Prospects for a full-fledged bailout of the banking system and a comprehensive effort to halt the decline in residential real estate prices are dimming as election year politics moves to center stage. There is strong anti-bailout sentiment among important sectors of public opinion. The probable Republican presidential nominee, Senator McCain, has signaled strong opposition to a full-fledged bailout. The Democratic contenders, for their part, are outdoing each other in offering what are really small measures of relief for the besieged, bewildered, and terrified mortgagee class.
None of the likely candidates are interested in proposing a serious bailout. The reasons are both political and a consequence of superficial "analysis" on the part of said would-be candidates. It is still unpopular to advocate bailout. The demonology of American politics, resentment toward "Wall Street" and banks, irritation at those who got into houses "the easy way" --i.e., without working hard and saving diligently -- remain strong obstacles.
None of the candidates appear to have the slightest grasp of the gravity of the situation, of the near-inescapable down-the-road fallout. In this, of course, they have plenty of company. Those who should be explaining the economic facts of life themselves are barely coming to grips with a situation which, in a number of significant respects, resembles rather closely the type of deflationary downturn people have only read about in economic history books.
As for the fading current Administration, it would be unrealistic to expect these folks to manifest the type of forward thinking or political bravery which has been so conspicuous by its absence over the past seven years. Moreover, the decision-makers have their focus elsewhere. This Administration awaits the safe harbor of retirement, and is unlikely to rock the boat any further, but rather to content itself with mainstream efforts at deflation containment.
For these reasons, it rests upon the FED's shoulders to do maximum heavy lifting UNTIL the economic and social consequences of the prospective deflationary downturn really begin to hurt, and thus generate a change in the public and elite mindset. Of course, it is possible that this sequence may come too late to avoid very serious consequences. The only comfort we can take is that the FED CHAIRMAN is now apparently fully alert to the danger, and is acting very aggressively to reverse his prior errors. The Treasury Secretary too is alert, and is exerting himself to the maximum.
We expect further CLEAR market signals; hopefully, such signals will move the Administration off the dime, though we remain skeptical.
