem and recommend solutions for the long term, then switched Thursday to propose the creation of a government agency as soon as possible.
Mr. McCain’s call for a new trust to relieve troubled financial companies of their bad loans — much like the Resolution Trust Corporation, which was created after the savings and loan crisis of the late 1980s — dramatizes how far he has backtracked from a career as a deregulator who opposed bigger government. He made his proposal hours before the Treasury Department and the Federal Reserve disclosed that they were considering a similar approach.
It also appears, however, that Obama is still coming to grips w/ the breadth and the depth of the crisis:
Among those who have supported the creation of such an entity is Paul A. Volcker, a former Fed chairman. He is among a core group of Obama advisers on the financial crisis that includes Robert E. Rubin and Lawrence H. Summers, the former treasury secretaries, and Laura Tyson, an economic adviser in the administration of President Bill Clinton, all of whom are expected to meet with Mr. Obama on Friday in Miami. Aides to Mr. Obama said that he was open to the concept but that the protection of taxpayers was a critical detail yet to be worked out.
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In an example of the frenetic efforts by the Obama side to keep up, the candidate late Tuesday asked for a conference call with core advisers. Mr. Volcker answered his cellphone on a Manhattan street corner, Mr. Rubin called in minutes after landing in New York from London, and they joined others to discuss how Mr. Obama should react.
Obviously, no one foresaw the specific mechanisms of Lehman Bros and AIG collapsing in the same week on the heels of the Freddie/Fannie collapse. As wmtriallawyer noted yesterday, however, Wall Street's shaky condition was no more of a secret than the shaky condition of the levees in NOLA before Katrina. One of the most disturbing aspects of the past 8 years is that policymakers were continually caught flatfooted by events that could've been forseen.
One of my biggest hopes for an OA is that this tendency, which has wreaked havoc on the country (and on the rest of the planet), will be reversed. I'd like to think that an OA will be as proactive as it is reactive. The jury is currently very much out on that question.
In order to assert some control on events, an OA will have to assert some control on its own party. As Business Week notes, there is a public debate between Sen. Schumer and Rep. Frank on the scope of federal intervention in the financial markets:
Under Schumer's model, the government would give capital infusions or loans to banks in return for an equity stake, similar to the deal struck with insurance giant American International Group, Inc. earlier this week.
In return, the banks would lift objections to legislation allowing loan modification for homeowners in bankruptcy. Currently, a person in bankruptcy cannot renegotiate the terms of their mortgage, unlike other kinds of debt.
By offering his plan, Schumer is specifically opposing another proposal being eyed by powerful members of Congress. House Financial Services Committee Chairman Barney Frank, D-Mass., said Wednesday such an entity might be needed in coming months to stabilize markets and prevent more implosions at major financial institutions.
"There have been a series of ad hoc interventions that have not worked," Frank said. "Has the private market made so many mistakes and burdened itself with so much bad paper that there needs to be some public intervention?"
While the ongoing ad hoc efforts are clearly better than no effort at all, they are utterly inadequate to address the deep structural inadequacies of our financial system. The lack of opacity, the greed and the opportunism, and the lack of accountability need to be addressed in any long-term approach. The addict has hit rock bottom, and the causes of the addiction must be treated, not just the symptoms.
The Dems, as a party, need to be moving towards a consensus on economic matters. A form of lemon socialism where Uncle Sam bails out those financial institutions that are deemed to be "too big to fail" on a case by case basis should not be a part of that consensus. If such a consensus is to be achieved, the top of the party ticket should exert every effort in order to achieve it.
A quick scanning of the Obama website appears to indicate that events have overtaken his prior economic plan. The site's claim that the Glass-Steagall firewall between investment banking and commercial banking was "increasingly inefficient" should now be reconsidered. While there is no indication that Sen. Obama, unlike Sens. Schumer, Edwards, and Dodd, ever supported Gramm-Leach-Bliley, it is still unclear whether Obama recognizes the true extent of the harm that that bill caused. While the suggestions offered are all good ones, they are probably now inadequate given the epochal events of this week.
I retain my confidence that Obama will win this election and that he will win it by a decent margin. I hope that I will be able to have similar confidence in the OA to deal w/ a financial crisis that will dwarf anything inherited by any POTUS since FDR.