Evans & Novak Political Report: Panic and Fear on Capitol Hill

Overview: The administration's vast bailout plan is meeting resistance this week, with Democrats calling for a more populist plan, Sen. John McCain and others on Capitol Hill calling for more congressional oversight of these proposed new powers for Treasury, and some conservatives and economists of all stripes questioning the efficacy of Paulson's plan, if not the broad idea of a bailout.

The mood of the day in Washington is panic and fear. Lawmakers in meetings with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke left ashen-faced when warned about the potential course of the U.S. economy absent a massive bailout. Those in the know keep hushed tones and insist "trust us," while laymen—basically everyone in Congress and the press—fear the unspeakable catastrophe around the corner.

Emboldened Democrats—including Sen. Barack Obama—are forcefully pushing an unapologetically interventionist line, stating repeatedly, in as clear terms as possible, that capitalism is the problem and government is the solution. It's the sort of stark rhetoric Democrats have mostly avoided for the past 12 years, but they feel they can get away with in the light of the Republican administration's accelerating march towards nationalizing the financial sector.

Congressional Republicans and conservatives, meanwhile, are almost completely at a loss. Republicans are still finding their footing after denying for months that the economy is endangered. Frantic behind closed doors, they seem unable to propose any solution that approaches the magnitude of the problem. Promising more drilling, capital-gains-tax cuts, and full business expensing comes across as laughable—the same things the GOP was pushing while saying the economy was strong.

At the presidential level, it's not only that McCain and Palin lack credentials and knowledge about economics, but McCain also lacks a real rudder. As the GOP nominee, he has taken up free-market talk, but does he really have any roots in a philosophy? Does Palin have the clout or the know-how to guide McCain? The answer to both questions is probably not.

When Republicans highlight the Democratic big-government programs that contributed to the mess—Fannie Mae, Freddie Mac, and the 1977 Community Reinvestment Act directing private capital in low-income housing—they lack conviction and credibility, having long been champions of policies such as IRAs and 401(k)'s driving money to Wall Street, or the home-mortgage interest deduction and the "ownership society."

The closest conservative talk has come to hitting on more fundamental problems of government's masterminding the economy has been a proposal—pushed by House conservatives under the auspices of the Republican Study Committee—to roll back the Federal Reserve's mission, leaving it only one charge: battling inflation. Some conservatives have critiqued "easy money."

Democrats, meanwhile, confront the threat of moral hazard by calling for stricter regulation and other expansions of government power. Control over CEO pay is just the most populist of the new regulations Democrats want to tack onto the bailout.

There is no Democratic willpower to torpedo this bailout. Right now, it appears the majority will simply add as much as they think they can get away with, and pass Paulson's plan. But Democrats also are very wary about passing a massive corporate bailout for which Republicans can attack them. In both chambers, they will work to make sure they have GOP support, but the minority may have the political upper hand here. Presidential

Electoral College: While it is too early to tell which way the unfolding economic crisis will sway the election, Obama still looks like the favorite, with a one-state lead by our last count. Meanwhile, a Washington Times story this week raised a very real possibility: a 269 to 269 Electoral College tie. The notion is worth considering.

By our count, which gives Obama a 273 to 265 lead, it would take a four-point swing for McCain to force a tie—for example, if McCain picked New Hampshire and its four electoral votes out of the leaning Obama column. Alternatively, if you swing Colorado's nine electoral votes to McCain and Nevada's five to Obama, it's 269 apiece. There are other such plausible permutations.

Additionally, it's important to remember that an absolute majority—270 Electoral Votes—is needed to win the election. A plurality with no majority—plausible if one state can't certify its vote or if, as happened in 2000, one or more electors abstain or casts a protest vote—is the same as a tie. It would throw the election to the House of Representatives and the Senate.

