The Power Vacuum

In response to today’s Politico Arena question:

Is there a potentially disastrous economic policy power vacuum, as Paul Krugman suggests this morning? What can be done about it?

What’s disastrous is the lack of transparency in the Treasury Department as led my Hank Paulson. What confidence remained in his office evaporated when he announced recently that he had known “all along” that simply buying distressed assets wouldn’t help the current situation. This means that either he deceived the Congress and the American people when asking for the massive emergency bailout bill or that he was trying to cover for an error of judgment after the fact. Neither spurs confidence in Treasury’s operation.

The reality is that there is a perception issue that is gripping us all at the moment. I firmly believe that we’re nearing the bottom and, as I predicted in early October on Arena, the Dow will settle somewhere between 7000 and 7500. Meanwhile, fear has swept away any sense of logic in the pricing of securities and the perverse effects of tax laws and various mutual fund regulations can only serve to further distort the market picture. This isn’t to say that there aren’t true issues with the economy. Rather, people turn to leaders in times of challenge. The Bush administration has gone on permanent holiday and Obama is reluctant to fill the gap. One is left to hope that the market can simply take care of itself.

He Has Them Where He Wants Them

John McCain wasn’t kidding when he made that statement. The reality is that his campaign faces such certain doom that it would seem Obama has already been the president for several months. McCain is a specialist in rising like a phoenix at the least likely (and last possible) moment, and this is the perfect opportunity for his greatest performance. The elements are in place for such a stunning reversal of fortune to occur. This isn’t to say that it’s likely, just that it’s possible, which is in and of itself a feat given how far the conventional wisdom has gone to write him off at this point.

Two things must happen for McCain to pull out a squeaker. First, note that a stunning fourteen percent of voters remain persuadable at this late hour, only four days until the general election. You have to love the incredulosity of the Associated Press report that claims, “a stubborn wedge of people…somehow, are still making up their minds about who should be president.” After all, what could keep them away from Obama? It all comes down to money. When the economy looks a little bad, I believe that voters tend toward a more liberal philosophy to “fix it”. Yet when faced with a market selloff like the one hopefully just behind us, more of an every-man-for-himself mindset begins to set in. Given this newfound personal insulationism in the face of dwindling retirement accounts, voters are becoming more wary of what they perceive as the Obama threat of raising taxes. They feel they simply can’t afford to give up one more dime. The Obama campaign’s fuzziness on the high-end number for their redistributive tax credit doesn’t help because it leaves the middle-class receptive to McCain’s argument that their tax hikes will creep down the line, leaving tax credits only for those that barely pay taxes to begin with.

Secondly, the almost absolute assumption of Barack Obama’s inauguration on January 20, 2009 could potentially depress turnout on election day. Even though excitement seems high for the Obama ticket, if too many of his supporters figure that he will win by such a landslide that their vote is not required, we may see a stunning reversal from arguably accurate poll numbers to actual numbers at the poll. That, however, assumes strong turnout for McCain, which is a problem. But if enough undecideds swing toward the more conservative choice and enough Obama supporters simiply write off victory as inarguable, John McCain may yet find a way to pull off what would be, perhaps, the greatest upset in the history of the presidency.