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October 20, 2008

Rope-a-Dope at Hofstra: Handicapping the Debate and Results

Well now that the debates are so far behind us, the punditocracy has weighed in and we've had a chance to contemplate the results let's weigh and assess them. At this point we've really and truly had a better chance to evaluate these two candidates than any others. Starting with the Saddleback Interviews - which were very revealing - and moving on thru three different and excellent debates. The last of which was the best as a debate IOHO and that of many others. Most importantly we've had a chance to see the candidates and how they perform with a real 0300 wake-up call. And for a final touch-me-up the candidates mutual roast speeches from the Al Smith dinner are online and widely accessible. In some ways the best part of the campaign and revealing of whole other sides of both.

Debate/Campaign Handicapping 

In terms of judging the debates we laid out our filtering process in a prior post (Crisis, Debates and Leadership ? Yeah, Right.) and haven't seen any reason to change either the filters or the conclusions. Briefly there's three-parts - appeals to the lizard-brain (the hindbrain) or more nicely put the heart, matters of substance and policy and distortionate mis-labeling of the opponents position. Of which both candidates are guilty. For example Barry and his team have mis-represented Johnboy's healthcare proposals and tried to stick him with the Bush label. More damagingly Johnboy and his time have tried the "terrorist" label and built a pretty negative set of campaign ads around that, ACORN and other severe mis-representations. For example on Acorn alone - you can register all the Micky Mice you want but to vote the person in question has to show up at the poll and present a valid Mouse id. Think about that for a minute - calling that a major threat to democracy, especially when at best it's less than a 2% error rate, is beyond distortionate. Worse to spend precious debate time whining about being abused and then within 90 sec. continuing on into these pejorative and distorted attacks is not appealing to many. As the polls show. Especially when there are serious matters of substance to be dealt with. All of this is reflected in an update version of an earlier chart showing our summary judgment of the two candidates. What we've seen from Barry is a calm and cool head in crisis, an ability to explain things and vastly increased substance that's largely correct. Though JB has at least two proposals (mortgage write-downs, healthcare) we'd like to see implemented. In contrast JB hasn't fixed his problems but has worsened them - less and less on framing and explaining and more and more emotional attacks that're ungrounded and pejorative. Combined with a very erratic performance in the crisis.

Matters of Substance

Speaking of which we carefully outlined what we feel is the required integrated economic policy program and basically heard it walked down in detail by Barry. Overall we've actually heard more substance in this campaign that's pretty much aligned with our take on what strategic policy should be than we've heard in a very long time. Just to remind you - when we focus on serious matters and not the lizard-brain - our take on policy is summarized in the accompanying blueprint. The really good news is that with regard to Energy, Education and Healthcare all those are truly on the table, have received serious and constructive proposals and, by-n-large, the candidates have converged on workable centrist positions. Oddly enough their positions on Iraq have also, for all practical purposes converged as well, though you have to listen between the lines of the distortions. Our biggest remaining hesitancy about Barry is his continuing refusal to backdown on the surge combined with his populist panderings on international trade policy. Yet when you listen carefully to Debate #1 both candidates are closer to each other, believe it or not, than either is to any other candidate or anything that the rest of the world thinks they're going to see. The biggest differences are in Economic policy where JB keeps retreating to old shibboleths of Supply Side III and slogans and mottoes instead of substance. Barry on the other hand not only has outlined an integrated program but has gathered a beyond All-Star to Hall of Fame level advisory team and is both listening to and guiding them. Given our views that Economic policy is the single most important issue cluster facing us that almost overwhelmingly indicates support for him. (Populist Panderings, the Candidates and Real Solutions)

Selling Substance to the Hindbrain

You can't lead if you can't sell your solutions. On the other hand you can't accomplish anything if your solutions are wrong-headed either. So the trick is to balance out emotional appeals with matters of substance while also maintaining your political support AND garnering support from new constituencies. A difficult but necessary balancing act. We've tried to capture and represent it with the accompanying chart. See what you think. 

The bottom of the chart shows the distribution of voters by the long-term representation of their views. We have about 13% who are strong D's and R's but the vast majority of the population is more centrist. Unfortunately for many years the parties have campaigned and tried to govern from their "bases", i.e. the extremes. Which has the terrible consequence of replacing constructive policy with hindbrain appeals. Now the vertical chart shows the distribution of how most folks make decisions - and since most don't have time to wade thru the details they decide with their (our) hearts. Though as the balance of idiotocracy punditry shows knowing a lot hasn't stopped a lot of commentators from hearing what they want to hear instead of helping us figure out what's really going on. On balance we think Barry has done a better job of synthesizing the heart and the head and migrating toward the center while JB has retreated to some darker place in the heart.

In the readings section you'll find three endorsements, of sorts for Barry that are startling in their own way. The first is David Brooks' character appreciation. Read the excerpt because otherwise you won't believe it. Next is the Washington Post's endorsement which is as fair and balanced an assessment as we've seen anyplace. And finally there's Colin Powell's endorsement this weekend. The excerpt doesn't begin to do him justice - click on thru and listen to his Meet the Press interview. Hard-nosed, balanced and heartfelt. This is a man of integrity, honor and ideals. 

The last half of the readings are selected stories on key policy issues - match them against our blueprint if you would on the one hand. And on the other agains the issues the candidates have or haven't addressed. 

Campaign and Debates

George Stephanopoulos, ABC During a fast-paced, spirited, and sometimes heated debate, McCain had his best debate, but Obama still won. WINNER: Obama Won, But McCain Had His Best Debate STRATEGY: Obama: A McCain: A STYLE: Obama: A McCain: A- ACCURACY: Obama: B McCain: B In terms of style, Obama won the battle of the televised split screens. McCain had several reaction shots during the debate where he rolled his eyes, seemed exasperated with Obama, and on the edge of anger. On the other hand, Obama remained cool under pressure, smiling through the attacks. That's the demeanor Obama's had throughout the three debates that has served him well. Ultimately, McCain didn't do enough to stop people from voting for Obama. Over the course of three debate the Obama campaign met their goal of reassuring the American people that he's ready to serve as president. One of McCain's worst moments during the debate was when Obama was calling for more civility during the campaign, but McCain brought up Obama's connection to former 1960s radical William Ayers.

The Best Debate By Far Mr McCain managed to land some good jabs on his rival. He pointed out that he had broken his promise to take public financing for his campaign (and thus limit campaign spending). He noted that Mr Obama's solution to every problem is to spend more money. He attacked Mr Obama for (unfairly) pretending that there is no difference between him and the present incumbent. “I am not President Bush”, he said at one point. “If you wanted to run against President Bush you should have run four years ago.” All good stuff. But Mr McCain also made two big mistakes. Bringing up Mr Obama's association with Bill Ayers, a former terrorist, made him look petty on a day on which the Dow Jones had lost 8% of its value and people have much bleaker issues on their minds. The second—and more serious—lay in his body language. Mr McCain let his contempt for the younger man shine through, harrumphing, grimacing, smirking and goggling his eyes whenever Mr Obama got a chance to speak. The whole performance was reminiscent of Al Gore's sighing in his debate with George Bush in 2000, which many people think contributed to his defeat. Mr Obama's performance during all this was remarkable. He remained calm and unflustered. He listened respectfully to his opponent. He took every opportunity to change the subject to economics and the woes of the average American. He even turned Mr McCain's assertion that he associated with Mr Ayers to his advantage, claiming that the people he associates with, on economic issues, are Paul Volcker and Warren Buffett. If many of his arguments were weak—he gave no sense of how he would reconcile his spending plans with America's giant deficits—his body language was impeccable. The instant polls all gave a big victory to Mr Obama. Mr McCain made the debate exciting, but Mr Obama got the better of the evening, surely increasing his already high chances of victory in November.

Analysis: McCain jumps around in bid to stop Obama The misadventures of Joe the Plumber were just the latest stumble for Republican John McCain as he veers from one idea to another in a thus-far elusive quest to slow Barack Obama's momentum. But Wurzelbacher's story didn't quite hold up under inspection: He isn't licensed as a plumber in an Ohio county that requires one. He owes $1,200 in unpaid taxes. The dream purchase of the plumbing company where he works is a long way off no matter who wins the election. McCain acknowledged Thursday he hadn't ever spoken to the man he'd suddenly made a central figure in his quest for the presidency; The McCain campaign has always felt more improvisational than Obama's well-oiled machine, and the Arizona senator's years as a Navy pilot left him with a taste for daring feats. Policy proposals have been floated and postponed. Lines of attack have been launched, then abruptly changed. And Joe the Plumber, like Sarah Palin before him, was pushed onto the national stage without a complete examination.

David Brooks: Thinking About Obama We’ve been watching Barack Obama for two years now, and in all that time there hasn’t been a moment in which he has publicly lost his self-control. This has been a period of tumult, combat, exhaustion and crisis. And yet there hasn’t been a moment when he has displayed rage, resentment, fear, anxiety, bitterness, tears, ecstasy, self-pity or impulsiveness. Some candidates are motivated by something they lack. For L.B.J., it was respect. For Bill Clinton, it was adoration. These politicians are motivated to fill that void. Their challenge once in office is self-regulation. How will they control the demons, insecurities and longings that fired their ambitions? But other candidates are propelled by what some psychologists call self-efficacy, the placid assumption that they can handle whatever the future throws at them. Candidates in this mold, most heroically F.D.R. and Ronald Reagan, are driven upward by a desire to realize some capacity in their nature. They rise with an unshakable serenity that is inexplicable to their critics and infuriating to their foes. Obama has the biography of the first group but the personality of the second. Through the debate, he was reassuring and self-composed. McCain, an experienced old hand, would blink furiously over the tension of the moment, but Obama didn’t reveal even unconscious signs of nervousness. There was no hint of an unwanted feeling.

They say we are products of our environments, but Obama, the sojourner, seems to go through various situations without being overly touched by them. Over the past two years, he has been the subject of nearly unparalleled public worship, but far from getting drunk on it, he has become less grandiloquent as the campaign has gone along. This was not evident back in the “fierce urgency of now” days, but it is now. And it is easy to sketch out a scenario in which he could be a great president. He would be untroubled by self-destructive demons or indiscipline. With that cool manner, he would see reality unfiltered. He could gather — already has gathered — some of the smartest minds in public policy, and, untroubled by intellectual insecurity, he could give them free rein. Though he is young, it is easy to imagine him at the cabinet table, leading a subtle discussion of some long-term problem. Of course, it’s also easy to imagine a scenario in which he is not an island of rationality in a sea of tumult, but simply an island.

Barack Obama for President  THE NOMINATING process this year produced two unusually talented and qualified presidential candidates. There are few public figures we have respected more over the years than Sen. John McCain. Yet it is without ambivalence that we endorse Sen. Barack Obama for president. The choice is made easy in part by Mr. McCain's disappointing campaign, above all his irresponsible selection of a running mate who is not ready to be president. It is made easy in larger part, though, because of our admiration for Mr. Obama and the impressive qualities he has shown during this long race. Yes, we have reservations and concerns, almost inevitably, given Mr. Obama's relatively brief experience in national politics. But we also have enormous hopes. OF COURSE, Mr. Obama offers a great deal more than being not a Republican. There are two sets of issues that matter most in judging these candidacies. The first has to do with restoring and promoting prosperity and sharing its fruits more evenly in a globalizing era that has suppressed wages and heightened inequality. Here the choice is not a close call. Mr. McCain has little interest in economics and no apparent feel for the topic. His principal proposal, doubling down on the Bush tax cuts, would exacerbate the fiscal wreckage and the inequality simultaneously. Mr. Obama's economic plan contains its share of unaffordable promises, but it pushes more in the direction of fairness and fiscal health. IT GIVES US no pleasure to oppose Mr. McCain. Over the years, he has been a force for principle and bipartisanship. Mr. McCain staked his career on finding a strategy for success in Iraq when just about everyone else in Washington was ready to give up. We think that he, too, might make a pretty good president. But the stress of a campaign can reveal some essential truths, and the picture of Mr. McCain that emerged this year is far from reassuring. To pass his party's tax-cut litmus test, he jettisoned his commitment to balanced budgets. He hasn't come up with a coherent agenda, and at times he has seemed rash and impulsive. And we find no way to square his professed passion for America's national security with his choice of a running mate who, no matter what her other strengths, is not prepared to be commander in chief. ANY PRESIDENTIAL vote is a gamble, and Mr. Obama's résumé is undoubtedly thin. We had hoped, throughout this long campaign, to see more evidence that Mr. Obama might stand up to Democratic orthodoxy and end, as he said in his announcement speech, "our chronic avoidance of tough decisions." But Mr. Obama's temperament is unlike anything we've seen on the national stage in many years. He is deliberate but not indecisive; eloquent but a master of substance and detail; preternaturally confident but eager to hear opposing points of view. He has inspired millions of voters of diverse ages and races, no small thing in our often divided and cynical country. We think he is the right man for a perilous moment.

Powell endorses Obama, chides McCain campaign tone Colin Powell, a Republican and retired general who was President Bush's first secretary of state, broke with the party Sunday and endorsed Democrat Barack Obama for president, calling him a "transformational figure" while criticizing the tone of John McCain's campaign. The former Joint Chiefs of Staff chairman said either senator is qualified to be commander in chief. But after studying both, he concluded that Obama is better suited than McCain, the standard-bearer of Powell's own party, to handle the nation's economic problems and help improve its world standing. "It isn't easy for me to disappoint Sen. McCain in the way that I have this morning, and I regret that," Powell said on NBC's "Meet the Press," where he announced the endorsement and delivered a serious blow to the aspirations of his longtime friend, Arizona Sen. McCain. But, Powell added: "I think we need a transformational figure. I think we need a president who is a generational change and that's why I'm supporting Barack Obama, not out of any lack of respect or admiration for Sen. John McCain." The endorsement by Powell amounted to a stunning rejection of McCain, a 26-year veteran of Congress and a former Vietnam prisoner of war who has campaigned as the experienced, tested candidate who knows how to keep the country safe. Powell's endorsement has been much anticipated because of his impressive foreign policy credentials, a subject on which Obama, a first-term senator from Illinois, is weak. Powell is a Republican centrist popular among moderate voters. At the same time, Powell is a black man and Obama would be the nation's first black president — a goal Powell considered pursuing for himself in 1996, before deciding not to run. Powell said he was cognizant of the racial aspect of his endorsement, but said that was not the dominant factor in his decision. Powell expressed disappointment in the negative tone of McCain's campaign, his choice of Alaska Gov. Sarah Palin as a running mate and their decision to focus in the closing weeks of the contest on Obama's ties to 1960s-era radical William Ayers, saying "it goes too far."

