Mortgage Crisis and the 2008 Election

James Pethokoukis argues that the morgage meltdown and the resulting volatility of the stock market may seal the fate of Republicans in 2008.

But a recession between now and Election Day 2008—along with accompanying job and income losses, falling home values, and a dodgy stock market—could be the whammy of political death. As it is, the online betting market Intrade gives the Democrats a 57 percent chance of winning the White House. (It also gives a 31 percent chance of a recession next year.)

An economic downturn as the election approaches might make the Dem candidate a lock. Negative growth in the second quarter of 1960 hurt Richard Nixon, running as Ike's successor. Likewise, a full-fledged recession in the second and third quarters of 1980 spelled doom for Jimmy Carter's re-election bid. In both those instances, the other candidates, JFK and Ronald Reagan, respectively, were running dynamic, "Let's Get America Moving Again" kinds of campaigns.

The Dems this year seem to be more focused on economic security than on economic growth. And who knows, maybe a dicey economy might even help GOP-ers like Rudy Giuliani and Mitt Romney, with their records of turning around Massachusetts and New York City, though that seems a stretch. More likely is a vicious circle where a weak economy makes it more likely that a Democrat will take the Oval Office. And in a sort of feedback loop, the greater the likelihood of that happening, the more likely it is that the stock market and business will focus on the rising prospect of higher taxes and protectionist trade legislation.

I am not so sure, because the historical trends Pethokoukis points to are a little more coincidental than causal.

Jimmy Carter's loss, while influenced by a poor economy, was probably more a direct cause of his inability to deal with the Iran hostage crisis. Nixon's loss was part of his lack of appeal as a candidate when compared to the youthful energy of John Kennedy at the dawn of the television age politics. To be certain, the economy cannot be discounted in its role in those two defeats (Carter more than Nixon), but there were a lot more factors than a poor economy that led to changes in the White House.

While a most Americans are not happy with the direction of teh country, those concerns are probably more driven by disatisfaction with the Iraq war than with the domestic policies of the Bush Administration. The "mortgage crisis" has not impacted too many Americans, with over 90% of Americans happy with their lot in life. Surely some of thoses 90% must be feeling a mortgage crunch.

The Democrats need to be careful with the economic policies. Since the Reagan tax cuts and deficit spending in the military during the early 1980's, the United States has undergone sustained growth for a quarter century. Protectionist trade policies, higher taxes and government subsidies will put the brakes on that growth pattern, which has experienced a few market downturns like the one currently happening.

The mortgage correction that is occuring right now was forseeable five years ago. Too many risky mortgages were issued based on a housing market artifically altered by liberal-pushed "smart growth policies." While the housing market was hot, the mortgage industry was making money hand over fist and a higher percentage of risky mortgages did not impact teh bottom line since the risky mortgages were making money.

Now that the housing market is readjusting itself, the mortgage industry is correcting itself as well. The sad part is that the mortgage restructure is going to keep teh housing market flat for longer than it would have had there not been so many risky mortgages issued. The one that cannot be implemented in the mortgage market is some sort of government bailout program that Hillary Clinton has proposed. Such a program will artifically alter the market such that people who probably shouldn't have the mortgage they have will be able to keep such poor products and a few years later will need another bailout.