Election 2008: Who Will Get to Spend the $700 Billion?
[“Election 2008" is an ongoing Money Morning series that examines the investor implications of the presidential election campaign.]
By Martin Hutchinson
Contributing Editor
Money Morning
The market’s verdict on the $700 billion bailout was pretty clear: Stock prices started dropping the moment the bill was passed on Friday afternoon and continued to do so Monday, with the Dow Jones Industrial Average closing down 370 points for the day – after being down 800 points earlier that same day.
The economic effect is also pretty clear: Given that the bailout plan is being launched at a point when money is already tight – and that it pours $700 billion of our money into the most useless, toxic waste left over from the housing bubble – you can be certain that it will end up starving more-worthwhile potential investments of badly needed capital.
But the political impact is less clear, in both the short- and long-term periods.
For a start, it’s not clear to the electorate who is to blame for the financial debacle. The Democrat presidential nominee, U.S. Sen. Barack Obama, D-Ill., naturally blames the Bush administration and mysterious “deregulation” for the problem. Indeed, he has a particular deregulatory act in mind, the 1999 Gramm-Leach-Bliley Act, which ended the separation of commercial and investment banking – conveniently ex-Sen. Phil Gramm was an advisor to Republican presidential nominee, Sen. John McCain, R-Ariz. Add in conventional Democratic rhetoric about the “evils” of Wall Street (albeit toned down somewhat since so many Wall Street titans are Democratic supporters and have provided funding for Obama’s campaign) and you would think he had a pretty clear path to sail to achieve electoral victory. After all, if economic or political disaster occurs on the “other guy’s watch, it generally doesn’t take a rocket scientist to figure out a way to blame that “other guy” for what happened.
However, it’s not quite as simple as that, though you would think it was from the initial reactions of the McCain campaign. Blaming Wall Street greed gets Republicans nowhere, since Wall Streeters are popularly thought to be mostly Republican. And if there was regulating to be done, why didn’t the Republican administration do it? Thus, the populist comments by the Republican vice-presidential candidate, Alaska Gov. Sarah Palin, at the end of the vice-presidential debate last Thursday night amounted to a series of “own goals”— a soccer term for when a team forgets which end is which and boots the ball past its own goalkeeper.
There are two perfectly respectable things a Republican candidate can say in defense of the last eight years of economic management:
- First, much of the housing disaster was caused by the activities of Fannie Mae (FNM) and Freddie Mac (FRE), the two government-backed behemoths who should never have existed in a rational free-market economic system – and who were pushed into conservatorship by foreign governments [To read all about that, check out Money Morning’s special investigative report on how foreign bondholders pressured the federal government to make that move.]
- Second, much of the misbehavior on Wall Street – as well as the subsequent collapse – resulted from an excessively loose monetary policy by the U.S. Federal Reserve over a period of more than a decade – and the Fed, in case nobody noticed, is not a private-sector operation.
There were signs Monday that McCain was moving onto the attack on the subject of Fannie Mae and Freddie Mac. Obama, after all, was the Senate’s second-largest recipient of campaign funds provided by the executives of those organizations – topped only by Sen. Christopher J. Dodd, D-Conn., who chairs the Senate Banking, Housing, and Urban Affairs Committee, which oversees Fannie and Freddie. Further, McCain was a leader of the (rather feeble) Republican attempts in 2005 to rein them in, which Obama and other Democrats opposed. Indeed, back in 2004-2005, there are lots of good sound-bite quotes from the Democrats about what splendid organizations Fannie and Freddie were.
Regrettably, for the Republicans, the responsibility of Fannie and Freddie for the disasters on Wall Street, while substantial (the securitization market would probably not have got off the ground without them) is somewhat indirect. Even more directly linked is the responsibility of the Fed in inflating money supply and inflating bubble after bubble. No politician, except the eccentric Rep. Ron Paul, R-Tex., has gone after the Fed, and since neither McCain nor Palin can be classed as economic experts, it seems very unlikely that either of them will use the Fed’s misdeeds as a key election-talking point in the last month of the campaign.
Thus, Obama’s mantra of Wall Street greed and excessive deregulation will probably continue to register with voters in the next few weeks, and should maintain – or even increase – the lead Obama is showing in opinion polls. The $700 billion bailout, which appears (rightly) to be massively unpopular, will remain in the news as supervising staffers are appointed and the first purchases of loans are made, and will be blamed primarily on the administration that thought of it. Both candidates supported it, so any advantage between them will be minor. At this point, therefore, it is difficult to see how McCain can win on Nov. 4, unless some foreign policy crisis refocuses the electorate’s attention away from the economy.
