Update on the Political Scene / 1st Debate Recap
After an unprecedented number of requests to address recent developments (the bailout, the debates) I'm making this post. Okay so "unprecedented" equalled two direct requests, but its more than I've ever gotten before. I'm going to try my best to explain what's being kicked around in Washington right now (without requiring readers to hold an economics degree to understand), as well as what happened when the candidates squared off on Friday night. I'll describe their answers to the main questions as well as what main themes emerged. I'll also give my impressions on what this all may mean going forward. This is a lot of ground to cover so be prepared for a lengthy read.

By now anyone who's not been living under a rock has heard the figure of $700 billion of government (taxpayor) money that is going to be pumped into the stockmarket. This is an effort to calm fears on Wall St and get banks to start lending money again and to provide some stability in the financial markets. Mortgages represent the single largest input piece of America's economic pie. Think about all of the 300 million people in this country and multiply it out by average house prices and rentals and you can see just how much $ is tied up into housing. When you take out a loan on a house, the bank packages your home debt with a bunch of other people's debt and makes "mortgage backed securities". The bank then sells them on the open market to other firms. And so on and so on, similar to other investments like stocks. If the loans are sound then the mortgage payments that come in will start paying off for those that are holding the debt markers. Others will want to purchase these assets and the price of the securities will rise. This system is nothing new and this practice in itself did not create any problems.

The problem came when banks (under pressure from the government) started making a ton of terribly unsafe loans to people who either had no business buying a house in the first place or were never committed to hold the homes and pay them off. Why would the government do this? Simply put - because politicians in both parties want to be re-elected. People who own homes are more likely to vote and incumbents get re-elected 95% of the time. The theory they clung to was that lower income people could be offered loans that started with no down payments and low interest and then the rates would increase, but it would be okay because these people's incomes would grow enough to cover the higher payments. There were also a ton of speculators who were only looking to turn a quick profit - taking out mortgages to purchase homes with the intent of turning around and selling them again in a few years after the home's market price had a chance to rise double digits in value. The underlying fundamentals of this scheme fell apart and the bubble burst. Fannie and Freddie (the Government mortage backers of last resort)and some private equity firms were left holding too many pieces of worthless paper that they couldn't re-sell. Banks lost all confidence in these institutions to save them from the bad loans that the government was pressuring them to make and lending grinded to a halt.

Politicians from both parties have been quick to point out that they saw this coming years ago. Everyone got on camera to issue empty "warnings" to cover themselves and try to shift blame while no one did anything about it until it became so bad that a bailout was in order. Both parties agreed that something had to be done, but there's always posturing involved. In a sly political move, McCain announced earlier this week that he would suspend his presidential campaign and return to Washington to try to broker a deal - he invited Obama to do the same. The Democrats quickly figured out that they could not afford to have the story be "McCain comes to Washington and saves the economy while Obama continues selfish fundraising". Democrats tried to counter by trying to make the story "Deal was on the table, McCain delays deal to steal credit for himself". Seeing that this stalemate would not be broken before Friday's debate, McCain left Washington and went through with the debate on Friday. Since then it appears that there is a tentative deal in place now and it will be voted on early this week. It appears that there will be an initial wave of $350 billion that will go to buying up these assets while refiguring regulations to help ensure it doesn't happen again. If thats not enough, another wave of $350 billion will be spent but with tighter regulations than before. If this works then the government would be holding assets that will improve in value and a return could be made that would offset the cost and maybe even turn a profit if done correctly and the market bounces back strongly. But this is a huge initial investment that will take a long long time to MAYBE turn a profit, and if its totally botched it could be a very costly waste.

With all of this going on, you can see why it was an important part of Friday's debate. The debate was initially supposed to focus entirely on national security issues, but this was such an 800 lb gorilla that it could not possibly be ignored. In fact the first 40 minutes of the 100 minute debate focused on this and other domestic economic issues. This was a big break for Obama as the economic news has hurt McCain far worse in the polls. And it was less time for McCain to talk national security - a topic on which he has always enjoyed a clear edge in the polls.

From the get go, both men tried to address the shortcomings that most independent voters have about them on the bailout issue. Obama is seen as not having any real specific prescriptions. He clearly outlined that any package must have real oversight, the investment has to be able to payback the taxpayers, no golden parachutes for failed executives, and protections from foreclosure for homeowners. He didn't take long to tie this all to Bush and by extension to McCain for not caring enough about the middle class. The first of many times in which Obama looked directly at McCain while speaking was to say that the economy's fundamentals "are NOT sound" - a direct attack on a previous McCain statement. McCain set out to show that he does empathize with people who are suffering but that he is optimisitic about the chances of improvement. His requirements for the bailout would require accountability and be coupled with spending controls for other areas of the budget.

