Governing today means giving acceptable signs of credibility. It is like advertising and it is the same effect that is achieved - commitment to a scenario.

-Jean Baudrillard

For every credibility gap there is a gullibility gap.

-Richard Cobden

Our alliances and our credibility are crucial elements of our working capital in advancing America’s interests in the world, and they have been eroded over the last four years.

-Patrick Leahy

I covered two presidents, LBJ and Nixon, who could no longer convince, persuade, or govern, once people had decided they had no credibility, but we seem to be more tolerant now of what I think we should not tolerate.

-Helen Thomas

As the events of the last few weeks have unfolded and opposition of Congressional approval of an enormous bailout of the financial system is gaining steam, I have noticed that our country may be going through another crisis - a “credibility crunch”.  Like the credit crunch, this crisis been brewing for years in the financial markets as well as in politics.  Just as America is dealing with the aftermath of a period of time where too much credit was given to uncrediworthy borrowers, we may be coming to the realization that too much credibility was given to uncredible public figures.

Take today’s action in Washington - as Bernanke and Paulson attempted to make the sale on their $700 billion bailout.

From Bloomberg,

Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson warned skeptical lawmakers that failure to pass a plan to buy troubled assets from financial firms would threaten markets and the U.S. economy.

“Action by the Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and for our economy,” Bernanke told the Senate Banking Committee at a hearing today. “Global financial markets remain under extraordinary stress.”

Bernanke and Paulson are pushing Congress to quickly approve a $700 billion plan to remove illiquid assets from the banking system. Lawmakers have balked at rubber-stamping the proposal, with Democrats demanding it include support for homeowners and limits on executive pay and Republicans questioning the plan’s reach and size.

The Fed and Treasury chiefs are trying to sway lawmakers such as Senator Sherrod Brown, a Democrat from Ohio, who said his constituents’ hold a “universally negative” opinion toward the proposal. Senator Jim Bunning, a Kentucky Republican, said the plan would “take Wall Street’s pain and spread it to the taxpayers.”

Bernanke pushed for the biggest federal intrusion into markets since the Great Depression after failing to stem the credit crisis by cutting the benchmark interest rate at the most aggressive pace in two decades. The Fed has also pumped billions of dollars into banks to try and restore liquidity, and invoked extraordinary powers to loan to securities firms.

“In light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand,” Bernanke said. “The Federal Reserve supports the Treasury’s proposal to buy illiquid assets from financial institutions.”

This sales job comes only weeks after they had to plead their case on the Fannie and Freddie bailout - where Paulson used the now infamous “bazooka” analogy.  Unfortunately the bazooka turned out to be firing blanks.  This is one of many gaffes made by top public officials and CEO’s regarding this mess.  I have posted links of what amounts to the Greatest Hits:

Paulson: Subprime mortgage fallout ‘largely contained’ (Marketwatch.com, March 13, 2007)

“Bernanke Believes Housing Mess Contained”.  (Forbes.com,  May 17, 2007)

“Subprime woes will take time, won’t hurt economy: Paulson”. (Marketwatch.com, June 20, 2007)

Paulson again downplays credit crisis, expects continued economic growth (Forbes.com, 9/20/2007)

Bank Chiefs See End for Woes Investors Can’t Forget (Bloomberg.com, April 16, 2008)

Paulson sees end of credit crunch (BBC, May 7, 2008)

IMF’s Strauss-Kahn: Worst of financial crisis behind us (iht.com, May 15, 2008)

Paulson Backs Fannie, Freddie in Their `Current Form’ (Bloomberg.com, July 11 2008)

Paulson Says Fannie-Freddie Rescue Needed to Stabilize Markets (Bloomberg.com, July 22, 2008)

Paulson Says Credit Crisis Spreads, Hurting Economy (Bloomberg.com, September 23, 2008)

If you notice it appears that Paulson has gone full circle.  Ordinarily we would think that the Treasurer and someone with extensive financial experience would be a credible and we better do what he says, but it is not the case this time.  Paulson’s statement today before Congress contradicted his often-repeated assertion as this crisis was first developing.

While nobody is perfect, there must be accountablity.  People must be accountable for credibility gaps such as this.  Perhaps it is true that someone could not predict such an event of this magnitude (although I will argue otherwise as many in the blogosphere have done just that).  If so, then why should we beleive him this time.  Just as responsibility can help an individual, company, or nation overcome a loss of creditworthiness, accountability can help the same entities overcome a loss of credibility.  I find it interesting that the proposed plan has very little transparency and accountability.  The best way for someone who has lost all credibility to remain in power is to be unaccountable.  Some in Congress have woken up to this.