Nov. 5, 2008 I’ve studied the polls and the electoral map for months, and I no longer believe that John McCain can win. Unless Barack Obama slips up, Jeremiah Wright shows up or a serious national security emergency flares up, Obama will become the 44th president of the United States.* The wayward wizards of Wall Street delivered the election to Obama by pushing the economy to the verge of collapse, forcing leery voters to choose between their pocketbooks and their prejudices. McCain delivered it to Obama with his reckless pick of Sarah Palin. That stunt made everything that followed feel like a stunt, tarnishing McCain’s reputation and damaging his credibility so that when he went negative it backfired. And, some radical rabble among McCain’s supporters delivered it to Obama by mistaking his political rallies for lynch mobs. This perfect storm of poor judgments has set the stage for an Obama victory. It’s over. Fast forward to Nov. 5. President-elect Obama (yes, get used to it) could wake up that morning as one of the most powerful presidents in recent American history. Not only is his party likely to maintain control of both houses of the Congress, it could dramatically strengthen its hand.  Congressional and Party Approvals Graphics

Policy Issues

The International Economic Crisis and Stratfor's Methodology Economics, war and politics are not separate spheres. They are a single entity together constituting the reality of the nation-state. There are those who argue that economic life should be left alone, not interfered with by political or military power. We won't engage in that argument. What we know, empirically, is that political and military power constantly impinge on economic life, and vice versa. It is impossible to imagine war without taking into account politics and economics. It is impossible to think of domestic or foreign policy without considering economic and military issues. By the same token, it is also impossible to think about economics without thinking about military and political matters. If it can be made otherwise, then someone will do so and then we will change our opinion. Until then, we cannot think of the free market as a meaningful independent reality. It is always shaped by other factors. Perhaps it should be otherwise. It isn't. An integrated approach to social reality requires that these distinctions, so important in the organization of a university or a newspaper, be overcome. They were created in order to organize human activities into manageable pieces. Our argument is that in so doing, reality is only apparently made more manageable, and in fact is falsified. The standard approach to these issues creates distinctions that don't exist and complexities that conceal rather than reveal the nature of the problem at hand. A general who tries to wage war without consideration of political ends and economic means is going to fail. An economist who tries to understand and predict the behavior of the economy without a comprehensive understanding of the political and military realities which shape the economy will not do particularly well. In our analysis of the current financial crisis in the United States -- and the world as a whole -- we have sought the center of gravity of the problem. We approached that simply by asking one question: is what is going on simply another inflection point in the business cycles that have occurred since World War II, or does it represent a systemic failure such as that which happened during the Great Depression? This struck us as the urgent issue. But just as our critics among Russian experts failed to see the main thrust of Russian history, many economists fail to see the main thrust of what is now happening. The United States is a $14 trillion economy with a potential problem amounting to $1-2 trillion (and probably far less than that). If the government intervenes, it will create inequities and imbalances in the system. But between the size of the economy and the government printing press, the problem will be managed -- particularly because there are underlying assets -- houses -- that can be monetized in the long run. The gridlock in the financial system will undoubtedly create a recession, but there hasn't been one for seven years and it's high time.  One can like or dislike the outcome, and we certainly agree that this will cause long-term dislocations and imbalances. But we also know that America as a nation-state has the resources to manage its way through this crisis if the government intervenes. And that intervention is as hard-wired into the American political-economic-military system as the law of supply and demand.

Man in the News: JM Keynes  “We have reached a critical point,” John Maynard Keynes wrote in March 1933. “We can ... see clearly the gulf to which our present path is leading.” If governments did not take action, “we must expect the progressive breakdown of the existing structure of contract and instruments of indebtedness, accompanied by the utter discredit of orthodox leadership in finance and government, with what ultimate outcome we cannot predict.” As the world reels from a 1929-style stock market plunge and a 1931-style banking crisis, his words are a fair assessment of the dangers we face once again. Keynes, whose life’s mission was to save capitalism from itself, is more relevant than at any time since his death in 1946. His renewed influence can be seen everywhere: in Barack Obama’s planned stimulus package, for example. When George W. Bush said his administration’s plan to take equity in banks was “not intended to take over the free market, but to preserve it”, he could have been quoting Keynes directly. The key to Keynes was his commitment to preserving the market economy by making it work. He was dismissive of Marxism but believed the market economy could survive only if it earned the support of the public by raising living standards. The role of the economist, he believed, was to be the guardian of “the possibility of civilisation”, and no economist has ever been more suited for that role. It was not until the Great Depression, however, that his ideas reached their full flowering, published as The General Theory of Employment, Interest and Money in 1936. The heart of the book is the idea that economic downturns are not necessarily self-correcting. Classical economics held that business cycles were unavoidable and that peaks and troughs would pass. Keynes contended that in certain circumstances economies could get stuck. If individuals and businesses try to save more, they will cut the incomes of other individuals and businesses, which will in turn cut their spending. The result can be a downward spiral that will not turn up again without outside intervention. That is where government comes in: to pump money back into the economy by some means, such as spending on public works, to persuade individuals and businesses to save less and spend more themselves.

A Spy Confesses, and Still Some Weep for the Rosenbergs You could choose to ignore, or somehow explain away, the Hitler-Stalin pact, or be wedded to the original Port Huron Statement instead of the “compromised second draft,” but if you seriously considered yourself fiercely loyal to the far left, you believed that the Rosenbergs were not guilty of espionage. At least you said you did.
For more than 50 years, defending Julius and Ethel Rosenberg was an article of faith for most committed American leftists. That the couple was framed — by officials intent on stoking anti-Soviet fervor and embarrassed by counterespionage lapses that allowed Russian moles to infiltrate the government — was at the core of a worldview of Communism, the Korean War and the ensuing cold war, and an enduring cultural divide stoked by McCarthyism. Now, that unshakeable faith has been rattled seismically. Not for the first time, of course; in the 1990s, secret Soviet cables released by Washington affirmed the spy ring’s existence. But this time, the bedrock under that worldview seemed to transmogrify into clay. Ronald Radosh, co-author of “The Rosenberg File,” a comprehensive account of the trial, declared that “a pillar of the left-wing culture of grievance has been finally shattered.” “The Rosenbergs were Soviet spies,” he said in an op-ed article in The Los Angeles Times, and “it is time the ranks of the left acknowledge that the United States had (and has) real enemies and that finding and prosecuting them is not evidence of repression.” Well, not quite. Many who took up the execution of the Rosenbergs as a grievance are reluctant to let go of it. Mr. Sobell, in fact, was rebuffed by his own stepdaughter, Sydney Gurewitz Clemens, an author and teacher. She said his confession “complicated history and the personal histories of the many millions of people, all over the world, who gave time, energy, money and heart to the struggle to support his claims of innocence.”

McCain Is the Real Health-Care Reformer Mr. McCain's proposal -- to give every American the tax credit businesses get for buying health insurance -- is the right prescription for what ails our health-care system. The foundation of that system -- employer provided health insurance -- is crumbling. For decades, the percentage of Americans who get their health insurance at work has been shrinking. In August, the Census Bureau reported that the decline continues. Today, 59% of Americans get their health insurance through the workplace. Twenty years ago, three-quarters of us did. With costs skyrocketing -- health-insurance premiums roughly doubled since 2000 -- the current path we are on is not sustainable. Mr. McCain recognizes that a large part of the problem is that the tax code favors employer-funded health insurance. The system, which began as a response to FDR's wage and price controls, is built on tax breaks that allow employers to buy health insurance with pretax dollars. Mr. McCain doesn't want to scrap employer-based insurance. He would keep part of the tax deduction in place. But he wants to fundamentally change the way the system works and instead give the self-employed and individuals a tax break for buying their own insurance. There are several advantages to this approach: - Choice. About half of those with employer-financed health insurance have a choice of exactly one plan -- and that plan is often designed to suit the needs of the employer, not the employee. In contrast, under the McCain proposal, families could opt out and join another plan -- perhaps offered by their church, union or trade association -- if it better suited their needs. - Portability. Presently, changing jobs means changing health plans and, often, family doctors. It also means that if a worker loses his job, he can also lose his health insurance. Under Mr. McCain's plan, job status wouldn't necessarily affect health coverage. - Labor mobility. By freeing workers of the need to stay in a job to keep their health insurance, Mr. McCain's plan would help create a more flexible workforce. A study by University of Wisconsin economist Scott Adams found that 20% to 30% of nonelderly men worry enough about losing their health benefits that they stay in jobs they would otherwise leave.

Biden misleads with accusation of tax increase Joe Biden charged Thursday during a campaign stop in Pennsylvania that John McCain's tax proposals for health insurance would be "the largest tax increase in the history of America for the middle class." He was wrong. McCain does propose taxing the health benefits that some 156 million people get through the workplace. That's a major change, because now no income taxes are levied on those benefits, but it's not the whole story. So, as Biden explained, someone who makes $40,000 and gets $12,000 in health insurance benefits would end up paying income taxes on $52,000. But what Biden didn't say was that McCain also proposes to give the insured a new tax break in exchange — a $2,500 tax credit for individuals and a $5,000 tax credit for families. For most families, that tax credit would for several years be more generous than the current tax break for employer-sponsored health insurance. An analysis of McCain's plan by the Tax Policy Center estimated that McCain's plan would increase the federal deficit by $1.3 trillion over 10 years, mainly because it would lead to less tax revenue coming in. The same group says Obama's plan would increase the deficit by $1.6 trillion over the same period. "McCain's plan seems to be a significant tax cut, at least in the short term," said Len Burman, who oversaw the analysis for the center, a joint venture of two liberal-leaning think tanks, the Brookings Institution and the Urban Institute.

Healthcare in Need of Remedies Thanks to a pact made by big business and labour half a century ago, most Americans receive their health coverage through their employers. Government has encouraged this compact by not classing company-provided health cover as a taxable benefit; people who buy their own, by contrast, have to do so with post-tax dollars. Economists criticise this tax concession, which is reckoned to cost the federal exchequer over $200 billion, for a variety of reasons: it favours the rich, discriminates against the self-employed and hinders labour mobility. But companies are starting to rebel. Tax break or no tax break, increases in health costs, which have long outpaced inflation, have meant that employers are spending ever greater amounts on providing cover. Those costs have nearly doubled this decade alone, and a new report by Towers Perrin, a benefits consultancy, forecasts they will surge by another 6% in 2009. Because the HAA harnesses the vast pool of money that is today distributed inefficiently through the tax break for employer-provided care, and then couples it with clever cost-control mechanisms, the Congressional Budget Office and the Joint Committee on Taxation have judged that the HAA will be revenue neutral or even revenue-enhancing within a few years. This is more than can be said for Barack Obama’s plan, which would expand coverage, but at a hefty cost. It has helped the HAA win the support of a bipartisan group of 16 senators, including such Republican budget hawks as Judd Gregg. Even the American Medical Association, the lobbying group for doctors that has been extremely wary of reforms, threw its weight behind the HAA in September. The attraction of a coherent, fiscally sound, bipartisan reform—be that the HAA or some variant on it—is great. But given the thorny politics and vested interests involved in a sector making up roughly a sixth of the American economy, the odds are still stacked against it.

Privatising fisheries works FOR three years, from an office overlooking the Atlantic in Nova Scotia, Boris Worm, a marine scientist, studied what could prevent a fishery from collapsing. By 2006 Dr Worm and his team had worked out that although biodiversity might slow down an erosion of fish stocks, it could not prevent it. Their gloomy prediction was that by 2048 all the world’s commercial fisheries would have collapsed. Now two economists and a marine biologist have looked at an idea that might prevent such a catastrophe. This is the privatisation of commercial fisheries through what are known as catch shares or Individual Transferable Quotas (ITQs). Christopher Costello and Steven Gaines (the biologist) of the University of California and John Lynham of the University of Hawaii assembled a database of the world’s commercial fisheries, their catches and whether or not they were managed with ITQs. As these fisheries were not chosen at random and without having any experimental control, they borrowed techniques from medical literature—known as propensity-score matching and fixed-effects estimation—to support their analysis. The first method compared fisheries that are similar in all respects other than the use of ITQs; the second averaged the impact of ITQs over many fisheries and examined what happened after the quotas were introduced. Whichever way they analysed the data, they found that ITQs halted the collapse of fisheries (and according to one analysis even reversed the trend). The overall finding was that fisheries that were managed with ITQs were half as likely to collapse as those that were not. For years economists and green groups such as Environmental Defense, in Washington, DC, have argued in favour of ITQs. Until now, individual fisheries have provided only anecdotal evidence of the system’s worth. But by lumping all of them together the new study, published this week in Science, is a powerful demonstration that it really works. It also helps to undermine the argument that ITQ fisheries do better only because they are more valuable in terms of their fish stocks to begin with, says Dr Worm. The new data show that before their conversion, fisheries with ITQs were on exactly the same path to oblivion as those without.

Making math uncool is hurting America, report says Americans may like to make fun of girls who are good at math, but this attitude is robbing the country of some of its best talent, researchers reported on Friday. They found that while girls can be just as talented as boys at mathematics, some are driven from the field because they are teased, ostracized or simply neglected. "The U.S. culture that is discouraging girls is also discouraging boys," Janet Mertz, a University of Wisconsin-Madison professor who led the study said in a statement. "The situation is becoming urgent. The data show that a majority of the top young mathematicians in this country were not born here." Writing in the Notices of the American Mathematical Society, Mertz and colleagues described their analysis of data from international math competitions going back to 1974. They also looked at surveys of U.S. students. "It is deemed uncool within the social context of USA middle and high schools to do mathematics for fun; doing so can lead to social ostracism. Consequently, gifted girls, even more so than boys, usually camouflage their mathematical talent to fit in well with their peers," they wrote.They also challenged the widespread belief that females lack exceptional math aptitude. "Innate math aptitude is probably fairly evenly distributed throughout the world, regardless of race or gender," said Titu Andreescu of the University of Texas at Dallas, who worked on the study. "The huge differences observed in achievement levels are most likely due to socio-cultural attributes specific to each country."

Posted by dblwyo at 11:08 AM | | Comments (0)

October 14, 2008

Populist Panderings, the Candidates and Real Solutions

Well the last of the debates are tonight and THE focal issue, as it should be, is the state of the economy. In our last post (Wobble Wheels Wakeup: Crisis, Response, Policy, Execution) we discussed the situation beyond the various worldwide rescue and re-vitalization efforts. In particular a key point we'll re-iterate is that once we get the wheels bolted back on the wagon we need to keep careening down a rather icy mountain sloped. A serious recession is pretty much in the cards and locked-in. The only real debate is how deep and how long; and this one is likely to be longer and deeper than anything many folks have seen for a long time.

One of the "interesting" anecdotes making the rounds in the financial community is that all the advisers aren't getting any phone calls ! It would seem that people are so shell-shocked that they're still trapped in the 1,000-yard stare syndrome. For my own part the contacts from family, friends and network more than reinforces that. We saw a more than generational collapse in the markets all collapsed into basically week. They come by their shock very....very honestly. We had to talk a bunch of folks out of selling their existing portfolios on Mon. open - which meant they would have missed the run up that mostly recovered the worst day from last week. We're far from out of the woods yet. In the readings the first one, finally, puts the emphasis where it needs to be - all these worldwide interventions are NOT quick fixes. Now we've been talking up the economy as THE central issue in this election for months (WRFest 20Jan08(Economics): Oops...Recession Ahead,The Coming Economic Crisis,Standing Corrected: Education 2nd Avoiding Economic Collapse 1rst) and outlined our sketch of a multi-faceted program that moves beyond arresting the immediate problems to looking at what needs to be done next and then beyond that. Which we thought we'd review here a little more. 

Comprehensive & Strategic Economic Program

Given all that what should we be doing - and therefore what should be looking for in tonight's debate. Well two things. One as close to this outline as possible and two minimal populist pandering, bearing in mind "nobody can handle the truth". That said in both his acceptance speech and the last debate Barry basically walked right down our reccy's while Johnboy appears to be improvising as he goes and throwing out one offs - not an integrated program. You might/ought/should invest the time to listen to this interview very carefully - from the guy who's called it for three years now !

Nouriel Roubini, New York University, Economics Professor Nouriel Roubini, an economist who predicted the depth and magnitude of the current financial situation before the decline of Bear Sterns, discusses the indicators he saw and his recommendations for stemming the financial downturn.

Step 1: Get Credit Flowing Again - we've been discussing this almost exclusively for the last several posts. While it's still very early days yet we think that the basic elements are in place and being acted on as rapidly as possible.

