The Democratic Collapse/Fedwatch Jude Wanniski & David Gitlitz August 25, 1994

THE DEMOCRATIC COLLAPSE

The surge on Wall Street yesterday was the first glimpse of many we will see in the next few years of a new political order in Washington, D.C. It became clear yesterday afternoon that Senate Minority Leader Bob Dole had masterfully outmaneuvered Senate Majority Leader George Mitchell in their high stakes chess match. Mitchell's announcement this afternoon that he will adjourn the Senate after mopping up the mess he's made of the crime bill means there will be no health care legislation this year. It had to be evident to the financial markets that the political risks associated with the Clinton health care and crime legislative agendas had evaporated. It is now obvious that if it is even possible for Congress to pass a crime bill this year, it will be viewed by the world at large as a historic and definitive Dole/Republican victory over the New Deal. The Democratic leadership from this point forward will be unable to use the chicanery of omnibus legislation under popular labels to finance the payola that sustains their intellectually corrupt organism. If this Democratic organism no longer has this nurturing, it will shrivel and die, forcing the party's rebirth on a new viable and moral plain.

It is now literally impossible for health care legislation to be enacted this year. None. House Speaker Tom Foley practically said that publicly earlier this week. Senate Democrats this week were pushed to the point of revolt against Mitchell, with one of his allies privately saying his decision to keep the Senate in session through the August recess was the worst blunder he has made in his years as Leader. When Sen. Daniel Inouye [D-Hawaii] flatly told Mitchell to get any kind of crime bill he can from Dole and let everyone go home to campaign, it forced Mitchell to do just that, with Inouye telling him there can be no health care legislation this year! Mitchell, though, has had an impossible position, and still has no positive options on the crime bill. Sen. Bob Packwood [R-Ore.], a military history buff, privately had likened Mitchell's position to that of General Rommel's Africa campaign in WWII. Rommel could not retreat into the desert because of a lack of petrol. He was forced to advance into withering allied fire, hoping for a miracle before his supplies were exhausted. 

Our confidence that Dole would not be outmaneuvered, and that the game was really over several weeks ago, was based on our sense that Dole genuinely sees the historic opportunity presented him and his party, and that he would not throw it away for a legislative compromise. [See "Dole's Health Care Gambit," 6-30-94.] When the "crime bill" was defeated in the House two weeks ago, with Minority Whip Newt Gingrich keeping his troops in line, the Democrats were hurled back into the desert. This then forced them to use precious time to regain that ground or lose everything they had worked for this year, including health care, on the eve of the elections. On Saturday, after a week of piece-meal concessions to Republican moderates, Democrats at least regained that ground as Gingrich could not keep his troops together -- outmaneuvered by Majority Leader Dick Gephardt, as a splinter group of House Republicans delivered the quick deal to President Clinton. 

The problem Dole then faced in the Senate was how to keep at least 41 of his 44 Republicans together for a procedural point of order, when several were tempted to cut the same kind of deal made in the House. At one critical point, it seemed Dole might lose, as fellow Kansas Republican Nancy Kassebaum appeared ready to wilt, as the Democrats hammered away at the "assault weapons" issue. Mitchell's best chance was to wrap this issue around Republican necks, arguing that the gun lobby was behind their nefarious attempt to deny the American people a crime bill. Of course, everyone in Congress knows the "assault weapons" issue is a phoney one, as The Wall Street Journal makes clear in its lead editorial this morning. It is a "feel good" issue the Democratic strategists use as cover, demonstrating that they are crime fighters, in order to deliver the pork to their troops.

Dole, though, yesterday afternoon checked Mitchell with an impossible choice: Accept the Republican crime amendments as a unit, stripped clean of all political porky payola, but leave the ban on assault weapons intact!!, or he would be forced to call the "point of order." A point of order, which requires 41 votes, would open the legislation to amendment on the floor. Mitchell cannot do the latter, because he knows his members will have to vote for the Republican amendments or be thrown out of office. He has to accept the Dole package or go home without a crime bill. With this deft tactic, Dole pacified Kassebaum and the other wilting Republicans, keeping his troops united. Mitchell, like Rommel, has run out of gas. 

The last straw may have been the story in this morning's Washington Post, which reports that Ollie North has opened a lead in his race against Sen. Chuck Robb [D-Va.]. Robb, of course, is stuck in a Senate that has not had a single vote in a week while Ollie roams the Virginia countryside cheerfully collecting what will probably be a runaway victory. My guess is that every Democrat in the Senate up for re-election read the Post this morning horror-stricken, knowing their own opponents are making hay as well. House Democrats, of course, skedaddled after Saturday's crime vote, yet if Mitchell has to choose the lesser of two evils and swallow the Dole crime bill, the House Democrats know they would have to return to Washington to vote for what has become a Republican bill. 

Like a tail wagging a dog, the minority party is in effective control, with now every likelihood that its stand on principle will convert to great gains in the mid-term elections.

Jude Wanniski

FED WATCH

The accumulating market signals that rule out another early fed funds rate hike may be taking the Fed -- at least for now -- off the treadmill that has sustained the brisk expansion of the monetary base in the midst of an ostensible Fed "tightening." Flush conditions in the bank reserve markets have kept fed funds trading below the new 4.75% target since the August 16 FOMC move, with few exceptions. For the week ending yesterday, funds traded at an effective rate of 4.66%.

This is a sharp departure from trading patterns that prevailed earlier in this period, with funds being bid above target on expectations of further imminent Fed action, and the open market desk ceaselessly injecting liquidity to help maintain the target. In a more perfect world, we'd expect to see a symmetrical response to a soft funds rate: if the desk injects cash to keep funds from trading above target, it should drain reserves to keep the rate firm. For whatever reason, the Fed has instituted a bias in its pegging procedure which makes it much more likely to take action to confirm the target from the high side (add reserves) than from the low (drain). However, the weak funds rate has at least kept the desk from mechanically injecting liquidity into the market this past week. The only open market operation has been a system repo first put on the books last Thursday, and rolled over Monday and this morning. While the dollar has firmed, the gold price remains above $380, however. This indicates a justifiable suspicion about the Fed's ability to continue resisting the temptation to provide excess liquidity. One possible explanation: Reserve market analysts are now all but certain that the Fed will conduct a large outright purchase of securities to permanently add reserves before the Labor Day weekend. If this occurs, we would naturally expect gold to move higher and bonds lower.

David Gitlitz