The 111th Congress, not the current Congress, would be responsible for electing the President, with each state's delegation getting one vote and a true majority of 26 states needed. Currently, Democrats control 27 state delegations with two ties and 21 delegations controlled by the GOP. Per our forecasts for this election, Democrats should control 29 in the 111th Congress (picking up Alaska and New Mexico). For the GOP to keep Democrats below 26, they would need to hold onto New Mexico and Alaska, and pick up Pennsylvania (which would require a net gain of two seats there) and Indiana (by defeating Rep. Baron Hill [D]), and switch New Hampshire to a tie (by defeating Rep.. Carol Shea-Porter [D]).

Of course, there is the possibility a Democrat in a conservative district in a Red State could defect. Rep. Heath Shuler (D-N.C.) or Rep. Gene Taylor (D-Miss.) are two names that come to mind. There are others. If McCain were to win the popular vote, this would be much more likely—though still a long shot.

The Vice President, meanwhile, would be chosen by the new Senate, which, in the Democrats' worst-case scenario, will have 51 Democrats plus Independent Bernie Sanders (Vt.). More likely, Democrats will have 52 to 55, plus Sanders (not counting Sen. Joe Lieberman [Conn.]). Again, considering that McCain will win a majority of states, political pressure could be applied to Red State Democrats such as Sen. Ben Nelson (Neb.), Sen. Claire McCaskill (Mo.) or Mark Begich of Alaska, if he unseats Republican Sen. Ted Stevens, to vote for Palin if the GOP ticket wins the popular vote. Party loyalty would likely win out, though.

Keeping Obama and Biden out of office, spurring a nightmare scenario of acting President Nancy Pelosi and acting Vice President Robert Byrd would require Republican craftiness and toughness that certainly hasn't shown itself to date.

East of the Mississippi: Over the next two weeks, we bring you a region-by-region breakdown of the top House races, with our forecasts. This week, we cover everything East of the Mississippi (plus some), and next week we will give you our analysis from the far side of the Great River.

Democrats will gain seats this election; the question is how many? Increased anxiety about the economy could offset or erase any Palin bump for the GOP. Democrats recruited better than the GOP, too.

Freshman Democrats who knocked off Republicans last year are a prime battleground. The other battleground is GOP-held open seats. With big Democratic gains in open seats only partially offset by GOP recapture of recent Democratic takeovers, the outlook is good for Nancy Pelosi's Democratic majority. Democrats +5. New England: (Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut)

Republican congressmen are nearing extinction in New England, with Connecticut the last refuge for the House GOP in a region that was once a Republican stronghold. In 2006, Democrats picked up both House seats in New Hampshire and two in Connecticut, leaving Rep. Christopher Shays (R-Conn.) as the lone Republican holdout. Naturally, Democrats have made Shays a top target, but on the other hand, the GOP is in strong position to win back one of the two New Hampshire seats.

Shays barely survived his 2004 and 2006 reelections, and this year he faces a well-funded challenge from Greenwich's Democratic chairman Jim Himes. A Democratic poll last week showed the candidates tied, with 10% undecided—a death sentence for Shays if true. Indeed, with the financial troubles hitting Greenwich, and Obama likely to win big here, Shays has to be considered an underdog.

Meanwhile, Rep. Carol Shea-Porter (D-N.H.) is one of the nation's most vulnerable Democratic freshmen. She faces a tough challenge from the man she unseated: former Rep. Jeb Bradley (R). Four years ago, she won by 5,000 votes in a landslide Democratic year. Democrats could get another landslide this year—with large leads in the latest Senate and governor polls, plus a significant Obama edge—but this is the state's Republican district, centered in Manchester.

The Palin Effect here helps the GOP by motivating the social conservatives, but as the election appears to swing back onto economic turf, that helps the Democrat, leaving Shea-Porter as a slight favorite.

While Shays and Bradley could both win, right now it looks like Democrats are about to wipe Republicans off the New England congressional face. Democrats +1.

Mid Atlantic: (New York, New Jersey, Pennsylvania, Delaware, Maryland, Virginia) New York and New Jersey offer the most fertile ground for House Democrats this year, as GOP numbers in those states continue to dwindle. Meanwhile, Pennsylvania offers some close contests.

