Democrats stand to gain from crisis

WASHINGTON – The credit crisis that has hit home mortgages and shaken worldwide financial markets is turning into an albatross for President Bush and Republican presidential contenders, piling atop an unpopular war in Iraq and eroding traditional GOP claims of good stewardship 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 have had little difficulty deflecting such calls for change.

But the credit upheaval and the shock waves it has sent through the economy have changed the political climate. In a Gallup Poll taken last week, 72 percent 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 percent recorded in January 1992, when unhappiness with the economy was credited with helping Bill Clinton win the presidency.

“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 health-care costs and pension worries to set a very unfavorable economic environment for the president’s party,” said Thomas Mann, a presidential scholar at the Brookings Institution in Washington.

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.

Sen. Christopher J. Dodd, D-Conn., chairman of the Senate Banking Committee and a Democratic presidential contender, got both 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 – pointing out 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.

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.

Jon McHenry, a partner with the GOP polling firm 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 the current trouble was 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,” McHenry said.

He 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 has created a dilemma for Republicans regarding how Washington should respond.

In general, the administration and its supporters have settled on macroeconomic moves such as 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.”