Monday, October 06, 2008

What lessened impact of bailout and Palin

Business Times - 07 Oct 2008

Bill's passage, vice-presidential debate fail to affect economic and political realities

By LEON HADAR
WASHINGTON CORRESPONDENT

AFTER defeating the first financial rescue bill on Sept 29 and sending the stock market into a sharp fall, the US House of Representatives approved a modified version of the US$700 billion bailout package last Friday by a 92-vote margin, following a 'yes' vote for the plan by the Senate on Wednesday. And yet Wall Street didn't rally.

In fact, the Dow Jones Industrial Average ended down 157 points, or 1.5 per cent, to 10,325 at the end of the day, following the news that Congress had approved the bailout.

And after Republican vice-presidential candidate Sarah Palin had become the butt of jokes following her disastrous performance on television news shows, the Alaska Governor didn't self-immolate during the televised vice-presidential debate on Thursday.

Some pundits even argued that she was poised and charming during her exchange with the Democratic vice-presidential candidate, Senator Joe Biden. And yet the Republican presidential ticket led by Senator John McCain has continued to sink in the polls after the debate.

In fact, Mr McCain decided to pull his campaign out of the battleground state of Michigan on Friday.

Indeed, as one of the most severe economic crises since the Great Depression of the 1930s intertwined with a historic and mesmerising US presidential race, neither the passage of the rescue package in Congress nor the outcome of the vice-presidential debate seemed to affect economic and political realities.

There are no indications that the American economy will stop its slump any time soon or that the McCain campaign can prevent the Democratic presidential candidate, Senator Barack Obama, from forging ahead in most of the key states where the election will be decided.

This situation reflects the way the game of expectation can affect both Wall Street and Washington - and the way the financial markets operate and the way the political games evolve.

The Sept 30 defeat of the rescue plan on Capitol Hill stunned the White House and the Democratic and Republican leadership on Capitol Hill and sent shock waves across the global financial markets.

Soon, however, government officials in Washington and investors in Wall Street recognised that much of what was taking place in Congress was nothing more than political posturing by lawmakers and that pressure on the dissenting Republicans and Democrats by struggling businesses in their districts combined with a few minor changes in the proposed legislation would create a favourable momentum for its passage by the end of the week.

Much of the opposition to the rescue package came from a group of conservative Republican lawmakers who opposed the legislation for ideological reasons, arguing that by constituting a government-backed financial plan to bail out irresponsible private investors, the plan violated their free-market principles. Joining them was a small group of left-leaning populist Democrats who were intent at punishing Wall Street.

At the same time, several Democratic and Republican lawmakers who were in the midst of difficult re-election campaigns were worried that if they vote in support of the unpopular bailout, they would be punished by angry voters in their districts.

But the stock market responded with a dramatic fall in all market indexes and reports from all around the country indicated that the credit markets were coming to a halt.

Lawmakers in Washington were bombarded with urgent cries for help from the owners of small businesses in their districts which reported that their credit lines were frozen and that they could not get the cash they needed to meet the demands of their clients and pay the wages of their employees.

In a week or two, they warned, some of them would have no choice but to start laying off workers and perhaps even consider declaring bankruptcy.

At the same time, lobbyists representing powerful business interests representing financial institutions, manufacturers, and car dealers, concerned about the credit squeeze, mounted a massive campaign to convince Congress to pass the bill.

The addition of several expensive business-tax breaks and increase in government insurance on bank deposits helped win approval in the Senate late on Wednesday and by the House of Representatives on Friday.

But investors in Wall Street were quite confident already on Tuesday that Congress would approve the plan to bail them out and they started factoring that expectation in their calculations. This explains why the Dow didn't experience another devastating plunge during the week.

In fact, by Friday Wall Street was already regarding a 'yes' vote in the House as a given, and instead was staring to react to the horrific news from the 'real' economy, after the latest employment report revealed the economy lost another 159,000 jobs in September, and 760,000 jobs in the entire year, a clear evidence that the economy was already in a recession.

Hence, the new expectation in Wall Street is that the economic recession would probably deepen with the shrinking of the manufacturing sector and more job losses, and that the bailout would have only a marginal effect on the economy and certainly not before the end of the year.

That explains in part why some investors are starting to sell shares of companies that are expected to lose earnings in the coming months.

And one of the regions with this trend of struggling manufacturing companies and rising jobs losses is the state of Michigan, where economic conditions are starting to resemble those of the Great Depression.

Huge lay-offs in the car industry that is already on the receiving end of government handouts, rising numbers of home foreclosures and major cuts in the spending by local governments have devastated urban areas across Michigan.

And voters in this state blame the economic policies of the Bush administration for their misery and identify the Republican presidential candidate with these economic policies, while the Democratic candidate is regarded as someone who is more likely to move them towards economic recovery.

That reality explains why the McCain campaign has decided to pull out of the state, admitting that their candidate won't be able to win its 17 electoral votes in November.

That reality also explains why Ms Palin's performance in the debate on Thursday has failed to shift momentum in the campaign in the direction of the Republican ticket.

In any case, the expectations from Ms Palin had been so low earlier in the week that her better-than-expected showing was not perceived as a game-changing victory. Indeed, opinion polls suggested that notwithstanding Ms Palin's 'folksy' demeanour, most of those who watched the debate, including undecided voters, thought that Mr Biden had won it.

Hence the outcome of the debate wasn't construed as a political victory for the Republicans. The only good news for them was that they hadn't suffered a devastating defeat on Thursday. So with the vice-presidential debate behind them, the Republicans recognise that the outcome of the race is going to depend on the way American voters perceive those who are on the top of the respective tickets - Mr McCain and Mr Obama.

And from that perspective, it's not surprising that the Republicans, not unlike the American economy, are in a very depressed mood, as many of them admit that there is not much they can do in the next four weeks to turn the momentum in their candidate's favour.

Indeed, most the national opinion polls point to a dramatic shift in the direction of Mr Obama who has a lead of more than 6 per cent over Mr McCain and is now leading in key states such as Florida, Ohio and Colorado, states that George W Bush won in the last election.

Mr Obama also seems to be gaining an edge over Mr McCain in Virginia, Missouri and North Carolina which have traditionally been regarded as red states.

But if the deteriorating economy has played into Mr Obama's hands, there is a possibility that an 'October Surprise' in the form of a national security crisis, such as a terrorist attack or a confrontation with Iran, could help Mr McCain who is seen by most Americans as having more foreign policy experience than Mr Obama.

The Republicans could also try to launch a major campaign of personal attack on the African-American Mr Obama by trying to convince white middle-class voters that the Democratic candidate was not 'one of us'.

It remains to be seen if such a strategy would work during these difficult economic times when most of these voters seem to blame wealthy Wall Street investors and their Republican allies in Washington, including Mr McCain - and not African-Americans - for their economic problems.


Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

On the election

Please read my new commentaries on the foreign policy debate between Obama and McCain and on the way the relationship between politics and media impact on Obama and Palin.