by Bill Stewart
Two weeks to go until the election, and we are either in the silly season or in desperate times. Both, I should think. The financial crisis has torpedoed Sen John McCain’s campaign, so he plays on the wilder shores of politics. First, he and Gov Sarah Palin accused Sen Barack Obama of “palling around” with William Ayers, a former domestic terrorist turned professor. When that didn’t work, the charges flew that Obama’s economic plans are “socialism,” so Americans beware. Both tactics were bad choices, as Obama continues to rise in the polls in the battleground states, especially in Virginia and North Carolina. McCain remains a victim of circumstance and his own bad judgment. His campaign still lacks a consistent theme. Moreover, he has been unlucky, and in politics that is often fatal.
On the other hand, Obama has been lucky. Neither he nor McCain has come up with an overall philosophical approach to what could become the world’s deepest recession in more than 60 years. But the financial crisis has played to Obama’s strengths, allowing him to concentrate on the economy, which was always going to be his strong suit. He should thank Dick Fuld, the former Lehman Brothers CEO, and Hank Paulson, the Secretary of the Treasury. Fuld failed to find a buyer for Lehman and Paulson failed to come to Lehman’s rescue. Lehman declared bankruptcy on September 15, transforming what had been a credit crunch into a world-wide financial crisis.
No matter who the Republican candidate would have been, he or she would have been in trouble. President Ronald Reagan laid out Republican economic orthodoxy in his first inaugural address: “Government is not the solution to our problems; government IS the problem.” Since then, Reagan’s words have been the Republican mantra, as much a fundamental belief as policy. Even President Bill Clinton bought into that view. That orthodoxy was shattered earlier this month when Secretary Paulson forced the country’s biggest banks to sell a significant stake to the government. The sale may be temporary, lasting only a few years, but the old orthodoxy is gone forever. The government now has a major stake in how the economy is regulated, reviving old memories of Franklin D. Roosevelt and the 1930s, when the government stepped in to revive the economy, making it a major partner of private industry and finance. Roosevelt’s actions were historic; so was Paulson’s, and there may be more to come.
President George W. Bush announced this week that in November Washington will host leaders of the world’s 20 leading economies to discuss the economic and financial crisis. The meeting will be held November 15, less than two weeks after the elections. Both McCain and Obama have welcomed the conference, but neither one has said whether as president-elect he will attend. The conference will be the first of several to discuss an overhaul of the rules, regulations and institutions that govern the world’s financial system.
These conferences may be the most important conference of their kind since the Bretton Woods conference that laid the groundwork for the world’s financial system after the end of World War 11. In 1944, 44 nations met in Bretton Woods, New Hampshire, under the auspices of the United Nations, to consider the stabilization of world currencies and the establishment of credit for international trade in the postwar world. Bretton Woods drew up plans for what became the International Bank for Reconstruction and Development and the International Monetary Fund, better known as the IMF. Both were parts of the World Bank, and both have been enormously important for more than 60 years. They were revolutionary at the time.
It is the Europeans who have been in the forefront of holding such a conference, just as they have been in the bank recapitalization program that Paulson reluctantly recognized as being more important in dealing with the current crisis than buying up toxic assets, his initial $700bn approach.
The old economic order is in crisis, just as it was in the 1930s. China already is feeling the pinch, which is not good news for the world-wide economy as China is the world’s newest economic powerhouse. If China falters, then a US recovery is all the more difficult. If we can’t buy their products, then they can’t buy our debt, which is what China has been doing for a number of years, helping to sustain our prosperity. We are each important to the other, which is why these upcoming conferences may be so important.
A crisis of this kind falls Sen Obama’s way. In March he laid out his views on greater and more coherent financial regulation. They were prescient. His views on taxation are more redistributive than those of Sen McCain’s. But then all taxes redistribute the wealth. The question becomes in which direction do we want to redistribute? Obama’s views are more in keeping with the times as we begin the most fundamental rewrite of the social contract since the Great Depression. This includes the beginning of near universal health care. The times call for vision and intellectual depth. Let’s hope we get both.