04 December 2008

Obama's Delicate Dance

It's been a quiet couple of weeks for the topics I like to cover in this column; not so much because nothing's been happening, as because not a lot of it is really new. The economy continues to wrestle with the downward spiral triggered by the sub-prime mortgage mess, for example, and there's little about it that's really new relative to what I've already discussed.

The economic news at the moment is that the Big Three US automakers are back on Capitol Hill begging for a dime, and the Senate is looking at best reluctant and at worst outright recalcitrant. Democratic leadership is very much in favour of some kind of bailout, not least of which because the Democratic Party is still very much beholden to organized labor. The rank-and-file of the party, however, are much less interested, and the Republicans aren't really interested at all. In particular, Senator Shelby continues to rail against the idea and treat the CEOs of those companies as punching bags when they come to testify. Meanwhile, light sweet crude hit $43.97 the barrel this afternoon.

But that's not what I'm here to talk about right now...


Since 5 November, President-Designate Barack Obama has been very careful, in public pronouncements, to insist that there is only one president at a time, and it ain't him yet. This despite calls from nearly every quarter for him to weigh in on the key issues that will soon be His Problem. World leaders, for example, were disappointed he didn't attend the economic summit on 15 November, merely sending quasi-official observers to the proceedings.

As I think I've said before, from the standpoint of respect for the office of president--and safeguarding his own eventual lame-duck days--this is the right stance to take. It can't be an easy one, however, for a man as intelligent as he, who seems to have gotten involved in politics in part because of a passion to make things better (and yes, for the moment, I'm choosing to take him at face value, foolish though that may be), to find himself right on the cusp of being able to do something, and yet having to wait just a little longer.

Which explains the somewhat mixed message he's actually sending with his transition. While it's plenty usual for a president-designate or president-elect to start naming his intended nominees before he's sworn in, it's downright rare for him to start making announcements in November, even if he already knows in his own head who they're going to be. At this point, he's announced his intended nominees for State, Commerce, Treasury and Defense, as well as various key "inside the White House" advisory posts. These are all areas of extreme national importance right now, so it's understandable why he might start with these.

But by starting so early, and naming such high-profile, intelligent, active individuals to the roles, it looks a lot like a shadow government.

Shadow governments are nothing new in parliamentary nations. It's quite common for the Loyal Opposition to have a key members of its parliamentary caucus named to especially keep an eye on specific departments of government, becoming, in essence, the relevant minister's shadow.

In the US, however, we don't tend to work this way. And it's particularly odd coming from the man who keeps insisting that there's only one president at a time.


On the other hand, I have to say that I have few complaints with his choices so far, both for those top jobs and for others that have been mentioned.

George W. Bush has notoriously governed by favorites, with the most important qualification for any nomination being personal and ideological loyalty to him. An extreme example of this is the sad case of Harriet Miers and her inexplicable and ultimately failed nomination to the Supreme Court. Less extreme, and more ideological than personal, was the similarly inexplicable, but strangely successful nomination of John Roberts to become Chief Justice of the United States, before he'd even been successfully voted on for the Supreme Court!

The glaring exception, in turn, was General Colin Powell, who tried valiantly to serve as Bush's secretary of state, only to be continually undermined by those with closer personal and ideological ties to the president.

While much is being made of Obama's "team of rivals", what's really remarkable is that this is a team of technocrats, people who are being chosen either because of clear qualifications for the specific office, or because they're generally recognized as being intelligent enough to do the job without them. Hillary Clinton, for example, doesn't really have that much direct foreign policy experience, and has never been a diplomat; yet no-one I've seen really doubts her ability to act as Obama's chief envoy and master of foreign affairs.

Now, there's a downside to technocrats, too. Highly educated people sometimes lose sight of practical reality. They sometimes get caught up in their own cleverness. But right now, I'm sort of looking forward to the idea of a cabinet staffed entirely by people who are widely regarded as being picked because they're smart.

21 November 2008

Gravity Continues to Assert Itself

The news, this week, has once again been bleak. Bank stocks collapsed again, led by Citi. Not very long ago, confidence in the Citi name led the bank to buy naming rights to the new Mets ballpark--Shea Stadium's replacement is Citi Field. Now, the name is mud, and most of the other big bank stocks are being dragged through it.

But to me, the more interesting, and potentially more dire news comes from the heretofore neglected realm of agriculture.

Conventional Wisdom at the moment seems to be that agriculture is going to do fine in this crisis. The price of oil (and hence, diesel for their various machinery) is down, while the price of crops is way, way up, right?

Wrong. The price of crops has crashed along with the rest of the commodities market. Right now, a bushel of winter wheat would go for about $5, but cost about $6 to grow.

This is a part of what economists talk about when they tell us that deflation is as bad, or worse, as inflation. It seems counterintuitive to think that lower prices could ever be a bad thing, and if all you ever are is a consumer, I suppose that's true.

But few of us are truly consumers, only. Many of us have jobs that produce, as well. Whether we're a "direct" producer, like a farmer putting seeds into the ground, reaping a harvest and selling it, or a more "indirect" producer, like me sitting in my office helping my company make better products, our livelihoods are ultimately tied to our ability to sell our product for more than it cost us to make it.

