Who's In Charge?

Another crisis has emerged on top of the unraveled financial system, hyper-volatile stock markets, and accelerating economic downturn: There’s no one at the helm of the economy or the piecemeal bailout and the other schemes devised to make it right. President George W. Bush is nearly absent and his credibility is exhausted. The Treasury Secretary’s authority is only slightly less damaged, and he cannot commit the nation to new policies. And now the Congress has left the city to campaign. The two presidential candidates, including whichever one becomes the next president, cannot assert any authority even if either of them wanted to. There’s no Congress around to pass on what Obama and McCain might call for. Further, President Bush couldn’t respond to an Obama recommendation without undermining his party’s candidate, nor respond to a McCain proposal without reinforcing the Democrats’ case that the two are in joined at the brain.

So, the economic crisis has continued to worsen. The problems in housing, finance and now the overall economy aren’t on recess, nor will they hold their fire until the next president is inaugurated. In fact, more economic and political problems will emerge. For example, last week, three of the nine banks slated to get the first bags of cheap, federal bailout money reported very respectable third-quarter profits. Wells Fargo, State Street Bank, and J.P. Morgan-Chase together earned profits of $2.6 billion for the quarter, even as they agreed to accept $25 billion each in cheap, new capital from American taxpayers.

Of course they agreed: The money will cost them 5 percent or half of what Warren Buffet received for his $5 billion capital investment in Goldman Sachs last month, so now they can expand their businesses at a cut rate. The CEO of J.P. Morgan-Chase called his $25 billion injection a “growth opportunity.” By what methods of accounting do they need emergency government assistance? And where are the deciders in the administration? The Treasury spokesperson said, ‘We are not here to make money off these companies,’ a view which almost certainly would draw sharp attacks from most members of Congress if they were here, as well both campaigns and most Americans. In fact, if interest rates rise before the banks pay back the government’s gifted capital, these loans to healthy, profitable banks will actually cost taxpayers plenty, since every cent of their $75 billion will be borrowed, and the recipients are paying below-market rates.

Presumably, the Treasury has criteria for extending these bailout loans, but since there is no transparency and, with Congress gone, no one to call for it, we cannot know what or whose criteria they are. But what could those criteria be, if sound, profitable banks qualify for emergency capital infusions? With a sinking economy and millions of Americans facing unemployment and home foreclosures, is it the first priority of those in charge to finance new growth opportunities for profitable banks? Is that the government’s reward for their managing to avoid bankruptcy? In fact, it looks like one of the final acts of an administration that now has injected a big dose of Asian-style “crony capitalism” between the most senior officials of the White House and the Treasury, and Wall Street.

This is happening, in part, because in the midst of genuine economic crisis, the United States is nearly leaderless. British Prime Minister Gordon Brown and other European leaders last week called for a ‘Bretton Woods II’ summit to redesign the global financial architecture, and last weekend President Bush called for his own summit. The Brits and Bush both want everyone to meet within a few weeks to begin the figure out how the International Monetary Fund, World Bank and the Bank of International Settlements should operate in this new era and, presumably, to discuss new terms for overseeing capital flow among countries. Who would speak for the United States? It’s likely that Barack Obama will be president-elect by the time they meet, but he still won’t be president and therefore unable to exercise presidential authority. The man who will still be president, George W. Bush, will also be utterly without domestic support or credibility in economic matters, with no means of selling a new international package to the American people or Congress. These kinds of issues come up during any presidential transition; but they’re especially worrisome this time, because we find ourselves in the middle of a cascading economic crisis that will not wait until next January.

Senators Obama and McCain need to prepare now. Both candidates should convene a group of trusted economic advisors to review the current options for dealing with the deteriorating housing market, the instability in our financial system, and the real economy’s accelerating problems, without reference to the campaigns. This group should report its findings and recommendations to the president-elect on November 5, and he should present his recommendations to a lame-duck Congress that same week. Campaign operatives may assume we have until January, but the man who becomes president-elect must know that he will have to take action as soon as the votes are counted.