Plans are already being made for the 2010 elections for the US Congress, and the Democrats would appear to have some advantages. They have a popular president, a six-percentage-point lead in party identification and nine points for a generic congressional ballot. Majorities of the electorate see both Barack Obama and the Democratic party as pushing for a change from the failed policies of the past. The Republicans seem divided and confused over a recovery strategy, plagued by high-level defections (such as senator Arlen Specter) and spokespeople (such as Rush Limbaugh and Dick Cheney) who seem too extreme to win over the necessary swing voters.
But the president's party almost always loses congressional seats in non-presidential-year elections. And if next year's elections reduce the Democrats' margin, it would be even more difficult to make progress on important reform legislation, such as healthcare. At the end of the day, the ability to deliver reforms that actually improve the lives of the majority of Americans will most likely determine their long-term success as a political party.
The 2010 elections will very likely be about who gets blamed for the current economic disaster. Even if the economy is recovering in the latter half of next year – and that is a big "if" – it will not feel much like an economic recovery for most Americans. The labour market will still be very weak, with unemployment projected to pass 10% and rising in the second half of next year.
Millions will have lost their homes and their jobs, and many millions more will have lost most of the equity that they had accumulated in their homes – the main source of retirement savings for most households. The party that gets blamed for the mess will be most likely to lose seats in Congress. The financial regulation overhaul announced on Wednesday by the White House contains some positive steps, but it does not address the main cause of this deep recession, which was not the regulatory structure but rather the failure of the regulators – including the Fed – to do their job.
The Democrats have a chance to defy electoral history and increase their congressional lead next year, and perhaps even push the Republican party toward the status of a permanent minority. Celinda Lake, one of the Democratic party's leading pollsters and political strategists, recently found that 71% of voters want Congress to hold investigations into the "events leading up to the Wall Street financial crisis". More importantly, the proportion is just as high among swing voters.
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A congressional investigation, if done right, would probe the errors, excesses, fraud, corruption and other abuses that led to the country's worst recession since the Great Depression. There is plenty of blame to go around, but much of it would probably land on Wall Street and the country's bloated financial sector. The vastly overpaid executives, who made ever-increasing bets on the proposition that obviously over-valued house prices would continue to rise indefinitely, would come under fire.
Some of them were rewarded for their failures with high positions in government. For example, George Bush's Treasury secretary Hank Paulson, who made $164m at Goldman Sachs during the peak of the housing bubble in 2006, helping to steer the economy into an iceberg and then coming to Congress to ask for a blank cheque of $700bn to bail out his Wall Street friends.
The most important policy makers, such as former Fed chairman Alan Greenspan – who has to some degree fallen from grace – but also current chairman Ben Bernanke, might also be asked to explain how they failed to notice the biggest asset bubble in the history of the world as it swelled over a period of several years to obviously threatening proportions.
The obvious analogy to such an investigation would be the famed Pecora commission during the 1930s, as some have pointed out. It was named for its intrepid chief counsel Ferdinand Pecora, who went after the Wall Street titans of that era and helped pave the way for the nation's most important financial regulatory reforms, such as the Glass-Steagall Act of 1933.
The Democratic congressional leadership thus has a chance do something that could promote badly needed reforms, is desired by an overwhelming majority of voters and could give them a big political boost. But do they have the guts to do it? We will soon find out.