The Debate

So I apologize for not having a post up for a few days. Life has been a little hectic, but hopefully things will slow down just a tad in the near future.    

Last night featured the first of three presidential debates that are going to take place over the next several weeks (there will also be one vice presidential debate this coming Thursday). After some drama created by McCain stating that he may not attend the debate because of the need for him to be on the hill to get a compromise on the bail out bill, the debate itself went rather well for both candidates. The reason for this is that both candidates had different objectives coming into this debate and that made the result, in some ways, a non-zero sum game (i.e. that it was possible for both candidates to win and no one to lose).    

For Obama, success in the first debate was in accomplishing mainly four things: 1) being gaff free; 2) relaying that he is the candidate for change; 3) showing himself to be rational, level headed, and even keeled, while not coming across as aloof; and 4) portraying readiness to president. Obama clearly accomplished all four of these tasks by not getting frustrated when McCain made attacks and coolly refuting the claims made against him with well constructed, but simple, explanations. At no time last night did Obama become flustered and, in fact, many of his prepared responses and exchanges with McCain showed that he is deeply knowledgeable about key economic and foreign affairs issues. 

Obama's theme of the night seemed to be that we have had 8 years of impulsive executive leadership based on feelings and emotion. This leadership style lead us to the current crises we now face, and McCain embodies more of this style of leadership, while I (Obama) am collected, rational, and deliberate.    

As for McCain, success for him last night was also based on mainly accomplishing four things: 1) being gaff-free; 2) distancing himself from Bush on the economy and spending; 3) showing himself to be the candidate who could actually bring change to Washington; and 4) maintaining vigor and energy to assuage fears that his age is an issue. I think McCain pretty much accomplished all of his tasks as well. McCain drove home repeatedly that he is against spending and that he has a record to prove that he can reform Washington. His remarks were well animated  with a great deal of enthusiasm. 

In examining McCain's message of the night, it seemed to be that the voters should trust him on foreign affairs because he has been on the ground and he has surveyed the terrain on which we are going to fight, while Obama “doesn't get it” because he hasn't been there. This was an interesting attack strategy by McCain. I think it would have been very effective if Obama hadn't demonstrated each time that even though his feet may not have been on the ground, he had a very accurate picture of what needed to be done. However, I do think that this type of attack by McCain should play well with the Republican base, so I am sure we will see it used again and again.    

Thus, since both candidates accomplished what they set out to do, in some ways this debate was a win-win for both candidates. One thing to note is that unlike in recent past debates, such as Bush vs. Gore or Bush vs. Kerry, the candidates had to do a lot less to differentiate themselves on the economy and foreign affairs issues. Polls show that not only do voters recognize that Obama and McCain have different views on these issues, but approximately 65% can correctly place the candidates and their views together and provide at least one major difference between them. Thus, I think we saw a lot less time being spent on trying to say “here is how I am different from my opponent” and more time spent saying “this is why I am right.”    

The key aspect to remember of any debate, however, is that unless someone makes a gaff, very few people actually remember what was said. Rather, what people take away from presidential debates are feelings about the candidates and what the candidates represent. It is in this category that I think the edge went to Obama. It was clear from the debate last night that both candidates are for change. But, as we saw at the conventions, McCain is for change by fighting and defeating those who are resistant to change; he said he would be the sheriff of spending, veto every spending bill he deems no good, and make Washington change by bringing the fight to them. By contrast, Obama is for change by bring people together to work out differences and make compromises; he repeatedly stated that he understands that there are deep divisions, but that the president's job is to bridge these gaps, not to increase them. History has clearly shown that both strategies can be effective in the right situation.   

However, in today's political climate, the idea that voters want more division and fighting in politics seems silly. We have had 8 years of very derisive politics, and the situation created by the Bush era is unlikely to be fixed by the next president simply wielding a big stick. Rather, it is going to take carrots and compromise to really bring change to Washington. This notion of how to bring change is in many ways really the heart of the election. It could just be me, but my gut tells me at this decision node, voters don't want change through force, but through reconciliation that brings people together.    

Traditionally, debates do not have a huge effect on how people will vote unless one of the candidates makes a huge mistake. However, debates are important because they give voters a chance to not only hear the candidates’ issue positions side by side, but also their tone and message. While I don't think last nights debate will have any real impact on who votes for whom, it did reinforce what type of leadership style voters have to choose from in the next election. 

The Need For Speed?

Today, President Bush announced that the whole world is watching to see if we can act quickly to resolve/contain the U.S. finical crisis. The message he was trying to deliver was not directed at the American public, but at Congress, to act quickly in passing his 700 billion dollar bank bailout proposal. Bush felt that this was necessary as many congressional democrats and a fair number of republicans have questioned the wisdom of the Bush bailout in its current form.    

It is clear that Bush wants to react quickly to this financial crisis, but a key question to consider is whether speed at this juncture creates more problems down the road. In other words, while waiting to take action in the short term main cause additional drops in the stock market, if we take the time to work out a compressive rescue and correction for what went wrong in the financial markets, will we be better off in the long term?    