If the prices at which we can sell go down, something has to be done to cut the costs, as well. If you're a farmer, you don't have many options: you have to buy fuel for your machinery, you have to pay your taxes and possibly rent (many farmers lease rather than own the land they farm) or mortgage, and you almost certainly have to hire help. You could hire less help, or hire illegal help and pay them pennies, but you can't do away with the help entirely.

If you're a more industrial organization, you could try cutting costs by cutting wages and benefits, but most people react badly, even in an economic downturn when they're happy just to have work, to actually having their wages and benefits reduced rather than raised. In a unionized environment, it's often impossible, which is one reason (but not the only reason, by far) that Detroit is in the midst of catching fire and sinking into the swamp.

So instead, you cut hours, or cut jobs.

This, of course, feeds a deflationary spiral, especially when credit is also hard to come by. If people aren't buying, producers aren't selling. Ultimately, they cut the prices of what they've already made to just try to get it out of their inventory (especially if it's at all perishable, like food), but if they have to cut prices below what it cost them, they have to cut costs...

12 November 2008

Economy and Politics: Bailing out Detroit?

With the election over and the bank bailout no longer really news, the persistent mutter in the media now is about the desperation of GM, Ford, and Cerberus (the private owners of Chrysler). It's a little hard to believe, I think, that the Big Three, who for so long were synonymous with American industry, could be this close to death, and yet, the facts are actually pretty much there for anyone to see:

  • Big Three profitability, particularly for GM and Ford, has been tied for over a decade to trucks and SUVs. It's not that they weren't selling cars, mind you. They even sold a few good cars, believe it or not. It's that they weren't selling cars at a profit.
  • Much like the mortgage debacle, the Big Three inflated their sales numbers, if not their actual profits, through cheap credit and easy leases. 
  • Big Three labor costs are very high.This is part of the reason they can't make an ordinary car at a profit.
  • When the price of gas spiked, automobile buyers quit trucks and SUVs cold turkey. US manufacturers were caught flat-footed by this, but worse, even if they hadn't, it's not really clear what they could have done about it, when they can't make a car at a profit!
  • With lots full of trucks they couldn't give away, let alone sell, dealers found themselves needing to borrow to obtain vehicles that would sell, only to find they couldn't get credit.
  • Making this worse, lots of trucks and SUVs were leased, not sold, in the last three years. In past years, these were easy to sell, "pre-owned", at a profit when they came back, a great deal if it works, because they got both the lease money and an eventual profitable sale. Now, instead, they've got lots full of used trucks they can't sell alongside all the new trucks they can't sell.
  • Once dealers started to get credit again, customers couldn't, so even customers who wanted to buy, couldn't.
So now, Detroit is saying, "Help us!" And some people are saying, "Yes, for heaven's sake, help them! Help them now!" and others are saying, "Why should we pay to save their short-sighted asses?"

Unfortunately, the answer to that question is simple. It's the only simple answer, really, in this whole mess. We need to at least consider a government bailout, because there are roughly three million jobs associated with the Big Three. If any one of them, especially the largest, GM, were to fail, that would be monumental hit to the broader economy. 

Michigan would take the biggest hit, of course, but there are automobile and truck plants scattered throughout the country in all sorts of odd places. Senate Minority Leader Mitch McConnell (R-KY), for example, has a vested interest in seeing some sort of bail-out happen, because there's a plant in Kentucky. Here in Saint Paul, there's a Ford plant that's probably going to close in the next few years no matter what happens, but if Ford were to suddenly hit the wall, the controlled, mitigated shutdown that Ford planned would become a sudden closure that would put hundreds on the dole queue all at once.

Exacerbating this situation is a belligerent United Auto Workers leadership. Their feeling is that this crisis is entirely management's fault, and therefore their membership shouldn't have to concede a single penny or in any way suffer the consequences. They are, however, wrong. UAW intransigence is one of the reasons Detroit can't make money on a small, inexpensive, efficient car and instead had to predicate their profits entirely on gas-guzzling monstrosities. 

As brave as they're feeling right now, with GM on the ropes, they're going to feel pretty stupid if, three months from now, there is no GM, and all of their GM-based members are out on the street. They're also going to be pretty angry at President-elect Obama, who right now really does have the worst job in the world: almost-President. He can't actually do a damned thing right now, but he's under a lot of pressure to save the world. There's 70 days 'til he's actually President, and GM might well fail before that.

One argument I don't buy, by the way, is that Detroit could have avoided this by going green much earlier, like Toyota did. This is too simplistic an argument. The Prius--my personal favorite automobile, hands down, and the one I drive--is not a cheap car by any stretch of the imagination, but it also doesn't make Toyota much money. It was expensive to develop, is expensive to build, and because of issues getting enough good batteries, for a long time was in extremely short supply. I think they're currently making a profit off of them, but for a long time, they weren't.

The Prius is not why Toyota is standing, albeit a bit wobbly, while GM is battered, bruised, and crawling on broken limbs to the phone to dial 911 with its broken nose. It doesn't hurt, but it's not the reason. The reason is that Toyota's overall business model and practices ensures that they can actually make money off their cars as well as their trucks. Some of this is that they made efforts to make their entire product line, even non-hybrids, at least a little more efficient; and also have a reputation for making solid, reliable cars. People are willing to pay a little more for that, if they can, so Toyota can sell their cars for a little more than GM et al. can. Some of it is that they're not burdened with the same labor costs. 

