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September 11 - 17, 2008
None of us have ever lived through an election at a time when 80 percent of voters think the country is headed in the wrong direction. But now that we’re in the thick of it, a few things are clear. From voters, the demand is: Surprise Me Most. For candidates, the lesson is: Weirdness Wins. Last winter, Barack Obama succeeded by running a weird campaign. He wasn’t just a normal politician aiming for office, he was going to cleanse the country of the babyboom culture war mentality. In his soaring speeches, he denounced the mores of both the Clinton and Bush eras and made an argument for unity and hope over endless partisan warfare. But over the course of the spring, Obama’s campaign got less weird. The crucial pivot came when he failed to seize on McCain’s offer to do a series of joint town-hall meetings across the country. Those meetings would have elevated the race and shown that Obama is willing to take risks in order to truly change the way things are done. Instead, Obama’s speeches became more conventional, more policy-specific and more orthodox. His Denver acceptance speech was different from his Iowa speeches. It was more traditionally antiRepublican and pro-Democratic. In the speech’s crucial contrast Obama declared: “It’s time for them to own their failure. It’s time for us to change America. You see, we Democrats have a very different measure of what constitutes progress in this country.” As David Broder noted, Obama’s speech “subordinated any talk of fundamental systemic change to a checklist of traditional Democratic programs.” It is easy to see why Obama might tack this way. Democrats have a huge advantage in a
straight-up issue contest. McCain is vulnerable on health care and the economy. But by campaigning in this traditional way, Obama ceded the weirdness edge to McCain. The old warrior jumped right in. Think about how weird last week was. The Republican convention was one long protest against the way the Republicans themselves have run Washington. McCain’s convention speech barely mentioned his own party. His vice presidential nominee came out of the blue and seems totally unlike the regular crowd of former eighth-grade class presidents who normally dominate public life. McCain’s campaign ideology, exemplified in a new ad released on Monday, is not familiar conservatism. It’s maverickism — against the entrenched powers and party orthodoxies. And it all worked. McCain got a huge postconvention bounce in the polls. Now the campaign has become a battle between two different definitions of change. The Obama camp has become the champion of policy change — after eight years of failed Bush-McCain policies, it is time for different, Democratic ones. The McCain campaign is the champion of systemic change — after two decades of bickering and selfdealing, its time to shake up the whole system in order to get things done. The Obama change is more responsible and specific, but it has all the weirdness of a Brookings Institution report. (Not that there’s anything wrong with that.) The McCain promise of change is comprehensive and vehement, though it’s hard to know how it would actually work in office. It will still be hard for McCain to win in this environment, but his emphasis on broad systemic change may appeal to swing voters. Independent voters do not believe the country’s problems can be solved merely by replacing Republicans with Democrats. They cast a pox on both houses. That’s why they’re independents.
WASHINGTON — The American people will have a clear choice in the Nov. 4 presidential election, now that both parties have picked their candidates. The choice is between Republican John McCain — once a “maverick” but now a conservative turncoat pandering to the evangelical right-wing of his party — and Democrat Barack Obama — a liberal and the first black person to win the presidential nomination of a major political party. McCain has, incredibly, tried to hijack O b a m a ’s slogan — “change.” This is an audacious McCain tactic that tries to separate him from President Bush, most of whose policies McCain has solidly supported for the past eight years. At last week’s Republican national convention, McCain departed from his previous practice of keeping silent about his excruciating POW experience during the Vietnam War in order to express his support for Bush’s duplicitous policies in conducting the war against Iraq. At this point, McCain has flip-flopped on so many issues, one wonders if he has any steadfast principles. I liked his impassioned statement that he hates war, but he is the militant hawk who said the Iraq War could last 100 years. And, of course, McCain has got to be kidding when he tries to portray himself as running against “Washington,” whatever that means. He has spent 26 years in the nation’s capital and has accrued a record that is hardly
