Virginia Republican Tom Davis has pretty much set forth reality for the Republican Party in November, and its not pretty. While there are some annoying typos reminiscent of some of my writing when I'm in a hurry to get something out there, the facts remain what they are, and they're not good.

Why the doom and gloom among Republicans? Let's look at some of the "internals" from this memo:

• Jobs and economic growth have emerged as the #1 issue, at 23%.
• Iraq is #2, with 18%
• Energy and fuel prices, at 16% (note how far up the ladder this one is)
• Health care (11%)
• Terrorism (8%)
• Immigration (8%)
• Environment (5%)
• Housing (3%) (that's an odd one)

Take #1 and 3 and you've got almost 50% of the electorate's "#1 issue".

But #1 and 3 are the same thing. Both are in fact caused by exactly what I have outlined repeatedly in The Ticker!

In fact, if you look at the last week's five tickers you will see that this theme and meme is right there in front of you. Start at the top at http://market-ticker.denninger.net/ and read down to "Credit Crunch Over - All Clear".

All of them.

This is not "my view." It is a compendium of reported news and lays out for anyone who gives a good damn the outright fraud that has become pervasive in our government and capital markets.

The Republican Party is not only complicit in this fraud they are egging it on at this point, desperate to see it continue through November lest it blow up in their face. Tom Davis is well-aware of this but he doesn't put that out in public in his paper, because should he sound the "siren call" the collapse may occur before the grenade can be passed.

What Tom Davis should understand is this:

The Republicans have no winning position that can be formed from trying to placate people with "happy talk" instead of facing reality. The economic impact of this fraud is going to happen and happy talk will not change the outcome.

If McCain wins (which I seriously doubt) then he will preside over the blast and that will be the end of The Republican party.

If Obama wins the blast will occur in early '09 as the current administration will stop being able to act when the July recess comes along, yet Obama won't have done anything yet before it all comes apart. The Republicans will still get the lion's share of the blame and be a minority party for 40 years, just like they were before the Gingrich Revolution.

If the economy and markets totally come apart before the election (the most likely outcome) then The Republicans are doomed as we will have a filibuster-proof Senate with certainty. If you doubt this outcome, look at consumer sentiment - that is a documented leading indicator of behavior over the next six to twelve months, which just happens to coincide at this point with the period leading to the elections. The sentiment numbers have never been wrong in predicting consumer behavior over the next six to twelve months.

80% of Americans did not participate in or benefit from the fraud and yet ALL AMERICANS are paying for it right now and will in the future.

The ONLY winning position for The Republicans is to force ALL of the fraud out into the open RIGHT NOW and thus force The Democrats into a corner - do they "pile in" or do they try to obfuscate and stall in which case you can pin the tail on THEM as the ones that are ripping off The American Public.

The answer for the Democrats to such a challenge will be to obfuscate, as they are the ones in power in Congress. Chris Dodd and Barney Frank are insanely vulnerable on this point right now, as housing is front-and-center in this crisis but The Republicans control the executive and thus can bring the hammer down on the fraudsters whether Dodd and Frank like it or not.

This means that The Republicans must do all of the following right here and now if they want to win in November:

• The Executive must indict all of the fraudsters they can find. Look back through those tickers at http://market-ticker.denninger.net/ and count 'em up. All the investment bank CEOs who put together toxic mortgages into securities knowing they were going to blow up would be a good start. Angelo Mozillo is, of course, the poster boy for this and indicting him (while largely symbolic in terms of real impact) would really get the ball rolling. Homeowners, brokers, appraisers and Realtors who participated in the fraud must be indicted and prosecuted, both civilly and criminally, with the intent of both restitution when possible and punishment for all involved.


• The Republicans in Congress must refuse any bail-out package that helps anyone, directly or indirectly, that participated in this fraud or benefited from it. The solidarity behind this position must be absolute. If it is not, you will be picked off one at a time. This means that you must be prepared to filibuster in the Senate, and actually do so.


• Any housing-related bill or amendment that goes through Congress must include forcing Fannie and Freddie to only underwrite sound mortgages and must force all their bad paper off their books. If that doesn't happen these two institutions will blow up. In "More On The Banking System" I detailed Freddie's exposure to just the self-identified ALT-A and subprime paper and showed how it exceeds their available capital. Freddie also has a huge amount of "Fast and Easy" exposure they are calling "prime" but it really is not; this is a ticking nuclear financial device. If you don't get it off their balance sheets it will detonate with disastrous results, and anyone in Washington who voted for their "modernization" without fixing this will get tagged for it.


• The Republicans must take the public position that home prices on average must contract to sustainable values, which means no more than 3x incomes on an average basis. Yes, some homes will sell for more, and some for less. The easiest and soundest way to accomplish this is to push for a Federal Law that bars any mortgage written with less than 20% down or greater than 36% DTI. Exempting FHA/VA from the down payment limits (but not DTI caps) is appropriate if both of those programs are limited to homes that sell for no more than 75% of the average price. This fulfills the FHA and VA program mandates to provide affordable housing to the lower tier purchaser while not allowing them to be abused by speculators and the more-wealthy.


• The Federal Reserve must be pressured to stop the fraud perpetuated by their programs in the banking system. The House and Senate both have the ability to issue subpoenas and force hearings, and you must exercise that power liberally until all of the bad paper is forced out into the open and the losses are taken. Put these bankers under oath and find out exactly what paper is in the TAF, the TSLF and in Bear Stearns and how it has been valued – in public hearings.

The 80% of Americans who did not participate in or benefit from the fraud form the voting block that can win this election - if they can be coalesced.

You can only do that by showing that 80% that you are not only stopping it now but will continue to after November has passed.

Either The Republicans take this approach here and now - before the July 4th Recess - or they will lose in November.

This is the only voting block that is both big enough and that Republicans have a way to coalesce which can change the outcome.

Lest you think I'm some Democrat "hack" trying to throw Republican election chances, here is proof that I am not:

I want to vote Republican in November. Give me a reason to do so, and I will. Fail and I will vote for change, because The Republicans have presided over the worst fleecing of Americans in 225 years. Arguments that "they'll be worse" are not going to work; you have to show us, here and now, that you will in fact stand for "law and order", not just make promises that will be immediately broken after the election is over.

There are millions of Republicans just like me out here, and we're the people you need, not the corporations who have robbed us all.