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Obama elected on a platform similar to President Bill Clinton’s 1992 platform of free trade and middle class tax cuts would be relatively investor-friendly, as was Clinton himself. Moreover, Obama’s undoubted ability might help him take the right steps to clear up the current mess and move the economy back into growth mode. But Obama elected on a platform of bashing Wall Street, opposing global trade, raising taxes on the rich and re-regulating everything is a very different matter; if he really believed his own propaganda he would be a menace both to investors and the U.S. economy.
Fortunately, as with most politicians, it seems likely that what Obama says to get elected and what he will do in office bear little relation to each other. We will just have to wait and hope.
[Editor’s Note: Money Morning Contributing Editor Martin Hutchinson has personally interviewed the economic advisors for candidates McCain, Obama and Edwards, and very early on concluded that Obama and McCain would be the best candidates for investors. For a full report on the "presidential profit plays," please click here. The report is free of charge.]
News and Related Story Links:
- Money Morning Election Series:
Election 2008: A McCain Victory Won’t Mean Same Old Republican Story
- Money Morning Election Series:
Election 2008: Dawning of Democratic Convention Illuminates a Few Bright Spots For Investors. - Money Morning Election Series:
Election 2008: Obama or McCain – U.S. May Suffer Either Way. - Money Morning Election Series:
Election 2008: The Achilles’ Heel of Obamanomics. - Money Morning Election Series:
Election 2008: Why Poor Presidential Approval Ratings Make For Great Stock Markets. - Money Morning Election Series:
Election 2008: As Democratic Primary Hits a New Pinnacle Today, Obamanomics Emerges as Clear Front-Runner for Investors. - Money Morning Election Series:
The Six Profit Plays to Consider as “Super Tuesday” Plays Out. - Money Morning Special Investigative Report:
Foreign Bondholders – and not the U.S. Mortgage Market – Drove the Fannie/Freddie Bailout.
Comment by david whetsell on 8 October 2008:
You say ” Moreover, Obama’s undoubted ability might help him take the right steps to clear up the current mess and move the economy back into growth mode.”
The only thing that will clear this mess is let the market and financals crash. The economy will never grow again until factories are started back in this country. To do that the goverment would have to put heavy taraffs on imports. The jobs for the last 15 years were build on credit. The people spent like they never would have to pay it back. It was all done by credit. Now there is no credit as everyone doesn’t have a factory job so no one will go back to work to pay their credit cards,cars, homes and everything else they borrowed. We better start putting up factories witk the money thats left. The goverment should put the 700 billion for startups and not bailouts.
Comment by Roger Dapson on 8 October 2008:
Looks reasonable enough, except that you left out the fact the President Clinton started the process of granting home loans to people that can’t afford them.
The Democrats on the oversight committees who defended the process ,though completely brain dead, were merely following their leader.
Comment by robertsgt40 on 8 October 2008:
“Fed not a private sector operation”? How do you figure? It’s a private corporation for profit that doesn’t pay taxes and has never been audited. See Federal Reserve Act 1913
Comment by Monte Notton on 8 October 2008:
There is one word in Martins editorial that makes me question whether he is just another shill for the status quo. Ron Paul eccentric? I’ll accept purist, loner or a dozen other adjectives. Certainly even those of us who benefit from the grease that is the way things are have a dream (or nightmare) as to how things could be and should be “in a perfect world.” I’ll be watching you closely Martin …it is time to cull some of the voices I read every day whose input matches most of the markets in the current environment; that is effectively worthless.
Lock and load,
Monte Notton
Comment by Searcher on 8 October 2008:
“The economy will never grow again until factories are started back in this country. To do that the goverment would have to put heavy taraffs on imports.”
Really? Smoot-Hawley all over again? And the rest of our trading partners are going along? Death wish.
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Comment by Laisseraller on 9 October 2008:
Great Article! a new blog giving deeper meaning into the $700 billion bail out plan. http://got700billion.blogspot.com/
Comment by chris erickson on 9 October 2008:
Well lets just cut to the chase, we know that the deregulation started when Bush senior was president ; it was
kept going buy the congress & junior finished the job .. Yes
the bill that deregulated was signed when Clinton was in office so were a few others that started with Bush…
Now that congress has given away the only reasl chance they
had to fix this mess ( when they paniced with the first drop of
the markets ) instead of waiting to see how far it would go
they gave in …
Now if they realy want to fix it they still have a chance if they
would as it is said take the bull by the horns ( or if you like the bear on …
They need to let the banks know that if they want access to
the funds for the bail out & other monies from the fed & tresuary they first will have to make funds avilable to the
public & buissness which need them . not just come begging
at the door for a hand out saying I’m failing ; what do they
tell you if you ask for help & beg ….
Also the toxic debt as it is called if bought by the goverment
should be purchased just like WuMu was sold , or Bear Sterns.
not at stated face value……
Then congress should re-nationalize Fanni & freddi ; they started live as goverment agencies back with FDR….
