With Breathless Speed, Events Slip From McCain

This morning's column was supposed to be called, "Two Dogs Chasing a Car." Envisioned as the third in a three-part series about the massive financial-market crisis, it would have laid out the three, equally unpalatable choices the next Administration would face in endeavoring to clean the whole thing up. Instead a short version will have to do. All but inconceivably, we have bigger fish to fry this morning.

Typically, when the financial sector of a modern, mixed economy starts to melt down in the wake of its own avarice (and note that this development is, more or less, typical), the central bank of that country responds by suffusing those markets with fresh liquidity. Indeed this has already happened, both here and in most of the other major industrialized nations of the world, over the past two days. But this move only reassures the stockholders and potential business investors of the world's capital markets that there will be sufficient credit for the next buyer out there to relieve them of the thing they are now deciding whether or not to buy--to bowdlerize a phrase, these moves only affect the "demand side" of the problem, by encouraging people to feel secure enough to go ahead with their demand.

On the "supply side" of the problem, which is also bowdlerized in this context, we have the institutions themselves, sunk up to their axles in suddenly worthless assets from the unraveling mortgage market and, in consequence, essentially if not actually broke. And unlike the issue of spurring renewed demand for financial assets from potential buyers, this problem is one that the central bank can't do anything about. This one needs government. And here is where the trouble comes in for our two friends, Mr. McCain and Mr. Obama--one of whom will find his jaws clamped firmly around the back bumper of this mess in about six and a half weeks.

Short of letting the whole thing run its course, the Federal Government must spend money bailing out these institutions--and the question is where, exactly, is that money going to come from. The massive deficits wrought by eight years of reckless tax cuts and intractable foreign vendetta have forced the treasury to rely ever more desperately on two principal creditors for our nation's public borrowing: The Social Security Trust, which is obligated by law to buy Treasuries with its transitory surplus, but which will begin making net withdrawals sometime early next year as simple demographics continue to ratchet the pressure, and the government of the People's Republic of China, which buys our treasury securities as a means of holding down its own currency value to artificially cheapen the prices of its exports to us, but which can only continue to do so as long as its own growth rate is sufficient to absorb the inflation that this practice would otherwise create over there.

Neither of these two buyers of our treasuries, you will perhaps have noticed, can actually be counted upon. Indeed neither of them will or even can continue to buy our treasuries for much longer. Faced with the disappearance of these two front-row bidders at the daily treasury auction, the government will have no choice but to lower the asking price for the bonds, which will have the effect of driving-up the interest expense of the bonds, since the payout at maturity is always fixed in advance. Once U.S. Government treasuries are paying a much higher interest rate, of course, their added security compared with other instruments will force those other instruments to re-price their own returns, in order to compete--and we could be looking very soon at an explosion in interest rates the likes of which would make the late 1970's look like a stroll through a Sunday School class.

Which brings us back to AIG: If the government of the United States can't politely and unceremoniously borrow the cost of the financial-sector, then the only three remaining choices are, (1) to raise the money by raising everyone's taxes -- not likely in an election cycle in which the two major candidates are competing to see who can give away more of the largest single swathe of public revenue, (2) to raise the money by cutting spending somewhere else -- which is neither popular nor entirely practicable, given how little of the federal budget remains discretionary, or (3) it can monetize the debt--in essence, pay the bill for the bailout by generating the money out of thin air on its basement photocopier, with all the evocative images of inter-war Germany that this notion might suggest. It's not difficult at all, after the week we've just had, to imagine a third-quarter of 2010 in which the unemployment rate in this country is 16% and the inflation rate is 18.5%. And if it happens, Lehman/Merrill/AIG will forever be remembered as the tipping-point.

Still want to be President?

Okay, so what if you do, and you're John McCain? Amazingly, your biggest problem isn't figuring out how to deal with this mess--or even how to take a coherent and credible position on the subject after years of agitating for less regulation--so much as to stop the hemorrhaging long enough that anyone can quell their laughter and actually hear what you're saying about it. To a professional economist like yours truly it's hard to imagine, but somehow the campaign of a major candidate for elective office has managed over the past six days to saddle itself with more pressing damage-control than would be suggested by the imminent self-destruction of the only mechanism that joins capital to industry. Somehow--somehow--the McCain team has gotten itself into deeper trouble than this.

If you're a regular reader of these columns than you already know most of the juiciest tidbits: from McCain's monumental gaffe about the fundamentals of our economy being strong, to the campaign's grudging admission of Sarah Palin's overt lie about having ever been to Iraq. There was the feeding frenzy on The View, the exposure of Palin's lie about her teleprompter, and the argument, so Orwellian that even low-information undecideds could see it as such--that the Vice Presidential nominee would no longer cooperate with the Troopergate investigation, on the gounds that the Republican-controlled Alaska State Legislature is running a a partisan witch-hunt against a Republican Governor. Words don't often escape me. They do, here.

