Bailing Out.(The Talk of the Town)

If Barack Obama is victorious on November 4th, someone on his transition team should send inauguration tickets to Richard Fuld, the chairman and chief executive of Lehman Brothers. For months, Obama had struggled to promote the sense--which was not altogether confirmed by the official statistics--that the economy was in real trouble. Back in March, in New York, he gave a thoughtful speech, tracing the sub-prime crisis to lax oversight, and calling for a major overhaul of regulatory policy. The serious newspapers reported the event, and that was that. By Labor Day, the McCain campaign had managed to reframe the economic debate--in as much as there was one--around gas prices, offshore drilling, and Obama's purported plan to raise taxes on ordinary Americans. (Actually, his tax plan would leave more than ninety per cent of households paying less money to the government.) Some polls even showed John McCain outscoring Obama on economic issues.

Enter Fuld. The trouble began during the summer lull on Wall Street, when he neglected to find an outright buyer for his faltering firm. That mistake was followed by the news, on September 9th, that a Korean bank that had considered investing in Lehman was withdrawing. Three days later, the government informed Wall Street that it would not bail out Fuld's firm. Coming less than a week after the U.S. Treasury's takeover of the mortgage giants Fannie Mae and Freddie Mac, the sight of the venerable investment bank filing for Chapter 11 protection spooked the markets, which experienced their biggest drop since 2001. Then, on September 16th, the Federal Reserve extended an eighty-five-billion-dollar loan to American International Group, the largest insurance company in the country, sparking panic on Wall Street. The economy was suddenly at the center of the campaign, which is where it should have been all along.

In the past few days, Obama has had the demeanor of a man who fell out a window and landed on a trampoline; McCain has looked like someone who thought he had won the lottery only to discover, en route to the prize ceremony, that he had been sold a phony ticket. The epizootic in the financial markets resurrected doubts about the wisdom of McCain's decision to pass over the business-minded Mitt Romney as his running mate, a choice that left him to face alone tough questions about economics--his least favorite subject. Last week, McCain restated his belief that the fundamentals of the economy were strong and flip-flopped on the regulation of Wall Street. "How is it supposed to reassure people to hear Mr. McCain intone, as he did yesterday, the words 'derivatives' and 'credit default swaps' as if it's the first time he'd ever heard of them?" the editorial page of the Wall Street Journal wondered.

No matter who wins the election, the economy has undeniably entered a new phase. John Kenneth Galbraith's comment that in America the only respectable type of socialism is socialism for the rich has never seemed more apt. The Treasury Secretary, Henry Paulson, and the Fed chairman, Ben Bernanke, had good reasons for nationalizing Fannie Mae and Freddie Mac, which help provide mortgages to tens of millions of American families. The rescue of A.I.G. was more questionable, but Paulson and Bernanke feared that letting it fail would cause chaos in the global financial system; hidden inside the insurance company was a financial-products division that had sold other firms all manner of exotic derivatives, including credit-default swaps, which guaranteed the value of bonds. Had A.I.G. gone under, those swaps would have been practically worthless.

Whatever the merits of saving A.I.G., many financial experts agree that the Bush Administration's policy of buying more time ...