Financial Crisis Is Absent From Agendas of Parties, Candidates

By Rich Miller

Aug. 27 (Bloomberg) -- The U.S. is facing the worst financial crisis since the Depression. You would never know that from the Democrats' platform in Denver or its Republican counterpart, or from listening to Barack Obama or John McCain.

While both candidates have bemoaned the ravages of the subprime crisis, they have yet to spell out steps for tackling it, such as using taxpayer money to shore up banks and housing.

``They fail to come to grips with the biggest danger that is going to hit the next president in his first few months in office: the crisis in the capital markets,'' said David Smick, a Washington-based consultant to hedge funds and author of ``The World is Curved: Hidden Dangers to the Global Economy.''

The Democrats' platform, adopted at their Denver convention this week, labels the crisis a ``debacle'' and promises to jump-start the economy with a $50 billion stimulus package. It says nothing about helping banks or bailing out the mortgage-finance firms Fannie Mae and Freddie Mac.

The draft of the Republicans' plank, to be adopted next week at their convention in St. Paul, Minnesota, supports ``timely and carefully targeted aid to those hurt by the housing crisis'' and opposes bailouts of private financial institutions. It doesn't mention Fannie and Freddie.

Fannie, Freddie

Many Democrats shy away from tackling the credit crisis because of the party's historical support for Fannie and Freddie. The Republicans, for their part, are reluctant to draw attention to a crisis that occurred on their watch. The subprime meltdown isn't the only item missing from the parties' agendas. The list also includes the Democrats' failure to set out a strategy for countering Russia's assertiveness and the Republicans' silence on income inequality.

Senator Charles Schumer, a New York Democrat, said conventions aren't the place to discuss detailed plans for dealing with the markets.

``The conventions are aimed at the average voter,'' he said Aug. 25 in Denver. ``You don't go into Quinlan's bar and ask them what to do about the'' Securities and Exchange Commission.

Democratic lawmakers also said Congress defused the issue by passing legislation last month to help homeowners refinance their mortgages and provide a financial lifeline for Fannie and Freddie.

`Big Step'

``We feel like we've taken a big step to stabilize the situation,'' said Senator Tom Carper of Delaware, a Democrat on the Banking Committee.

The situation is reminiscent of the 1988 presidential campaign between George H. Bush and Michael Dukakis, when there was little mention of the savings and loan bailout that the Bush administration later put in place. The Federal Deposit Insurance Corp. has estimated the cost of that rescue at about $125 billion, though former Treasury Secretary Lawrence Summers said the bill would have been about $300 billion in today's dollars.

The cost of the current crisis may be larger. Banks and securities companies have recorded $504 billion in losses related to the turmoil and the International Monetary Fund forecasts the bill will eventually be double that.

``We are in the midst of the worst financial crisis since World War II,'' Stanley Fisher, governor of the Bank of Israel and a former IMF official, told central bankers in Jackson Hole, Wyoming, on Aug. 23.

Bank Failure

Harvard University professor Kenneth Rogoff, another former IMF official, predicted that a big U.S. financial institution would go bust. Neither Senator Obama of Illinois, 47, nor Senator McCain of Arizona, 71, has addressed such an eventuality, which would likely entail the use of taxpayer money.

Carly Fiorina, a top economic adviser to McCain, said the candidate views the economy as ``the most important domestic issue'' and has offered solutions to the housing crisis.

``He would not allow Fannie and Freddie to fail,'' she said in an interview yesterday on Bloomberg Television. ``He would reform them fundamentally.''

To help plug their losses, banks and brokers have raised more than $350 billion in capital from investors. That is becoming increasingly difficult, said Mohamed El-Erian, co- chief executive officer of Newport Beach, California-based Pacific Investment Management Co.

The government may have to step in to keep credit flowing to the economy, according to El-Erian, who managed the endowment of Cambridge, Massachusetts-based Harvard University until 2007.

Keeping Mum

Tom Gallagher, senior managing director at ISI Group in Washington, said it isn't surprising that Obama and McCain are keeping mum about the possibility of increased government money for the banks and housing market, given the uncertain outlook and the potential costs involved.

With the government unlikely to take many further steps to ease the crisis before the November election and the end of President George W. Bush's administration, Gallagher said the next president may be compelled to act soon after taking office in January.

Gallagher, who worked as an aide to former Democratic Senator George Mitchell, likened the situation to the early 1930s. President Franklin Delano Roosevelt talked little during the campaign about the bold steps he took after the election to try to turn the economy around.

The crisis ``will confront us from day one,'' said Jason Furman, an Obama economic adviser. ``It will be an issue that will require presidential attention.''

To contact the reporter on this story: Rich Miller in Denver at rmiller28@bloomberg.net