Use them to lower instrest rates to 4.5 % fixed … Instead
of evicting people from their homes , keep them in them….
This would go a long way toward stabilizing the housing
market….
When I say lower the instrest rates , I mean do it for every body who owns a home , building or land that has a mortgage
on it ….
Now as far as the jobs here / production in factories . they
same rules / laws that apply to the auto indusrty can be
applied to that …. & if the goverment / congress would
eliminate a lot of tax breaks for , big oil ; farming & the like ;
green industries could/should be given them instead…
About the fed it started out as a goverment / private bank
which at least in its many lives has been bankrupted buy the
goverment .. It is now a quasi / semi private -goverment owned bank ..Which sometimes has too much power or
carries to much say over the economy & goverment….
But it tries to do what it was intended to…..just ask JP Morgan….
As far as who becomes president he is screwed by this econmy , if he raises taxes , he will slow it down ; if he cuts
them the goverment will not have any real money…..
A lot of this was also caused by spectuation , by lenders , wall street with their fancy securities they sold , people buying more house than they could aford ( but the banks/lenders told they they could aford it )…The goverment / congress/ president Bush stating on national TV to buy a house… So who really is at fault…
Lets just clean the mess up ; have the lenders discount the
loans the hold ; write down the value of the realestate ;
get congress & the press to sign off on it … Why not well
the banks/lenders & wall street or investers who hold these
enities are going to take ( one hell of a tax write off as it is
& not pay any taxes so what is a few dollars more to them )..
If you dont agree with me thats ok ; every one has a opion
& some place the sun doesn’t shine …. some body needs to
tell the bamks / holders of these enities & congress to get
their collective heads out of there …….
sincrely
.. chris
Comment by chris erickson on 9 October 2008:
I wrote A very concise note here yet is didn’t show up ; so I’ll make this short ; if the banks want money from the fed ; either they loan it out or they don’t get any ; any loans bought should be bought just like WaMu & Bear Sterns were
sold … Fannie & Freddi should be kept & used to lower instrest rates ( to 4.5% fixed on every loan their is for
real estate ) Make the holder of any enitiy / loan if they want a tax write off as they are sure to take write down all of the ones they hold … They aren’t going to pay any taxes as
it is…..as far as production / out sourced jobs treat it like
the auto industry …. eliminate tax credits for oil that is not produced here , the farm subsities get rid of… give these credits to the green industry that is going on in this country
not over seas ….& re instate all of the over site / rules that
Bush senior started to get rid of & junior finsihed the jod of
with help from congress & yes Clinton did sign the repeal in 1999 of the Gramm / Leach / Bliley act….
Get over it lets fix the f-in up… They banks & congress need
to get their heads out of where the sun doesn’t shine & ck
out the real world & help fix it before it falls on their heads..
They panicked & gave out the money & did it help ; no
because the markets weren’t done falling jet…. now were
close … let see if they can still get it right ; they have a little time left … before the year is out…
sincerly chris .
p/s this is 1/4 the size of the original
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Comment by North American Union on 13 October 2008:
It is health that is real wealth and not pieces of gold and silver.MohandasGandhiMohandas Gandhi
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Pingback by Government Won't Extend $700 Billion Bailout Plan to U.S. "Big Three" on 4 November 2008:
[...] But with the presidential election set for today (Tuesday), it’s unclear if some of the Bush Administration’s reluctance to add the auto industry to the bailout plan is part of a concern about setting a precedent that could open the door to other industries – further boosting the rescue plan’s ultimate cost – or if the administration is seeking to avoid making any decisions that could subsequently conflict with the goals of the incoming president. For instance, the Democratic nominee, U.S. Sen. Barack Obama, D-Ill., has said in recent days that he supports increasing aid to the troubled auto companies, while Republican hopeful John McCain, R-Ariz., has not said whether he would support auto-sector aid beyond the $25 billion, The Times reported. And, as Money Morning has reported, President George Bush realizes that some decisions about how the bailout will be administered will have to be left to the next president. [...]
Pingback by Jutia Group - Market Jitters & Political Critters on 4 November 2008:
[...] But with the presidential election set for today (Tuesday), it’s unclear if some of the Bush Administration’s reluctance to add the auto industry to the bailout plan is part of a concern about setting a precedent that could open the door to other industries – further boosting the rescue plan’s ultimate cost – or if the administration is seeking to avoid making any decisions that could subsequently conflict with the goals of the incoming president. For instance, the Democratic nominee, U.S. Sen. Barack Obama, D-Ill., has said in recent days that he supports increasing aid to the troubled auto companies, while Republican hopeful John McCain, R-Ariz., has not said whether he would support auto-sector aid beyond the $25 billion, The Times reported. And, as Money Morning has reported, President George Bush realizes that some decisions about how the bailout will be administered will have to be left to the next president. [...]
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