Who Will Look After the Economy Until January?

The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.
-Antonio Gramsci, Prison Notebooks

In late 1932, as large numbers of banks began to fail, there was a five month pause between Election Day and the inauguration of the new president, which was then held in March. It was the worst possible time for a long interregnum. Banks were failing, by the hundreds. One American in four was unemployed.

Herbert Hoover, now the lame-duck president, repeatedly tried to enlist Franklin Roosevelt's support for some form of emergency bank closure proclamation, relying on emergency wartime legislation enacted in World War I. But Roosevelt did not want to be tainted by the failed Hoover, and Hoover would not act on his own authority without Roosevelt's concurrence.

As late as 1 a.m. on the eve of Roosevelt's inauguration, top aides to the incoming and outgoing chief executives were sparring over possible plans, and Roosevelt was still resisting Hoover's pleas that the two issue some kind of joint order. When Roosevelt did act as president, his first week in office, to declare a "bank holiday" while federal officials sorted out the mess and re-opened sound banks, the plan looked much like Hoover's.

If that Barack Obama is our next president, the interregnum, now "only" two-and-a-half months, will take on many of the morbid characteristics of the winter of 1932. George W. Bush is a spent force -- an irrelevance. On November 5, Barack Obama becomes the chief executive in-waiting, while the legal powers of office still belong to Bush. The Paulson plan, not even a week old, has been adjudged a failure by the world's financial markets. We are on the verge of a full blown depression, and time is of the essence.

Ideally, the House and Senate leadership, working with Obama's team, would be developing their strategy for rescuing the economy. A post-election session of the lame duck Congress, Democratic but less so than the incoming one, would be called back to Washington to work on emergency legislation -- to recapitalize banks, refinance mortgages, and pump money into the consumer economy.

However, my round of reporting this week suggests that Obama and the congressional leadership are not there yet. The leaders on Capitol Hill are literally exhausted after nearly two weeks of twenty-hour days brokering the Paulson plan, and stunned that their efforts have not borne fruit. The Obama people are looking to January to launch an emergency program rather than November. And to the extent that their eyes are on November, the focus is November 4, not November 5. "First, we have to get him elected," one senior economic aide told me. Yet, as Obama himself said, in one of his most elegant put-downs of McCain, a president needs to be able to more than one thing at a time.

The general belief is that Treasury Secretary Paulson has been granted sufficient powers by the legislation to take an equity share of banks, and to refinance a lot of mortgages -- if he chooses to use it. But the powers are vague, and they depend on Paulson's disposition to behave more like Roosevelt rather than like the private investment banker that he was -- and continues to resemble.

"Between the Fannie and Freddie rescue and the Paulson plan," one official told me, "we probably own two-thirds of the mortgages in America." But "we" in this case is the Treasury Department, peopled by former officials of Goldman Sachs, who demonstrate far less concern for the distressed homeowners than for the bondholders.

The Treasury Department simply does not have the staff or the competence, and may not have the political will, to lead a mass refinancing of mortgages. This morning's Wall Street Journal reports that fully one mortgage in six now carries more debt than the underlying value of the home. Even John McCain has called for something bolder and more direct than the Paulson plan.

The one federal agency with something close to the competence and experience to take the lead on large-scale refinancings is the Federal Deposit Insurance Corporation, a far more aggressive and interventionist agency than Paulson's Treasury Department. But in the jousting over the details of the bill, Paulson made sure that the FDIC was excluded from the inter-agency panel that oversees Treasury's actions. That cannot bode well.

Assuming Obama wins, there will be a Democratic successor to Paulson and that Treasury will doubtless use the powers granted Paulson far more aggressively. But that will be after January 20. And at the rate that the financial system is collapsing, even three months is an eternity.

The two other key players in this morbid interregnum are Fed Chairman Ben Bernanke, whose tenure will continue into the Obama administration, and House Speaker Nancy Pelosi. Bernanke continues to expand the emergency powers of the Fed, now venturing into uncharted waters by having the central bank go into markets and buy unsecured short term commercial loans, a power not even granted Paulson by the recent legislation. It would be far better if Bernanke worked in concert with an overall strategy devised by the incoming administration.

Pelosi is on board for an emergency second stimulus package, to be enacted right after the election, this time in the range of $250 billion. At the rate the economy is cratering, she will get little of the usual resistance from Democratic blue-dogs and Republican foes of big government. Even "earmark" will become a good word again, since the whole country will be earmarked for help. But if the banking system goes down the drain, and housing foreclosures intensify, a fiscal stimulus will not be sufficient.

Obama, Bush, Bernanke, and Paulson would do well to avoid the mistakes of the Hoover-Roosevelt interregnum, a stand-off that made it even more arduous to climb out of the Great Depression once Roosevelt finally took office. As difficult as it may be, they need to negotiate a much bolder emergency program that Obama can carry out. And they should move right after Election Day, and begin the planning right now.

Bush, you will recall, took office promising to be "a uniter, not a divider." Obama has promised to bridge differences, beyond ideology and party. Both candidates have pledged, ad nauseam, to put country above politics because of the emergency. This would be a good moment to actually act on those pledges. For Bush, it would be the one grace note of a failed presidency. For Obama, it would allow a beginning on a bipartisan high. And it might even spare 300 million Americans the worst.

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