Step 2: "FIX" Housing - we're not going to get the economy back on it's feet while Housing continues to drag so much. At the same time too many people bought too many houses for unsupportable prices with funny money. Until prices come down significantly MORE it won't start self-correcting. In other words we need for the homeowners and the lenders to take another 15% haircut, write it off and re-negotiate the loans to something more sensible. And it'll need a serious institutional framework.

Step 3: Major Fiscal Stimulus - the last so-called recovery was put together on the Housing ATM and was pumping $500-700B/year into the economy at least. The economy will fall into a major serious recession unless we stimulate it and that stimulus needs to be of the same order of magnitude. This also needs to be quick, targeted and temporary - not another political boondoggle (fat chance I know but....). Tax cuts won't do it. On the other hand the impact on the deficit is irrelevant for a lot of reasons (still be low as a % of GDP, worse w/o stimulus). Things like extended unemployment benefits, more rebates, and direct spending programs fit the bill. Lots of very...y good economists like Larry Summers have tabled excellent proposals (btw - Barry's econ team is non-pareil and Larry's on it. See below). 

Step 4: Infrastructure Investment -the US has let it's electrical, waterway and transportation infrastructures deteriorate to the point of...well never mind. A massive decade long infrastructure rebuilding project would see us get new electrical grids, new highways and transportation systems and possibly new power plants and alternative energy supplies. This would have the benefit of providing enormous fiscal stimulus, i.e. creating jobs and making a major long-term investment for things we know how to do. BtW - major sidebar. The long boom of the '80s and '90s was primarily built around two things. Supply side is utter nonsense. Reagan got it going the old-fashioned way with deficit spending and Clinton got lucky and also cut the defense budget. Bingo, that's it.

Step 5: Strategic Investment (Energy, Biosystems, Materials) - we need new industries and we need to get off of our oil dependencies. There's things we can do in each and both. For example by increasing conservation as well as mandating enormously higher mileage thru better materials and engineering we could get a huge jump for the next ten years. Then we need to build new power plants, particularly nuclear, we need to open up our own offshore deepwater to oil exploration and we need more refineries. That all togeter takes us into the next decade. Beyond that we need some major alternatives - and don't believe 'em. We don't have the knowledge or technology do magic yet. For example we should really be heavily emphasizing coal but need major new technology not the Rube Goldberg fixes running around. So a concerted national effort (does the word Manhattan Project ring any bells) to create major new energy sources and technologies would stimulate the economy, create new industries and provide us several paths to the future.

Combine that we major parallel investments in new life sciences and materials, both because they offer the best hopes for the Next Big Things and because they are synergistic with energy investments. For example if we pie-in-the-sky about Fusion we need the new materials for the reactor vessels. Or new lightweight composites for high-temperature turbines. Similarly new bio-sciences offer up their own benefits not least of which is designed alternative energy crops as well as way to control and manage environmental problems. The real beauty of this is that it doesn't take a lot now because it's all at early stages.

Step 6 - Education Investment: the decline in average income is due more to natural evolutionary shifts in the kinds of labor demanded by an increasingly technical economy. When the US Economy really started on its' accelerated path after the turn of the 19thC few know that a key ingredient was the widespread development of high-schools and the resultant upgrading of the skills and knowledge of the population. Education is the co-dependent imperative along with creating new industries IMHO. (Readings(Education): the Single Most Important Domestic Policy Issue) 

 So there you have it in a nutshell :) A complete now to futures strategic economic policy recommendation. Believe it or not it's at least a decent strawman based on reality, the ways things actually work instead of fantasies and offers some real benefits. Test it against the candidates if you like. The results might be interesting ! The guy you want to vote for is the one that comes closet to ticking off this strategic agenda, doesn't offer up utter unsinn (German for nonsense and Supply Side III more than qualifies), has the best team and sounds like he's got a better grasp. We highly recommend you at least skim the readings to get a feel for how they stack up therein. And also to help you decide on where you think economic policy lies on the importance spectrum. We happen to think it is the sine qua non and will dominate the next Presidential term and outweigh almost any other issue short of a major shooting war.

Policy Issues

Federal bank buy-in no economic quick-fix With any luck, the government's quarter-trillion dollar cash infusion in banks will get them lending again, but the radical move won't quickly turn around the tottering economy. The pain will almost certainly drag on as vanishing jobs, shrinking paychecks and nest eggs, and slumping home values continue to force millions of Americans to pull back. Sales at the nation's retailers are expected to drop in September even as they get a break from record-high energy prices. Uncertainty about the economy -- and their own financial fortunes -- probably will force consumers and businesses alike to hunker down further, spelling more problems for the already troubled economy. Anxiety about the economy is the No. 1 concern of voters. With the presidential election just weeks away, Democrat Barack Obama and Republican rival John McCain are working furiously to convince people that each is the best choice to steer the economy through these perilous times. In addition to September retail sales numbers, other economic data out Wednesday is expected to show that even though the recent retreat in energy prices calmed inflation at the wholesale level bit, costs are still high and are squeezing businesses. Many economists believe the country is on the edge of -- or already in -- its first recession since 2001. If the government's new plan works -- it will merely cushion the blow. Democrats on Capitol Hill are pushing for another round of stimulus that could cost as much as $150 billion, an effort to provide additional relief and lift the country out of the doldrums.

Examining the candidates  A survey of academic economists by The Economist finds the majority—at times by overwhelming margins—believe Mr Obama has the superior economic plan, a firmer grasp of economics and will appoint better economic advisers. Does their opinion matter? Economics is just one of the many things the next president will have to worry about; voters still seem to prefer Mr McCain on foreign policy. And even on the economy, economists may not have the same priorities as the population at large. Arguably, what a president says about economics on the campaign trail is less important than how he responds to the unexpected challenges that inevitably arise once he is in office. Yet economists’ opinions should count for something because irrespective of any party affiliation, most of them approach policy decisions with the same basic tool kit. Their assessment of the candidates’ economic credentials and plans represents an informed judgment on how well they will handle difficult trade-offs between efficiency, equity, growth and consensus-building. Regardless of party affiliation, our respondents generally agree the economy is in bad shape, that the election is important to the course of economic policy and that the housing and financial crisis is the most critical economic issue facing America. A candidate’s economic expertise may matter rather less if he surrounds himself with clever advisers. Unfortunately for Mr McCain, 81% of all respondents reckon Mr Obama is more likely to do that; among unaffiliated respondents, 71% say so. That is despite praise across party lines for the excellent Doug Holtz-Eakin, Mr McCain’s most prominent economic adviser and a former head of the Congressional Budget Office. “Although I have tended to vote Republican,” one reply says, “the Democrats have a deep pool of talented, moderate economists.” Where the candidates’ positions are more clearly articulated, Mr Obama scores better on nearly every issue: promoting fiscal discipline, energy policy, reducing the number of people without health insurance, controlling health-care costs, reforming financial regulation and boosting long-run economic growth. Twice as many economists think Mr McCain’s plan would be bad or very bad for long-run growth as Mr Obama’s. Given how much focus Mr McCain has put on his plan’s benefits for growth, this last is quite a repudiation.  Poll Results Graphic

Obama cautious, vague in economic crisis Sen. Barack Obama has taken a commanding lead in the race for president not because of any dramatic gesture, but because of a signature political trait: his caution. The nation's economic crisis triggered Obama's sharp rise in what had been a tight race. But Obama hasn't tried to seize the kind of central, national leadership position for which Sen. John McCain grasped, and fell short. Nor has he been touting — Bill Clinton-style — a highly detailed plan for what he'll do the moment he takes office. The result is that while virtually all observers agree that he has benefited from the crisis, his allies and critics alike remain a bit hazy on what exactly he would do if he takes office Jan. 20, 2009. "He's certainly laid out all the right elements that are needed for an economic recovery, but nobody's sure at this point which ones will be at the very top of his priority list when he takes office," said Thea Lee, the chief economist for the AFL-CIO. "To my knowledge, he's said absolutely nothing about what he would do," said Glenn Hubbard, a former chairman of President Bush's Council of Economic Advisers who is now the dean of Columbia Business School.

Obama has often thrived in this campaign by talking in foggy terms about his plans, here and abroad. It frustrates critics — and some voters looking for clear indications of how he would lead — but also provides tremendous flexibility for adjusting positions now and in the White House if he wins. In fact, Obama has talked about the economy — only softly. Many of his key plans — for economic stimulus, for attending to the troubled housing market and for financial regulations — are policy prescriptions he and other Democrats have been discussing for months or more. Several became urgent — and in some cases passed into law — when the crisis deepened last month. Publicly, though, he's said little, repeatedly answering a question in the first debate about what priorities would have to be set aside owing to the cost of the bailout with a list of the many programs he'd nonetheless provide. McCain was hardly more specific, though he did finally say he'd seek to freeze almost all federal spending. "Steady leadership is not just about having ideas — it's about having consistent ideas and working to make them happen," said Obama's director of economic policy, Jason Furman.

Ok, You Two, What Would You Do to Solve This Mess? Obama and McCain have taken different tacks to handling the meltdown. It's not by accident. How their economic gurus shape their views. Barack Obama was in "governing mode," says one of his aides. In a small room next to A basketball arena at the University of Miami, Fla., the Democratic nominee had convened an emergency session of his new economic brain trust. It was a remarkable gathering for a candidate who, during the primaries, had relied largely on an obscure, baby-faced University of Chicago economist named Austan Goolsbee. With Obama in the room were Bob Rubin and Larry Summers, both Clinton-era Treasury secretaries credited with lifting global financial markets out of the "Asian contagion" of 1997; Paul Volcker, former chairman of the Federal Reserve; Laura Tyson, Clinton's Council of Economic Advisers chair; Gene Sperling, Clinton's national economic adviser; and Dan Tarullo, also a key Clinton go-to man on trade and G8 issues. Piped in on a conference phone were legendary investor Warren Buffett, Nobel Prize-winning economist Joe Stiglitz and Obama's would-be veep, Joe Biden. The topic at hand: what to make of Treasury Secretary Hank Paulson's $700 billion rescue plan, which was to be announced later that day (Sept. 19). "There's a comfort level in having someone able to say, 'This is a little like what we faced 10 years ago'," says the aide, who would divulge details about the session only on condition of anonymity. "But Obama was running the show. Twice he cut some people off when they started to talk about what message he should deliver [to the public]. He said, 'Hold it, we'll do that later. You guys are here to help me figure out what we should be doing' " to solve the crisis. In a phone call that day, Paulson had pleaded for time to sell his plan. Obama obliged by saying only that he supported giving Treasury and the Fed broad authority. Even though, behind closed doors, he was going into detail about his own possible solutions—mulling the virtues of the Depression-era Home Owners Loan Corporation and the response to the S&L crisis of the '80s—Obama supplied few specifics on his thinking. Nor has he revealed much more three weeks later, other than to talk about "protecting the taxpayer." While no one at the meeting would confirm they had advised the candidate to keep to generalities, Obama's approach did conform to the old Rubin-Summers philosophy from the '90s: loose talk by politicians just makes things worse, aggravating markets and upsetting negotiations. While both men have now backed major government intervention, Obama and McCain are getting different kinds of economic advice. Since the crisis began, Obama has gotten close to the Clinton "A-team" that helped to reassure markets in the '90s—Summers, Rubin and Tyson now routinely travel with him—whereas McCain continues to take the looser approach he's used as senator. McCain conducts occasional phone conferences with anywhere from seven to 30 business people and economists who review his campaign material; otherwise, the senator funnels their advice through Holtz-Eakin, a former staff member of Bush's Council of Economic Advisers and later director of the Congressional Budget Office. "I'm the chief bureaucrat," says Holtz-Eakin. "We've got lots of people out there. He likes to just listen to the various points of view … He really does operate in a style reminiscent of his time as chairman of the commerce committee." Many of McCain's advisers are Fortune 500 CEOs like Meg Whitman of eBay—he named her at the second debate as a possible Treasury secretary—rather than denizens of Wall Street or Washington (though he does speak with John Thain of Merrill Lynch regularly). McCain's chief financial-market expert, former Treasury undersecretary John Taylor, is regarded in the economic community as a brilliant thinker and analyst but a less-than-effective administrator. (The McCain campaign declined to comment.) Jack Kemp, chiefly known as a passionate advocate of tax cuts, also travels with McCain, says Holtz-Eakin.

Who's to Blame? Go Back to Bedford Falls - If the global economy survives the autumn and our cable-TV companies are still in business come Christmas, Americans surfing the channels for classic Yuletide movies may finally figure out exactly whom they have to blame for the housing bubble and everything that has followed. Forget the predatory lenders, Wall Street sharks and their government enablers: It all started with George Bailey. Yes, that George Bailey -- the hero of Frank Capra's "It's a Wonderful Life," the most popular man in Bedford Falls, the man so indispensable that he earned a private visitation from a guardian angel just to show him how dreadful a world without him would have been. It's easy to forget, so potent is the supernaturally charged final act of Capra's classic, that before he was visiting looking-glass worlds where he'd never been born or scampering through the snow and shouting "Merry Christmas!" till his lungs burst, Jimmy Stewart's George Bailey was actually a pretty savvy businessman. And it's even easier to forget the precise nature of his business: putting the downscale families of Bedford Falls into homes they couldn't quite afford to buy. This is the substance of the great war between Bailey and Lionel Barrymore's Mr. Potter, the richest, meanest man in Bedford Falls. Potter is against easy credit and the suburban dream, against the rabble moving out of his tenements and buying homes, while the Bailey Building and Loan exists to make suburbia possible. The Bailey vision is economic and moral all at once.

There Is a Silver Lining The crisis has forced the United States to confront bad habits developed over the past few decades. If we can kick those habits, today's pain will translate into gains. The whole country has been complicit in a great fraud. As economist Jeffrey Sachs points out, "We've wanted lots of government, but we haven't wanted to pay for it." So we've borrowed our way out of the problem. In 1990, the national debt stood at $3 trillion. (That sounds high, but keep reading.) By 2000, it had almost doubled, to $5.75 trillion. It is currently $10.2 trillion. The number moved into 11 digits last month, which meant that the National Debt Clock in New York City ran out of space to display the figures. Its owners plan to get a new clock next year."Leverage" is the fancy Wall Street word for debt. It's at the heart of the current crisis. Warren Buffett explained the problem in his inimitable way on "The Charlie Rose Show." "Leverage," he said, "is the only way a smart guy can go broke ... You do smart things, you eventually get very rich. If you do smart things and use leverage and you do one wrong thing along the way, it could wipe you out, because anything times zero is zero. But it's reinforcing when the people around you are doing it successfully, you're doing it successfully, and it's a lot like Cinderella at the ball. The guys look better all the time, the music sounds better, it's more and more fun, you think, 'Why the hell should I leave at a quarter to 12? I'll leave at two minutes to 12.' But the trouble is, there are no clocks on the wall. And everybody thinks they're going to leave at two minutes to 12." If there is a lesson to be taken from this crisis, it's a simple and old rule of economics: there is no free lunch. If you want something, you have to pay for it. Debt is not a bad thing. Used responsibly, it is at the heart of modern capitalism. But hiding mountains of debt in complex instruments is a way to disguise costs, an invitation to irresponsible behavior. At some point, the magical accounting had to stop. At some point, consumers had to stop using their homes as banks and spending money that they didn't have. At some point, the government had to confront its indebtedness. The United States—and other overleveraged societies—have now gotten the wake-up call from hell. If we can respond and change our behavior markedly, this might actually be a blessing in disguise. (Though, as Winston Churchill said when he lost the election of 1945, "at the moment it appears rather effectively disguised.")

