According to the latest Gallup poll three quarters of Americans believe the economy is in a recession. It's no surprise respondents tell pollsters the economy has become the dominant political issue. How will the recession play out in the 2008 Presidential campaigns?
We are in the middle of an economic meltdown spurred by the bursting of the debt credit bubble. Speaking on the PBS New Hour noted financial reporter Jane Bryant Quinn described the situation as "the most significant financial crisis we've had since the 1930s." Financial writer David Leonhardt recently wrote, "The crisis isn't close to ending."
Why has the economy turned sour so rapidly? Most observers fault the mortgage credit bubble that saw financial institutions making questionable loans sub prime mortgages that resulted in their being saddled with vast portfolios of failed mortgages. (One in ten homeowners now have no equity in their homes.) As financial institutions began to report disappointing quarterly results, public confidence plummeted and some Wall Street institutions most notably, the venerable Bear Stearns brokerage firm began to fail. This led to a domino effect: confidence deteriorated, stock prices fell, and more firms were threatened. Recently, New York Times columnist Paul Krugman wrote that Wall Street is facing "a systemic market call," where "the whole financial system is facing demands to come up with cash it doesn't have."
There are four major players in this economic drama: the Federal Reserve Board, large financial institutions, the White House, and Congress. To its credit, the Federal Reserve Board has acted aggressively to stop the erosion of public confidence. They have lowered the discount rate to 2.25 percent, increased the money supply, and bailed out Bear Stearns. While these actions are laudable, the Fed is running out of options.
The financial markets have responded defensively. While the discount rate has fallen by more than 50 percent, the prime rate (5.25 percent) has not decreased as rapidly. And the rates paid by consumers mortgage (5.62 percent), automobile loan (7 percent), and credit card (12 percent) have remained stationary or, in some cases, increased. As a result, there has been a tightening of credit; it is now more difficult for small and medium-sized businesses to get loans. Therefore, consumer confidence has fallen, inflation has risen, and the total number of jobs in the economy has shrunk.
Sinking to new levels of incompetence, the President doesn't understand the gravity of the situation. In his March 14th speech at the New York Economic Club, Bush promised to veto legislation aimed at ameliorating the recession: "I'm deeply concerned about law and regulation that will make it harder for the markets to recover." His solution was for Congress to make his tax cuts permanent.
While there are many creative idea floating in the Democratically-controlled Congress such a relief for homeowners facing foreclosure most of these face Bush vetoes.
Given this situation a market paralyzed by fear, a Federal Reserve board with limited options, and a stalemate created by a witless Republican President blocking Congress what should we expect from the Presidential candidates?
The Republican candidate, John McCain, plans to run as the new, "improved" version of George Bush: I'll follow the same policies, but do a better job of implementing them. McCain doggedly pursues the failed Bush Iraq policy and plans to "deal" with the recession by cutting taxes and trusting the market to do the right thing.
McCain's intransigence is an opportunity for the Democratic presidential candidate, likely to be Senator Barack Obama. Obama should make three broad points: this recession is tied to the war in Iraq; the American public needs immediate assistance; and the President must represent all of the people.
Senator Obama must link the mind-boggling cost of the Iraq war to our current economic woes. According to Nobel-prize-winning economist Joseph Stiglitz: "The spending on Iraq was a hidden cause of the current credit crunch because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit." On March 20th , Obama made this connection, stating the $12 billion per month being expended on the Iraq campaign might better be spent on domestic programs.
His second point should state the obvious: main street needs help as much as Wall Street. Senator Obama has proposed a common-sense economic plan to buoy the confidence of average Americans: a plan that emphasize tax cuts for the working class, protection of homeowners, and massive investment in America's infrastructure.
The final and most critical component of an Obama alternative to the failed Bush-McCain policies is to instill confidence in the American people. Poll after poll has indicated Americans believe the US in headed in the wrong direction and don't approve of the President's handling of the economy Senator Obama, with his teamwork message, we're all in this together, can both instill confidence in Americans and motivate them to form the new consensus necessary to overcome our nation's daunting problems.