Congressional leaders of both parties, Treasury Department Secretary Henry Paulson, and Federal Reserve Chairman Ben Bernanke just completed an emergency meeting to discuss a potential comprehensive legislative initiative to combat the subprime mortgage crisis. Brief comments were made by several legislators from both parties after the meeting tonight, and then Secretary Paulson made some brief, yet insightful comments. Neither campaign has yet commented on the meetings, and the political effect on the race is up in the air.

Paulson noted that the issue of bad debt related to the real estate mortgage industry is “systemic”, and expressed some optimisum that a “comprehensive” solution would be reached shortly regarding the “root problem” of the financial crisis: “illiquid assets on financial institutions’ balance sheets”. Paulson hopes to get detailed legislation to Congress in a matter of hours. The aggressive move by Paulson, combined with McCain’s call for a similiar RTC-like solution today on the stump, the MFI Trust, put Obama and the Democrats on the defensive for the first time since the economic crisis broke on Sunday night.

While the Democrats in charge of Congress earlier today signaled their intent to adjourn without any legislative action to combat the roiling economic crisis, now congressional Democrats are being forced to at least hear Paulson out, as they did tonight. The next few days will decide whether a bipartisan legislative solution to the subprime mortgage crisis will be enacted prior to the election and which party holds the momentum in the race for President going into the first debate on September 26th.

Over the next few days, Obama and the Democrats are between a rock and a hard place - if they support a new RTC-like plan, the argument that the Bush Administration is a failure loses some luster and the markets may rebound strongly, potentially hurting Democratic electoral chances. On the other hand, if Obama and the Democrats are seen as blocking quick action on the financial crisis, voters may enact an electoral revenge. The Presidential campaign has heated up, and every moderate voter should be paying close attention to both campaigns on the preeminent issue this year.

The Dow Jones Industrial Average (DJIA) jumped about 400 points this afternoon on the breaking news that Treasury Secretary Henry Paulson has been floating the idea to Congressional leaders of an entity simliar to the Resolution Trust Corporation (RTC) to buy up bad subprime mortgage debt and place a floor on the present spreading liquidity crisis.  The RTC was created in the late 1980’s to clean up the mess created by the Savings & Loan banking crisis. The leak of Paulson’s RTC comments places pressure on congressional Democrats to focus on legislation to help staunch the crisis.

Just today, Democratic Senate Leader Harry Reid and Speaker of the House Nancy Pelosi announced that they favored adjorning Congress as without any legislative action because as Reid put it, “no one knows what to do”. With McCain’s announcement of an RTC-like solution he called the MFI Trust, and the leak of the Paulson entreaties to the Democratic Congress to act, Democrats will have to decide whether to cooperate with the Treasury and act now or adjourn and hope that voters don’t notice the inaction but instead focus on Obama’s heralding of the continuing economic malaise.

This week, John McCain has undergone a slide in his standing nationwide as the financial crisis on Wall Street, combined with McCain’s “the fundamentals of the economy are strong” gaffe, have pushed voters in Obama’s direction.  Today in Cedar Rapids, Iowa, John McCain laid out an economic program to fix the subprime mortgage mess that is dragging down both mortgage companies and investment banks.   The Obama campaign and the mainstream media have been strongly critical of McCain’s economic policy, and today’s speech appears to be designed to specify McCain’s plan to fix the economy and perhaps rebut such criticism. 

The central plank in McCain’s economic plan is the creation of a Mortgage and Financial Institutions (MFI) Trust, which would act in concert with the Treasury Department and financial institutions with exposure to non-performing subprime mortgage loans to purchase a large chunk of the non-performing loans and sell them off over time.   The idea is similiar to the relatively successful Resolution Trust Corporation (RTC), which was created in the 1980’s to clean up the Savings & Loan mess via purchase and slow resale of those failing banks’ assets.   If implemented, diverse economists from the Carter, Reagan, Bush 41 and Clinton years believe a new RTC-like plan may work.  As envisioned by McCain, implementation of a MFI Trust may stop the current free fall in the subprime mortgage paper market and place the U.S. economy on a path back to stability.  