McCain, Obama Push Populist Approaches to Solve Wall Street Credit Crisis Barack Obama and John McCain, both laying claim to the populist ground, have different approaches to implementing the financial markets rescue plan. The Democrat is focused on recapitalizing banks while halting foreclosures and creating new jobs, while the Republican wants to purchase and refinance mortgages of troubled homeowners. Obama promoted a package yesterday aimed at the middle- class, including temporary tax breaks on retirement savings, and federal loans for small businesses. McCain today proposed reducing taxes on long-term capital gains to 7.5 percent in 2009 and 2010, expanding on his plan to devote $300 billion to cutting mortgage payments for over-extended homeowners. Two weeks after both senators voted for the $700 billion federal financial-rescue plan, the presidential contenders are pushing different priorities to voters who've been reluctant to spend billions to rescue Wall Street.

Posted by dblwyo at 10:21 AM | | Comments (0)

October 12, 2008

Wobble Wheels Wakeup: Crisis, Response, Policy, Execution

That loud squeaking noise you hear and the side-to-side motion making you see-sick is "US" trying to get the wheels to stay on the economy wagon, keep 'em turning and get on down the mountain. After a pronounced lack of political leadership scared the bejesus out of the markets they shared the angst by scaring the bejesus out of us all. And in the last week or so, shall we say, the worldwide schadenfreude with (for example) the German Finance Minister dancing on the grave of the American economy has metamorphized into a worse crisis in Europe that's spreading worldwide. Oddly enough this apparantly was the wakeup call that finally got everyone's attention despite literally years of warning. Call it re-discovering history. Not the history that says that market economies are subject to cycles or that speculation leads to booms which lead to busts. We knew all that. No, we're re-discovering something more fundamental...people don't pay attention until the pain exceeds the gain. Which threshold was crossed this week apparently !

The Silver Light in the Tunnel

Which is good news in and off itself but there's actually better news. Not only has the rescue package passed but a) it's being modified or extended within the existing authorities to include other essential steps, including bank re-capitalization, direct purchase of commercial paper and some plans to buy down mortgages. And b) similar programs are being rapidly adopted on a worldwide basis by all the developed economies and they are coordinating their efforts, though more than somewhat hampered by on-going parochialisms. Nonetheless the toolkit to get out of this mess is being put in place about as fast as possible, let alone reasonable, by some very competent people who are also demonstrating a superb capability to innovate under stress (Adm. Jim Stockdale's primary and No. 1 criteria for real leadership !  Thoughts of a Philosophical Fighter Pilot (Reprint ed.))

At this point we've still got some pain to go though the markets may be calming down, at least the equity markets though considerable rehabilitation needs to be done (as we've been discussing) on the credit markets. Nonetheless we have the tools - and if that sounds too much like the leadin to the $6 Trillion Man I strongly urge you to listen to Paul Volcker's Rose interview. Which doesn't meant there's not some more pain to come but does mean that all this talk of a "Great Depression" is beyond overdone - if it bleeds it leads and right now the economy is what's bleeding. 

Some Perspective

After the break you'll find Volcker's WSJ oped piece excerpted along with Gordon Brown's, which outlines the nature of things, necessary corrective measures and shows some real grasp and leadership. While I'm not sure how he's received in Britain this is the kind of thing we needed over here and got only from some. And the complete opposite from others (Anatomy of a Crash: Welcome to the Political Sausage Factory). Neither of the candidates has particularly stepped forward, but the Senate leadership did on both sides of the aisle as did the House Democratic leadership. We won't further comment on the reprehensible to despicable actions of the House Rips but you likely take our point. But the two guys who've stepped up and carried the load are Hank and Ben - who've been struggling with this for well over a year, continue to meet Stockdale's criteria for leadership of performing well under incredible pressure and keeping a calm head and putting up with all the nattering from the critics who have almost uniformly focused on knocking things down instead instead of helping to make them better. The cartoon is very funny, IOHO, but greatly exaggerated so take it as black humor from somebody who's a superior critiquer but not a contributor.

The graphic at right is a much more realistic depiction of the strategic alternatives we're facing, though being a very simple chart it likely has no emotional impact. Let me try and wrap some words around it to help out.

The bottom sub-chart shows GDP under four scenarios: a "Mild" downturn though one still more severe than we've seen in thirty years. My expected case and two bad cases - one where we have a protacted and fairly severe downturn and the other where that bad case morphs into a sustained malaise. The equivalent of the GD is NOT shown but it'd have GDP declining for 4-5 years for a total 25% drop followed by another five of sub-par growth. What we're facing is nothing at all like that. Let's get some perspective people - this is going to be painful enough and take us all pulling together. Time for the negative heads to quit pumping up circulation in their outlets and start pumping up circulation in the country !

In other words even the worst case is better than the GD by two or more orders of magnitude. What we're trying to do is get as close to the region between the green and blue lines as workable and stay as far as possible from the orange and red lines. On the record to date I consider that both possible AND likely, though beyond getting the wheels more secure and turning again there's a bunch of other things required that boil down to stimulate the hell out of the economy. But do it right and don't run us thru another trip in the political sausage factory. But you'd better darn well vote for the candidate you think will do his best to avoide that repeat or take our medicine. 

Leadership and Response

Playing Frisbee on a Precipice There are 3½ weeks to go. Life, and political campaigns, can turn on a dime. But I think it just turned on a lot of dimes. There was an October surprise, and it has all but certainly decided the race. On the left, a smug triumphalism is setting in. On the right, anger rises: the finger pointing is about to begin. In parts and pockets of the middle, we have Americans who aren't thinking about politics because they're busy trying to imagine what a modern depression would look like and wondering, for the first time ever, if it is possible that they may wind up living in their cars. A friend caught the mood in a jollier way, quoting an old comic: "I have enough to live comfortably for the rest of my life, as long as I'm hit by a bus tomorrow." Both campaigns, in the closing stretch, seem not fully worthy of the moment. We are in crisis—a once-in-a-century event, as we now say. And what we got from the candidates, in this week's presidential debate, was a bunch of gummy meanderings—smooth, rounded sentences so full of focus-grouped inanities that six minutes in viewers entered a kind of trance in which we almost immediately gave up on trying to wrest meaning from what was being said and instead focused on mere impressions. The look of things. The men on the plane, the pseudo-tough political operatives who surround both candidates, sometimes grouse, in private, that it's all symbols now, all mood, all about the visual. But they have some real responsibility here. They send their candidates out to speak such thin gruel, such spat-out porridge, that we are struck dumb, and left daydreaming about the fact that Mr. Obama's suits are always slate gray and never seem to wrinkle, and Mr. McCain tonight seems like a rabbity forest creature darting amid the hedgerows. As to what they will do about the crisis, Mr. Obama will raise taxes on the rich and help us weatherize our homes, while Mr. McCain favors "energy independence" and buying up mortgages. On the causes of the crisis they spoke of insufficient regulation, or high spending. But these were not the great causes. Neither party has clean hands. Or rather, both parties have dirty hands. Here is the truth, spoken by the increasingly impressive Sen. Tom Coburn: "The root of the problem is political greed in Congress. Members . . . from both parties wanted short-term political credit for promoting homeownership even though they were putting our entire economy at risk by encouraging people to buy homes they couldn't afford. Then, instead of conducting thorough oversight and correcting obvious problems with unstable entities like Fannie Mae and Freddie Mac, members of Congress chose to . . . distract themselves with unprecedented amounts of pork-barrel spending." That is the truth. And yet at the debate, when one citizen-questioner invited both candidates to think aloud about the responsibility of our representatives in Washington, they both gently suggested she was cynical. She was not cynical. She was informed. Why would anyone trust either candidate to help dig us out of this if they can't speak frankly about what got us into it? One had the sense this week that our entire political class is playing Frisbee on the edge of a precipice, that no one is being serious enough, honest enough, that it's all too revved, too intense, and yet too shallow.

A Deepening Leadership Crisis Yesterday’s stunning rejection by the House of Representatives of the financial rescue plan represents one of the clearest signs yet of the deepening leadership problem we are facing as a people. The pleas of a President, Congressional leadership, the business community, the press — all were ignored and defied by a majority of Members in the House. The opposition was especially intense among House Republicans, even though the most urgent pleas came from fellow Republicans in the executive branch. Those who voting against a rescue, in my judgment, should be held accountable by voters at the polls this November if the country now endures greater hardships. But we should recognize as well that the reason so many voted against the package was that the public has been against it — and in turn, the public has not been persuaded because it has lost trust in our national leadership. And THAT is a serious problem for a democracy — one that deserves more extensive debate about why the breakdown in trust and what can be done about it. At Harvard’s Center for Public Leadership, which I have the privilege of directing, we have taken public surveys in each of the past three years measuring confidence in our nation’s leadership. Our surveys have been done in partnership with U.S. News & World Report as well as Yankelovich. The results haven’t been pretty. In the fall of 2005, some 65% said we have a leadership crisis in the country. By 2006, the number had risen to 69%. And last fall, no less than 77% declared there was a crisis of leadership. Moreover, 79% said the United States would decline unless we get better leaders. Please note that this survey did not reflect just an unhappiness with President George W. Bush. It was widespread across 12 different institutions and leadership groupings. Only the military and the medical profession were given relatively high marks this past fall. Strikingly for purposes of understanding these past few days, the institutions and groups with the lowest levels of confidence were smack in the middle of this financial meltdown. Four of the five lowest rated groups in the index were business, Congress, the executive branch, and the press. No wonder the “leaders” of these institutions had so much trouble persuading the general public about the seriousness of our financial mess. What we see today then is a leadership vacuum. And in particular, we are experiencing an interregnum in Washington, a moment when the highest office in the land seems vacant and we are awaiting a new national leader.

The Git  'er Done  Boys

A Professor and a Banker Bury Old Dogma on Markets For the last year, as the nation’s economy lurched from crisis to crisis, the chairman of the Federal Reserve, Ben S. Bernanke, had been warning Henry M. Paulson Jr., the Treasury secretary, that the worsening situation might ultimately force a sweeping federal intervention. A longtime student of the Great Depression, Mr. Bernanke was acutely aware of what could happen without a decisive move. Finally, the moment that called for action arrived late Wednesday. Less than 24 hours after the Fed bailed out American International Group, the giant insurer, it was clear the turmoil gripping Wall Street was only growing worse and that ad hoc solutions were not working. Talking into a speaker phone from his ornate office, Mr. Bernanke told Mr. Paulson that it was time to adopt a comprehensive strategy that Congress would have to approve. Mr. Paulson understood. Reluctant in recent days to send Congress a plan that lawmakers had warned had little chance of quick passage, he had worried that a rejection would only further shock the markets. But during two conference calls Wednesday night and Thursday morning, he agreed that they had no choice. “It just happened dramatically,” Mr. Paulson said in an interview on Friday. “There was only one way that we could reassure the markets and deal with a very significant and broad-based freezing of the credit market. There was no political calculus. It was overwhelmingly obvious.” Just like that, Mr. Bernanke, the reserved former Ivy League professor, and Mr. Paulson, the hard-charging former Wall Street deal maker, launched what would be the government’s largest economic rescue operation in modern times, one that rivals the Iraq war in cost and at the same time may redefine Washington’s role in the marketplace for years.

The plan to buy $700 billion in troubled assets with taxpayer money was shaped by two men who did not know each other until two years ago and did not travel in the same circles, but now find themselves brought together by history. If Mr. Bernanke is the intellectual force and Mr. Paulson the action man of this unlikely tandem, they have managed to create a nearly seamless partnership as they rush to stop the financial upheaval and keep the economy afloat. Befitting their roles and personalities, Mr. Paulson has become the public face of their team — he plans to appear on four Sunday talk shows — while the less visible Mr. Bernanke provides the historical underpinnings for their strategy. Along the way, they have cast aside the administration’s long-held views about regulation and government involvement in private business, even reversing decisions over the space of 24 hours and justifying them as practical solutions to dire threats.

A Short Banking History of the U.S. We are now in the midst of a major financial panic. This is not a unique occurrence in American history. Indeed, we've had one roughly every 20 years: in 1819, 1836, 1857, 1873, 1893, 1907, 1929, 1987 and now 2008. Many of these marked the beginning of an extended period of economic depression. How could the richest and most productive economy the world has ever known have a financial system so prone to periodic and catastrophic break down? One answer is the baleful influence of Thomas Jefferson. To Jefferson, who may not have understood the concept of central banking, Hamilton's idea was what today might be called "a giveaway to the rich." He fought it tooth and nail, but Hamilton won the battle and the Bank of the United States was established in 1792. It was a big success and its stockholders did very well. It also provided the country with a regular money supply with its own banknotes, and a coherent, disciplined banking system. But as the Federalists lost power and the Jeffersonians became the dominant party, the bank's charter was not renewed in 1811. The near-disaster of the War of 1812 caused President James Madison to realize the virtues of a central bank and a second bank was established in 1816. But President Andrew Jackson, a Jeffersonian to his core, killed it and the country had no central bank for the next 73 years. No small part of the reason that an ordinary recession that began in the spring of 1929 turned into the calamity of the Great Depression was the inability of the Federal Reserve to do its job. It was completely reorganized in 1934 and the U.S. finally had a central bank with the powers it needed to function. That is a principal reason there was no panic for nearly 60 years after 1929 and the crash of 1987 had no lasting effect on the American economy. In the 1990s interstate banking was finally allowed, creating nationwide banks of unprecedented size. But Congress's attempt to force banks to make home loans to people who had limited creditworthiness, while encouraging Fannie Mae and Freddie Mac to take these dubious loans off their hands so that the banks could make still more of them, created another crisis in the banking system that is now playing out. While it will be painful, the present crisis will at least provide another opportunity to give this country, finally, a unified banking system of large, diversified, well-capitalized banking institutions that are under the control of a unified and coherent regulatory system free of undue political influence.

Tools and Outlook

We Have the Tools to Manage the Crisis Today, the financial crisis has reached a critical point. The sharp decline in the stock market and its volatility dramatically make the point. More important if less visible, the flow of credit through the banking system and the financial markets is seriously impaired -- even in part frozen. For months, the real economy, apart from housing, had not been much affected by the developing crisis. Now, a full-scale recession appears unavoidable. Important state and local governments face deficits they may be unable to finance. Recessionary forces are apparent in other important countries and exchange rates are unstable.Those are facts. They are the culmination of economic imbalances, a succession of financial bubbles and financial crises that have been building for years. It's no wonder that confidence in markets, banks, and financial management has been badly eroded. Without effective action, fear might take hold, threatening orderly recovery. Fortunately, there is also good reason to believe that the means are now available to turn the tide. Financial authorities, in the United States and elsewhere, are now in a position to take needed and convincing action to stabilize markets and to restore trust. None of that is easy. Some of it poses risks for the taxpayer. All of it is decidedly unattractive in the sense of large official intervention in what should be private markets able to stand on their own feet. Unattractive or not in normal circumstances, the point is the needed tools to restore and maintain functioning markets are there. Now is the time to use them. To that end, the immediate and critical need is determined, forceful and persistent leadership -- extending across administrations and Congresses. Both the public and private sectors must be involved. The inevitable recession can be moderated. The groundwork can be laid for reconstructing the financial system and the regulatory and supervisory arrangements from the bottom up. The extraordinary interventions by the government (and taxpayer) should be ended as soon as reasonably feasible. That rebuilding will be the job of another day -- of a new administration here in the U.S., of finance ministries and central banks working together. It must draw upon the strength of the now chastened private sector. It will require more understanding of the risks embedded in so-called financial engineering and of the perverse compensation incentives that have exalted risk over prudence. There is, and must be, recognition of the essential role that free and competitive financial markets play in a vigorous, innovative economic system. There needs to be understanding, in that context, that financial ups and downs -- and financial crises -- will be inevitable, even with responsible economic policies and sensible regulation. But never again should so much economic damage be risked by a financial structure so fragile, so overextended, so opaque as that of recent years.