The issue of cutting spending was, as always, the hardest to pin the Presidential candidates down on. You can't say that you're going to cut all sorts of specific programs because that angers significant voting blocks. McCain focused on giving specific examples of government projects that sound ridiculous (studying bear DNA for example) but ultimately don't amount to much in the overall scope of the budget. The only specific cut he said he would make is for ethanol subsidies, which used to sound really good but most people understand do more harm to food prices than good to gas prices. When pressed he made a fairly hasty proposal to issue a spending freeze for all things not pertaining to the military. Obama stated that this is unwise as "needed programs" are underfunded. He did concede that many of his big proposals would have to be placed on hold but strongly resisted identifying what he would place on the back burner. He did note that we are spending billions on the Iraq war while the Iraqi government has a $79 billion surplus, going along with his long stated position that troop levels have to be reduced in Iraq. Both men agreed that we are too dependent on foreign oil. The main Democrat prescriptions (alternative energy, conservation) and Republican prescriptions (increased domestic production and nuclear power) were rehashed once again. Ho-hum.

The debate shifted to foreign affairs and the first question was about what lessons we can take from Iraq. McCain stated that we started strong, lost our way for awhile, but General Patreous has us back on track. He proclaimed that we must stay in Iraq and finish the job so that we don't have to return in later generations. Obama held firm to his position that we shouldn't have gone in the first place. Afghanistan should have been job #1 and we did not finish that which is hurting the US efforts in both countries. McCain said that whether or not we should have gone into Iraq is a moot issue for the next president - we're there and we have to decide how to proceed. He then took the opportunity to point out that Obama was against the troop surge in 2007 that has worked remarkably well by all accounts. He feels that Obama's plans would put our fragile success in Iraq in jeopardy. Obama countered that the surge only masked the past failures and that McCain was wrong in his early views on the war.

When the topic moved to Afghanistan, Obama reiterated his feelings about how that effort has been neglected in favor of Iraq and that troop levels need to be reconfigured. He pointed to neighboring Pakistan as being a safehaven for Al Qaida. The candidates argued over what Obama meant when he said that the US should take unilateral action in Pakistan against Al Qaida if Pakistan does not offer help. McCain attacked Obama's past statements as being a threat to Pakistan, a country that we need to utilize as an ally in the fight on terror. At this point, both men looked to their wrists to explain that they proudly wear a military bracelet presented to them by the grieving mother of a US soldier killed in combat. McCain said this bolsters his resolve to finish the job so that the youngman didn't die in vain. Obama sees this as a sign to reshape and perhaps reduce war efforts so fewer mothers aren't in this situation.

Afghanistan and Iraq have been the main focus of our international conflicts, but there are plenty of other potential conflicts on the horizon. On Iran, both men went way out on a limb to say that it would be bad if Iran got nuclear weapons(wow - I made it this far without any real sarcasm). Both advise sanctions as opposed to direct military involvement. McCain made a new proposal for a "League of Democracies" that would bypass the UN, which has been hamstrung by Russia and China who view Iran as a major trading partner. Neither man seemed to want to call out any of the US companies that deal heavy in Iran - such as General Electric, but I was hardly surprised by that. The candidates then squabbled over the key issues surrounding Russia's invasion of neighboring Georgia. Obama contends that the Bush Administration gave Putin a free pass for years and didn't do anything to pre-empt possible problems. McCain made another attempt to paint Obama as naive (more on that later) in attacking Obama's prior statements that both Russia and Georgia were complicit in the matter. While we can't go back to a Cold War stance on Russia, we cannot treat an oil revenue fueled KGB governed Russia trying to recapture Georgia and its oil as being morally equivolent to Georgia itself. Both candidates agreed we are safer than we were before 9/11 but McCain argues for increased surveillance while Obama prefers to increase spending on stopping the proliferation of terrorism. Obama noted that we need missile defense (SDI) but with Al Qaida operating in 60 countries we cannot count on shooting down missiles when its more likely we'll be dealing with suitcase nukes.

Both men closed up with personal stories. Obama spoke of his father who tried hard to get to the US to get an education and bring back solutions to his home country of Kenya. He thinks America has lost alot of luster in the world's eyes and he wants to bring that back. McCain said that after he was released from POW camp, he came back and worked on normalizing relations with Vietnam. If he can work with them he can work with anyone, and he personally knows how to turn enemies into allies. At the end of the debate, Obama moved quickly across the stage to come across and shake McCain's hand before McCain could get too far away from his podium. In normal circumstances this is usually seen as a sign of confidence and energy from just having earned a victory (just like an energetic victorious football coach runs further onto the field to greet the slow and depressed coach he just beat). You can't really read that into this one though as you can't expect McCain (a man in his 70's whose body was crippled by torture) to move as quickly as Obama (a man in his 40's with no such limitations), no matter how confident McCain felt. So that's a fun little body language read that just wasn't applicable this time around.

