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Republican Voters Pushing Out TARP Supporters

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If you think you've seen chaos and dysfunction in the government so far, you ain't seen nothing yet.

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Yesterday Republican primary voters came across the barricade with torches and pitchforks. Any remaining day traders still playing Wall Street's latest pump-and-dump gambit -- the mirage that QE 2.0 is lurking just around the corner -- should carefully consider the implication. Indeed, the signal emanating from this year's election noise is quite unmistakable: The unholy alliance of careerist politicians from both parties that slammed through the September 2008 bailout of Wall Street -- against the vocal wishes of 80% of the electorate -- has been shattered.

The literal poster-boy victim of this anti-crony capitalist tide is Rick Lazio, the GOP candidate for New York Governor who went down to overwhelming defeat at the hands of an unknown from Buffalo. In fairness, it's possible that the allegedly conservative Lazio was only doing his job all those years as JPMorgan's (JPM) chief influence peddler in Washington. Maybe he didn't really believe that the largesse obtained by JPMorgan on his watch were an appropriate imposition on the taxpayers -- such as the 10-year industry-wide holiday on paying deposit insurance premiums, which effectively bankrupted the FDIC, the $28 billion safety net for the Bear Stearns acquisition, or the $25 billion TARP takedown. But one thing is certain: Republican voters most definitely didn't think Lazio's four-year apprenticeship to Wall Street's chief crony capitalist, Jamie Dimon, enhanced his qualification for the governor's mansion.

In the Delaware Senate nomination race, nine-term Congressman Mike Castle suffered what can only be described as an ignominious defeat at the hands of Tea Party heroine Christine O'Donnell. Ordinarily, a career that included founding a pro-chastity religious group called the Savior's Alliance for Lifting the Truth and selling portraits of various Vatican personages wouldn't be much of a qualification for higher office. But at the end of the night, O'Donnell had one big thing going for her while Castle had a political lifetime of nearly everything going against him.

O'Donnell had apparently been to Washington only once for a brief stint as an intern at the Republican National Committee, and therefore hadn't been instructed in the doctrines of crony capitalism by the denizens of K Street. Thus, not understanding that it's the job of Wall Street to harvest the profits and Washington to underwrite the losses arising from the nation's vast financial casino, she consistently and loudly denounced Congressman Castle's vote in favor of TARP.

That was all that the voters of Delaware needed to hear -- thereby reinforcing a recurrent pattern coming out of this election cycle: Namely, GOP Senators who voted for TARP have been sent packing, or have packed up and quit voluntarily before the voters could fire them.

The first of these departed was Senator Robert Bennett of Utah, a purported conservative who spent 18 years on the Senate Finance Committee where he never once encountered a business tax subsidy he didn't like. Other pro-TARP Republican Senators who got their walking papers include Kay Bailey Hutchison (defeated for Governor of Texas), Lisa Murkowski of Alaska, and Senator Arlen Specter, who's been the sole member of the Specter Party in the Senate for several decades now.

Adding to the ranks of pro-TARP departures was the voluntary exit of Senator George Voinovich of Ohio and especially Senator Judd Gregg of New Hampshire. The latter served on the banking committee where he consistently re-broadcast K Street talking points with flawless fidelity.

Needless to say, had Bernanke and Paulson been forced to pitch their Wall Street bailout to the kind of Senate Republican caucus likely to emerge from the November election, the outcome might have been far different. Certainly the principled voice of Senator Richard Shelby wouldn't have been diluted and muffled by the confused, excuse-making noises that emanated from the above-named departed. Perhaps even one of Senator Jim Bunning's rhetorical beanballs would have found its mark!

At the same time, the Delaware Putsch was a repudiation of the kind of "country club statism" represented by the 40-year career of Mike Castle. As president of the so-called Republican Main Street Partnership, he represented the wing of the GOP that's especially challenged by fiscal math.

These so-called Main Street Republicans were always the first in line for Federal pork targeted at their middle-class constituencies -- such as Cash for Clunkers, Cash for Caulkers, tax credits for homebuyers, and subsidies for agriculture, Amtrak, ethanol, higher education, urban development, and more. Fair enough, if that's what they believe in. But when this breed of Republican also lined up to drive a $300 billion annual hole in the budget by voting for the Bush tax cuts, and then supported several hundred billion more in annual red ink for two unfinanced wars, credulity met its limit.

Undoubtedly, certain sleepwalkers who still inhabit the financial world and periodically mount a ritual cheer for free markets, low taxes, and small government will find yesterday's outcomes comforting. Poor things! In fact, yesterday was simply a foretaste of the political chaos that is coming down the pike in November and for years to come.

America is in deep fiscal trouble because it's been in the thrall of two free lunch parties for 30 years. The Democrats have pushed out the boundaries of the welfare state and supported the wars. The Republicans have started the wars, decimated the revenue base, and surrendered on domestic spending cuts.

Consequently, the Federal government is destined to borrow $100 billion per month from now until at least October 2013, when conceivably a new government might be installed. At the same time, inflation is slinking toward zero and real growth seems likely to bounce along the bottom at 1% to 2%, owing to the burdensome overhang of our 40-year national borrowing binge. Consequently, nominal GDP can't possibly grow at more than $40 billion to $50 billion per month. The debt and income ratio is thus 2:1 and debt is on top. A Greek-scale public debt ratio in excess of 100% of GDP is baked in the cake.

It's axiomatic that Washington will do nothing about this runaway fiscal freight train before the spring of 2013. President Obama, his veto pen already sheathed and his political knees already knocking, won't even be able to stop an extension of the Bush tax cut for the top 2% of wealthiest Americans. In that environment, the very idea of means-testing Social Security, axing farm subsidies, or throttling current runaway spending for higher education gives implausibility a new definition.

But the real danger to financial markets isn't simply the endless sums which must be floated in Treasury auctions week in and week out. The more ominous threat is that the Delaware Putsch signals that the nation's economic governance will now descend into sheer, partisan chaos.

Some of the Tea Party-supported marginalistas who have grabbed the Republican nomination will likely lose in November. But for the next several years the GOP will be the site of a vicious civil war in which the remnants of the regulars will be under merciless attack by Tea Party activists, amateurs, Bible thumpers, and just plain whackos from the hinterlands.

At the same time the Democrats are likely to respond to their upcoming drubbing by forming the equivalent of a circular firing squad. That fractionation will, in turn, preclude an agreement with the White House on any kind of meaningful fiscal plan -- let alone a productive negotiation with Republicans who should have de facto control of Capitol Hill, if not an elected majority.

As the utter chaos and dysfunction of the American fiscal and economic policy factory comes into clearer view, the global fixed-income and currency markets may at some point succumb to a panic attack. This time there will be no Wall Street bailout because the careerist bag-carriers who supported the last one will be long gone. But no matter. The next crack-up will be of a scale way beyond the pay grade of even Uncle Sam.
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