Neither Barack Obama nor John McCain is known for economic expertise but it's a safe bet that managing the fallout from the financial industry's meltdown will be a top priority for the next US president. While both presidential candidates have been quick to promise reform, including broader power for regulators, investors warn that few of their policy proposals will survive perfectly intact after the Nov. 4 election and the start of the new, post-Bush era in January. “What they say and what they do will be very different,” said David Gilmore, partner at Foreign Exchange Analytics in Essex, Connecticut. “The events unfolding on Wall Street are impacting the real economy very quickly and will dictate what kind of economic policies are pursued.” Obama, a Democratic senator from Illinois, plans to raise capital gains and corporate taxes to pay for income tax cuts for Americans making less than $250,000 a year, but money managers said those may have to be delayed or pared back. “It's just not a good idea to raise taxes when the economy is weak,” said Chris Orndorff, who helps invest $50 billion at Payden & Rygel in Los Angeles. “It would be different if we were growing at 3 percent a year but, at around 1 percent, that would be a punch to the gut that we don't need right now.” On the other hand, with federal books already deeply in the red, markets will probably have to get used to some form of tax increase in the future, even though both Obama and McCain are proposing tax cuts – albeit with different distributional effects. The US Congressional Budget Office is projecting a record budget deficit of $482 billion in fiscal year 2009. And that was before the government took over $5.4 trillion of liabilities from home finance companies Fannie Mae and Freddie Mac and extended an $85 billion emergency lifeline to insurer American International Group. Here, McCain may have to rethink $600 billion in proposed tax cuts that the nonpartisan Tax Policy Center says would swell the national debt by $5 trillion over the next decade. Even former Federal Reserve Chairman Alan Greenspan said recently the country cannot afford tax cuts of the size and scope that the Republican senator from Arizona is proposing. Leonard Burman, director of the Brookings Institution and Urban Institute's joint Tax Policy Center, put a finer point on it: “McCain says he'll offset enormous tax cuts with cuts in spending, but he would have to cut the size of government back to what it was in the 1950s to make the books balance.” That the challenges are legion was made crystal clear this week, which began with the biggest stock market slide since the aftermath of the Sept. 11 attacks in 2001. Investors saw the demise of Lehman Brothers, a Wall Street institution, and the takeover of Merrill Lynch, both victims of an ongoing credit crisis that is at the root of the worst This week's $85 billion bailout of American International Group wiped out common shareholders of the company but failed to calm financial markets, which are fretting about which financial firm will be the next to need serious help.