New York Republicans are faring as poorly as their New England neighbors. After the 1994 elections, the GOP held 14 House seats in the Empire State. Currently the Republicans hold only 6. After this election, that number will be at most 3. All three GOP retirements this year—Representatives James Walsh and Tom Reynolds Upstate as well as disgraced Rep. Vito Fossella of Staten Island—lean strongly towards Democratic takeovers. None of the 23 Democrat-held seats provide promise for the GOP.

In New Jersey, it's a similar picture. The retirements of Representatives Jim Saxton (R) and Michael Ferguson (R) yield two leaning Democratic takeovers, while Rep. Scott Garrett (R) faces a spirited challenge from a blind rabbi.

Northern Virginia has also been home to a Democratic surge—one which likely will result in a Democratic pickup. Fairfax County. Chairman Gerry Connolly (D) is the favorite to win the seat of retiring Rep. Tom Davis (R).

In Maryland, Republicans have to defend the Eastern Shore open seat where conservative State Sen. Andy Harris (R) knocked off liberal Rep. Wayne Gilchrest (R) in the primary, and Gilchrest is supporting the Democrat.

Pennsylvania, meanwhile, promises a slew of competitive races. The best GOP chances—and the only non-freshman Democrat vulnerable this year—is in the 11th District where 12-term Rep. Paul Kanjorski (D) is trailing Hazleton Mayor Lou Barletta (R) of immigration-law-enforcement fame.

Other Republican pickup opportunities include former Rep. Melissa Hart's (R) rematch against Rep. Jason Altmire (D), Tom Manion's (R) challenge to freshman Rep. Patrick Murphy (D), and businessman Chris Hackett (R) has a chance to win back the Northeast corner of the state from Rep. Chris Carney (D), who won the seat in 2006 from accused mistress-strangler Don Sherwood (R). Democrats are making a serious run at Rep. Phil English (R), but the other GOP seats look safe right now.

In the Keystone state, the only challenger looking like a favorite right now is Barletta, which offsets one of the six seats Democrats will gain between New York, New Jersey, and Virginia. Democrats +5.

South: (North Carolina, South Carolina, Georgia, Florida, Alabama, Mississippi, Louisiana, Arkansas, Tennessee, Kentucky)

The South has formed the core of the GOP majority since 1994, but even in this region Republicans have struggled of late—losing seats in North Carolina and Kentucky in 2006, and dropping special elections in Mississippi and Louisiana this year. Throw in (decidedly non-Southern) South Florida, and the Democrats have gained six seats in the last two years. The GOP is positioned to make up some of that ground this fall.

Begin with those two special election victories for Democrats—both Democrats, Rep. Don Cazayoux (La.) and Rep. Travis Childers (Miss.) are underdogs in their general elections this year, where they will be down-ticket from Obama.

In Alabama, each party is defending an open seat, with Representatives Bud Cramer (D) and Terry Everett (R) both retiring. Democrats have a good shot at both seats, especially with their recruitment of Montgomery Mayor Bobby Bright (D) in Everett's district. Palin provides a bump in these districts, but that could disappear by November 4. As of now, Republicans are favored in both.

In the Louisville, Ky., district, former Rep. Anne Northup (R) does not appear to be making headway in her rematch against Rep. John Yarmuth (D).

Florida provides a handful of exciting races, with several vulnerable incumbents. Republican Representatives Ric Keller, Vern Buchanan, Lincoln Diaz-Balart, and Mario Diaz-Balart, all face serious challenges this year, with Orlando-based Keller perhaps the most endangered. Republicans hope to win back the Palm Beach seat of former Rep. Mark Foley (R), who became a mascot of the failed and disgraced GOP majority last year. As of now, though, Florida's seats look static.

With expected gains in Louisiana, Mississippi, and Alabama, the GOP can mitigate its losses in the rest of the country. With an economy-inspired Democratic tidal wave possible, even the Southern gains could be wiped out. Republicans +3.