From the outside, it appears that Toyota's management actually thought in terms of long-term sustainability, while GM, Ford and Chrysler all focused on immediate profitability. They might well have had contingency plans for the day when oil started to rise and demand for the guzzlers slackened, but they were all expecting it to be gradual. They didn't foresee or plan for a sudden spike putting the fear of G-d into the market, and they certainly didn't foresee or plan for the possibility that such a spike would coincide with a general, world-wide collapse of the financial system.

Like the bank bailout--which, by the way, will now officially not happen the way it was originally advertised; there will be no government buy-out of toxic assets, after all--I'm not really happy with the idea of throwing good money after bad companies. But I shudder to imagine what will happen if a million or more workers are tossed out into the cold at once.

06 November 2008

Politics: Class Act

I'm still formulating my thoughts about the election itself, and what I think it means, and how I feel about it. But I don't want to get out of the habit of posting to this blog when I think it's relevant just because that's still in the queue.

First of all: if there's anything about the American electoral process that you, my faithful readers (all 50 or so of you :-D ) would like explained, please comment here, and I'll be happy to go into it.

Now, to what I really wanted to talk about.

Among the many articles about the upcoming presidential transition, there was a brief note about what Obama will not be doing.

He won't be intruding himself on the upcoming Global Economic Summit. He's not even currently planning to be in Washington that week, although he hasn't ruled it out, in order to meet outside the summit with various leaders on an informal basis.

Now, I imagine many of you are thinking, "What?! He needs to be there. Someone sane has to represent America at that meeting! That's what we elected him for!"

But Barack Obama, smart, smart man that he is, recognizes that one of the things that makes the United States great, one of the things that helped prove to the whole world that a federal, democratic republic could actually work, is that we have respectful, orderly, cooperative transitions of power. And that during that transition, we still only have one president, and it isn't the new guy.

Until 15 December, Senator Barack Hussein Obama II is the President-Designate. Between 15 December and 20 January, he's the President-Elect.

Which means that until 20 January, Obama is, for the purposes of that summit and host of other ongoing executive-branch issues, just another guy. The President, for good or ill, is still George Walker Bush, and the summit, and whatever comes of the summit, is still entirely his business.

Obama recognizes--because while he does an adequate show of modesty, he does know that he's a rockstar superhero--that he could easily undermine Bush simply by being present. He's already more popular (in part because he hasn't had a chance to do anything yet, but also because he's articulate and thoughtful) than the Lame Duck in Chief. He's probably smarter. And since whatever is decided will ultimately fall on Obama's shoulders, it could be argued that he should have some say in it.

But Obama knows, first of all, that the classy thing to do is to let Bush finish his term as unmolested as possible given the needs of transition. And, from a more calculating, political standpoint, that to undermine Bush in any way would be to invite, 4 or 8 years down the road, his own successor to do the same to him.

So, once again, he's taking the high road. While I sincerely hope that we don't wind up regretting his lack of input into the summit, I think that's the right thing to do.

02 November 2008

Politics: What I want to happen

This is not an endorsement article, per se. There wouldn't be much point, since in terms of the man I want to win the top job, everyone who knows me has known my answer since the MN caucuses back in February.

But there's more to what I want to see on 4 November than just that the least evil should win.

For one thing, I don't just want Barack Obama to win the presidency, becoming the first black President, and only the second non-WASP President (the first being Kennedy, who was Catholic) in US history. He'll be more than that, by the way. Think about every European and European-descended country that has a white majority. Have any of them had a national leader who hailed from one of their minority populations? Many have had women, but all have been white. Can you imagine France electing a black premier? Or Germany?

No, I don't think so. For good or ill, the very fact that we're even seriously talking about the possibility (and a strong possibility at that) that Barack Obama will be President 44 is an example of and testament to American Exceptionalism.

But I digress.

I don't just want Obama to win. I want him to win big. I want him to pull something close to 350 electoral votes. I want him to crack 50% of the popular vote. I want there to be absolutely no question, as there was for Bush's first term, about whether he "really" won. I want it to be clear and unequivocal that better--even if it's only slightly better--than half of those who bothered to turn out favoured Obama.

I also want some of the third-party candidates to manange to crack a percent or two, each. Yes, I realize that especially in the case of Nader, that's a couple of percentage more that Obama might have been above 50%. But more to the point, if Obama cracks 50%, and Nader and other other whackjobs take, say, 4% total, than that demonstrates that noticably fewer than 50% of the electorate liked McCain. In other words, he can't say that he almost won. Again, I want Obama's win to be clear and unchallengable. I've said repeatedly over the last 8 years that Gore lost, in the end, because he failed to inspire a sufficient margin so that the hanging chads wouldn't matter.

I want to see Al Franken take the Senate seat currently held by Norm Coleman. I know a lot of DFL partisans who really, really loathe Coleman, and I can see why: he turned coats, he's staunchly pro-life, he's fiscally conservative, and for the first two or three years of his term he was a Bush zombie.

I don't loathe him, but I don't really like him much, either. Mainly because of his years as a Bush zombie, but also because of a persistent sense that he's a chameleon. Al Franken doesn't inspire huge confidence in me, I'll admit, but at least he's been consistent. So I'll settle for a very narrow win by Franken...or, for that matter, a narrow enough win by Coleman that it makes him think a bit.

