Mortgage Meltdown May Hand 2008 to Democrats

Economy was a bright spot for the GOP, but recession odds are growing.


It's terrible luck for Republican candidates in 2008 that just as the Iraq war seems to be ever so slightly turning for the better, the economy seems to be taking a turn for the worse, thanks to the spreading mortgage credit crisis. The former might not be decisive enough to save the party in 2008, while the latter might be just damaging enough to do it in for sure.

The nearly six-year Bush boom—"the greatest story never told," according to economist and CNBC host Larry Kudlow—has been a tangible accomplishment that the GOP candidates, including the party's eventual White House hopeful, could have trumpeted next year. It has a nice, understandable narrative, too. Faced with an imploding Internet stock bubble and corporate scandals, Bush slashed taxes in 2001 and 2003 and helped restart America's amazing growth machine.

But a recession between now and Election Day 2008—along with accompanying job and income losses, falling home values, and a dodgy stock market—could be the whammy of political death. As it is, the online betting market Intrade gives the Democrats a 57 percent chance of winning the White House. (It also gives a 31 percent chance of a recession next year.)

An economic downturn as the election approaches might make the Dem candidate a lock. Negative growth in the second quarter of 1960 hurt Richard Nixon, running as Ike's successor. Likewise, a full-fledged recession in the second and third quarters of 1980 spelled doom for Jimmy Carter's re-election bid. In both those instances, the other candidates, JFK and Ronald Reagan, respectively, were running dynamic, "Let's Get America Moving Again" kinds of campaigns.

The Dems this year seem to be more focused on economic security than on economic growth. And who knows, maybe a dicey economy might even help GOP-ers like Rudy Giuliani and Mitt Romney, with their records of turning around Massachusetts and New York City, though that seems a stretch. More likely is a vicious circle where a weak economy makes it more likely that a Democrat will take the Oval Office. And in a sort of feedback loop, the greater the likelihood of that happening, the more likely it is that the stock market and business will focus on the rising prospect of higher taxes and protectionist trade legislation.

Yet I still think Americans will avoid recession, thanks to the Teflon consumer (falling gas prices will help) and the global boom, which may be the "second greatest story never told." The global economy is now expected to grow at 5.2 percent this year, according to the International Monetary Fund. Good trade numbers this week have helped prompt many economists to revise their take on second-quarter growth. Many now think it rose at more than 4 percent, rather than the 3.4 percent annual rate first estimated by the Commerce Department. But it remains to be seen how much momentum will slow going forward.