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Credit crisis compounds Republicans' political troubles
LA Times
By Peter G. Gosselin
August 22, 2007

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."

peter.gosselin@latimes.com

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