We must lead the world to financial stability. Strong banks, unfrozen markets, greater transparency and international supervision are the four keys to recovery. The banking system is fundamental to everything we do. Every family and every business in Britain depends upon it. That is why, when threatened by the global financial turmoil that started in America and has now spread across the world, we in Britain took action to secure our banks and financial system. The stability and restructuring programme for Britain that we announced this week is the first to address at one and the same time the three essential components of a modern banking system - sufficient liquidity, funding and capital. So the Bank of England has pledged to double the amount of liquidity it provides to the banks; we have guaranteed new lending between the banks so that we can get the banks lending to each other again; and at least £50 billion will be made available to recapitalise our banks. We will take stakes in banks in exchange for a return and will guarantee interbank lending on commercial terms. And at the heart of these reforms are clear principles of transparency, integrity, responsibility, good housekeeping and co-operation across borders. But because this is a global problem, it requires a global solution. Indeed this now moves to a global stage with a range of international meetings starting this week with the G7 and the IMF and, we propose, culminating in a leaders meeting in which we must lay down the principles and the new policies for restructuring our banking and financial system all around the globe. When I became Prime Minister I did not expect to make the decision, along with Alistair Darling, for the Government to offer to take stakes in our high street banks, just as nobody could have anticipated the action taken in America. But these new times require new ideas. The old solutions of yesterday will not serve us well for the challenges of today and tomorrow. So we must leave behind outworn dogmas and embrace new solutions.

Posted by dblwyo at 10:11 AM | | Comments (0)

October 11, 2008

Anatomy of a Crash: Welcome to the Political Sausage Factory

Now that we've just had the worst single week in the financial markets in post-war America, that people are (literally) shivering in their beds and nobody knows which end is up now what ? The answer to that is technical, economic and political. But remember back in distant history when Wall St. was going to rip us all off with a "bailout" package and the consensus reaction was let 'em burn in hell. Well we did, they are and we've got the seat right next to 'em. Be careful what you wish for - God's listening and he has a bleak sense of humor. There's so much going on we can't compress all the explanations, analysis and readings into one post. And it's been moving so fast it's been hard to keep up. For a bit more technical explanation of the market situation, and a few reasons for a gleam of hope try this: Whistling Past the Graveyard: Market Assessment and Outlook. And for a look behind the curtain at the economic realities which are just beginning to come home try this one: Wheels Back on the Wagon ? Still Headed for Icy Curves along with the prior post: Marketing Elephant Pills: Struggling to Explain the Rescue. So here we're going to concentrate on some of the political and policy issues with more to follow. However the bottomline is that the composite political cartoon exactly captures what triggered a crisis into a near collapse.

Inside the Sausage Factory

This started out bad, as we've discussed and metastasized into something really dangerous but, IOHO, what sent things over the edge was the failure of the rescue package on the first attempt in the House. And make no mistake, it failed because it not only didn't get supported by the Rips there but was actively opposed on ideological and partisan grounds. In fact the House Dems more than stepped up to their responsibilities. Unfortunately by the time the bill eventually passed it was necessary to scare people which woke up everyone to how fragile the situation is before we we prepared to cope with it. Now that's not the only thing that went on. Rather like that H.S. lab experiment where you drop just one more grain of salt in the super-saturated solution which immediately crystallizes into a near-solid this was a pre-avalanche situation just waiting for that last big boulder to start the whole thing down the mountain. BtW - that's not entirely a metaphor but how the mathematicians describe catastrophic cascades leading to collapses. The picture is from the press conference just after the Rescue package was passed - you can judge the level of strain AND the anticipated results from the near giddy grins on the faces of the most senior and serious members of both House and Senate. Unfortunately little did they and we know we were all standing on the lips of the abyss.

Now What ?

After the break you'll find some readings on the the anatomy of the political backstory and some on the financial backstory. The former substantiate all the conclusions we're suggesting IOHO. Skim 'em and reach your own conclusions if you like. In the latter section we especially want to draw your attention to the story and audioclips from PBS on some of the details which are all couched in non-technical terms. We strongly suggest you listen to those - it'll only take a few minutes and surely this crisis deserves that much attention ? Even more strongly we suggest you listen to Charile Rose's interview of Warren Buffett who provides his usual insight, folksy wisdom and blunt, plan-speaking truths about where we're at and where we're going. 

The bottom line here is that y'all just got a lesson in practical politics and what the majority of the electorate thought it wanted. The problem is that what you've seen is the triumph of the lizard-brain over good sense. The lizard-brain being that primitive part we inherited from our remotest ancestors that makes decisions on emotions and survival instincts and relies on the thinking mind to help rationalize things and get us out of trouble. We aren't going to wax on having done so at some length, if rather abstractly, in major prior posts (Inside the Sausage Factory: the 4P's of Political Reality ,911 Memorial: Fix the Problem Don't Repeat the Crash,Rational Voters, Public Choice, Economics and Futures).

Here's the key point - this is going to keep happening as long as we keep electing people to public office who tell us what we want to hear instead of telling us what's really going on.

You don't have to know the technical details of these major issues to make deeply informed decisions. What you do have to do is pick people to represent you whom you trust, who tell the truth and who will act in the balance for larger as well as narrower interests.

Let me that another, blunter way.

There's nothing going on that we didn't encourage. Make up your minds whether or not the party's worth the price the Piper always charges. And then either party on or let's start cleaning up these messes. 

Political Backstory

Anatomy of the Bailout Breakdown Republicans and Democrats talked a lot over the last few days about putting aside their partisan differences for the good of the country to pass a financial markets rescue plan. But they mostly appeared to agree on one thing - that even if they were going to support it, no one much liked the $700 billion bailout bill they had negotiated with the Bush Administration, and certainly no one much wanted to take any credit for it. So perhaps it shouldn't have come as such a shock when the House of Representatives failed to pass the bill Monday afternoon, or that the rest of the day was spent in partisan fury and recriminations. The most obvious culprit in a legislative meltdown that many warn could take the economy down with it were House Republicans, who had gotten an earful from their constituents disapproving of the bailout and had been strongly against it from the start. After scuttling the first proposed deal last week at a contentious White House meeting, saying they simply didn't have the votes, House Republicans forced a renegotiation of the bill, moving it further to the right to make it more palatable to their members. But even some Republicans remarked that their leaders didn't seem to be trying too hard to get the votes. There wasn't "some of the bursting of arms that I've seen in some votes over the past 12 years," said Rep. Chip Pickering, a Mississippi Republican. Why wouldn't there be a harder push on such a crucial bill? "The leaders knew people have deeply held convictions on this," Pickering said. "Everyone knew what the stakes were."

And the stakes become even clearer once the tally started at 1:27 Monday afternoon. By 1:51, 227 members had voted against it - nine votes more than the 218 majority. By 2:02 p.m. Hoyer and Rep. Rahm Emanuel, the No. 4 House Democrat, were in animated discussions on the Republican side of the chamber with Boehner and Blunt. Hoyer "was running around in there saying, 'The market is falling! The market is falling!'" said Scott Garrett, a New Jersey Republican. Faced with a major GOP shortfall, Democrats refused to force 12 of their members to change their votes for a bill that they had just spent the past week renegotiating in order to garner Republican support, dropping several provisions important to Democrats. By 2:05 the vote was done, failing to pass by a margin of 228-205. In the end, Republicans delivered 37%, or 65 of their 199 members, compared to 60% of House Democrats who voted for President Bush's "rescue" plan.

Dysfunction Exacts a Heavy Price The country has learned in recent weeks the price of financial failure. Now it will learn the price of political failure. The collapse of the financial-rescue package in the House on Monday may well be reversed, at some point. iscouraged House leaders yesterday sounded as if they hoped the Senate could lead Congress back out of the wilderness in the next few days, giving the plan a second crack at passage. But even if senators manage to revive the bailout plan, a great deal of damage already has been done: American voters, who didn't like the plan in the first place, will like even less the discovery that Washington's response to their concerns was to collapse into genuine dysfunction. Three-quarters of Americans already think the country is on the wrong track, and the same share disapproves of the job Congress is doing. Before Monday, it seemed unlikely those numbers could go much higher. They can, and now probably will. Beyond that, the hope that Washington had gotten the message in this campaign year that Americans were yearning for an end to gridlock and partisan warfare has been shattered. There will be plenty of blame to go around. House Republicans demanded changes in the plan last week, got some of them, and yesterday delivered just 65 votes -- a third of their members -- for a rescue package that their party's president, their party's Treasury Secretary and their party's House and Senate leadership all called vital to the nation. Then on Monday, it was Democratic House Speaker Nancy Pelosi's turn to hurt the effort. She chimed in with a bizarrely timed and distinctly partisan floor speech blaming Republicans for the market mess, just minutes before her party needed scores of Republican votes to make the bailout work. Whether she turned votes against the plan, or gave Republicans a convenient excuse to vote against it, was being hotly debated in the Capitol late Monday. But either way, the atmosphere is even more sour as a result. As it happens, Democratic leaders also failed to convince 95 of their own members to back the rescue plan, showing that the splintering of support was widespread in the halls of Congress. Now, though, the consequences of simultaneous political and economic breakdown ripple well beyond Wall Street and Washington. The effects could well be global. The U.S. -- meaning both parties and the public and private sectors -- has to worry about what global investors make of the picture of disarray they now see in the U.S. That's a crucial consideration because the U.S. now depends on foreign capital to finance both a trade deficit of more than $700 billion and a $400 billion federal budget deficit. Today, foreign lenders hold about half of America's public debt, and the nation relies on them to finance more than 70% of its new debt, the nonpartisan Peter G. Peterson Foundation estimates.

Why aren't Americans buying the bailout? The $700 billion financial bailout package failed because most Americans wanted it to fail. Before the vote, members of Congress were getting calls 100 to 1 against the bill. The question is: why? It's easy to see why bailing out rich bankers doesn't feel super, but why, despite all the efforts of all of the country's leaders to fill them with fear of an economic apocalypse, did Americans not see a failure to act as a serious threat to their livelihoods? Traditionally, human beings are not great at assessing this kind of risk - a peril that has not yet arrived and that is, in any case, hard to viscerally imagine. Witness people's reluctance to evacuate before hurricanes, and weather forecasts portend a danger far easier to comprehend than failing investment banks. But there are methods of communicating risk in a way that stills the heart, with words that inject dread into the populace. And Treasury Secretary Henry Paulson Jr., Fed Chairman Ben Bernanke and President George W. Bush used none of them. "The case wasn't made as to why the little guy needs this," says Paul Slovic, author of The Perception of Risk and a psychology professor at the University of Oregon. "The numbers and vague warnings are too abstract." The most effective warnings are like the most effective TV ads: easily understood, specific, frequently repeated, personal, accurate, and targeted. Paulson and his grim reapers managed only to repeat themselves frequently. They were not easily understood, partly because the problem is so complex. They did not personalize or target their warnings. And, as they themselves admitted, they did not know if their warnings were necessarily accurate, due to the novelty and unpredictability of the crisis. But their biggest mistake was a lack of specificity. They never clearly told the American people what might happen if Congress did not act.

Animal Instincts: Main Street Seeks Revenge on Wall Street The outrage expressed by many so-called Main Street folks over the proposed Wall Street bailout is based on more than a sense of injustice. It's about revenge, a basic animal instinct shared by humans, chimpanzees and even blue-footed boobies. And Washington politicians would be wise to listen up and stick some get-back-at-'em clauses into the bailout bill if they hope to get the support of the average American, says one behavioral economist who studies these things. In phone calls made by constituents to politicians, as well as e-mails to news organizations and other media, the public has expressed a preference for a package that helps consumers and homeowners without assisting fat cats on Wall Street. In fact, a Pew Research Center survey conducted Sept. 27 through Sept. 29 found that nearly 70 percent of Americans say they feel angry about the government's plan, and half admit they are scared. President Bush and other leaders who support the bailout warn, however, that if financial institutions are not propped up quickly and significantly with public money, the average American will pay the price. Bring it on, many people seem to be saying. Dan Ariely would agree. "People are willing to lose money to get those people [on Wall Street] to suffer" because the corporate financial leaders have violated a social contract, says Ariely, a behavioral economist at Duke University. "We need to include revenge in the bill." The bill should also include a code of punishment for exacting revenge for future financial misdeeds, Ariely said last night on "Marketplace," a radio program produced and distributed by American Public Media. However, psychologist David Schroeder of the University of Arkansas, Fayetteville, doesn't think revenge is technically the right word for what the public seeks, because it implies an urge to make others suffer at whatever cost. The public wants retribution, he says, for what is seen as a violation of the rules of the game, one they put their trust in. "Retribution involves a punitive component," Schroeder said, "and we're hoping that's going to deter these people from doing it again and we'll get them to abide by the rules in the future."

House opposition wilts  As the final high stakes vote on the bailout bill approaches Friday, Cummings is not alone among lawmakers who have found solid reasons to reconsider their vote. Whether it's the "Obama factor," or the fact that billions in new tax incentives have been added to the bailout bill, it's becoming clear that opposition is wilting to the $700 billion financial rescue plan just in time for a second House vote on Friday. After a blitz of last-minute lobbying, Republicans and the Bush administration are hoping to get in the neighborhood of 80 to 85 GOP votes on the bailout bill after garnering only 65 on Monday. And Democrats are hoping to build slightly on the 140 lawmakers who supported the bill earlier this week. The outcome still hangs on the prerogatives of a dozen or so wavering lawmakers in both parties, but congressional leaders are “cautiously optimistic” about the outcome Friday even after watching their rank and file sink the initial bill on Monday in a public revolt that shook financial markets around the world. Thursday brought another round of public – and private – reversals, with Georgia Rep. John Lewis, a prominent member of the Congressional Black Caucus, telling colleagues at a closed-door meeting that he would support the bailout plan, according to people present – Lewis wouldn’t confirm as he left the meeting, but said, “Just watch the board.” Republicans, from retiring Minnesota Rep. Jim Ramstad to Tennessee Rep. Zach Wamp, and Democrats, from Nevada Rep. Shelley Berkley to Missouri Rep. Emanuel Cleaver, all declared on Thursday they would support the current bill, according to various news sources. It's important to note that nothing is certain until the gavel falls Friday, so none of these public or private declaration means a thing until that point.

Financial Backstory

As Credit Crisis Spiraled, Alarm Led to Action Up and down Wall Street, hedge funds with billions of dollars at Goldman and Morgan Stanley, another storied investment bank, were frantically pulling money out and looking for safer havens. Panic was spreading on two of the scariest days ever in financial markets, and the biggest investors — not small investors — were panicking the most. Nobody was sure how much damage it would cause before it ended. This is what a credit crisis looks like. It’s not like a stock market crisis, where the scary plunge of stocks is obvious to all. The credit crisis has played out in places most people can’t see. It’s banks refusing to lend to other banks — even though that is one of the most essential functions of the banking system. It’s a loss of confidence in seemingly healthy institutions like Morgan Stanley and Goldman — both of which reported profits even as the pressure was mounting. It is panicked hedge funds pulling out cash. It is frightened investors protecting themselves by buying credit-default swaps — a financial insurance policy against potential bankruptcy — at prices 30 times what they normally would pay. It was this 36-hour period two weeks ago — from the morning of Wednesday, Sept. 17, to the afternoon of Thursday, Sept. 18 — that spooked policy makers by opening fissures in the worldwide financial system. In their rush to do something, and do it fast, the Federal Reserve chairman, Ben S. Bernanke, and Treasury Secretary Henry M. Paulson Jr. concluded the time had come to use the “break the glass” rescue plan they had been developing. But in their urgency, they bypassed a crucial step in Washington and fashioned their $700 billion bailout without political spadework, which led to a resounding rejection this past Monday in the House of Representatives. That Thursday evening, however, time was of the essence. In a hastily convened meeting in the conference room of the House speaker, Nancy Pelosi, the two men presented, in the starkest terms imaginable, the outline of the $700 billion plan to Congressional leaders. “If we don’t do this,” Mr. Bernanke said, according to several participants, “we may not have an economy on Monday.”