From MSNBC,

But it seems increasingly questionable that the bill — still in its drafting stages — will pass by Congress’ self-imposed deadline of Friday, when it is supposed to adjourn for the elections.

Among rank-and-file congressional Democrats, there is deep anger that the end result is likely to be a bailout designed by the Bush administration but made possible only by sufficient votes from Democratic members of Congress.

Yet Democrats face the risk that they will be blamed if they fail to pass a rescue bill and Main Street America feels the impact of an economic disaster.

Enough votes to block passage?
Meanwhile many Republicans also are skeptical. Some say so far they are not seeing the impact of the credit crisis in their districts. So it is entirely possible that there might be enough disaffected Democrats and Republicans to prevent the bill from being passed in its current form.

One of the problems is that Treasury Secretary Hank Paulson faces a credibility gap on Capitol Hill that many trace to the Bush administration’s handling of the Iraq war, launched long before Paulson signed on in 2006.

“As much as I admire Secretary Paulson and (Federal Reserve Chairman) Ben Bernanke, this administration has no credibility at all,” said veteran liberal Democrat Rep. Jim McGovern of Massachusetts. “I wouldn’t trust them to tell me the correct time.”

House Majority Leader Steny Hoyer said President Bush, even with his diminished credibility among Democrats, ought to go on national television and appeal to the American people to support the rescue bill.

What I find most interesting about all of this is its similarity to the actual credit crisis as I believe we are witnessing the beginning of a credibility crunch fall upon Washington.  Just as many trace back the beginning of the credit crunch to American Home Mortgage, I think we are witnessing the beginning of a “credibility crunch”..

What do I mean by credibility crunch?  A credibility crunch is an period of time where public figures’ and leaders’ credibility comes under question on a widespread scale and many “credible” figures are effectively “market to market” as not credible.

A credibility crunch, while not a financial event, can have drastic implications on the economy and political climate.  In fact, I contend that the crediblity bubble will be the last bubble to pop of this 20+ year “super asset bubble” and while metaphorical, it may be the more painful and cause the most instability.

Credibility, like credit, can dramatically alter perception of person or organization.  Three years ago someone may have assumed the person who lives down the road in the nicer house driving the nicer car was much wealthier and more successful, but as you see him three years later forecolose on his house and trade down to a Kia Sephia, it becomes clear that perhaps you were wrong in your assessment.  In essence, you had an inflated opinion of this person due to his overuse of credit.  The “wealthy” and “successful” individual was “marked to market” and took a major writedown.

Credibility is no different.  In times of peace and prosperity, many people become content and tend to relax oversight and accountability of leaders whether in government or industry.  This has the effect of inflating a person’s perceived credibility.  While most people did not question Bernanke’s or Paulson’s credibility a year ago, many have begun to do so recently.  As the links displayed above will illustrate, their credibility is beginning to be “marked to market” as something quite to the contrary.

Just as the credit crunch has been accompanied by the unwinding of credit, the credibility crunch will have a similar unraveling, but with credibility.  To illustrate how this would occur, lets use the events of this past week.  Up until now, the Fed and Treasury has had very low accountability and very high credibility.  In trying to push forth this piece of legislation, they have begun to see that there is much less “liquidity” for their credibility.  Or to be more blunt, Congress is not buying their bullshit this time around.  Congress is now putting their credibility on the line.  The reason for their stall is because, politcally, this is a very dicey subject and they must be careful as to how credible they are perceived to the voting public.  If they fail to come off as credible then we may see outrage amongst Americans, and less “liquidity” for the credibility of Congress (we will no longer buy their bullshit).  If this occurs, there is potential for some sort of revolutionary policial and/or economic movement, which may be accompanied by increasing instability.  Similar to how the credit crunch gets “bailed out” by Central Banks and the Government, a credibility crunch is usually bailed out by some sort of radical leader - who may or may not be the best thing for the country.

It will be interesting to see how this credibility crunch unfolds.  As the election kicks in to full gear, it will be important to observe how the public approaches the regular campaign lies and empty promises, as well as the issues and media spin.  Gauging on the recent activity in the campaigns, I would say that for now its business as usual.  I guess that means, for the time being, the credibility crunch is contained.