McCain also shined a spotlight on the strong ties between Obama, the Democratic Party and the goverment sponsored entities (”GSE”) at the center of the subprime mortgage crisis:  Fannie Mae and Freddie Mac.   McCain referenced recently publicized fundraising figures for Fannie Mae for the period of 1989 to 2008 showing the top three receipients being Democrats, with Obama in the number 2 position.  Obama’s choice of ex-Fannie Mae CEO Jim Johnson as the head of his search committee was also highlighted, with McCain’s clear intent being to tie Obama to the root of the present financial crisis.   Recent analysis of the subprime crisis suggests a link between the GSE’s lending practices and the exponential creation of subprime mortgage debt and resultant housing market oversupply.

Interestingly, the mainstream media’s coverage of McCain’s economic policy speech is solely focused on McCain’s statement that he would fire the present chief of the Securities & Exchange Commission (”SEC”), Christopher Cox.   Perhaps in the days to come the mainstream media will report on the pros and cons of McCain’s MFI Trust proposal and pressure Obama to outline in concrete terms his economic revitalization plan.  

To date, Obama has focused on laying sole blame upon the GOP and McCain for the present financial crisis and promising change, increased regulation and tax cuts if elected.     Obama ridiculed McCain’s proposal earlier this week to engage a commission to determine how to reform overlapping regulatory agencies over financial markets to steamline the bureaucracies and increase effectiveness. Interestingly, Obama himself supports streamlining of regulation, but has no concrete proposal on how to actually fix the present regulatory failings, instead relying on the claim that GOP control of the Presidency is the primary problem with financial regulation. Today’s detailed proposals from McCain may force Obama’s hand in fashioning concrete proposals for fixing the subprime mortgage mess and the failure of oversight on Wall Street.

With the glow of the conventions fading, Barack Obama has blunted John McCain’s momentum as built by his VP pick of Sarah Palin and convention speech excitement by successfully altering the media narrative and taking advantage of the rough economic news of recent days.   Obama was on his heels at the end of the convention period, looking up at McCain for the first time since wrapping up the Democratic nomination in June - trailing by up to five points in the Gallup daily tracker last week.  After the 9/11 Forum, the Obama campaign changed gears by first pushing a media narrative depicting McCain as out of touch and deriding his campaign as “sleaziest and least honorable campaign in modern presidential campaign history.”  While presidential historians generally scoffed at the Obama “sleaziest” claims, the Obama campaign has been successful in changing the subject from Obama’s gaffes (see lipstick on a pig) to the claimed untoward tactics of the McCain campaign.  

On Sunday, news broke that giant investment banker Lehman Brothers was facing insolvency, and when neither the Treasury Department nor any private company wanted to pitch in, Lehman Brothers filed the biggest Chapter 11 Bankruptcy filing in U.S. history on Monday morning.   Tuesday was American International Group’s (AIG) turn to look for suitors to save their flailing company, and late Tuesday night a 85 billion dollar federal loan was arranged.   The federal loan did not shore up the market, and America has been shocked by the huge market losses in the first three days of the week, with the Dow Jones Industrial Average dropping over eight hundred points this week to close today at 10,609.66, off almost 8% for the week. 

Obama has seized upon the economic anxiety spreading amongst voters to make his case for change by blaming the GOP policies and by extension McCain for the collapse of the corporate giants.  As noted by the Obama campaign today, headlines across America shouting out horrible economic news are helping drive voters back to Obama.  As expected, the cable news media is playing along with Obama by airing hourly segments about how bad economic news helps Obama and hurts McCain.  McCain hasn’t helped himself by providing on Monday a sound bite for Obama’s use (”the fundamentals of the economy are strong”) in his “out of touch” narrative.   Meanwhile the Obama campaign’s release this morning about the AIG loan didn’t exactly instill confidence in his economic expertise with the inability to proper identify AIG (Obama’s release discussed the American Insurance Group, not the actual company in question, American International Group). 