I am not an economics expert, so it is difficult for me to offer a real analysis of this inherent economic tradeoff. However, from a political standpoint, the current situation is rife with potential political gains and losses. To understand the likely outcome of this situation, it is important to take a look at the different political motivations for several key players: President Bush, congressional democrats, the Republican Party, McCain, and Obama.    

For President Bush, a large part of his legacy as president will be affected by how this economic crisis unfolds. If the crisis leads to another great depression, then regardless of any good he has done in his political career, he will always be remembered as the president who failed to prevent a great depression. President Hoover’s legacy supports this point of view. Hoover was an extremely accomplished public servant before he became president, and he was an immensely popular president until the economic downturn in 1929. The result of his presidency coinciding with the start of the great depression is that his legacy is forever tied to that event.  Thus, beyond any personal conviction Bush has regarding  the best present course of action, from a political motivation stand point, Bush is best served by having a short-term solution rather than a more long-term comprehensive fix.    

Congressional democrats have competing political interests. From one perspective, they should be in favor of a short-term fix because if it temporally rights the economy, they can go back to their districts and say "see I was there to protect you. I saved the economy." However, initial responses by the democratic base have been very negative towards the Bush bail out plan. Thus, if they were to fast track the bill with just an up or down vote with no amendments, they risk being seen as weak to these key supporters.    

In addition, congressional democrats don't want to be seen as obstructionists (because they held up necessary legislation at a critical juncture) or partisan (since conventional wisdom argues that economic downturns favor the party out of power for the presidency), as it could result in an electoral backlash from voters who are hurt by an increasingly worsening economy. A key fact to remember is that even after the election, the new president will not take office till the end of January. If no action at all is taken, a lot could go wrong in those four months. As a result, if we weigh all of these pressures, it appears that the motivation for congressional democrats would be to pass some package to rescue the economy, but likely some altered form of the Bush Plan.    

As for the Republican Party, its motivation is quite similar to that of President Bush. Survey research has shown that up until Carter, the Democrats were consistently rated as more competent in handling the economy. When experts studied this empirical regularity in detail, they found that this opinion was the result of the Republican Party's association with control of the White House at the start of the Great Depression. For voters who lived through the Great Depression, the Republican Party was, in their minds, inextricably linked with economic failure. Thus, the Republican Party should do everything in its power to make sure we do not enter another depression while it holds the presidency. Therefore, republicans should also be in favor of quick action to ensure that the economy doesn't slide into recession or depression while they are in control.    

The last two actors to take a look at are the two presidential candidates. As both are senators, they are both going to have to cast votes on the Bush Plan. This is one of the few opportunities that voters are going to get to see how both candidates act at the same time and at the same level of policy making. Both candidates are running on a message of change. Well, I can almost guarantee that the bail out plan is going to get spun as more of the same in Washington. So the question becomes whether both candidates can take the comprehensive change approach and vote against a simple bailout of the banks and get away with it with their supporters.    

In looking at Obama, he clearly cannot support a simple bailout; that would go against all of the themes of his campaign about reform in Washington. However, he cannot be seen as not working to find a solution for the crisis. The problem for him is that he is not the President of the United States in the senate. Thus, he is just one of 100 and it would be difficult for him to dictate a completely different plan. As a result, it would appear that Obama's best course of action would be to vote against the Bush Plan, but support any modification that provides some regularity reform. This way he can say "I have fought for reform in good and bad times and if you elect me, you will keep seeing reforms coming."   

In the case of McCain, he is in a much tighter spot than Obama. If he is truly a candidate for change, then how can he simply vote for the Bush Plan? He has tried so hard to distance himself from Bush, and there is no way he could cast a “yea” vote for the Bush Plan and win the presidency; in the minds of most voters that would be the same as saying he endorses how Bush has handled the economy for the past eight years.    

However, McCain also could not easily vote for a Democratic Party sponsored bill that calls for reforms and regulations. If he were to sign on to the bill, he would look like a follower of the Democratic Party and a deserter of the Republican Party. In addition, a lot of his support comes from fiscal and small government conservatives who are outraged over the level of government spending and intervention that democratic reform plans for the finical markets call for. As a result, McCain is stuck in a hard position of not being able to support the Bush Plan, but also being equally unlikely to support a democratic reform bill. His best bet is to try to sponsor a bill himself, but in a democratically controlled senate, that is very unlikely to happen.    

Taking all of this analysis together, it seems that the likely outcome of this crisis is that the democratic controlled Congress will write their own bill that incorporates large aspects of the Bush Plan (so that they can move quickly), but that also provides for additional regulation and protections for the taxpayers (thinking more long term). I am not sure this is the best outcome as it may rush the passage of critical reforms for the finical markets, but given the nature of the crisis, it is probably the best-case scenario.   

Ah, What A Mess

I don't have much time for a post today so this one is going to mostly be posing a question for everyone to ponder for the remainder of the weekend. Feel free to post your thoughts on the matter below. 