The Media Equation: Daring to Say Loans Made No Sense  As the assumptions that had blown air into the bubble began to dissipate, many mainstream reports became increasingly skeptical in their reporting and blogs like Calculated Risk offered increasingly alarming insights. After large-scale financial disasters, the press is usually criticized — often justly — for ignoring the problem, but it’s hard to make that case with the subprime mess. If no one saw this coming, they were not looking. “This has been a very slow-moving train wreck,” said Andrew Leckey, director of the center for business journalism at Arizona State University. “But it came wrapped in the warm feelings of home ownership while the executives behind it used obfuscation and a lack of transparency to lie about how deeply they were in the subprime business.” As Mr. Davidson and Mr. Blumberg showed, there’s more than one way to get behind the lies. Using an ad they placed on Craigslist — “Were you employed in the subprime mortgage industry?” — the pair proceeded to assemble a remarkably likable rogues gallery of participants up and down the subprime food chain. One was Clarence Nathan, who sounded like a nice guy, but his house was in foreclosure, and he did not have full-time employment. He had no assets to speak of, and yet he received a loan for $450,000. Kevin Kelly, a writer and thinker who helped invent Wired and The Whole Earth Catalog, is a huge fan of “The Giant Pool of Money.”  “It was not an abstract,” he said. “These were ordinary people doing ordinary things that accumulated in the wrong sequence and creating a system that failed. Normally, the scale prohibits people from understanding, but it was broken down into parts and sets of behavior that regular people could understand.” It was clear even last spring that the people who perpetrated this fraud knew at some level what they were doing. Mr. Davidson said that the idiosyncrasy of the instruments, combined with the overlay of technology, allowed the traders to live in denial. They would sit at terminals and use data — historical data that had been gathered before they started giving out money to people with no ability to pay — and decide that the risks were manageable. All of it was unreal, ineffable, tough to know. Except the way it turned out, as Mr. Davidson notes near the end of the story. “It’s as if the global pool of money thought it was putting trillions of dollars in a savings account, but really, half of it was going into a furnace. The money is gone, burned up, never to come back.”

PBS Clips on the Crisis

Planet Money Money makes the world go around, faster and faster all the time. At Planet Money, a multimedia team of reporters tracks down the economists, investors and regular folks who are trying to make sense of the rapidly changing global economy.

Global Pool of Money Got Too Hungry All Things Considered, May 9, 2008 · NPR's Adam Davidson and This American Life's Alex Blumberg jointly report on how rising defaults on subprime mortgages in the U.S. became a global financial crisis. This American Life host Ira Glass talks with Michele Norris about this first ever collaboration.

355: The Giant Pool of Money A special program about the housing crisis produced in a special collaboration with NPR News. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money.

Bailout Clash: 200 Economists Vs. The Senate October 1, 2008 · A group of 200 economists has signed a petition against the $700 billion Wall Street bailout plan. They believe the government must act — but they call the sweeping rescue a broad response to a narrow problem.

The Week America's Economy Almost Died September 26, 2008 · When short-term credit markets seized up last week, many economists and regulators say America faced a terrifying abyss. The nation risked becoming a place where no banks would lend and no customers could buy, where no one could get paid and commerce would cease — perhaps for decades.

Bernanke's 1980s Computer Model Predicts Crisis September 26, 2008 · A set of equations drawn up in the 1980s by Federal Reserve Chairman Ben Bernanke considered the effects of shocks to the financial system. A co-creator says that the model predicts disaster if there's not a quick intervention, and it guided Bernanke to take action now.

Economic Scene: Lesson From a Crisis: When Trust Vanishes, Worry In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right. A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again. Frederic Mishkin — Meyer’s grandson and, until he stepped down a month ago, an ally of Ben Bernanke’s on the Federal Reserve Board — told me this story the other day, and its moral is obvious enough. Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress, turning into modern-day Meyer Mishkins, more interested in punishing Wall Street than saving the economy. All of which may be true. But there is good reason for the public’s skepticism. The experts and policy makers who so desperately want to take action have failed to tell a compelling story about why they’re so afraid. It’s not enough to say that markets could freeze up, loans could become impossible to get and the economy could slide into its worst downturn since the Great Depression. For now, the crisis has had little effect on most Americans, beyond their 401(k) statements. So to them, the specter of a depression can sound alarmist, and the $700 billion bill that Congress voted down this week can seem like a bailout for rich scoundrels. Mr. Bernanke and his fellow worriers need to connect the dots. They need to use their bully pulpits to teach a little lesson on the economics of a credit crisis — how A can lead to B, B to C and C to Depression.

Main Street's Complicity Fed Wall Street Scheme - The securities that are poisoning the financial system are made up of mortgages and home equity lines that are going sour. They may soon consist of sick credit card and automobile debt as well. “Innovation” on Wall Street meant that the institution that made the loans could sell them off, and bankers could carve up those loans into new instruments, which they in turn sold to investors around the globe, with the result being that no one felt responsible for ensuring that the person who got the mortgage or the credit card or the home equity loan could actually pay for it. But who made the decision to take on that mortgage she couldn’t really afford? Who lied about her income or assets in order to qualify for a mortgage? Who used the proceeds of a home equity line to pay for an elaborate vacation? Who used credit cards to live a lifestyle that was well beyond her means? Well, you and I did. (Or at least, our neighbors did.) In other words, without the complicity of Main Street, Wall Street’s scheme never would have flowered. Some would argue that the modern sales machinery — remember those ads telling you to let your home take you on vacation? — is to blame. And it is. But we’re supposed to be adults, not children who can’t keep our hands out of the cookie jar. (Those who were lied to by brokers about the reset rates on adjustable-rate mortgages and other elements of their loans are in a different category.) Just as many of us deserve a share of the blame, many of us also got a share of the profits. No, not the kind of profits that Wall Streeters got, at least individually. But if you sold your house over, say, the last five years, you got an inflated price because of the proliferation of credit made possible by the Street’s practices. If you bought a house, then you got a lower mortgage rate than you would have if it weren’t for Wall Street. If you made money on the shares of Merrill Lynch or Lehman Brothers or another participant in this mess, then you shared in the profits. One could even argue that the overall stock market wouldn’t have achieved the heights it did were it not for our housing and debt-fueled economy. So if you cashed out at all, then you got some of the profits.

Pressured to Take More Risk, Fannie Reached Tipping Point But by the time Mr. Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans. So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives. For a time, that decision proved profitable. In the end, it nearly destroyed the company and threatened to drag down the housing market and the economy. Dozens of interviews, most from people who requested anonymity to avoid legal repercussions, offer an inside account of the critical juncture when Fannie Mae’s new chief executive, under pressure from Wall Street firms, Congress and company shareholders, took additional risks that pushed his company, and, in turn, a large part of the nation’s financial health, to the brink. Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers — more than three times as much as in all its earlier years combined, according to company filings and industry data. Leaning on Risks

 

Posted by dblwyo at 03:42 PM | | Comments (0)

October 08, 2008

Crisis, Debates and Leadership ? Yeah, Right.

The good news, such as it is, about the sudden explosion of the credit and economic crisis is that we're getting to watch both our prospective leaders in a tough situation. Make no mistake this is a real 3a.m. call and how they've both responded to it tells us a lot. And then we have the debates, which are much less revealing but in that lack of revelation also might have something to say. After the break you'll find a bunch of skimmable excerpts that trace out the last couple of weeks and the candidates reactions, some discussions of the debates and a couple of carefully selected assessments of last night's in the context of the crisis. On the whole these are not shining moments for either candidate, neither is doing too badly but, on-balance, Barry has played a more careful and successful game. Wile Johnboy badly wrong-footed himself with his grandstanding and what appears to be tone-deafness. We'll get to our specific handicapping of last night in a bit but to understand the situation take a look at "Meet the Press'" survey of the Electoral Map and it's sudden huge shifts in Barry's favor. Now Real Clear Politics (RCP National Average) has Barry over JB by 49 to 44 and In-Trade puts his odds at 73%. The key here is not so much that 5pt lead as it is the electoral shift. For an excellent discussion of the background context this Rose panel discussion, supposedly focused on the VP debate, has more to say about the situation and the candidates and is one of the better ones. Between those and our prior post (Calm Down: the Fat Lady Ain't Sung, Yet.) the argument that JB has wrong-footed himself seems to be covered beyond a need for more detail; and the readings will reinforce the assertion.

Assessing the Debate

Given all that going into last night's debate Barry had to not make any major mistakes while JB needed to come up with something new. First goal achieved, second stillborn. But neither stepped up and really either took any chances nor offerred a compelling assessment of the situation or a convincing path forward. That said, on the whole - and you had to listen carefully - Barry did offer up a correct strategic economic plan or plans, JB offerred up one tactical but workable suggestion but still doesn't get how serious this is and with regard to Economics and the crisis I have to give it to Barry.

In judging the debate there are three major strands being woven together all at once and you have to filter out two of them. The first is that politics is a matter of the heart, not the head. You may have a technically correct understanding and recommendation but if you can't explain and sell it then de nada; it doesn't matter. (Marketing Elephant Pills: Struggling to Explain the Rescue) On the other hand you can focus on just the selling and forget the substance. Which is all too often what our politics has been in the last twenty years. What politicians know or they aren't in the game is that first you start with the appeal to the lizard-brain with the right labels and use that to present your program. Given that's what most people judge by instead of substance and analysis it's as natural an outcome as breathing. The third thing politicians do is try to slap a label on their opponent and get them associated with bad thoughts and both candidates played that hand over and over again. My own opinion is enough already, we heard you, it's not convincing and it's certaily not useful. And judging from some of the polls and interviews that's a general reaction. The problem is it's not general enough and people do buy into those labels.

Once you filter things out what you're left with is the hints of substance. Ironically once you do that, and something we've mentioned before, both candidates are closer to each other and a pragmatic and progressive middle than they can afford to admit. For example on Energy both are essentially saying we need a concerted national effort that includes all the options in a balanced fashion, from coal and nuclear to wind and solar. On Healthcare they're actually both pretty close and market-oriented - we've come a long way from Billarycare II and an even longer way from not being on the agenda. Interestingly enough McCain's healthcare proposal is the most radical and addressess one of the biggest problems which is because it's paid for by tax-free dollars by employers it's subsidized, restricted to only those working for big companies and not portable. By bringing it out in front of the tax barrier all those are addressed, nobody gets hurt and it's a darn sensible financing mechanism. BtW with the proposed tax credit the net effect for most folks is no different than they have but it's enormously more flexible. In the long-run I'll bet some version of JB's plan gets adopted insofar as financing goes - it just makes too much sense and is too workable.

They still have some serious divergences on foreign affairs and in this area more than anything Barry scares me. You don't in fact announce to the world that you're going to attack Pakistan. JB has a much better command of the terrain on a tactical level - that is in specific problems where he's worked he has mastery. But he has no overall framework - which is a major weakness. When you parse it all out, again, despite the labeling and perjorations the differences are smaller than they were and close to realities. My biggest worry about Barry here is his blunt refusal to backdown on the Surge by hearkening back to the original decision. Hindsight is great but we are where we are. What would you do in the circumstances ?

Which leaves the economic crisis as the main differentiator IMHO. And there JB came up with one solid tactical proposal, buy down mortgages and make the banks and owners eat some losses, which I consider sensible, workable and necessary. BtW it's also in my own seven-point economic blueprint among s.t. emergency fixes along with major strategic initiatives.Readings (Economy): It Really is the Economy, Stupid Frog I strongly suggest you review as a checklist for last night's debate. 

You need to be real clear about this despite both candidates dodging and loosing my respect and indicting their credability. If we get the wheels of credit turning we've still got a major Housing problem and an organic downturn that's worsening by the day. And it's been visible for months. The candidate who came out and said that and explained it so that people got it would be the one you want. Of course if you're not sure and botch the explanation that'd just panic the sheeple over the cliff and make the situation worse. Maybe playing safeball isn't such a bad idea after all, eh ? 

The bottomline is that Barry marched right down my list while JB was still arm-waving about tax cuts and how he'd fix things. Not serious. Even less serious and much more dangerous were his candidates for Treasury Secretary. If you read nothing else read Perlstein's assessment and that article.

Bon Appetit' 

Crisis Metastasis 

Why It's Getting Mean The financial crisis changes the entire shape and feel of the presidential election. It isn't just bad news, it's bad news that reveals what many people deep down feared, and hoped not to see revealed: that the huge and sprawling financial system of Wall Street is maintained essentially on faith, mood and assumption; that its problems are deep; that at some level the system looks to have been a house of cards. It isn't just bad news; it's deep bad news that reaches into the heart of widespread national anxiety.Everyone is afraid—the rich that they will no longer be rich, the poor that they'll be hit first by the downturn in the "last hired, first fired" sense, the middle class that it will be harder now to maintain their hold on middle-classness. Both the Democrats and the Republicans spent the week treating the catastrophe as a political opportunity. This was unserious. A serious approach might have addressed large questions such as: Was this crisis not, at bottom, a failure of stewardship? Instead, from Barack Obama: It's the Republicans' fault, and John McCain means more of the same. From McCain: We're reformers and we'll clean up the mess, unlike Mr. I Can't Think of Anything to Do but Raise Taxes. Open question only history will answer: President Bush did not address the nation on the crisis until Thursday of this week, almost a week after it began, and Democrats are going to try to paint this as 9/11 times Katrina: Where was he? Will this work? Will it stick? They're going to try to turn Mr. Bush into Herbert Hoover. Hoover was not good for the Republican brand. The economic crisis brings a new question, unarticulated so far but there, and I know because when I mention it to people they go off like rockets. It is: Do you worry that neither of them is up to it? Up to the job in general? Is either Mr. McCain or Mr. Obama actually up to getting us through this and other challenges? I haven't heard a single person say, "Yes, my guy is the answer." A lot of shrugging is going on out there. My beautiful election enters its dark phase. Lots of signs of the new darkness. Mr. Obama's army is swarming, blocking lines when Obama critics show up for radio interviews. A study out Thursday said the Obama campaign has become more negative than the McCain campaign. There is the hacking—no one at this point knows by whom—of Sarah Palin's personal email account. From Mr. Obama himself, a new edge. He tells an audience in Elko, Nev., to "argue" with McCain supporters and "get in their face." Bambi is playing Chicago style. No doubt everyone around him has been saying, and for some weeks now, "Get tough." But this is not how to get tough, and it does not reflect a shrewd reading of what the moment demands. People want depth, not ferocity. We've got nerves that jingle-jangle-jingle. And it gives Mr. McCain a beautiful opening. He can now play Oldest and Wisest, damning the new meanness more in sorrow than in anger. There's another reason things will get more mean than meaningful. Here is the tough, sad, rather deadly assumption I see rising among our media people, our thinkers, observers and chatterers, the highly sophisticated who've seen'em come and seen'em go: It is, again: What if neither of them is the right man? What if neither of them is equal to the moment? What if neither party is equal to the moment? On the Republican side, the legitimate anger sparked by the media's personal attacks on Sarah Palin and her family has now been funneled, coolly and almost chillingly, into antimedia manipulation. This is no good. It may help the Republicans win, because no one likes the media. Even the media doesn't like the media. But it invites charges of winning bad. And if you win bad in a 50/50 nation, it makes it really hard to govern.

