As American tangle with an accelerating economic downturn, scarily-volatile stock markets, and an array of bailout and other emergency programs, yet another pitfall has become apparent: Thereâ€™s no one at the helm of the economy or efforts to help it. President George W. Bush is nearly entirely absent, the Treasury Secretary cannot commit the nation to new policies, and now Congress has left the city to campaign. The two presidential candidates, including the next president, also cannot assert any authority even if either of them wanted to, since Congress is adjourned and the president couldnâ€™t respond to an Obama recommendation without undermining his partyâ€™s candidate, nor respond to a McCain proposal without reinforcing the Democratsâ€™ case that the two are in joined at the brain.
So, the economic crisis continues to worsen. The problems in housing, finance and now the overall economy arenâ€™t on recess, nor will they take hold their fire until the next president is inaugurated. In fact, more problems will emerge, both political and economic. For example, this week, three of the nine banks slated to get the first bag of cheap, federal bailout money reported very respectable third-quarter profits. Wells Fargo, State Street Bank and J.P. Morgan-Chase together earned $2.6 billion in profits for the quarter, even as they agreed to accept $25 billion each in new capital from American taxpayers. Of course, they agreed: The money will cost them 5 percent, or half of what Warren Buffet received for his $5 billion capital investment in Goldman Sachs last month, so now they can expand their business at a cut rate. The CEO of J.P. Morgan-Chase called his $25 billion injection a â€œgrowth opportunity.â€ But by what methods of accounting do they need emergency government assistance? And the deciders in the administration? The spokesman said, â€˜We are not here to make money off these companies,â€™ a view which I expect would draw attacks from most members of Congress if they were here, both campaigns, and the public. In fact, if interest rates rise before the banks pay back the capital, these loans to healthy, profitable banks will actually cost taxpayers plenty, since every cent of their $75 billion will be borrowed, and the recipients are paying below-market rates.
Presumably the Treasury has criteria for extending these bailout loans, but since there is no transparency and, with Congress gone, no one to call for it, we cannot know what they are. But can they be, if sound, profitable banks qualify? With a sinking economy sinking and millions of Americans facing unemployment and home foreclosures, is it the first priority of those in charge today to finance new growth opportunities for profitable banks? Is that their governmentâ€™s reward for their managing to avoid bankruptcy?
In fact, it looks like one of the final and morally corrupt acts of an administration that has introduced a big dose of Asian-style â€œcrony capitalismâ€ between the most senior of the White House and the Treasury, and Wall Street.
This is happening, in part, because in the midst of a genuine crisis, the United States finds itself nearly leaderless. British Prime Minister Gordon Brown and other European leaders this week called for a â€˜Bretton Woods IIâ€™ summit to redesign the global financial architecture. They want to meet within a few weeks to begin the figure out how the International Monetary Fund, World Bank and the Bank of International Settlements in this new era and, presumably, to discuss new terms for overseeing capital flow among countries. Who would speak and negotiate for the United States? Itâ€™s likely that Barack Obama will be the president-elect by the time they meet, but he wonâ€™t be the president, and therefore unable to exercise presidential authority. The man who will still be president, George W. Bush, with be utterly without domestic support or credibility in economic matters. He will have no way of selling a new international package to the American people or Congress. These kinds of issues arise during any presidential transition, but theyâ€™re especially acute this time, because we find ourselves in the middle of a cascading economic crisis that will not wait until next January.
Senators Obama and McCain need to prepare now. Both candidates should convene a group of trusted economic advisors to review all the options for dealing with the deteriorating housing market, the instability in our financial system, and the real economyâ€™s accelerating problems, without reference to the campaigns. This group should report its findings and recommendations to the president-elect on November 5, and he should present his recommendations to a lame-duck Congress that same week. Campaign operatives may assume we have until January, but the man who becomes president-elect must know that he will have to take action as soon as the votes are counted.
Our next blog will take us through what actions the president-elect ought to recommend.