The combination of the rough economic news and the strongly negative Obama messaging about McCain and his campaign have served to buoy the previously slumping Obama campaign.   A mainstream media that appeared to strongly support the Obama campaign’s negative messaging has helped to amplify the effectiveness of Obama’s change in strategy on the public’s view of the candidates.  Indeed, the back and forth between the campaigns has been to Obama’s decided advantage so far this week, and the advantage is beginning to show up clearly in the national and state polls.  Obama jumped back ahead in the Gallup daily tracker today to a two-point lead, 47%-45%, his first time since the week of the GOP convention that Obama has had a lead. 

As for Obama’s claim that McCain is running the “sleaziest and least honorable campaign in modern presidential campaign history,” and the mainstream media’s strong endorsement of Obama’s claims, reality runs counter to this narrative.   The media and Obama point to two main examples of “dishonesty” from McCain:  the kindergarden sex education ad, and the “lipstick on a pig” controversy.  Both claims appear to this observer to be more differences in interpretation as opposed to dishonesty.   Regarding the sex education ad, McCain’s ad states that Obama supported comprehensive sex education for K through 12th grade.  Obama countered that the kindergarden sex curriculum was limited to “age appropriate” matters and hence McCain was lying, and the media readily agreed.   In reality, the substantial change advocated by the proposed Illinois state legislation at issue does indeed call for comprehensive sex education for grades K-12 instead of only grades 6-12 as the previous law allowed for.    The bill is unclear as to what exactly the kindergardeners would be taught, i.e. what is “age-appropriate”.   Accordingly, McCain’s ad is not a lie and instead is a difference of interpretation between the campaigns in which the wording of the bill actually supports McCain’s ad.  

 As for the “lipstick on a pig” controversy, the Obama campaign managed to turn his arguably inartful comments back upon McCain by claiming that McCain campaign was lying when it pushed the message to the media that Obama was targeting Palin with the comment.   To this observer whether Obama was referring to Palin or not is a matter of interpretation and accordingly the view of the McCain campaign can hardly be classified as dishonesty.   If one watches the video clip, the crowd clearly appears to understand Obama’s comment as a ding on Palin and the initial press accounts of the comment from the Obama beat writers backed up this perception by the crowd.    Obama managed to posit several different interpretations of his own comment, ranging from the pig being the Bush administration policies and the lipstick the new McCain “change” message to the pig being McCain and Palin being the lipstick.   As Obama and his campaign could not definitively state what he meant by that comment, and the crowd who watched inferred Obama was dinging Palin, calling McCain a liar because of his campaign’s messaging here is disingenious at best. 

Cutting through the fog of the present media narrative, it appears to this observer that neither candidate has developed a strong message that connects with voters on how to confront the present financial crisis and resolve it.   Obama has touted his $1000 tax cut for the middle class while speaking in generalities about reducing the influence of special interests and lobbyists, while McCain has highlighted his intent to streamline and reform government agencies which regulate the economy to make such agencies more effective and less compartmentalized.   Both candidates will surely continue to work to strike the right chord over the next few days with rattled voters who are looking for realistic solutions and not soundbites.  The next few days are sure to continue on with the “McCain’s out of touch//sleazy” narrative unless McCain can find a way to break the news cycle’s present direction - something the campaign appears at present to be incapable of doing.  

Tonight in New York City, a new tone of civility was struck as Columbia University hosted John McCain and Barack Obama in the Nation of Service forum.  Each candidate had a little less than an hour of questioning by a joint panel consisting of PBS’s Judy Woodriff and Time’s Richard Stengel.  The forum was the culmination of the two-day ServiceNation Summit 2008, focusing on encouraging community service throughout the country and world.   As noted by host Stengel, civic participation is at or near an all-time high in America and the prominence of tonight’s forum in the general election period underlies that strength.   The takeaway from the forum overall is not so much any advantage gained by either candidate but instead a turning down of the volume of the campaign and demonstration of the likeability of each candidate. 

The campaign has turned more heated in the days since the conventions, and tonight was a demonstration of the positive qualities of each candidate.  McCain was direct and forceful; Obama was professorial and eloquent.  Collectively, Obama and McCain entered tonight’s forum as unusually well liked, in historical standards, with both candidates drawing between 55-60 percent favorability ratings from the public.  The George W. Bush elections, with Al Gore and John Kerry, featured more polarizing candidates with little appeal beyond a bare majority of Americans. 