Great Lakes: (Ohio, Indiana, Illinois, Michigan, Wisconsin, Minnesota) The upper Midwest, like Pennsylvania and New York, provides two different types of districts that were strong for Democrats in 2006 and will be strong again in 2008: white-bread suburbia and dying industrial towns.

In Ohio, Republicans need to defend three open seats and two vulnerable Republicans. Franklin County Commissioner Mary Jo Kilroy (D) is the slim favorite over State Sen. Steve Stivers (R) in Ohio's 15th District. Representatives Jean Schmidt and Steve Chabot face serious challenges, too.

Indiana Republicans failed to recruit A-List challengers to the two freshmen Democrats who took over GOP seats in 2006, and the GOP's hopes here rest on ex-Rep. Mike Sodrel (R) knocking off Rep. Baron Hill (D) in a re-rematch. Right now Hill is a slight favorite, though a lasting Palin bounce could be enough to help Sodrel even the score between these two at 2-and-2.

Republicans are struggling in Illinois, having already lost the seat of resigned Rep. Dennis Hastert (R), and on the verge of losing another exurban Chicago district—that of retiring Rep. Jerry Weller (R). Suburban incumbents Mark Kirk (R) and Melissa Bean (D) look safe right now, and the open seat of Rep. Ray LaHood (R) leans Republican.

In Michigan, Representatives Joe Knollenberg (R) and Tim Walberg (R) are playing defense in tough races, and Walberg is currently being outraised. Wisconsin features a top freshman target for the GOP in millionaire Rep. Steve Kagen (D), facing a spirited rematch from former Assembly Speaker John Gard (R).

In Minnesota, the top House race is the suburban barn-burner between lawyer and Iraq veteran Ashwin Madia (D) and State Rep. Erik Paulsen (R) to replace returning Rep. Jim Ramstad (R). Meanwhile, Rep. Michelle Bachmann (R) has far outraised her opponent. Democrats +2.

“Those in the know keep hushed tones and insist “trust us,””

Yeah, sure.

How about just retoractively cancel all short trades? But then, that might be what’s it’s really about, and they don’t want to say “we’re protecting gazillionaires”. They did stop further short trades, though.

They would rather take are money to bail out their friends.

That is the reason for the “hushed tones.”

McCain said something needed by Monday when the markets open.

If they want “liquidity” the Fed can do that via the commercial banks without a bailout of the hedge funds and investment banks.

“Promising more drilling, capital-gains-tax cuts, and full business expensing comes across as laughable—the same things the GOP was pushing while saying the economy was strong.”

Laughable? What a buffoon! Even Lord Keynes knew that you don’t raise taxes in a recession. If we are, in fact, barrelling toward a depression, getting government out of the way is all the more important.

How much you want to bet that the history books will blame this crisis, too, on “capitalism”?

Take a much, much simpler tack: simply declare all the CDS contracts to be void. This tactic also has the merit that, through the centuries, hundreds of thousands of 'contracts' have been made into nullities by the order of gov't.

Plus, unwinding all of one kind of trade is a fantastically complex undertaking. Unless you've worked in the back office of a securities or bond firm, you have absolutely no idea how difficult your 'solution' would be to implement. And it wouldn't get done very efficiently either, just btw. And it would cost a shjtload of money to do.

Does Senator McCain want to win this election? Then he had better entirely denounce any and all Administration schemes to bail out failed investment banks, insurance firms, etc., and call for the firing of Paulson and a vote of no confidence in Chris Cox and Ben Bernanke, who serve under fixed terms. If McCain calls for letting the investors and the subprime borrowers to pay the price for their poor decisions, he will be President and win by a margin unseen since that Reagan enjoyed in 1984. If he just wants to tweak it here and there, he will be at a disadvantage to Obama, who will promote all sorts of little benefits for his party's constituents as part of the deal. Obama will be POTUS 44, like it or not.

Take a much, much simpler tack: simply declare all the CDS contracts to be void.