Mr. McCain Goes Back to Washington Presidential campaigns live in fear of a Dukakis-in-the-tank moment. The question is whether John McCain just had his. Sen. McCain's decision to rush to Washington for bailout negotiations, to suspend his campaign, and to issue a bipartisan statement with Barack Obama, has been spun by his team as an example of putting "country first." Mr. McCain's fellow Republicans have latched on to that theme. Out in the real world -- that is, everywhere other than in Washington -- the view may be different. The nation is in the middle of a financial meltdown. Voters want to know how, why and what the presidential candidates propose to fix it. What they've instead seen from Mr. McCain is alternating anger and vagueness, capped this week by an impulsive call to delay the first presidential debate. He wants to portray all this as rising above politics. It could look instead as though he's trying to escape it. What makes this move so risky is that it potentially undermines Mr. McCain's biggest strengths: his experience and judgment. On Iraq, on Georgia and other national security issues, the GOP candidate's merit was foresight and boldness. What aided him throughout was a conscious decision to put principles ahead of politics ("I'd rather lose an election than a war"). This financial mess was an opportunity for him to demonstrate similar leadership, and put to rest doubts about his economic sensibilities. Instead, Mr. McCain's campaign appears to have deliberately chosen to view this crisis through a narrow lens of presidential vote-getting. How else to explain the past two weeks? He seems torn between wanting to be a man of action, and wanting to distance himself from an unpopular president who is acting. Mr. McCain might well believe a $700 billion bailout is necessary to stabilize the American economy -- a lot of smart people do. But he isn't going to give Treasury Secretary Henry Paulson -- hired by George W. Bush -- credit. So he's waffled. This consideration also explains Mr. McCain's decision to lay a complex financial problem off on Bush SEC chief Chris Cox. The bigger McCain error has been to use this crisis to target key voting groups. Vice presidential nominee Sarah Palin has proved such a rock star with the conservative base that Mr. McCain has felt liberated to turn his attention to the independents and Reagan Democrats he'll need to win this election. Fair enough. But there is a difference between showing leadership that attracts those groups, and pandering. Mr. McCain's angry, populist tone has clearly been a pitch to those blue-collar Democrats, the Hillary Clinton crowd, who supposedly want someone to blame for today's mess. His fury over Washington's failure of oversight, and his call for a new "bipartisanship," are laser-focused on independents who supposedly believe Washington is broken.

Case Study Obama taught at the University of Chicago Law School for a decade before he left in 2003 to run for the United States Senate. He emerged as one of the Senate’s most liberal members, and his voting record is often invoked in the current campaign, especially by his opponents. But the men and women who studied with him at Chicago echo Escuder’s observation that Obama was much more pragmatic than ideological. Even as his political career advanced, Obama’s teaching stuck to the law-school norm of dispassionately evaluating competing arguments with the tools of forensic logic. But Obama apparently was not attached to legal argumentation for its own sake. “It was drilled into us from Day 1 that you examined your biases and inclinations,” Richard Hess, now an attorney at Susman Godfrey in Houston, told me. “And then, when you made decisions, they were based on sound empirical reasons.” Escuder saw his professor as “a street smart academic”: “He wanted his students to consider the impact laws and judicial opinions had on real people.” According to Marcus Fruchter, who took constitutional law with Obama and now practices at the law firm of Schopf & Weiss in Chicago, “You never would have known he was going to be a liberal senator based on what he said in his courses.”  Obama’s rootedness in the real world shaped every aspect of his teaching. He laced his lectures with basketball analogies. Some students thought Obama’s teaching offers a more accurate glimpse of his potential presidency than the oft-cited statistic that he holds the most liberal voting record in the Senate. “I don’t think that there is a ‘teacher Obama’ and ‘politician Obama,’ ” said David Bird, who works at Reed Smith in Pittsburgh. “He came across as very practical and down to earth. I think that reflects who he is as a person and his experience organizing and in the legislature.” Dan Johnson-Weinberger, who lobbies for progressive causes in Illinois, agreed that his former professor isn’t likely to emerge as an ideological liberal if he indeed makes it to the White House. “Based on what I saw in the classroom, my guess is an Obama administration could be summarized in two words,” he said. “Ruthless pragmatism.”

Obama's tightrope walk As Obama moves through the wreckage, he’s confronted with a paradox: He wants to move on to more certain political terrain but is also tempted by the enticing political spoils of a campaign focused on the ailing economy. The Illinois senator also faces a more pressing concern as the House prepares for a pivotal vote later in the week: how to lead the bill to final passage while also staying far enough away from it to avoid being singed if it goes down. “It was very Clintonian, from a conservative point of view. He was trying to walk a tightrope — trying to help out with the bailout as best he could without having it stick to him,” said Ron Bonjean, a GOP strategist. The tightrope has gotten even trickier, as Obama has assumed a more prominent role in twisting arms in the House. Obama returned to Washington on Wednesday as the Senate was poised to pass its version of the bailout legislation. Aides to Obama and congressional Democratic leaders say that the nominee was not asked to make calls to rank-and-file Democrats before Tuesday. Democratic leaders — along with the rest of the political establishment — wrongly assumed they already had enough votes.

Beyond Ideology, a Generational Clash One candidate cited Churchill and Eisenhower, and described George Shultz, who served in Ronald Reagan’s cabinet, as a “great secretary of state.” The other promised anxious voters a federal budget that could be examined on a “Google for government” and accused his opponent of having a “20th-century mindset.” The first presidential debate was more than a clash of ideology or temperaments. Barack Obama and John McCain did not even wrestle over the $700 billion economic bailout. Theirs was a generational collision, and at times it looked almost like a dramatic rendition of Freudian family tension: an older patriarch frustrated and even cranky when challenged by a would-be successor to the family business who thinks he can run it better. Neither of the candidates took full advantage of the debate rules that allowed them to confront each other directly, and that reticence suggested the stiff politesse of two relatives determined not to ruin Thanksgiving dinner. Mr. Obama was calm, still, poised and more businesslike than personable. He was trying to be like John F. Kennedy talking about the space race, but he often sounded like a technocrat. He wore a dark suit and a flag lapel pin, and chose to focus on appearing steady and serious-minded and so ready to be president that he at one point sounded as if he already were: “I reserve the right as president of the United States to — to meet with anybody at a time and place of my choosing if I think it’s going to keep America safe.” Mr. McCain felt secure enough not to wear a flag pin on his lapel, and comfortable enough to make jokes. Mr. Obama was not particularly warm or amusing; at times he was stiff and almost pedantic. But all he had to do was look presidential, and that was not such a stretch. Mr. McCain had the harder task of persuading leery voters that he can lead the future because he is so much part of the past. He tried to remind viewers of his greater experience and heroic combat career, while also casting himself as a maverick outsider ready to storm the barricades. Mr. McCain wanted to be the true revolutionary in the room, but his is the Reagan revolution, and for a lot of people right now, it doesn’t look like morning in America.

Reviewing the Debates

100 percent, absolute truth? John McCain told the Des Moines Register this week that he always tells "100 percent absolute truth," even in campaign ads. There's one big problem with that bold statement: it's just not true. McCain has made a number of statements - in paid ads and on the campaign trail - that simply cannot be described as 100 percent accurate. Some aren't even close. Barack Obama is guilty, too. He falsely accused McCain of wanting to slice Social Security benefits in half and grossly exaggerated his role in writing this year's economic stimulus plan. He also promised to accept public financing - and then proceeded to opt out when it was clear he could raise more money on his own. But only McCain made this dare: prove it, he told the Register. The paper did not - Politico will. With the help of the truth-squad crew over at the invaluable Politifact and FactCheck.org, as well as other fact-checking web sites, here is a list of some of McCain's biggest whoppers:

Obama comes out on top, poll says A national poll of people who watched the first presidential debate suggests that Barack Obama came out on top, but there was overwhelming agreement that both Obama and John McCain would be able to handle the job of president if elected. The CNN/Opinion Research Corp. survey is not a measurement of the views of all Americans, since only people who watched the debate were questioned and the audience included more Democrats than Republicans. Fifty-one percent of those polled thought Obama did the better job in Friday night's debate, while 38 percent said John McCain did better. Men were nearly evenly split between the two candidates, with 46 percent giving the win to McCain and 43 percent to Obama. But women voters tended to give Obama higher marks, with 59 percent calling him the night's winner, while just 31 percent said McCain won. "It can be reasonably concluded, especially after accounting for the slight Democratic bias in the survey, that we witnessed a tie in Mississippi tonight," CNN Senior Political Researcher Alan Silverleib said. "But given the direction of the campaign over the last couple of weeks, a tie translates to a win for Obama."

The Takeaway From the First Debate  As important as they are, debates can't change the fundamentals of a presidential campaign. Reagan was popular, his foreign policy was strong, and the economy was booming. A bad debate didn't negate any of these fundamentals. This lesson now applies to John McCain. He performed ably last Friday in the first debate with Mr. Obama. But he shouldn't expect to gain much ground from that or from the next two presidential debates, even if he outscores Mr. Obama again. And the vice presidential debate on Thursday between Sarah Palin and Joe Biden is a sideshow. The fundamentals of the race remain. And while they aren't nearly as daunting as those facing Mr. Mondale in 1984, they certainly favor Mr. Obama. The economy is weak. The president is unpopular. It's a change, not a status quo, election. The surge has worked, but the war in Iraq is hardly a campaign plus. The political cycle points to a Democratic takeover. The next two debates, one a town hall, the other on domestic issues, may be easier for Mr. Obama and tougher for Mr. McCain. When the overarching issue is who'd be the best commander in chief, as it was in the first debate, Mr. McCain prevails. This issue always matters in presidential contests, but the 2008 race isn't primarily a commander in chief election. It's a domestic policy election. As luck would have it, Mr. McCain had plenty of opportunities to show his dexterity on economic issues in the first debate, since nearly half of it was devoted to the financial breakdown. He missed most of these opportunities. I was waiting for him to explain his role in assuring House Republicans a voice in the bailout negotiations, and why that was critically important. He never did. Mr. Obama also gave Mr. McCain several openings. He cited Mr. McCain's recent comment that the country's economic fundamentals are strong. Instead of pointing out that the fundamentals -- unemployment, interest rates, inflation -- are indeed reasonably strong, just in jeopardy because of the financial crisis, Mr. McCain ignored the opportunity. Mr. Obama, it turns out, is more vulnerable on spending and taxes than Mr. McCain might have expected, and his economic recovery plan, to the extent he has one, is full of holes. Mr. McCain, on fiscal and economic issues, is comfortable chiefly when talking about curbs on spending; on domestic programs or taxes he's less confident. We'll find out if either man is resourceful enough to exploit these weaknesses, or wise enough to learn from their mistakes, as Reagan did. If not, that will be revealing all by itself.

Commentary: Two visions (First Take) Anyone hoping for a train wreck or a massive meltdown by political neophyte Sarah Palin was disappointed by her debate against Democrat Joe Biden on Thursday. Instead of a gaffe-filled 90 minutes, viewers were treated to a mostly straight-forward debate about the issues, mostly about the diametrically opposed directions each party wants to take the country. Thankfully, the debate wasn't about gotchas, or witty lines, or body language. Both candidates delivered thoughtful, at times impassioned views on the biggest issues of the day: the economy, the war, and the course of a nation that may be at a crossroads. Both Biden and Palin tried to connect with the middle class, repeating the themes that have dominated this election. Palin said she and John McCain are the "team of mavericks" who will talk straight and bring real change to Washington. Biden countered, saying McCain is independent only on issues that don't really matter to people and would simply bring more of the same failed policies of the Bush administration. Palin rescued her political career with her competent and aggressive performance Thursday. Some who have "misunderestimated" her will think again. She may not be experienced enough or knowledgeable enough to lead the nation, but she got up off the canvas after the Couric KO and fought Biden to a draw, at least. That said, it's hard to imagine that Palin changed many votes. This election is still about Barack Obama and John McCain.

Some facts adrift in veep debate Republican Sarah Palin criticized a version of a Barack Obama health care plan that doesn't exist and Democrat Joe Biden clung to a misleading charge about Republicans and big oil when the two clashed in the vice presidential debate Thursday. Some examples of facts cast adrift in the debate: PALIN: Said of Democratic presidential candidate Obama: "94 times he voted to increase taxes or not support a tax reduction." THE FACTS: The dubious count includes repetitive votes as well as votes to cut taxes for the middle class while raising them on the rich. An analysis by factcheck.org found that 23 of the votes were for measures that would have produced no tax increase at all, seven were in favor of measures that would have lowered taxes for many, 11 would have increased taxes on only those making more than $1 million a year. BIDEN: Complained about "economic policies of the last eight years" that led to "excessive deregulation." THE FACTS: Biden voted for 1999 deregulation that liberal groups are blaming for part of the financial crisis today. The law allowed Wall Street investment banks to create the kind of mortgage-related securities at the core of the problem now. The law was widely backed by Republicans as well as by Democratic President Clinton, who argues it has stopped the crisis today from being worse.

McCain, Obama Clash Over Taxes, Regulation, Iraq, Skirt Personal Attacks  Republican John McCain and Democrat Barack Obama collided over regulation, taxes and the financial crisis in last night's debate, holding back on the personal attacks that have intensified in the campaign's recent weeks. The two senators stuck to familiar themes, and the event lacked any of the fireworks each side said it was prepared to deliver. McCain stressed his record of seeking bipartisan compromise on issues from campaign finance to climate change, while Obama vowed to reverse the policies of the last eight years that he said helped create the mortgage crisis. ``I've fought excess spending. I've fought to reform government,'' said McCain, who also pledged to buy mortgages of homeowners facing foreclosure and renegotiate them. Obama said he best understood the plight of working-class Americans, promising a middle-class ``rescue package'' and tighter regulations on the financial industry. Just four weeks before the election, Obama is gaining in the polls, and if McCain's task was to produce a game-changer, he didn't get one in the second of their three debates. ``Was this debate enough to shift the momentum away from Obama? I don't think so,'' said Charlie Cook, editor of the nonpartisan Cook Political Report in Washington. Neither candidate altered the course of the race, said Alan Schroeder, author of ``Presidential Debates: Forty Years of High-Risk TV.'' ``It puts everything back to where it was 90 minutes earlier, and that's good for Obama,'' Schroeder said.

Assessing the Debates

The Testing Time Every few years, the world seems to face a new testing time. After Sept. 11, leaders had to figure out how to respond to Islamic extremism. Now we face another test. Today, leaders around the world have to figure out how to stabilize economies amid volatile global capital flows. This test is rooted in a global shift in economic power. The rise of China, the vast wealth of the petro-powers and easy monetary policies created an ocean of excess savings that had no obvious place to go. This money was entrusted to a few thousand traders who sloshed it around the world in search of the highest returns. These traders live in a high-tech version of Plato’s cave. They do not see reality directly. Instead they see the shadow of reality as it dances around in numbers on their computer screens. They form perceptions about other people’s perceptions of where the smart money is going next, so they’re three or four psychological levels removed from normal economic activity. This is more than a mortgage problem. We live in a world in which trillions of dollars can move instantly, but they are in the hands of human beings who are, by nature, limited in knowledge, and subject to self-deceptions and social contagions. By one count, financial crises are twice as prevalent now as they were 100 years ago. In his astonishingly prescient book, “The World Is Curved: Hidden Dangers to the Global Economy,” David M. Smick argues that we have inherited an impressive global economic system. It, with the U.S. as the hub, has produced unprecedented levels of global prosperity. But it has now spun wildly out of control. It can’t be fixed with the shock and awe of a $700 billion rescue package, Smick says. The fundamental architecture needs to be reformed. It will take, he suggests, a global leadership class that can answer essential questions: How much leverage should be allowed? Can we preserve the development model in which certain nations pile up giant reserves and park them in the U.S.? Until these and other issues are addressed, the global markets will lack confidence in asset values. Bankers will cower, afraid to lend. America’s role as the global hub will be threatened. Europeans will drift toward nationalization. Neomercantilists will fill the vacuum. This is the test. This is the problem that will consume the next president. Meanwhile, the two candidates for that office are talking about Bill Ayers and Charles Keating.