Both candidates were complimentary to each other on this anniversary of the 9/11 attacks, with McCain jokingly offering Obama as position in his cabinet as “Service Czar” and Obama later essentially returning the favor.   Obama specifically concurred with McCain’s position several times, most clearly with their joint critique of claim that the Bush Administration did not stir up service but instead put forward the ”go shopping” message in the aftermath of 9/11.

As for substance, both candidates readily agreed to support bipartisan legislation soon to make its way through the Senate, the Hatch/Kennedy Bill, which substantially enlarges several government service groups like AmeriCorps.   Obama was careful to stress military service, perhaps remembering his gaffe by omitting the mention of military service when giving the commencement address at Wesleyan University and listing ways for the new graduates to serve their country.  McCain was questioned about Palin’s rough treatment of Obama’s community organizer days and seized the opportunity to praise community organizers and community service while defending his running mate’s right to defend herself from criticism of her small town mayor roots.

An interesting divergence in questioning occurred regarding the issue of “American Exceptionalism”.   Briefly, American Exceptionalism is the concept that America is a unique country that organizes itself aroung certain values, like democracy, the rule of law, liberty, the common good, volunteerism, that are uncommon in other countries hence making America exceptional.  Woodruff pushed McCain hard on whether he thought his belief in American Exceptionalism meant that the U.S. is “better” than other countries - McCain adroitly continued to rely on the “unique” nature of America.   Obama was let off somewhat easier, just affirmatively responding to whether be believed in American Exceptionalism.   The interviewers may have let an opportunity slip here as Obama’s positions laid out in his Berlin Speech are in some respects philosophically at odds with the concept of American Exceptionalism, yet no followup questions ensued.   

The kids at Columbia interviewed after the forum appeared pretty fired up about service, talking at length about signing up for foreign service and even supporting the return of ROTC to Columbia University’s campus.  ROTC was banned from Columbia University in 1969 and has historically been a polarizing issue.  Tonight, McCain and Obama both agreed that the university should accept ROTC back onto campus, underscoring a night filled with agreement on policy and pledges of bipartisan cooperation to augment service in America.

As for missteps, McCain  made a mistake when explaining his respect for mayors.   ”It’s easy for me to go to Washington and frankly, be somewhat divorced from the day-to-day challenges people have,” he said.  Surely Obama will arrange an ad around those words.   For Obama, a strong support of increasing the size of the military slipped out in the questioning, which is quite at odds with his stated positions regarding reducing specific weapons systems like missile defense and claims to be able to fund his domestic programs with the use of funds freed up by reduced military spending on Iraq.  Obama may face questions in the coming days on this inconsistency.  Another strange moment occurred after Stengel stated that  that civic involvment was at an all time high in America and Obama went into a stump response about the need to restore American service to what it once was.    

An interesting point of divergence emerged during the dueling set of similiar questions asked of each candidate.  When questioned on the scope of the government’s role in spurring additional service, McCain highlighted his philosophical reluctance to be overly reliant on the government, reserving national disasters and national defense as the only sectors in which the government should be the primary actor.  McCain stated several times that an over-involved government would risk taking the space of private volunteer efforts and possibly reduce volunteerism overall.   Obama, on the other hand, clearly stated his preference for a primary government role in all service efforts and defended that role as critical to spurring additional national service.    

In summarizing his support for a central government role in volunteerism and service, Obama stated that he “wanted to make government cool again”.    For this observer, Obama’s statement was the highlight of the night and drew stark contrast to the very man that Obama had lunch with today - Bill Clinton.  Indeed, it was Bill Clinton, in the 1996 State of the Union address, that stated ’[t]he era of big government is over’.    Obama has made clear previously that he supports an expansion of the size and scope of the federal government, but tonight underlied his passionate belief in the ability of the government to solve the most pressing issues of the day, including the spurring of additional volunteerism in America.

Each of the candidates performed well and neither appeared to gain an advantage politically from the evening.   The next few days will determine if the level of civility shown tonight will reduce the acrimony between the campaigns over the ongoing Palin attacks and counterattacks and the testy environment which accompanies a deadlocked race for the Presidency.