unblemished. Now we come to McCain’s stunning selection of Alaska’s governor Sarah Palin, a vastly unprepared politician, to be his running mate. Her political views are to the far right. She supports the National Rifle Association, the teaching of creationism side-by-side with evolution, rejects women’s’ rights to reproductive choice, and promotes abstinence above sex education in schools. There is an official inquiry underway in Alaska looking into Palin’s drive to fire a state safety commissioner after he refused to fire her former brother-in-law, a state trooper who was in a messy custody fight with her sister. She also put pressure on a librarian in Wassila — where she was mayor — to censor some books, but happily the librarian stood her ground and refused to do so. The fact that 72-year-old McCain knew so little about Palin before selecting her for the Republican ticket calls into question his judgment. Palin would be a real amateur if she succeeded to the presidency, especially in foreign and domestic policies. McCain obviously thinks anyone can be president.So when McCain speak of “change,” it represents a giant step backwards. The Republican ticket offers no solutions to the Iraq war — the war without end. McCain, who once called Christian conservatives the “agents of intolerance,” truly made a strange choice for his running mate in view The new occupant of the White House — Obama or McCain — will face problems of rising unemployment and more expensive fuel, food, and health care. There is the Continued on Page 54
Save the home lenders, save the world? If only it were that simple. The just-announced federal takeover of Fannie Mae and Freddie Mac, the giant mortgage lenders, was certainly the right thing to do – and it was done fairly well, too. The plan will sustain institutions that play a crucial role in the economy, while holding down taxpayer costs by more or less cleaning out the stockholders. But Sunday’s action needs to be seen in a larger context – that of the attempt by the Federal Reserve and the Treasury Department to contain the fallout from the ongoing financial crisis. And that’s a fight the feds seem to be losing. There was indeed a bubble, and since it popped two years ago home prices have fallen faster than they did during the Great Depression. Falling home prices, in turn, have led to the muchfeared phenomenon of “debt deflation.” Yes, deflation: prices are going up at the checkout counter, but the prices of assets, which are what matter for balance sheets, are dropping fast. As the economist Irving Fisher observed way back in 1933, when highly indebted individuals and businesses get into financial trouble, they usually sell assets and use the proceeds to pay down their debt. What Fisher pointed out, however, was that such selloffs are self-defeating when everyone does it: if everyone tries to sell assets at the same time, the resulting plunge in market prices undermines debtors’ financial positions faster than debt can be paid off. So deflation in asset prices can turn into a vicious circle. And one consequence of what he called a “stampede to liquidate” is a severe economic slump. That’s what’s happening now, with debt deflation made especially ugly by the fact that key financial players are highly leveraged – their assets were mainly bought with borrowed money. As Paul McCulley of Pimco, the bond investor, put it in a recent essay titled “The Paradox of Deleveraging,” lately just about every financial institution has been trying to reduce its leverage – but the plunge in asset values has nonetheless left these institutions with more debt relative to their assets than before. And the numbers keep getting worse. In July 2007 Ben Bernanke suggested that subprime losses would be less than $100 billion. Well, last month write-downs by banks and other financial institutions passed the $500 billion mark – and the hits keep coming. Which brings us to Fannie and Freddie. They’re the only big financial institutions that haven’t joined in the rush to deleverage, which is why they now account for about 70 percent of new mortgage loans. But their financial foundations have been undermined by debt deflation, even though their lending was more responsible than average. (A subprime borrower is basically someone whose credit wasn’t good enough to qualify for a Fannie- or Freddie-backed mortgage.) So Fannie and Freddie had to be rescued – otherwise debt deflation would have gotten much worse. Indeed, their financial troubles have already caused problems for would-be home buyers: mortgage rates are up sharply since earlier this year. With the federal takeover, which removes the pressure on the lenders’ balance sheets, we should see mortgage rates drop again – which is definitely good news. But is it enough? I doubt it. The current U.S. financial crisis bears a strong resemblance to the crisis that hit Japan at the end of the 1980s, and led to a decade-long slump that worried many American economists, including both Bernanke and yours truly. We wondered whether the same thing could take place here – and economists at the Fed devised strategies that were supposed to prevent that from happening. Above all, the response to a Japantype financial crisis was supposed to involve a very aggressive combination of interest-rate cuts and fiscal stimulus, designed to prevent the crisis from spilling over into a major slump in the real economy. When the current crisis hit, Bernanke was indeed very aggressive about cutting interest rates and pushing funds into the private sector. But despite his cuts, credit became tighter, not easier. And the fiscal stimulus was both too small and poorly targeted, largely because the Bush administration refused to consider any measure that couldn’t be labeled a tax cut. As a result, as I suggested, the effort to contain the financial crisis seems to be failing. Asset prices are still falling, losses are still mounting, and the unemployment rate has just hit a five-year high. With each passing month, America is looking more and more Japanese. So yes, the Fannie-Freddie rescue was a good thing. But it takes place in the context of a broader economic struggle – a struggle we seem to be losing.