The Congress problem.

Today Democrats roaming Washington, D.C., have the self-satisfied look of the cat that swallowed the canary. If the November congressional elections were held today, the Republicans would risk losing both houses of Congress. Conventional wisdom says the GOP is more vulnerable in the House of Representatives. Yet if you classify all the Senate races according to those judged highly vulnerable, Republicans may have more trouble in the Senate. Today six Republican Senate seats fit that category, but only two Democratic seats are described as highly vulnerable.

With today's risk spreads unrealistically narrow, this situation for global markets bears watching. With the President sidelined under such a scenario (under a Democratic majority even in one house, the White House would likely face a miserable final two years answering Democratic subpoenas) and the partisan Congressional leadership engaged in internal warfare, the U.S. Congress would be subject to its own, sometimes reckless impulses. The issues of China, financial globalization, and general trade could all be up for reevaluation at a time of huge U.S. current account imbalances and the ever-growing need for foreign capital. Think this is all an exaggeration? Consider the recent Dubai ports episode. What shocked Washington insiders was the broad-based, spontaneous, and visceral response of emotional distrust on Capitol Hill toward the foreign element. One old Washington hand said he had not seen such reckless abandon since the days of internment of Japanese-Americans following the attack on Pearl Harbor. One informal poll showed that 75 percent of the members of Congress said the actual facts of the Dubai situation were of no interest. All that mattered: the emotional feel in their gut toward this foreign intrusion.

None of this discussion of GOP woes is to suggest that the Democratic Party is offering some brilliant future vision. Democrats in large part seem driven by an almost pathological hatred of the President, hardly a healthy approach to long-term political success or governing. Plus, there is some worry whether the party politically may be peaking too soon. On the other side of the aisle, the Congressional Republican leadership is in sheer panic. Discussions are underway over how to gin up the loyal GOP voter base, based on the strange notion that the party can somehow separate itself from an unpopular President. That's not going to happen. If the GOP loses big in November, George W. Bush will be the reason. In a wartime situation, how a president looks and performs is important, and clearly the President, particularly to parts of his own base, has been made to appear indecisive and ineffectual as developments in Iraq spin beyond his control.

The irony is that all of this has happened even as the Bush economy has performed extraordinarily well. Some strategists suggest that in the end the GOP, because of the strong economy, will retain control of Congress. Don't bet the ranch on this logic. Recent experience has shown that in a time of war, the economy is not that important in voter's minds. In 2002, for instance, President Bush was trusted to fight the war on terror. Bucking the historic trend, the President saw his party actually pick up seats in both houses of Congress despite a less than favorable economy. In the end, the war in Iraq (and perhaps potential developments in Iran) will decide the outcome in November.

Over the next several months, the President will try to regain political traction. It won't be easy. The reason is that the Democratic Congress has mastered the art of the "drive-by" shooting, always keeping the White House on the defensive through a relentless series of effective attacks. Sometimes the "drive-by" shots reflect absolute falsehoods. Yet a surprising number have been transformed into damaging, self-inflicted wounds by the Administration itself.

None of this would matter to global markets were it not for the fact that Congress six months from now could be transformed into an unstable force for the international system. The Washington free trade consensus of decades past is in high retreat. A WTO crisis is likely by the end of April. By the fall, if not earlier, the Democrats are expected to initiate an attack suggesting the Bush Administration has been too soft on China at the expense of American jobs. Worse, all of this is happening at a time when there are fewer fail-safe mechanisms in place in the event of dangerous unpredictabilities. Previously, when some Congressional figure offered a trade or financial proposal potentially destabilizing to global markets, a series of counter-forces would set in. First, the congressional leadership (often from both parties) would issue a warning. If that didn't work, a well-known, highly credible Treasury Secretary (James Baker, Robert Rubin) would make an appointment with the offending legislator. Next the President would call. And if the situation became really dangerous, Alan Greenspan would step in and suggest prudence.

Yet today, with so many new players on the scene, with a weakened Congress out to destroy itself in partisan out rage, with the U.S. Treasury hollowed out, a new Fed Chairman unknown on Capitol Hill, and a President on the defensive, the normal fail-safe mechanisms have suddenly vanished. Six months from now, the U.S. Congress may well be run largely by powerful, faceless, special-interest-driven committee chairmen, a situation representing uncharted waters for global markets. For example, was the Dubai ports matter the first of many emotional Congressional gut responses to sensitive international financial matters? Will globalization (today a dirty word on Capitol Hill) itself soon come under attack, particularly if the economy within a year or two begins to slow and real wages continue to remain stagnant? Today to a lot of Washington insiders, there is a curious feel of unpredictability in the air, despite a booming global economy. The party in power in Washington is running scared. Foreigners beware. No wonder the price of gold is rocketing through the roof. In today's Washington, anything is possible.