[NYTr] The Credit Crisis and the One Party with Two Names

[All the News That Doesn't Fit]

sent by rick kissell

The Los Angeles Times - Aug 22, 2007
http://www.latimes.com/news/nationworld/nation/la-na-creditpol22aug22,1,4931642.story?coll=la-headlines-nation&ctrack=5&cset=true 

Credit crisis a GOP worry

The credit crisis compounds Republicans' political troubles from the 
Iraq war. It may bolster Democrats' calls for new regulations.

By Peter G. Gosselin

WASHINGTON --- The credit crisis that has hit home mortgages and shaken 
worldwide financial markets is turning into a political albatross for 
President Bush and Republican presidential contenders, piling atop an 
unpopular war in Iraq and eroding traditional GOP claims of being good 
stewards of the economy.

And it may be having a more far-reaching effect as well: giving 
Democrats a powerful argument for passing new financial regulations
that the administration desperately wants to avoid.

Democrats say the nation's system of financial safeguards, many of them 
designed in response to the Great Depression of the 1930s, is
inadequate for today's highly deregulated, global economy. Until now,
Bush and congressional Republicans had little difficulty deflecting
such calls for change.

But the credit upheaval and the shock waves it sent throughout the 
economy have changed the political climate. In the most recent Gallup 
poll, taken last week, 72% of Americans said the economy was "getting 
worse." That was the most pessimistic showing since Gallup began asking 
the question in the early 1990s and comparable only to the 71% recorded 
in January 1992, when unhappiness with the economy was credited with 
helping Bill Clinton win the presidency later that year.

"Even if this doesn't lead to serious instability and a slowdown of the 
economy, [the credit crisis] reinforces the insecurity, from higher 
energy prices, higher healthcare costs and pension worries to set a
very unfavorable economic environment for the president's party," said
Thomas E. Mann, a presidential scholar at the Brookings Institution in
Washington.

And Democrats demonstrated Tuesday that they intended to take full 
advantage of the Republicans' plight.

In the House, Rep. Barney Frank (D-Mass.), chairman of the House 
Financial Services Committee, announced plans for a Sept. 5 hearing on 
the credit crisis and ticked off an ambitious legislative agenda to 
address the problems, including expanding the roles of 
government-sponsored mortgage loan facilitators, Fannie Mae and Freddie 
Mac, and imposing new rules on companies that issue mortgages and those 
that package them for sale as securities.

"The financial markets have outgrown the current regulatory system, and 
we need to do something about it," Frank said.

In the Senate, Christopher J. Dodd (D-Conn.), chairman of the Senate 
Banking Committee and a Democratic presidential contender, got Federal 
Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry M.
Paulson Jr. to come to his office and explain what they were doing to
ease the credit freeze-up.

Although Dodd generally praised the two officials after the session, he 
seized the chance to take a rhetorical shot, noting that the 
administration acknowledges the seriousness of the problem but says no 
systemic changes are needed.

"You're getting sort of a dual message that it's going to take some
time to fix [the problem], but that everything is hunky-dory," Dodd
said.

Separately, Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget 
Committee, demanded the resignation of St. Louis Federal Reserve Bank 
President William Poole for Poole's comment last week that the Fed
would only cut rates before its September policymaking meeting in the
face of "calamity."

"It was reckless and irresponsible of him to leave people with the 
impression the Fed would take no action," Conrad said. "He's got to go."

Within days of Poole's comment, the Fed, concluding that the credit 
freeze-up posed a danger to the economy, cut its largely symbolic 
discount rate charged to banks and suggested it was ready to cut its 
much more influential federal funds rate if matters worsened. The 
federal funds rate is what banks charge one another for short-term 
loans, and it directly affects other interest rates throughout the
economy.

St. Louis Federal Reserve officials said Tuesday that Poole had no 
response to Conrad's comments.

To some extent, Republicans are hobbled by their own free-market, 
anti-government-regulation principles, whereas Democrats, who believe 
that government action can lead to better outcomes, have maneuvering 
room. That could prove particularly important depending on how the 
credit crisis plays out in the coming weeks.

Jon McHenry, a partner with the GOP polling firm of Ayres, McHenry & 
Associates in Alexandria, Va., voiced the view of most Republican 
politicians and -- at least until last week -- a substantial number of 
economic policymakers in saying that the current trouble is largely the 
product of private borrowers and private lenders who made bad business 
decisions and should suffer the consequences.

"If you're a free-market Republican, you give people the freedom to
make their own mistakes," he said.

But McHenry acknowledged the political bind that creates for the GOP.

"Standing on the sidelines when people think there's a problem that 
could spread certainly is not a politically comfortable place to be,"
he said.

The Fed's decision Friday that, private or not, the bad decisions that 
are freezing credit pose a threat to the economy as a whole have
created a dilemma for Republicans about how Washington should respond.

In general, the administration and its supporters have settled on 
macroeconomic moves such as the idea of an across-the-board Fed rate 
cut. They oppose more narrowly targeted microeconomic moves favored by 
the Democrats, such as allowing Fannie Mae and Freddie Mac to buy up 
more troubled mortgages.

The problem for Republicans is that if the crisis doesn't ease, it will 
mean that the across-the-board solutions aren't getting sufficient aid 
to the places where it is most needed. That in turn could provide a 
strong argument for the kinds of intervention favored by Democrats.

Administration officials "don't think that there's much to do [about
the crisis], but that's a conscious choice on their part," Frank said.
"They are not going to get in and do anything micro, only macro."

A classic example of the difference between the two parties' approaches 
is whether to unleash Fannie Mae and Freddie Mac. The two 
government-created corporations have the power to buy up mortgages and 
hold them as investments or package them for sale as securities.

The two agencies are deeply unpopular among Republicans, who believe 
that they falsely convince investors that the full faith and credit of 
the federal government is behind their securities and, so conservatives 
think, because they crowd out private companies from the same business.

The Bush administration already has imposed limits on the size of the 
portfolios the two can have, and the president has said that he would 
only permit their use in the crisis after they have been "reformed," 
which would involve sharply curtailing their operations.

Democrats expressed outrage at that position.

A congressional free-for-all could ensue if the crisis continues into 
the fall and Democrats press to overturn Bush's decision on the
mortgage corporations and move to regulate mortgage brokers.

But instead of getting into a fight, GOP pollster McHenry has some 
advice for members of his party: Shut up.

"There is more trouble for Republicans in talking about the problem
than there are benefits," he said. "Let the Democrats offer what they
have to offer and let the proposals go along for a while and hope
events improve before you have to cast a vote."