(Curious fact: if Franken wins, he will be the fourth successive Jew, not counting Dean Barkley's two months filling in for the late Wellstone, to sit in the "Class 2" seat from the Land of Lutherans: Rudy Boschwitz, Paul Wellstone, and Norm Coleman.)

I want to see Michelle Batshit Bachmann (R-MN 6) lose. I would prefer it to be a humilatingly huge loss, but there's no real prospect for that. I will settle simply for her to be turfed out. I don't know Tinklenberg from a hole in the wall, honestly, and I don't get a vote in the 6th District Race, anyway, so I don't care so much that Tinklenberg wins, as that Bachmann loses.

I want to see Keith Ellison (DFL-MN 5), the first Muslim ever returned to Congress, and my district's representative to that body, win again. Fortunately this seems like a no-brainer. I haven't even seen evidence of a campaign, suggesting that none of his opponents are really credible. Of course, this district is so firmly in the DFL's grip that a Republican would have to pretty much be handing out suitcases of cash to win that seat.

I want to see a 59 seat Democratic majority in the Senate. Not 60. 59. I want them to have to work a bit to stay fillibuster-proof. I don't want them utterly unfettered. I have friends reading this I know feel differently, who desperately want to see that magical 60, but I'm just not partisan enough to think that giving any party that kind of power is a good idea. Of course, as others have pointed out, even 60 isn't a guarantee of fillibuster-proof-ness. Senators tend to think a bit more for themselves.

I will also point out, as fair warning to the more partisan readers in the crowd, that if, two years from now, the Democrats have demonstrated either that they're incompetent or that their ideas are making things signifiantly worse, I reserve the right to root for a Republican majority mid-term. I don't want the Republicans out right now because they're Republicans. I want them out because they've screwed everything up. But Democrats have screwed things up in the past, too, and they will again in the future. You can take that to the bank...if you can find a bank still open to take it to.

I want to see some clear and workable ideas for stopping the bleeding in our economy. I don't want a New New Deal. The New Deal didn't fix anything; all it did was freeze things in place so they didn't get worse. I want to see a clear plan for how we're going to not just stop getting worse, but make things better. I want the Democrats to show that they can be both liberal and in favour of real prosperity and not just the prosperity of, "at least it's not getting any worse, so enjoy what you have."

Lastly: I want America to lead the world again. Really lead it, not just say we're the leader and strong-arm people into following us. I want us to innovate. I want us to shine. I want to be proud to be an American, not because it's required to pass some cultural test of patriotism or loyalty, but because the nation has earned my pride.

01 November 2008

Politics: Are we there, yet?

Today, I had occasion to say to a friend that it was a really good thing I don't have a nail-biting habit.

Otherwise, I'd be up to the elbow right now.

"But Mikey," I hear you say, "the polls all say that Obama's got it locked. Gallup's got Obama up 10  on McCain. If you go with Real Clear Politics's average, he's +6. Five Thirty Eight's got about a 7% spread in Obama's favour. He's going to win everything Gore or Kerry won and then a few that they didn't, and given how close those elections were, that puts him over the top! Stop worrying!"

I'd love to. Really. The problem can be summarized in three words:

"Dewey Defeats Truman".

There are some significant parallels, although the parties are reversed. Republican Dewey was ahead in the polls, and those same polls showed significant coat-tails that would drag a strong Republican majority into both houses of Congress. Truman was the incumbent, running for his own term after stepping into FDRs, and was deeply unpopular with certain segments of the population.

The big issue that year was that polling was in its infancy, and phone polls only work if people have telephones. In the late '40s, this was predominantly people with money, and they favoured the Republican Dewey, naturally. Pollsters had also failed to take into account the relative lack of momentum in popular opinion; that it can and will turn on a dime. So they stopped polling weeks before the election, sure that they had the answer already.

On Election Day, it became clear almost immediately that the polls had been dead wrong. Conservative media at the time insisted as the day wore on that "late returns" would show a surge for Dewey, and honestly seemed to believe it--hence, the Tribune's headline--but it was never a realistic hope. Truman not only won, he won by a handy electoral margin, and brought in a Democratic majority to both houses. Ultimately, the populace punished the Republicans for the "Do Nothing" 80th Congress, which, with a weak Republican majority, failed to get much past FDR's successor.

Polling has come along, long way since then, but it still has some dreadful flaws. The difference is that most people in the media now know those flaws. They still use polls, because it's a nice pithy way to summarize a story, but they know, and often admit to, the flaws. For example, nowadays, phone polling tends to still be focused on land-line phones, because of a reluctance to spam cellphones (thank heaven!). But now, the equation is opposite of what it was in the mid-40s. The people who still have landline phones tend to be poorer.

Then, there's the fact that, in this jaded age, many of us simply hang up on telephone solicitations of any kind, especially robocalls. Part of how the campaigns themselves gauge support is based on how many people they successfully talked to, but McCain's campaign has used a lot of robocallers, which are even more likely to get hung up on. Therefore, McCain's own numbers may well be wrong. He may have tremendous support from people who simply don't want to talk to his robots.

The race question also, sadly, screws up everything when it comes to believing the polls. It shouldn't, of course, but it does. This is the much bally-hooed (and somewhat debunked) "Bradley Effect", where people say to pollsters, "Sure, I'll vote for the {insert minority here}!" but they're lying because they don't want the stranger on the other end of the phone to think they're a bigotted pig. But on Election Day, when push comes to shove, they'll mark for the white guy.