For New Contagion, Same Old Prescriptions  Against a backdrop of an unfolding meltdown in global financial markets and the near-certainty of a U.S. recession, the two candidates for president used the occasion of a much-anticipated town hall meeting last night to repeat all the talking points they were making long before the recent bank failures, the free fall of stock prices and the federal government's expensive rescue efforts. A televised national debate is hardly the ideal place to lay out a 10-point program for containing the credit crisis or for rebuilding and redesigning the world's financial infrastructure. But neither did either candidate see it as an opportunity to lay out the broad principles he would follow in managing the current crisis or to sketch the outlines of a new form of capitalism that might replace the current model, which many Americans are coming to conclude provides too little in the way of fairness and economic security. Asked by an Internet questioner what sacrifices they were prepared to ask Americans to make to get us out of the economic mess, both Barack Obama and John McCain sidestepped the question, with McCain resorting to his familiar promises to cut back on pork-barrel spending and Obama pitching a easy-to-swallow plea for everyone to turn down the thermostat. Rather than talking about sacrifices, the candidates got into their most spirited exchanges while trying to outdo each other in proving that he would be the most aggressive and committed in cutting taxes for most households. Although both candidates relished the opportunity to point an accusing finger at greed and fraud on Wall Street, neither took up the invitation of moderator Tom Brokaw to assign any responsibility to households and consumers who take on too much debt and live beyond their means. Indeed, so anxious were both candidates to avoid delivering bad news to the voters one month before the election that neither chose to answer a simple question about whether they expect the economy to get worse before it gets better.

McCain U.S. Treasury Secretary May Bear No Resemblance to Obama's Choice  -- John McCain and Barack Obama are bringing different criteria to the choice of Treasury secretary, arguably the next administration's most powerful post, with the Republican candidate looking for a big name and the Democrat seeking someone to reassure markets. McCain in a Reuters interview last week mentioned Warren Buffett, the 78-year-old billionaire who supports Obama and his proposal to increase taxes on the rich, as well as former EBay Inc. Chief Executive Meg Whitman and Cisco Systems Inc. Chairman John Chambers, both of whom have limited experience with financial markets.  Obama has made it clear he would rely on former Treasury Secretary Robert Rubin for advice in his choice. Rubin, according to people who have spoken with him, would have a short list of recommendations that includes New York Federal Reserve Bank President Tim Geithner, former Treasury Secretary Larry Summers and Roger Altman, a Wall Street investment banker and former deputy Treasury secretary. The task of choosing the next Treasury secretary has taken on added urgency as a result of the landmark legislation Congress passed last week that puts $700 billion at his disposal to soothe roiling credit markets and avert a severe recession. ``It is important to have someone at Treasury who commands respect and understands financial markets and the global market,'' said David Gergen, a professor of public service at Harvard University who has advised both Republican and Democratic presidents. Republicans and Democrats alike give current secretary Henry Paulson credit for crafting a workable solution to the financial crisis and helping push it through Congress in a difficult political environment. Gergen and others say the next president should consider retaining Paulson in the interests of continuity, though the 62-year-old former Goldman Sachs Group Inc. chairman has indicated he isn't interested in serving beyond January, when the next president takes office. Observers find McCain's mention of Buffett curious, as he almost certainly wouldn't be interested and even the mention of the Berkshire Hathaway Inc. chairman's name infuriates tax- cutting fiscal conservatives, whose support McCain has worked hard to win. 

Posted by dblwyo at 10:12 AM | | Comments (3)

October 01, 2008

Marketing Elephant Pills: Struggling to Explain the Rescue

Have you heard the old joke about the guy headed into work who bumped into a salesman scattering some sort of pill on the grounds in front of his building and asked him who he was and what he was doing ? Well it seems he was an elephant pill salesman scattering samples to show how well the worked. After the guy fell down laughing he said, "You idiot, this is New Jersey...we don't have elephants here !". To which the reply was, "See, and you ever wonder why ? Work pretty good don't they". That, among other things is a major part of the problem. The Rescue Package is dealing with an arcane issue that nobody can yet see is a real problem. On that note did you notice that Ford's auto sales were down 35% today ? And least you think that's due to their problems Honda, who's been trouncing everyone, was down 24% ! So there do indeed be elephants here and they're in the room. Worse they're pretty po'd.

Over the course of the day I had a long series of exchanges with a friend who I initially thought was speaking for himself and eloquently presented the credibility problems and voter backlash with the bill. Over the course of the day that was clarified and it beame clear my friend was representing his neighbors and colleagues and doing so eloquently. Since he's captured extremely well much of the pushback that threatens our economy it seemed like a good idea to share it since it speaks to objections that many of you may have. If you find them convincing I strongly suggest you share the arguments with your network and your Congressional representatives. Again the level of ignorance is apalling and the anger palpable. Here's the re-constructed exchange, edited for posting and in some of the back and forth my buddy, Snow, is in blue while my comments are inserted in red for contrast. Other than that it's in timeline order. 

The graphic provides a little context. What all the talking heads thought we'd is the light purple line but are becoming rapidly disabused. We can't escape a downturn and it's likely to be something worse than we've since at least 1980, all things considered. Think of that as the black line with the best case, receding in the rearview mirror the yellow line. What we desperately want to avoid is falling into the region below the black line and heading for the read line, or worse. And ending up with the Japanese disease for a decade or more. BtW - it's not jus theirs. Did you know that we had the same experience in the '30s and only the massive spending of WW2 pulled us out of it ? Think about that while you re-read and, hopefully, re-think the alternatives in the following table. And go vote for the one you'd prefer. Again this is up to you. Stick to your anger and get prepared to find out what that redzone looks like.

 

 

 

----- Original Message -----

From: Snow

I have been going back and forth, thinking about the bail-out issue.  Bill Heard, the largest Chevy dealer in the country, filed Chapter 11 the other day.  They were stuck with too large an inventory of trucks and SUVs that no one wanted to buy.  Isn't this really similar to those companies that own mortgage-backed securities no one wants to buy.  One way to look at Bill Heard is to say they didn't anticipate the market.  I have yet to hear how Congress is going to bail out Bill Heard.  Perhaps market forces provide discipline enough in situations like this.

 Wall Streeter's earned billions in profits during this latest bubble, got massive bonuses, and otherwise had unbelievable compensation while getting us into this mess.  The ordinary people that I deal with, who work for ordinary businesses, or own ordinary businesses, feel those titans of Wall Street made their own beds and they need to sleep in them like the rest of us.  Flash points come from the new CEO of WaMu before the take-over making about $2 million per day in pay.  The view here of ordinary people is that pay was excessive to say the least.  It does not sit well with those asked to pay for a bail-out.

The feeling of ordinary people is since we are cruising in uncharted territory, we ought to look around a while before doing anything.  Why re-enforce bad behavior by taking away any penalty for such action.  Those around me think doing nothing is the best move for the moment.  Congress should debate this over a period of a few weeks or even next year before acting.  That, in itself, calms the situation.   I tend to agree.

From: Dave

Snow - thanks. Thoughtful and accurate, at least as a reflection of the general thinking. Almost need to get you to post this as a comment on my most recent blog dissection of the political process.Re-visiting your economics background a bit however let me advance a couple or three counter-arguments. While I'm no happier with Wall St. excesses than anyone else this the peasants setting out to burn down the castle and instead starting a conflaguration in the forest that threatens to wipe out the village, the fields and the rest of the county.

Credit markets worldwide collapsed on Sep16 and are still in dire straights. That means that working capital for auto dealers, the local mfg plant and small businesses, the ability to hire, write payroll checks, etc. are all in immediate jeopordy. We're clearly headed into a downturn, as I've been warning for months, and it's likely to be more severe and sustained than almost anyone suspects, with the exception of Nouriel Roubini. Anybody btw who followed my investment advice to go heavily in cash and s.t. high-quality bond funds in Jan. would have saved themselves a lot of grief. Anybody who followed the additional advice to put their speculative funds into inverse ETFs just made a huge bundle. Anybody who followed along with my negative dissection of the Finance and Technology sectors might also have done well recently.

This debate is exactly as you've framed it. Unfortuntely it's a potential suicide pact when so framed.

The other side of the hill on this one is that everybody rode this gravy train. Anybody who held any sort of investments, got a loan, took out home equity on their appreciated house, paid for a vacation, bought a new car since '03 benefited from the over-inflated Housing bubble that sustained all this. And was perfectly happy to do so while driving net personal savings to below zero. Wall St. is merely the most obvious face of the "eat, drink and be merry for tommorrow housing prices are going up" and we can do it all again. And all of that was floated on a s sea of leveraged liquidity funded by Wall St's artifical and synthetic debt.

Now the party is over, there's a terrible mess, and the Pipe like all Pipers want his pay. And like all good Pipers he also carries a claymore.

----- Original Message -----

From: Dave

To: Snow

My friend, may we reason together on this ? Or are you set in your views ? You wouldn't install and configure a system without understanding the practice, the data tables and the communications links. We have some analogous challenges here. Your entire business is based on a deep...deep understanding the technicalities, the business processes and your customers. It's not necessary to go that deep here by any stretch but is critical to look at both the best available facts on the ground and the appropriate framework for interpreting them.  

With that in mind I've inserted some responses in the body or your note - forgive the color it was chosen for contrast not to shout at you.

----- Original Message -----

From: Snow

To: Dave It is potentially a suicide pact as you say.  Yet we have heard more than a few times before in our recent memory about the need to act immediately and not having the time to think.  Most ordinary people saw that no weapons of mass destruction, though promised, we ever found.  They wonder this time whether they will be found.

An interesting analogy but a flawed one on three levels for which some data does exist. But a powerful one nonetheless and it explains 98% of the voter pushback. Flawed in that the data on credit breakdowns was visible last week, last night, thru this year and last. I myself have been discussion the metastasizing credit crisis and it's consequences for almost a year now. The WMD is clearly evident and the smoke trickling from the hole is from a big bomb. That people don't understand the evidence in front of them is a critical part of the problem.

A more correct Iraq analogy would be Jan07 when everybody wanted to cut and run which meant the likely collapse of the nascent Iraqi state, the resulting collapse of the ME and the cutting off of ME oil supplies with economic consequences then that would have been horrific and now would be more so. When the people who argued against the Surge and maintaining ME stability establish a rational national energy policy instead of wilfully turning a blind eye to the ripple requirements their positions will strengthen IMHO both factually and morally. The KEY point, whichever side of the debate, is that hindsight is always 20/20 but we have to deal with the situation at hand and make terrible decisions on the best available data.

As long as we are taking the time to think this out, investigate, and debate the economy, perhaps the market, should coast along.  The worst outcome would be an absolute "No" or an absolute "Yes" right now.  What the country needs most now is confidence.  That is only going to come from thinking and talking about this situation a while longer.  The taxpayer has already put hundreds of billions of dollars into this crisis.  We have some time for a reasoned response.

Well I'll agree that confidence is the problem but in a crisis the best response is generally NOT to freeze up in a panic and pray the Tiger doesn't eat you. Running away is not an option. Again several points of disagreement and flawed data here. First off the taxpayer has put no dollars into any of these emergencies nor have any fatcats made a bundle. You can walk thru each "bailout" from BSC to AIG and find direct and immediate benefits. For example in AIG the stockholders were wiped out, the Treasury owns 80% of the worlds largest and most effective insurance comany which continues to function well, got warrants and is getting 12% returns on the $85B loans to the extent they are drawn down. Same differences in all the other cases. Again, what are the facts, not what the headlines tell you.

Right now the equity markets are hanging by a thread only on the hope that a bailout package will be resurrected and moved. Meanwhile the much more important worldwide credit markets are imploding in the US, Europe and Asia. Just this morning Ford, in deseparate straights anyway, used $1.5B of cash on hand to repay short-term commercial paper rather than try and roll it over. If this keeps going on pretty soon jobs are going to hemmorage, companies will be shutting down and what's already promising to be a serious downturn will topple into something much more severe.

If we can keep the wheels on the wagon for a while longer thru other means, as we appear about to be forced to do, then maybe we can have the talk-talk that will make you feel better. But we don't have months, very likely don't have weeks but may be able to have days.

-- Original Message -----

From: Snow

To: Dave

I just love your comments.  Really I chose my analogies based on what ordinary folks are currently saying.  They do not necessarily reflect my views, but reflect those of what a lot of Americans now think.  Yet I do think talking for a few more days could have a calming effect on the economy and perhaps the market.   It may take that time anyway since most voting one way or the other in Congress are up for re-election.   My thought is that we are far stronger than what we are being led to believe.  We are going to survive regardless. Yes, almost of course. This will, presuming we come thru it of course, clean out so much of the aberrant nonsense that's accumulated for two+ decades. Four in particular: 1) we'll change back to a nation of savers which has huge consequences for the economic environment, 2) the Finance industry will move back to what it was a decade ago with less leverage and rocket science though still with much real value-add, 3) we'll get an antirely new regulatory regime out of this (Paulson's Spring Blueprint is a very good and decent start) and 4) we may get some cleaning up of the sausage factory of political decision-making but iff the electorate sees their role and puts pressures on to change the system. Lower liklihood - like the stillborn Reagan Revolution.

As for the war, I supported going in and think that the execution of it was on par with how the Bush administration has handled most critical issues, not very good.  Those seem to be your sentiments also I see.  The problem we face is that the Administration is crying 'Wolf' again and it is falling on much deafer ears than previously.  We have been trained by experience not to react as strongly as before.  That may be our downfall this time, but again we are going to survive. The world changed on 911 but not surprisingly, people were just made aware of it at long last. The "end of history" meme came crashing into ruin and we need to re-architect the world system because power politics is alive and well. Johnboy scares me because of his lack of grasp on economics while Barry scares me because of his lack of grasp on foreign affairs and security. Sadly we can't split the difference. Which is most import. My weightings used to be 50%/30%/20% For/Econ/Domestic. As much trouble as we're in economically they'd now have to be 35%/50%/15% in terms of priorities and criticalities.

So if we wind up doing nothing, do you feel the 'Great Depression' or the like lurks around the corner.  Is our total financial sector going to collapse or just major parts of Wall Street.  Is it the credit market hurting our big auto makers or the fact that they chose the wrong course in their product offerings. Absolutely NOT. The GD was triggerred by exactly the wrong policy choices. We actually are smarter. The bad news is that it brought us the "Great Moderation" which people took for granted and took to much risk than they were being compensated for. On the other hand this is going to be a more severe downturn, last longer and be more fragile than anything we've faced for a long ... long time.

My thoughts are that our economy and the world economy will survive no matter what.  We just might not be happy with the particular outcome from doing nothing. Attached some graphics but the gist of it is we need to avoide a major downturn while accepting something like negative or slow growth for the next 2-3 years while we get back on our feet in the de-tox process. That's my best case. One chart shows real consumption and retail sales - which are already dropping worse than they've done for years, a conceptual business cycle outlining the alternative paths forward and a table of alternative scenarios. The biggest danger I see, barring imposion, is a Japanese decade. If you look at the history what really got us out of the GD was WW2. Like to avoid that.

Posted by dblwyo at 04:07 PM | | Comments (0)