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The American subprime explosion is still sending ripples of trouble out to the rest of the financial world. But subprime mortgages may only be the beginning of disruption in the US. And the reason for that has to do with the coming presidential election. Markets are uncertain about what a President Obama, a President Hillary Clinton, or even a President McCain and Congress might do. In this respect, 2008 is like another election year: 1936.

Elected in 1932 on the platform of a “new deal for the American people”, Franklin Roosevelt famously said in his first inaugural, “We have nothing to fear but fear itself.” Yet the historical orthodoxy, that the New Deal brought an end to the Great Depression, is the opposite of the truth: FDR’s “bold, persistent, experimentation” stirred up new fear and uncertainty in the markets. The New Deal is remembered for its spectacular public works projects, such as the Tennessee Valley dams. But it also meant higher taxes, inflexible wages and strikes that cost far more jobs than the New Deal created.

The effects of political uncertainty, then as now, were felt around the globe. The New York Times reported from London, quoting Tom Paine’s old adage, “Credit has been called ‘suspicion asleep’. Many bankers and economists here think that suspicion has now been awakened by the [Roosevelt] government hand and that it will not go to sleep again for many years.” They felt the same way in America.

As Roosevelt campaigned for re-election in 1936, promising “a rendezvous with destiny”, Wall Street hoped that the president would tire of experiments and allow the US economy to recover. But after his second election triumph FDR signalled the opposite; he declared that in government he saw “an instrument of unimagined power”. The trouble was not merely the new policies: it was the uncertainty over their extent. Capital retreated to its country house; unemployment rose again; and what might have been a half-decade depression became a decade-long one.

The US coped with the crisis then as it is coping now: with denial. But denial does not curtail damage. The Bush administration and the Federal Reserve are doing what they can, but to limited effect. Investors are already focusing on the sure prospect of a Democratic House and Senate and a president whose philosophy will be quite unlike Ronald Reagan’s. Bill Clinton supervised the Democratic divorce from Lyndon Johnson and his Great Society by ending welfare. There has been no such break from the interventionism of FDR’s New Deal.

The House Speaker Nancy Pelosi has already made it clear she wants to continue in FDR’s footsteps. That means reversing the tax-cutting trend, begun by Reagan, that has endured under Bill Clinton and George W. Bush. That will very likely mean expanding government intervention; for example, in health care. As with the New Deal, it is the political uncertainty that has aroused suspicion and gloom on Wall Street. Today’s political uncertainty will affect markets and peoples far beyond America’s shores.


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