Of course, as I just said, there's some material out there debunking the effect, so it may not really have ever happened, let alone be happening now. But human nature being what it is, it's not hard to imagine, really. And therefore, it's easy to worry about.

And so, yes, friends, I'm nervous about how this is going to turn out. In 2000 I was complacent, in part because Clinton had so trashed his own image and legacy that I was ready for even a stupid monkey. I didn't vote for the stupid monkey, mind you, but I was OK with him, because hey, how much harm could he do in four years, right?


Then in 2004 I was also complacent, in part because I was still personally angry about 9/11 and not thinking as clearly as I would like, and therefore still somewhat pro-war; but also because Kerry was such a damned zombie that it was impossible to take him seriously. Again, I didn't vote for the stupid monkey, but I still firmly believed that everything would be OK in the end.

Except...it wasn't. The wars have dragged on. In the case of at least one of the two wars, it's clear to all but the most die-hard, delusional neo-cons that it was the wrong war for the wrong reasons. Our standing in the world is shit. We lost their respect when we went into those wars, and we lost their fear when they started to realize our military was pretty tapped out. And now, our economy, the world's economy, is down the toilet.

No election is simply going to fix all this instantaneously by magic.  But the wrong result will make it worse. So it matters. And until it's over and decided, I'm going to be nervous about how it will turn out.

29 October 2008

Economy: A couple of less gloomy days

The week opened with sharp declines on the news that the "real" economy--meaning the cycle of production and consumption--was seriously sprained if not actually broken. The last two days, however, have been a bit cheerier for the markets. Two days ago, Asia time, the Nikkei and Heng Seng posted tremendous rallies, while yesterday saw the Nikkei's rally continue and the Heng Seng basically flat. Domestically, the Dow 30 shot up 900 points, back above the 9,000 mark, and today is floating just above yesterday's surface, almost like it's holding its breath.

Some of this is bargain hunting, of course, but some of it is also a case of "buy on rumour". The Federal Reserve Open Market Committee (which is what we often really mean when we talk about "The Fed") is meeting today to talk about interest rates. There's a strong belief they're going to cut them another quarter or half point. The Federal Funds Rate is currently at 1.5%, so you do the math.

Meanwhile, the LIBOR, the London Inter-Bank Overnight Rate that governs bank-to-bank credit, is still well above that, at 3.47%. That's down quite a bit, though. At the height of the crisis, LIBOR was over 5%. Keep in mind that, when everything is working right, LIBOR tracks the Federal Funds rate fairly closely, so the fact that there's still a 2% gap is troublesome. But the fact that it's now only a 2% gap is also reason to hope that credit markets really are thawing.

Still, this little column of mine isn't really about sunshine and roses, so of course, I have to point out some of the gloomier news. In a move that shocks almost nobody, most of the big banks receiving bailout money this week from the US Treasury are not planning to apply that money as a laxative to their constipated credit departments. Rather, they're going to use it to fund buyouts of smaller, weaker banks, thus consolidating the industry and creating more "too big to fail" institutions.

The problem is that Secretary Paulson failed to include any requirement, when he cut the checks to the banks, that it be used for lending. He just asked them really nicely. And now, the carrot having failed, he's doing nothing to apply the stick.

Now...maybe he honestly doesn't feel he has the authority to do so. Or, maybe he's such a dyed-in-the-wool free-marketeer that he just can't bring himself to really nationalize the banks by giving them orders of this sort. Maybe he thinks it's just as well that our debt-oriented economy is facing massive restructuring and a new paradigm, even if it hurts (and really, if so, I'm not sure I disagree; but then, I'm employed, right now...). Or maybe he's doing his friends favours at the taxpayer's expense--he'd hardly be the first cabinet minister in the history of government to do so.

Whatever the reason, the banks are planning to use the money to ensure their own survival, and to hell with the credit-based economy they spent the last 30 years constructing, and right now, nobody's in a position to do anything about it. The executive branch is stuffed full of Reaganites and neocons still in denial; the legislative branch is useless until January[*]; and the judicial branch really has nothing to do. It's not against the law to hoard one's treasure, nor for a corporation or individual to look out for what they believe is their own best interest.

However, it's doing nothing to improve the confidence of the economy. In addition to "big" credit pulling back, like inter-corporate credit, mortgages, and car loans, now the credit card companies are pulling back, behaving like fresh Born Agains, suddenly avid to preach tighter, more responsible credit after decades of sending credit-card pre-approvals to anyone who can prove they have a pulse. They're cutting credit limits (which automatically lowers credit scores, by the way, even if the cut has nothing to do with you, personally), raising interest rates, and in many cases just refusing to issue cards to new customers.

And all right before the American Winter Compulsory Capitalism Festival and Pine Tree Slaughtering Extravaganza.

Black Friday, the day after Thanksgiving Day in the US, is so nicknamed because it's the day many retail establishments finally make a profit on the year (and hence, are now "in the black"). Many of them spend their entire year running a loss that they expect to make up as the calendar winds down and children start praying to the Arctic toy-giving god.

This year, with money tight, jobs being shed, and credit cards pulling back, it may have a connotation more akin to the day historians attach to that day, exactly 79 years ago, when the stock markets wound up their third day of monumental collapse and set off the era we now call the Great Depression, 29 October 1929: Black Tuesday.

