James Pethokoukis

First, a few obsevations:

1. Democrats are getting hammered in swing state Virginia. It’s not just Bob McDonnell, down ticket, too.

2. Independents (very deficit-phobic) look like they are flocking to VA GOP.

3. Economy isnt that bad in VA, just 6.7 percent unemployment. So more than just anxiety about job loss.

4. Blue Dogs will look at VA and fear for their seats, especially if McCain in ’08 or Bush in ’04 won their districts.

5. #4 is is bad news for Obama agenda. Already it looks like healthcare will slip into 2010.

6. Spending, spending, spending is freaking Americans out. “Trilion” has a powerful, visceral impact.

7. All the candidates in NY, NJ and VA ran as low-tax, control spending types. But McDonnell in VA was able to successfully paint Dem Creigh Deeds as a taxer and spender.

8. NY a sign that me-too, moderate Republicanism is a non-stater in party. Hofffman will encourage more primary challengers and boost folks like Rubio in FL and DeVore in CA.

9.  Will Blue Dogs revolting and GOP emboldened, Obama agenda as currently constituted is in bad shape.

10. Blaming Bush for economy is done as a political weapon. New polls show 49% blame Bush, 45% blame Obama. Give that number another year of high unemployment. This was Jon Corzine’s strategy vs. Chris Christie. Good thing for Corzine that he had Dem machine in his corner, plus outspent Christie by 3-to-1.

Bottom Line: While there were local factors as play, this election day is looking like a rejection of  big-spending Washington that seems to be doing little to fix the economy. And certainly using the weak economy as crisis to be exploited is at an end. Sorry, Rahm Emanuel. Just another data point, of course. But a significant one.

Former Bush WH deputy press secretary Tony Fratto gives it his best shot:

Over the decades, large, complex financial institutions —big banks— have been unquestionably beneficial to the U.S. economy, and to the global economy. Big banks efficiently facilitate cross-border trade and investment on a global scale, resulting in benefits that have consistently accrued to consumers and improved standards of living for people in all markets.

Large U.S. financial institutions have also contributed to the development of deep, liquid capital markets here in the United States, ensuring unique access to global financing for U.S. firms. Scale and scope are needed to sustain global trade and finance, and big U.S. banks are leaders in delivering those services.

There are ways to increase the safety and soundness of big banks – to prevent the kind of explosion we saw with Lehman Brothers, but breaking up our big banks is the wrong way to go. Initiatives to raise capital levels, improve capital quality, decrease leverage and improve liquidity – across the entire global banking system – make sense.

Me: But I guarantee you that plenty of GOPers in 2010 and perhaps the 2012 nominee are going to call for breaking up the banks and paint the Ds as the party of Wall Street. The party will not be pro-Big anything

Michael Mandel of BW doesn’t think the Oracle’s purchase of Burlington Northern Santa Fe should be interpreted as a positive economic sign:

Let’s take a look at what Burlington Northern carries. Its major freight revenues (as of 2008) come from coal (23% of revenues); agricultural products (20%); international intermodal shipments of consumer products, which is probably mostly imports (16%); construction and building products (14%); and petroleum products (4%).

In essence, Buffett is betting that the next ten years will look a lot like the last ten: A lot of growth in imports, construction, energy and agricultural products. If he thought that innovation was going to be the driver of the next ten years—biotech, energy, and infotech—he wouldn’t be buying Burlington Northern.

I’m not saying that Buffett is wrong. His skepticism about the tech sector in the late 1990s, and innovation in general, turned out to be right on the mark. Berkshire Hathaway stock over the past decade has risen by 84%, whil the S&P 500 is down by 18%.

But his “all-in wager on the economic future of the United States” paints a remarkably gloomy picture of where we are heading.

Which one do you believe? John Hussman sketches them out:

1) One possibility, which is clearly the one that Wall Street has subscribed to, is that the recent downturn was a standard, if somewhat more severe than normal, post-war recession; that the market’s recent strength is an indication that it is looking forward to a full “V-shaped” recovery, and that the positive print for third-quarter GDP is a signal that the recession is officially over. Applying the post-war norms for stock market performance following the end of a recession, the implications are for further market strength and the elongation of the recent advance into a multi-year bull market.

2) The alternate possibility, which is the one that I personally subscribe to, is that the recent downturn was the initial phase of a more prolonged deleveraging cycle; that the advance we’ve observed in recent months most likely represents mean-reversion – qualitatively and quantitatively similar to the large and often abruptly terminated “clearing rallies” of past post-crash markets; that major credit losses are continuing quietly but are going unreported thanks to changes in accounting rules by the FASB this past spring, which allowed for “substantial discretion” in accounting for loan losses and deterioration in the value of securitized mortgages; that a huge second-wave of mortgage losses can be expected from a reset schedule on Alt-A and Option-ARMs that has just started (following a lull in the reset schedule since March) and will continue into 2010 and 2011; that intrinsiceconomic activity remains abysmal; that recent GDP growth is an artifact of massive fiscal stimulus that is unlikely to have sustained follow-through; and that recent market valuations are not representative of those observed at the end of most post-war recessions, but are instead similar to those observed at major market peaks prior to the mid-1990′s.

When you’re a nation getting ready to borrow $10 trillion or more over the next decade, you don’t want markets questioning your central bank’s commitment to controlling inflation.

But Congress continues to risk just such a scenario, whether through aggressively questioning Federal Reserve Chairman Ben Bernanke or pushing a bill to audit Fed monetary policy.

Now Representative Barney Frank, the chairman of the House Financial Services Committee, has suggested curbing the authority of the 12 Fed regional bank presidents.

As Frank sees things, monetary policy should not be influenced by “inappropriately placed private businessmen — or women, occasionally — picked by other private businessmen, and occasionally women.”

Drill down a bit and it’s clear that what really bugs Frank is not so much that regional bank presidents are selected by a nine-person panel, six of whom are elected by bankers. He just thinks they’re too hawkish.

Frank even commissioned and publicized a study that found that 97 percent of the hawkish dissents at Federal Open Market Committee meetings during the past decade were from the regional bank presidents.

Of course, higher rates would have been a good thing, given that the Fed’s extraordinarily easy monetary policy was a huge contributor to the financial crisis. And going forward, the Fed will face the economically and politically challenging task of withdrawing monetary stimulus when economic growth may well be sluggish and unemployment high.

But such medicine may be necessary to prevent an inflation outbreak. Congressional threats and bullying will make a hard job even more arduous.

Moreover, one reason the Fed has a decentralized structure is because of historic concerns about monetary policy serving only Washington and Wall Street.

Yet citizen concerns about the concentration of financial power are as alive today as they were in 1913 at the Fed’s creation. Monetary policy set solely by a presidentially-appointed and Senate-confirmed Board of Governors should certainly set off alarm bells with bond vigilantes concerned that Washington may try to inflate its way out of its debt problems.

If Congress wants to look at how the Fed conducts its  business, better to focus on better ways to make monetary policy reflect forward-looking market gauges such as commodity prices rather than the unemployment rate or output.

Ultimately, though, the Fed’s problem isn’t too much influence from bankers in Kansas City or Atlanta or Chicago. It’s too much influence from politicians in Washington.