On Friday, President Bush announced that he wants congress to pass a 700 billion bailout of the financial markets. The basic idea is that the government will buy all the bad loans and mortgages that banks have on their balance sheets from homeowners defaulting on their loans. Most analysts agree that if all of these bad loans were taken off the hands of the banks, then they would once again be able to turn a profit.

There are two key points to notice here. First, when Bush says the government is going to use 700 billion to buy these loans, the government doesn't just print more money, it has to generate it from somewhere. To raise this amount of money, it can do three things. One, it can raise taxes to cover the cost (very unlikely in this case). Two, it can cut current spending levels in social programs or a war effort to off-set this new cost (again very unlikely in this case). Three, it can take very high interest foreign loans to finance the deal (most likely option). In essence, this last option is how the Bush administration has financed the wars in Iraq and Afghanistan without raising taxes at home. The take home point is the money doesn't just appear, it has to come from somewhere.

The second point to note is that there is another way to solve this crisis that hasn't been discussed. The Bush plan focuses on saving the banks, but does nothing for the home owners who have these loans. A viable alternative would be to have the government either help homeowners make their payments, or restructure of all floating loans that have been made in the last five years to fixed rate loans with affordable monthly payments (i.e. lower fixed interest rates and perhaps extending payment periods beyond 30 years) so that people can make their payments. The effect would be that banks would not be making big profits (and perhaps might even be taking small losses as opposed to their current huge losses), but they also would be able to remove the bad debt off their books, since payments would be coming in. 

So, the big question is which plan is better? I personally come down on bailing out homeowners over bailing out banks, or at least having a combination of bailing out both.  The idea that only the banks should be bailed out with my money seems both morally wrong and financially unsound. I completely agree with idea that these banks can't simply be left to fail. They are too integrated into the financial system. However, that doesn't mean the solution to the problem has to let the banks completely off the hook, while individual homeowners get nothing and are led to financial ruin themselves. It seems to me if you are going to use taxpayer dollars to solve this problem that the solution better address both sides of the crisis. 

In the end, the question comes down to who should get rescued: the banks, the homeowners or both? Both banks and homeowners are guilty of greed and have both made mistakes, but why should only one side get bailed out?

Let's Play a Word Association Game

The continued bad news from the financial markets has clearly shoved the economy into the limelight as one of, if not the key issue in this election. Many pundits believe that this has the potential to shift the race in Obama’s favor. I happen to agree with this sentiment, but it is important to understand why; the reasoning is not as simple as it may seem.   

The traditional logic of the economy and presidents is that since the president is the only nationally elected official, he is held (rightly or wrongly) accountable for the overall wellbeing of the national economy. In many ways, the president is kind of like a quarterback in football: when things go right he gets too much credit, and when things go wrong he gets too much blame. The key fact to remember is that while a president is a critical player in the health of the economy, he is still only a single person among many other players in the game. Thus, he can make all the right choices and still get stuck with the blame for other players’ poor performance.   

Rather then trying to actually assess how much blame we should attribute to the Bush administration for the current economic crisis versus mistakes made by key finical institutions, it is more important to examine how the current set of events is likely to be interpreted by likely voters in November. Intuition may suggest that if people are personally feeling the pinch of a bad economy (i.e. they suddenly have less in their purses or wallets than they did previously), they should hold the party in power of the presidency responsible and vote for the opposing party’s candidate.    

However, most reputable research disputes this theory. Rather than voting based on ones own economic situation, the vast majority of voters tend to vote based on what they perceive as the general condition of the economy as a whole. This raises several important questions regarding the current election.   

The first is that for the first time in the history of the United States, most adults have some stake in the stock market. Either as a result of personal stocks or retirement funds, peoples’ well-being is much more closely tied to the welfare of the stock market than ever before. The result is that even if the overall fundamentals of the economy are strong, if people perceive that the overall stock market is in crisis, then the nation is in a national economic crisis. Thus, using the same logic as before, if people perceive a national crisis in the stock market, which I think most currently do, they will likely vote democrat in November.   

The second aspect that is unique to this financial market crisis situation is that in some ways the republicans are guilty of their own image success. In terms of associations, if you asked most people which party they associate with big business or Wall Street, they will say republicans. Thus, even though the Republican Party is not probably directly responsible for the current finical situation, republicans are guilty via association.   

If this association theory is correct, then all Obama should have to do to win on this key issue is to hammer on this association and pose the question “who you would rather have clean up this mess: the people who are in bed with big business or an outsider who knows what is right?”  

The third aspect to take note of is that in terms of the abilities of the candidates, McCain will be hard pressed to win an election that is based on the economy. McCain’s best chance of winning this election is to keep the agenda on national security, experience, and social conservative issues. He has almost no experience with economic issues and his age, race, income (via his wife), and own statements on the economy all make him ill suited to play the understanding white knight to the rescue.   

This is not to imply that Obama would actually do a better job at attempting to resolve the situation. That question will largely be the result of what kind of economic teams are put in place by the respective candidates. But actual chance of success is much less important in the economic arena of politics than association with ability. On this count, Obama is clearly far out ahead of McCain.