[*] Yes, I know they'll be convening again after the election. It's not impossible they'll get something useful done in their lame-duck session, but I wouldn't bet the farm on it.

24 October 2008

Strange Days Indeed

It is, I think you will admit, a strange day indeed when we can look at the major US market indexes closing the day down 3-3.5% and call that a good thing; and look at the plummet in oil prices and strengthening of the dollar and call that a bad thing.

And yet, that's where we find ourselves today. Friday in Asia was a financial bloodbath, with the Nikkei (Japan) and Heng Seng (Hong Kong SAR) giving up 9.6% and 8.3% respectively before the opening of US markets. Overnight futures trading for the Dow and S&P had to be halted until the opening bells because they hit the "limit down" thresholds. Everyone expected today to be another dramatic crash in the US, as well.

In the end, despite a pessimistic start, bargain hunting, contrarian investing, and G-d knows what else kept the day's losses on the Dow 30 to 3.6%, S&P to 3.5% and NASDAQ to 3.2%.

The market continues to slide despite the thawing of the credit markets--they're not yet fluid but they've at least moved from pack-ice to slush. The problem now is that frostbite has already taken its toll. What we're seeing now, to use a somewhat graphic metaphor, is the sloughing off of flesh killed by the cold.

You see, public companies tend to only react to thinks in quarterly bursts. That's when they have to post their financials, and so that's when they tend to make big pronouncements to go along with those financials. A company that's doing well, and expects to keep on doing well, will post its massive profit and announce how it intends to build on its success. A company that's doing poorly will announce its painful loss and follow up with what it intends to do to return to profitability.

Well, there have been a lot of losses to go around, this quarter. Banks, of course, are hosed. The automobile industry, as I've described in the past, was already reeling from oil prices killing demand for their biggest sellers, and then further crushed from several directions by the credit freeze. Manufacturing in general is falling off the rails (and it wasn't really doing all that well to begin with due to over a decade of open-market, free-trade policy, which predates Bush, lest you forget and blame the shrub for everything).

Then there are the job numbers. Unemployment stands at a nationwide average of 6.1%, which is hardly dire by 1930s standards but is well above what we've gotten used to. Many of those corporate earnings announcements came coupled with announcements of layoffs, which means the only direction that number is going is up.  Even privately held Chrysler chose to join the herd and make an announcement that its cutting 25% of its salaried staff. And despite good numbers from Apple, Google and Microsoft, Big Tech is not immune: Yahoo! announced a big layoff, too.

Even in the best of times, which not even the most contrarian pundit is prepared to suggest these are, announcements like these could cost the Dow 3% or so. So in the end, the fact that we held to only a "normal" fall-off for the day, compared to what happened elsewhere, is definitely good news.


Meanwhile, oil is way, way down compared not only to the stratospehric highs of the summer, but the prices we'd seen for the last couple of years. Along with it  has fallen the price of gasoline--I could have paid $2.29 in Saint Paul this afternoon, for example, except that I filled up yesterday at $2.39, same station.

The dollar, in turn, is strengthening after a long decline. That should be good, right?


The strengthening dollar is the easier one to explain. The dollar is not getting stronger because our economy is so great, because of course, our economy is in tatters just like everyone else's. The dollar is getting stronger because other countries are faring even worse, and their currencies are reflecting it. The currency markets are basically saying that, even now, when the US has demonstrated massive national fiscal irresponsibility and helped to trigger the crisis that's got everyone in a panic, the dollar, and various dollar-denominated assets, are the best of a bad lot.

So basically, the dollar is stronger because the currency system is all interlinked instead of being based on a common, independent standard like gold or silver, and thus, it's all relative.

The price of oil crashing is a bit more of a mixed blessing than truly a bad thing, because it means that those of us who aren't feeling too panicked or too strapped for cash to drive anywhere are paying far less at the pump.

But it's not an unalloyed good thing, I assure you. Because aside from the first order reaction of, "Yay, I can fill my Prius up for less than $40!", the effects, and causes, of oil's decline are something to worry about.

First, effect. You see, many of the OPEC countries--and I'll grant you at the outset that if it weren't for the way the world economy is all interwingled, we might not care so much--many of the OPEC countries depend upon oil selling at or above a particular price in order to balance their budgets. Saudi Arabia, for example, needs oil above $55/barrel; Iran needs $90/barrel and is therefor already hurting. It's currently in the mid-60s, and despite the cut in production announced yesterday, still falling.

Now, cause. Perhaps more important (and more deserving of sympathy) than what the drop in oil prices means for the producing countries, is what it says about the consuming countries, which is that their economies are all, universally, so far down the shitter the world market is suddenly drowning in surplus oil.

From a summer spent facing the reality (and it is a reality, folks) of Peak Oil, we're now facing a winter of severe discontent in which people aren't buying much gasoline, not because it's too expensive, but because they're terrified of spending money...or no longer have any to spend!


Lastly, because we're so close to the election, I can't resist a bit of politics as well.

Y'all know that hoping for Mr Obama to pull off not just a victory, but a significant, unassailable victory; one that will be immune to electoral shenanigans like the one that Mr Gore suffered. I don't want a victory that hangs on the chads of few thousand provisional ballots. I want to see a mandate.

