Fiddling with Pig Lipstick While The Financial System Burns

Last week, I watched cable news outlets in amazement as the McCain campaign manufactured a media frenzy out of thin air.  Lifting a Barack Obama quote dramatically out of context, McCain tried to claim that Obama dissed Sarah Palin.

This is the quote by Obama which many media outlets did not report in full:

“John McCain says he’s about change, too - except for economic policy, healthcare policy, tax policy, education policy, foreign policy and Karl Rove-style politics. That’s not change. That’s just calling the same thing something different. You can put lipstick on a pig - it’s still a pig.  You can wrap an old fish in a piece of paper called ‘change,’ it’s still gonna stink after eight years."

No big deal, right?

Here the Australian Broadcast Service outlines how the McCain camp galvanized to construct the phony controversy over the remark, faking umbrage in order to falsely accuse Obama of insulting Sarah Palin.

They enlisted former Governor of Massachusetts Jane Swift and Fred Thompson to do their bidding.

"Within minutes of Senator Obama’s remarks the Republican Party had arranged for former Massachusetts governor Jane Swift to talk with reporters by conference call. She called Senator Obama’s comments ‘disgusting’ and claimed that Senator Obama had called Ms. Palin a pig." says Austrialian Broadcast Service’s John Shovelan.

"[Sarah Palin] is undergoing the most vicious assault that anybody has ever seen in public life," hissed Thompson who was trotted out for a sound bite.

(The story is told a little differently in the Boston Globe which added this bizarre remark by Swift:  "Challenged about how she could be sure that Obama was referring to Palin, Swift replied, ‘She’s the only one of the four presidential or vice presidential candidates who wears lipstick.’")

Except, by any stretch of the imagination, Obama wasn’t referring to Palin. Fox News Bill O’Reilly and Mike Huckabee spanked McCain over the deception, and now Swift and Thompson look like patsies.

Worse, the press played along, legitimizing the McCain ploy by dissecting the phony tempest on cable news networks.

"They went to town on Tuesday and all day Wednesday reporting this ’story,’" says Hartford Courant’s Roger Catlin, "and every pair of ‘experts’ they lined up to talk about this vital political issue said about the same thing: It’s ridiculous to even be talking about this….What’s apalling is the ease at which the cable news people lap it up. They’re the ones every bit as liable for the coarsening of the political dialog by endlessly repeating it."

Politico.com posted a conversation with experts on the press role in the Lip n’ Pig silliness.

In the meantime, Hurricane Ike barreled toward Texas and the financial system teetered.

Tonight, the NY Times reports that Wall Street banks are collapsing.  The Times is using words like "stunning," "dramatic," and "extraordinary" to describe today’s events, and printing headlines such as "Nations Finance Industry Gripped by Fear."

In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, hurtled toward liquidation after it failed to find a buyer…..

But even as the fates of Lehman and Merrill hung in the balance Sunday night, another crisis loomed as the insurance giant American International Group appeared to teeter. A.I.G. sought a $40 billion lifeline from the Federal Reserve, without which the company may have only days to survive.

Lipstick-on-pig diversion vs. Fannie Mae/Freddie Mac debacle and the potential meltdown of the U.S. financial system - the juxtaposition of issues is breathtakingly absurd.

Someday, will the McCain camp look back in shame at how they fiddled with pig lipstick while the financial system burned?

Last week, Charlie Rose discussed the ramifications of the Fannie Mae/Freddie Mac bailout with guests NYT business journalists Gretchen Morgenson and Floyd Norris,  co-CIO for PIMCO (the bond fund) Mohamed El-Erian, and NYU’s Nouriel Roubini.

Below, you can watch the full video but here are snippets from their conversation.  The segment is chilling, and prescient.

Roubini: "[there is a] systemic banking crisis ahead of us….debts are unsustainable..it’s the decline of great empires…"

Rose: "Is there any smart discussion of this in the political debate?"

Roubini: "No, I’m surprised, given the severity…."

El-Erian:  "It’s much bigger than a credit crunch…another unthinkable has become thinkable…this is far from the end….if you ask me what is the one thing that can go terribly wrong in the next few months is that we no longer get the support [for buying U.S. securities] of the rest of the world."

Roubini outlined a plausible scenario in which international investors in U.S. treasuries might pull out.  Then he said, "in my view the fundamentals are much worse [today than 1991]…today 25% of homeowners are underwater.  [Soon]  about 40% will be underwater…"

Rose:  "I’m getting more depressed as we talk."

Morgenson:  "I’ve been so disappointed throughout this entire process of the lack of recognition of our policymakers that there was a problem.  For months [they said] the problem was going to contained to sub-prime…It has just been denial upon denial upon denial of this problem.  I don’t think that any American can have any confidence that these people are going to be straight with them about how big a problem it is and whether there are solutions. Everything is a band-aid put on a gaping wound."