I was bothered this morning by a comment by Kip Herriage whose well-reasoned article “Do Not Trust This Market” was posted on Seeking Alpha.  He supported a viewpoint articulated by economic analyst Ambrose Evans-Pritchard in an article in the London Telegraph a few days ago. The gist of the article, worth reading in its entirety, is summarized in the lead sentence: “If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Gotterdammerung ”

I wasn’t shocked by someone citing such a dire prospect because I think that wherever we are going, we’re not there yet, and the general direction is continuing to be south.  What bothered me was Herriage’s assertion that “I’ve yet to see a single economist that I respect come out and support Obama’s stimulus program, and we already know that Geithner has no real plan to solve our banking crisis.”

I am concerned because I think that at this point the critical issue isn’t whether Obama’s plan is right or not, “good” or “bad” in terms of political philosophy, or even whether some other action would be more successful.  I think it would be great if all economists thought it was brilliant and could support it.  But, I don’t think those are the most critical issues.  Instead, I think the single most critical issue (proposed in my post yesterday) is that the fate of the economy is hinged to the fate of President Obama.

A Collapse In The Ability Of Obama’s Supporters To Believe They Have A Shot At A Better Life Would Be A Social, Political And Economic Catastrophe.

Obama was elected, in my view, by engendering passion among this nation’s broad economic and political middle. He did that by emphasizing and appealing to the mood that things were bad and getting worse to such a degree that specific issues (such as the war in Iraq or abortion, etc.) were less important.  In other words, Obama was elected by people who believed that he could improve the direction of the nation by his programs, his approach, and his style – all which translated into confidence that he had what it took to get the country turned around. They believed in him.

There is general agreement that we’re going to go through a very difficult period for a substantial amount of time.  The most optimistic of the people to whom I have spoken express their optimism this way:  “Well, we can’t be too far away from the bottom.”  In that environment, we are going to have to fear fear itself.  Imagine what happens if people lose faith and conclude that the slide will not come to an end and neither they nor their children will ever have even some slim chance to enjoy what used to be called “The American Dream.”  If that were to happen, consumers would sink into an even deeper coma.  They would abandon the political process or splinter off to specialized interest groups that appeal to their particular views and biases.  Political gridlock and partisanship would soar, lowering the prospects for recovery even more.   Chaos will emerge as the nation feels leaderless and without direction.

What would make them lose faith?  To answer that question, first consider the more basic question: where is their faith anchored now?  Certainly not with the Bush policies or people associated with them.  Not with Congress, which American voters disliked more than Bush.  With corporate leaders?  With Wall Street?  Bankers?  Lawyers?  Doctors/healthcare providers/the healthcare system?  Teachers?  No.  No.  No.

Americans trying to have hope even in the face of miserable prospects have hinged that hope to one idea and one person: Barack Obama’s promise of change.  If Americans lose faith in him they will have faith in nobody.  They will be left with one overriding awful conclusion:  life is going to get worse.  What will happen then?

We only need to look at current world headlines to get to an answer.   No faith in political leadership in Eastern Europe has led to economic riots.  In Italy, thousands of people took to the streets several days ago to demand more political action to address the economic situation.  In Japan, temporary workers who are being evicted from company-owned housing are moving to the streets.  You know the maxim from Wall Street that “the trend is your friend”?  Well, the trend right now in political capitals around the world is toward political instability.

Add the reality of a global economy with money moving from one nation to another, where countries are in debt to their political adversaries.  Add the reality of volatility in prices and the very availability of core commodities such as oil and food.  Add the reality of a world where individuals are accessible through the Internet 24/7/365, where they can be coalesced into communities quickly and effectively and then mobilized for whatever vested goals they want to achieve.

Now think back to the French Revolution, when the disillusionment of the middle class gave rise to an era of social, political and cultural upheaval.  Imagine that picture on a global scale.  Think that is possible?  I think that even if the risk is low, the consequences would be so formidable that the risk must be taken extraordinarily seriously.

The United States right currently enjoys relative political stability, which may be even more important than economic stability and more important than whether we move further away from Capitalism or not.  In other words, even if you hate Obama’s policies and everything about him, you better hope that he succeeds at least to the degree necessary to keep his coalition together because if that falls apart we have a much more than just an economic crisis to confront.  So, the most practical political action for now, even for Republicans who hate what they are seeing, is to hope like hell that Obama stays highly popular.  If not, there may well be a lot more than investment portfolios that will fail.