Financial markets -- what effect on the election

It has been interesting to see the unanimity of Obama and McCain with regards to the government intervention with Fanny and Freddie and the refusal to have government intervention with Lehman. Both candidates supported the government acting to save Fanny and Freddie from bankruptcy. Both also supported the refusal to act insofar as Lehman is concerned. I cannot wait to see what will differentiate the two in this area. So far, we have seen the predictable -- Obama saying the fault for the crisis lies with Republicans, but other than that nonsense, neither has much to say.

It seems to me that no one is making clear to the public what is really at stake here. Looking at Lehman alone, its stock value has gone down from about $50 billion a year ago to about 100 million dollars today. That $50 billion dollar loss is just a part of the losses that have resulted. Lehman's bonds and other instruments will be frozen by the bankruptcy and may not be paid at anything like full value. One never knows in a bankruptcy what will come out of it. In other words, the losses from Lehman alone to the economy will be as large as the amount pumped into the economy by the feds in the so-called "stimulus" package. The only difference is that the stimulus package gave everyone a small amount, while the Lehman failure will hit some people extremely hard -- meaning that the Lehman failure will hurt much more in human terms than the stimulus package helped. When you couple the Lehman loss with the losses to shareholders in Fanny and Freddie, the losses for Merrill shareholders, those of Washington Mutual, Bear Sterns and IndyMac and all of the other failing or threatened financial institutions, the losses to the economy are staggering. I have not seen anyone come up with a full total, but the number has to be above a trillion dollars. Couple that loss with the increased amounts that have been sent overseas for imported energy this year, and it is a miracle that the economy has still continued to grow.

So the question remains -- what will the candidates do about this? Obama's answer of raising taxes for the top 5% clearly will only make things worse. Obviously, when there have been major losses in the economy, it does not make sense to take more money out of circulation in the private sector. The net effect of those tax raises will be multiplied many times and will produce a material slow down beyond any already being experienced.

McCain's prescription of cutting business taxes may help, but it is far from a panacea. The question is how to heal the sick credit and housing markets.

Let's hope that we hear some clear answers (rather than finger pointing) from both candidates before long.