But we all have to be prepared right now for one absolutely guaranteed true thing: on 5 November, we will wake up to a financial mess as ugly as it was the day before. On 21 January 2009, when Mr Obama is, I hope, firmly ensconced in office, the world will still very likely be in turmoil. The mere fact of Obama's election and inauguration will not magically make everything better overnight. It took, depending on how you want to look at it, anywhere from 8 to 30 years for this current disaster to overtake us. Today's state of affairs is not merely the work of the monkey currently masquerading as President, but of his three predecessors, including, let's all remember, Democrat Bil Clinton, all of whom followed fiscal policies that contributed to the mess.

It will take a long time to repair the damage. While I don't want to say, "never", it's very unlikely that we'll see a spontaneous miracle happen that fixes all the problems and returns us instantaneously to prosperity.

What we can hope for, what I do hope for, is clear-headed thinking to examine and disentangle the knotty skeins of the problem, and provide confident leadership as we move forward. We need steady hands at the rudder. I believe, I hope, Mr Obama offers that, and equally to the point, I have not seen any sign that Mr McCain does.

22 October 2008


There is increasing evidence that Senator McCain may have made what might be politely described as a tactical error in the selection of his running mate, Governor Palin.

Of course, given my audience, which as far as I'm aware is still mostly people I know, and mostly relatively liberal people I know, this isn't much of a surprise here. With the exception of a couple of co-workers who surprised me, nearly everyone I personally talk to have been scratching their heads raw trying to figure out what the hell McCain was thinking in selecting her. Many concluded that it could only be a blatant and cynical ploy to go after disaffected women voters, believing that they'd take out Hillary's thwarting upon Obama by voting for whatever woman was in the race.

Right at first, the ploy appeared to be working. The whole folksy soccerhockey-mom image actually played well for several weeks, because, let's be honest, there was in fact an audience who were most interested in Hillary Clinton because she was a woman, and so they gravitated to another woman who seemed to understand their pain.

But since then, Governor Palin has made the mistake of many a candidate in the radio-and-television age, a mistake that has been made all the more deadly in the YouTube age, where the most fleeting moment on television can be scattered to the winds of the browser-enabled world.

She opened her mouth. Repeatedly.

And every time she did, it just got stranger and stranger.

The most recent example that keeps coming up is that no no fewer than three occasions, Governor Palin declared in front of an audience that the Vice President is "in charge" of the US Senate. A lot of apologists have tried to cover for this gaffe, but it simply makes her come across as ignorant and unprepared when she proclaims a role for the job she's running for that does not exist.

It's true that, in the earliest days, John Adams actually sat and presided over the Senate most days--which is to say that he held the gavel and listened to the senior lawmakers natter. He didn't have anything else to do, because George Washington had chosen, for reasons which remain somewhat cloudy, to exclude him from even an advisory role in government.

Since then, however, even that formal role of sitting with the gavel has fallen by the wayside. The President of the Senate presides only on ceremonial occasions, while a President Pro Tempore--an actual senator--presides daily. And even the President Pro Tempore has relatively little power compared to the Speaker of the House. The real power in the Senate lies with the caucus leadership.

And then there's that whole "real America" bullshit. Mrs Palin is not the only purveyor of this particularly insidious piece of tripe. In fact, it appears to be the home-stretch strategy of the entire campaign. Like most of the RNC's strategies this season, it's so very blatant it's hard to believe that it works. And yet...it does. You know there are people who actually believe that they live in the "real" America, and that "real" America is Republican Red.

Of course, even the RNC recognizes when someone goes a bridge too far. MN Sixth District Wingnut Congresswoman Michelle Bachmann  has been abandoned by the RNC after she was "trapped" by Chris "Hardball" Matthews into saying on national television that there ought to be an investigation into who is pro-America and who is anti-America. Even the RNC isn't quite willing to be associated with a call for neo-McCarthyism, so they've pulled all their TV ads for her.

Meanwhile, Bachmann's opponent, the Elwyn Tinklenberg, was running a losing campaign until that fateful interview aired and then went viral. Now, he's suddenly got a huge war chest, courtesy of donors who had never heard of him before, but were willing to back anyone who might pry Batshit Bachmann[*] loose. Something similar happened with Mr. Robin Hayes, Republican critter from North Carolina's Eighth District; and then there's Nancy Pfotenhauer, one of McCain's advisers, talking about Northern Virginia vs. Real Virginia.

The fun part is that, in every single case, polls suggest that more Americans, real or otherwise, are turned off by this sort of rhetoric than turned on. It may play to the "base", but it actively repulses everyone else. Bachmann was winning; now, she's not.  Hayes was winning. Now he's not.

McCain was neck and neck; now, in most polls, he's between 6 and 12 points back.

The irony, here is that McCain spent so many years painting himself as a maverick (G-d, I hate that word, now), so many years pissing off the "real America". And now, his only chance of winning rests with the same Republican base he's spent years pissing off.

And let's be very clear here: as much as I would like Palin and the "real America" rhetoric both to turn out to be not merely albatrosses but anvils around McCain's neck, dragging his campaign down to a well-deserved epic fail, it's not a sure thing. Twelve days is more than enough time for Obama to do something equally dumb; more than enough time for people to get complacent and decide they don't need to show up Election Day after all, because Obama's victory's a sure thing without them; more than enough time for...well, anything, really. Granted this campaign feels like it's been going on almost since the day Kerry lost, but really, twelve days is an eternity in this news cycle.