As far as main themes go, each man clearly carved out a talking point that they returned to several times. Obama framed many issues with the belief that the US cannot apply 20th century solutions to 21st century problems. He is saying that McCain prefers re-trying things that have failed as opposed to trying new solutions. He used this theme on topics like domestic oil drilling (can't try to drill our way out of the problem). With regards to Afghanistan there is something important to remember. The US used them as a pawn against Russia during the Cold War. When that ended we pulled out of the region and the poverty that resulted led to the rise of Al Qaida. On the economy he tried to paint McCain as being in line with the "trickle down" theory - giving breaks to those at the top and hoping that the benefits move down to those on the lower rungs of the economic ladder.

McCain consistently stated that Obama just doesn't understand the important matters at hand. Cutting troop levels and opposing the surge would ensure defeat in Iraq and make it necessary for us to send future generations there. Iraq has emerged as the "central battleground" in regards to terrorism and placing a timetable on withdrawal would only shoot ourselves in the foot. Obama has also famously said that he would sit down with our enemies without precondition. This would give international legitimacy to crazy people who want to do things like blow up the US and its allies. You can't just "talk them out of it". He was also quick to point out that he has personally been to the countries in question whereas Obama has not. This painted Obama as a faraway student of international affairs whereas McCain is a hands-on leader with a strong history of results. This brought him back to the message that Obama is all talk. Obama has the most liberal voting record in Congress (which is true) and that Obama "can't reach across the aisle for compromise when he's that far to the left". McCain offered several specific examples of opposing his own party (there are many) to get things done for the people and not for his party.

All of this is very subjective and open to interpretation. But there are a few things that I think were undeniably clear. McCain was much more aggressive - more apt to directly attack Obama's past mis-steps and was less likely to stop talking when Obama tried to get a word in edgewise. Obama was very restrained for much of the debate and seemed to let the debate "come to him" as opposed to trying to assert himself. Obama was clearly more prepared to debate and had his main points ready to go and was more efficient in turning the questions back towards his talking points. McCain frequently stated that Obama was wrong or "doesn't understand". There were several points in which Obama began his response to a McCain answer by saying "John is right" before pointing out where they differ. McCain never once started a response with "Barack is right". In fact he was more likely to say "my opponent" than anything else. This may end up coming off as too condescending for independent voters.

McCain is supposed to have a huge edge on foreign policy, cemented by his experience edge. But after this debate McCain supporters may be able to say that Obama is wrong on foreign policy but will be harder pressed to say that he is totally naive. Sure there was a lot of tedious name dropping from Obama but there was definite substance too. Obama clearly showed that he at least belongs on the same stage as McCain when discussing foreign policy. So Obama definitely cut into that edge. But McCain had a stronger showing than many thought he was capable of on economic issues. Before Sarah Palin was picked, many thought McCain would need to seek a running mate to conceal his lack of experience on economic issues. With his confident responses to questions in the debate and his willingness to step up and try to broker a deal on the mortgage mess, he too was a swimmer and not a sinker.

There is going to be debate over who won and who lost, and the opinions will vary based on the opinion giver's personal preference. But the topic of this debate was (theoretically) national security. This should have been a blowout win for McCain and it definitely was not. While McCain enjoyed a short-lived lead in the national polls after his convention and Sarah-mania, he has already given that lead back. In no way do I mean to imply that this is huge trouble for McCain (there is way too much campaign left and it all comes down to the electoral map anway) but he did not get the results he was seeking. Not from his campaign suspension to go back to Washington and not from this debate. The true impact of these developments will be seen in the polling data this week. Pay attention to Tuesday and Wednesday's daily polls to see if the rest of the country agrees with me, but my gut feeling is that Obama is going to slightly increase his lead to about 5-7% in the national polls.


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Update on the Political Scene / 1st Debate Recap
Authored by: togasteve on Monday, September 29 2008 @ 06:04 PM EDT
The bailout package as it is presently written was voted down in the House today. It needed to get 218 "yes" votes - a majority of the 435 memmbers of the House, but never got past 207. Representatives from both parties had their switchboards flooded with constitutent calls opposing the bailout. At the start of my main post above, I tried to explain as plainly as possible what the situation is. Apparently there weren't enough people talking openly with the public to ease their fears. Since all House seats are up for election in every cycle, not enough members felt secure enough to go against their constituent's wishes so close to the elections. Republicans were more likely to vote "No" for several reasons, including feeling that they were prohibited from putting in enough input on the package.

The Dow Jones Industrial Average saw its biggest one day nominal drop EVER as traders were shocked that this didn't get done, as most expected it would. This is far from over, and an amended bill will be considered later. I think something will eventually get done, but there has to be a better effort from the Administration and others to calm public fears.

I read a few online articles that were put together quickly to try to explain everything. This is the best one I've found so far:

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