You may also know about several other plum little bomblets going off in the background of McCain's week-at-George-McGovern's like so many Chinese firecrackers, though The Key Grip has been far too busy mulling the end of global civilization to write about them. You may know, for example, that campaign co-chair Carly Fiorina was quoted on Monday saying that she didn't think Sarah Palin was qualified to be the CEO of Hewlett Packard--a comment which didn't take long to hit the political news-ticker pages like a category-four hurricane, and which she later that afternoon tried to repair by clarifying that she didn't think McCain was qualified to be the CEO of Hewlett Packard, either. And coming from someone who'd lopped the top 30% from the share price of the company before finally being bought out by the Board of Directors, that's a damning statement indeed.

The campaign had no sooner promised to "disappear" Ms. Fiorina (and yes, that was their word for it), than McCain's senior economic advisor, Douglas Holtz-Eakin, was asked what for what accomplishments McCain should be credited in the area of economic policy, and Eakin, apparently channeling Al Gore, held up his Blackberry and said,

"He did this. Telecommunications of the United States is a premier innovation in the past 15 years -- comes right through the Commerce Committee -- so you're looking at the miracle John McCain helped create, and that's what he did."

And if that story didn't break like a tsunami over the political news ticker-sites, it certainly had plenty of traction on the late-night talk circuit, where everyone from Jon Stewart to Jay Leno and back again made mincemeat of the campaign for such a ridiculous assertion. Truly I could go on and on: from the contradictions on fundraising to the spectacle of every major media outlet turning McCain's advertising director into a punching bag over their shamelessly misleading ads, to the hacking of Palin's personal e-mail account (and her possibly criminal destruction of the files, shortly thereafter), to the sudden and aptly-timed quickening of Obama's air-war, things truly couldn't have gone much worse for Team Crankypants if their candidate had decided to skip the Christmas rush and have his stroke, early.

What you probably don't know is that the polls are moving with unusual swiftness to reflect this sea-change in the dynamic of the 2008 election. And friends, you're going to like hearing about it. The national tracking polls range from Obama +2 (Gallup) to Obama +4 (Survey USA, Quinnipiac, and ARG). Meanwhile states that haven't been competitive for weeks, or even months, are showing as dead heats: Obama and McCain are tied in Florida according to both CNN and ARG. McCain is five points up or less in Missouri, between Rassmussen and Survey USA. Montana is a statistical tie. Obama is ahead in Virginia. And, most surprising of all, we have this stupefying result, fresh of the presses in the great state of Indiana, birthplace of the modern Ku Klux Klan, where according to the Indianapolis Star, Mr. Obama currently maintains a three-point lead. Oh and by the way, none of these are states that McCain can lose, and still be President. Not a single one of them.

In talking about something that unfolds in real-time, political analysts have long ago learned the valuable lesson of not over-reporting or over-spinning any particular moment in the drama. A week, as they say, is forever in this game--and boy haven't we learned that over the past week? But still this author believes that Mr. McCain's appearance on the View will mark a turning point from which the race may well recede dramatically and irretrievably from his grasp. The Steve Schmidt strategy, known and obvious to even casual observers of the contest, was to have and protect a lead, headed into the debates. McCain could claim victimization at the hands of pompous bullying by the loquaciously superior Obama, and an abiding press would indulge this half-truth by spinning their analysis the same way.

But an inferior debater can't claim victimization when he's the one throwing the Hail Mary passes on the stage. To win a debate from behind, you have to rock the hall with naked attacks designed to throw your opponent off-guard, and this kind of approach will rob McCain of his only oratory weapon--that of trying to be more like us, than the other guy. It could make for three or four very, very long nights in the lives of ardent Republicans from coast to coast. Indeed it could make for some unusually high ratings for the baseball playoffs.

My guess is that Senator Obama will be six or seven points up in the national tracking polls, and sitting comfortably on perhaps a twenty-five to thirty vote cushion in the electoral college, by the time these two characters take the stage for the first time. With all the pressure on the other guy, Mr. Obama will appear relaxed, comfortable inside his own skin, more "one of us" than he could ever have appeared in displaying his willingness to spar. My guess is that it will take an enormous gaffe or a major scandal--a "September surprise"--for Mr. McCain not to badly lose the debates for looking desperate and off-message.

My guess is that Mr. Obama is going to win this election.

Dave O'Gorman
("The Key Grip")
Gainesville, Florida