Thursday, September 27, 2007

It's the Economy, Stupid (Redux)

The conventional wisdom holds that the Iraq war, because it's the "biggest issue" now, will be the lead issue in the 2008 elections. At least one poll disagrees, saying that "the overall care and resources devoted to children" and "the quality of a public school education" could be (or should be) the focus of the candidates.

In any other year, such issues might stay in the foreground. For most Americans, however, Iraq is already a sideshow that in no way affects them directly, and "the care of children" is too nebulous an issue to inflame the passions of voters. (Which candidate is "against" the care of children? For that matter, which children welfare proposals are the best or most urgent?)

Instead, it is becoming clearer each day that the issue that there will be one issue on the mind of every American come next July: the economy.

Calculated Risk has a chart showing the strong historical correlation between dropping home sales and recessions--and it seems clear we're on the edge of a big one. In addition, by next summer, a devastating number of adjustable-rate mortgages will reset (almost twice as much as the amount that caused fainting spells on Wall Street last month), foreclosures will shatter new records, and the current mortgage/credit crisis will be a fond memory. Complicating matters will be the price of energy. And a severe downturn in the economy often leads to an increase in violent crime, a hint of which we're already seeing.

Nouriel Roubini, one of the doomsayers who had been warning of the current debacle for some time, has changed his tone again, saying that his previous forecasts were too "optimistic":
With lower home prices, lower home equity withdrawal, a credit crunch in mortgage and consumer credit markets, high oil and gasoline prices, falling employment, lower consumer confidence, the savings-less and debt-burdened US consumer – that spent well above its means for years – is now on the ropes and at the tipping point.

Iraq will still be on the radar, but the average American will be spending far more time worrying about how to pay the monthly bills. And traditionally, when that happens, the party in power gets the blame. The election in 2008 could turn out to be a replay not of 2006 but of 1992.