The politics of the bail-out

The White House's dramatic $700bn plan to bail out Wall Street is the biggest story in the US, and the latest topic that the presidential candidates are obliged to talk about.

The immediate effect has been to benefit Barack Obama's campaign, which the public perceives - by a small margin - to be more competent to manage the economy.

Senator Obama's poll numbers began to move up in tracking polls in the middle of last week, and the average of the latest polls give him a 2.7% lead over Senator McCain, according to the RealClearPolitics website.

But although voters are increasingly pessimistic about the economy, they are also deeply split, and increasingly cynical, about the wisdom of a $1 trillion bail-out of Wall Street, whose excesses many blame for the crisis.

John McCain is increasingly attacking greed on Wall Street

And Senator McCain, whose gut reaction has been to oppose government bail-outs, may yet benefit from the growing scepticism about giving the US Treasury a blank cheque to buy up devalued Wall Street assets.

He has also begun to talk openly about the "greed" of bankers - using harsher language than Mr Obama - which could also give him a boost.

The realisation that the bail-out is not playing as well on Main Street as it is on Wall Street is pushing Congressional leaders to press for more concessions in return for an early deal on the package with the Bush administration.

Among the proposals circulating on Capitol Hill, the one gaining most political traction is a limitation on executive bonuses.

Some Democrats also want the government to take an ownership stake in any firm that gets a bail-out, and others want a significant weakening of bankruptcy laws to give judges discretion to allow families facing foreclosure to stay in their homes.

Voter distress

The economic crisis has pushed voters into one of the most pessimistic outlooks in recent times. Over 80% of the public believes the economy is likely to get worse, with nearly 30% saying the US is facing not just a recession, but a depression like the l930s, according to a recent Gallup poll.

Many homeowners are unable to keep up with their repayments

The deteriorating economy is the main reason that nearly 90% of the public says the country is heading in the wrong direction, according to polling by the Pew Research Center, says its associate director, Michael Dimock.

But so far the government actions to stem the crisis have not inspired confidence.

Just one in four voters (28%) back the plan for a $700bn bail-out, while 37% are opposed and the rest are undecided, according to a new poll by Rasmussen Research conducted over the weekend.

Even fewer, just one in seven, backed the earlier, smaller $85bn bail-out of insurance giant AIG.

Part of the reason is a deep distrust of the effectiveness of government. A majority of voters say that any action by the federal government in the economic crisis is likely to make things worse, rather than better.

Independent voters, who are being courted by both presidential campaigns, are the most sceptical about a bail-out.

Another big dividing line is between those who own stocks and shares (around two-thirds of voters) who narrowly support the bail-out, and those who do not, who are strongly opposed.

One reason for the scepticism about the bail-out is that most people do not yet personally feel affected by the crisis. More predict that their own finances will improve next year than those who say they will get worse, despite their overall pessimism.

A Populist Note

The two candidates - whose campaign plans have both been knocked off course by the crisis - have taken increasingly divergent paths on the bail-out, although both are moving gingerly lest they be blamed for blocking the rescue.

Barack Obama called for help for 'struggling families'

Senator Obama has given the plans a cautious welcome, calling for urgent action by Congress - but urging that ordinary people, not just Wall Street bankers, get some benefit from the rescue.

He has also urged Congress and the administration to pass another economic stimulus plan to further boost the economy with more government spending.

Senator McCain, who at first opposed the AIG bail-out only to endorse it the next day, has called for more Congressional oversight of any big bail-out operation by the US Treasury.

He said on Monday that "when we're talking about $1 trillion of taxpayer money, 'Trust me' just isn't good enough."

As well as attacking Washington - and implicitly criticising the Republican Treasury Secretary Hank Paulson - Mr McCain also lashed out at bonuses on Wall Street.

"We can't have taxpayers footing the bill for bloated golden parachutes like we see in the Lehman Brothers bankruptcy," he told a working class crowd on Monday in Scranton, Pennsylvania.

Mr Obama - whose criticism of Wall Street has been more restrained - has sought to attack Mr McCain for flip-flopping on the issue, accusing him of being a strong advocate of deregulation for his entire Senate career until he changed his mind last week.

"He's trying to make up for 26 years in 26 hours, he's flipping so fast," Mr Obama said in Green Bay, Wisconsin.

Long-term damage

So far the candidates have been reluctant to acknowledge that a big bail-out would greatly limit their option when they took office.

Both are advocating tax cuts which could cost between $2 trillion and $4 trillion over eight years in office, according to independent analysis by the Tax Policy Center. Their healthcare plans could cost another $1 trillion, the Center adds.

Mr Obama argues that he will be able to pay for his schemes by raising taxes on the rich - those making over $250,000 per year - while Mr McCain says he will be able to find enough savings in the federal budget to pay for his tax cuts.

But with the size of the bail-out now roughly equivalent to annual government spending (excluding social security and Medicare) such claims are less and less credible.

James Horney of the left-leaning Center for Budget and Policy Priorities, acknowledges that the growing size of the federal deficit - which could double to $600bn to $900bn in the new president's first year - will make it hard to pass any new spending programmes.

On Friday both candidates will spar on foreign policy in the first presidential debate.

But with only 8% of the public now saying that the Iraq war is the most important issue facing the country - while 48% say it is the economy (according to the latest New York Times/CBS News poll) - the final debate on domestic policy, in mid-October, could be more crucial to the outcome.

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