How about the following:

Any CDS that is not revealed to the public by October 1 will not be allowed to be paid out until seven days after it has been made public. At minimum, the public record must identify the parties to the transaction, the amount, and whether it has been triggered.
No CDS may pay out until the fact that it has 'triggered' has been revealed to the public.
No CDS may pay out on a daily basis an amount greater than a certain fraction of its parent entity's assets, based upon the number of outstanding triggered and untriggered CDSs. This would ensure that when multiple CDSs fire in succession, the assets get divided among them instead of all going to the first ones.

BTW, I'd also like to see the following rules for short-selling stocks:

Any entity selling stocks shall be expected to prove that the stocks were owned at the moment of sale. If the entity cannot provide such proof, then the purchaser shall have the right to either adjust the sale price to the lowest price between the time of sale and the earliest time for which the seller can prove ownership, or to reject the transaction.

Such a rule would eliminate the advantages to naked short selling by anyone who intends to complete a trade; if it can be shown that someone engaged in naked short selling without intending to complete a trade (for purposes of attacking stock prices) that should be a criminal matter.

As for executive compensation, I'd like to require that any executive pay over a certain amount in a corporation which is being bailed out must be held in escrow for some period of time (possibly all for two years, or possibly different amounts for different durations). If the corporation needs further infusions of capital to remain solvent, the escrow account shall be used before taxpayer funds.

If a whiz-bang CEO thinks he can turn around a company, and if he succeeds, he should be able to collect a lot of money. If he fails, however, he should not receive such compensation.

This is giving me a headache.

If this and If that and If the other.

Let it go, let it go. We won’t know who has won (or in case Sen Obama wins, who has stolen) the election until November 4th or early hours of the 5th.

And besides, the October surprise is coming . . . just be patient.

No quarrel generally. I'd make 7 days into 7 months for CDS contracts (frankly, I'd rather cancel them outright, as a moral lesson to scumbags to the effect that, if you want to bet on a debt instrument going into default, buy puts, not CDS). I can live with paying off the dirtbags at OUR convenience.

I don't really see what your ''public knowledge'' provisions gain for the nation. Direct the citizens' ire at GS, Merrill, MS and the boys? Sure, it will...but so what? To what purpose, cui bono? The only necessary thing is to reliquify. I'm sure the Regress will screw this up, because they want their contributors and cronies to be paid.

Be inclined to ask for a transaction register. Line items for EVERY disbursement made from the bailout fund, INCLUDING the expected payback date. We won't get anywhere near that level of transparancy, of course. Sigh.

Your short-selling rule is -- no offense -- idiotic. Short sales have, from time immemorial, been made with borrowed shares, not 'owned' shares. Better that your rule should read that the short-seller must be able to prove that the shares sold had in fact been borrowed...which is NOT the case with the 30-odd billion ''naked'' short shares out there today.

Y'know, it's curious. You and I between ourselves have been more specific, and, candidly, made more sense in terms of palliating/ameliorating/helping end this mess than anyone I've seen in the woefully inept Regress or in the laughably inept ''media''. Yet there's not one chance in hell that any of our ideas will be adopted by these dipshjts.

As the ol' Perfesser, Casey Stengel, used to say -- ''It's amazin' ''.

FReegards!

I don't really see what your ''public knowledge'' provisions gain for the nation. Direct the citizens' ire at GS, Merrill, MS and the boys? Sure, it will...but so what? To what purpose, cui bono? The only necessary thing is to reliquify. I'm sure the Regress will screw this up, because they want their contributors and cronies to be paid.

The vast majority of citizens wouldn't have any use for the hundreds or thousands of gigabytes of information detailing all the credit default swaps, but any entity which owns credit default swaps should be interested in knowing the value of other credit default swaps from the same firm. Further, people who own assets or credit default swaps related to them should be interested in knowing what the nature of other credit default swaps related to those assets. Coding that information would be a little more complicated than simply identifying the buyer, seller, and amount, so that would be phase II of the 'data dump'.

Given the intertwined nature of credit default swaps, I don't see any good way of ensuring that the people who need particular bits of information about the market will receive it, other than by broadcasting everything. Given that terabyte hard drives are readily available, distributing the information should not be difficult.

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