We're very close to seeing an end to the Era of Stupidity. But it's not going to happen by itself.

[*] Credit where due: This phrase comes to me via the Stephanie Miller Show , this morning, which in turn was quoting Wonkette .

19 October 2008

Short Take: Powell endorses Obama

Retired General Colin Powell endorsed Senator Obama today on Meet the Press.

This is not a huge surprise, perhaps, to anyone with a long enough memory to remember that Powell is only a recent Republican, choosing a party officially in the run up to the 2000 election after years as an official independent. Powell has always been opposed to the neoconservative strain of the Republican Party, which is one of the reasons he's no longer Secretary of State to George W. Bush.

Powell expressed concern about the conduct of McCain's campaign, McCain's erratic handling of the economic crisis, and his choice of Palin as reasons why he couldn't endorse McCain.

17 October 2008

The Week in Review

There hasn't really been all that much that's inexplicable this week. The stock markets have been wildly variable, but in a time of uncertainty and turmoil, that's to be expected. The markets are ultimately made up of people; the people are wound pretty tight; so any news, good or bad, results in a wild swing up or down as people respond with either sadness or euphoria.

 In response to one of my earlier stock-market-focused posts, my friend Ian (and I've scapegoated him on this one before) retorted that the markets are not the economy. And, as I later pointed out, he's absolutely right. The markets are merely one facet of the economy.

What makes obsessive focus on the stock markets so attractive is that we know within seconds when they change. It used to be that public market data was delayed 15-20 minutes if you weren't out on the trading floor in person, but that's no longer true. You can pull up the Wall Street Journal's web page, click on the header link to the market data chart, and watch the numbers change by the minute if you're so inclined, now, and they're up-to-date, without delay.

So it gives us a sense that we know exactly what's going on, at any given moment. We can watch the roller coaster and think we know where it's going.

But sometimes, the real economy is actually ahead of the curve. Which brings us to an interesting bit of news that slipped past most of the media this week. You see, the September retail numbers came in--that is, the comparison of same-store sales from month to month and year to year--this week. And they were awful. really, hideously awful. That part isn't a surprise.

The surprise is that they started to crash before the crisis hit. Well before. They'd actually been sliding since July. September started out awful for retail and only got worse. But because we only get those statistics two weeks after the month is over, and not on a day to day basis, it's more difficult to watch. There's no bouncing ball to follow.

In short: the "real" economy, what the candidates have been obsessively macro-ing as "Main Street"--really is pretty thoroughly screwed up, and it's not the stock market that's tanked it. Rather, both are being tanked by the same underlying cause, the credit crunch and the general loss of confidence in every aspect of the economy.


Meanwhile, the last of the debates was this week. I have one friend who insists that McCain won, because he stayed on the attack and kept Obama on the defensive.

I can't disagree more.

McCain stayed on the attack, and in the process looked and sounded drunk and belligerent. Note that I do not suggest he actually was either drunk or drugged, only that he did not sound, to my ears, like he was a coherent, decisive leader. He sounded like an angry old man grasping for control.

Obama, on the other hand, remained absolutely cool in the face of all of McCain's attacks. Unruffled, unflappable. He answered every challenge. Sometimes he changed the subject--every politician does this--but he never lost his cool. He never ceased to give the impression that he was already in control and therefore didn't need to grasp for anything.

If I had any lingering doubt about which one of them I want answering the big red phone, the third debate dispelled it. I want the man who stays calm and thoughtful in a crisis, not the man who feels a need to lash out to make a point.

14 October 2008

The New, New Bailout

If you remember a couple days ago I talked about leadership, and how the Financial Crisis of 2008 desperately needed some. Well, it finally got it, from a place nobody expected...and yet, we should have.

The leader of the current movement is the Right Honourable Mr Gordon Brown, First Lord of the Treasury and Prime Minister of the United Kingdom. Mr Brown hasn't really been getting a lot of respect lately. His predecessor, Tony Blair, was a charismatic politician of the Clinton model, a showman as well as a policy wonk,. Brown, by contrast, is a dour Scots technocrat. As finance minister under Blair, the two frequently clashed over fiscal policy, and were generally seen as rivals. Brown's succession to the prime ministry was seen as something of a caretaker role, because, like John Adams, Brown seemed to be the only man who was unaware of how obnoxious and disliked he was.

And yet, we come back to what Brown's previous job was: finance minister. If anyone was going to have a handle on how to handle a financial crisis, Brown was a likely candidate. But we all got so used to thinking of him as a lame duck that it never seemed to occur to anyone that he'd be the one to lead the way.

So Mr Brown and his government came up with a plan that was much more direct, if much more socialist, than the Paulson Plan: invest directly in key banks, in exchange for equity shares; and guarantee inter-bank lending with national funds, the same way individual depositor accounts are guaranteed. Except they're talking about guarantees without limits.

The European Central Bank followed suit not long after. This is not just a case of follow-my-leader; it's a matter of survival. In a world where money can flow freely across borders, if Country A is doing something confidence-building and Countries B, C, and D don't, where are you going to send your money?


So now, the US is following suit, despite the fact that it's got to be tearing up the ideologue NeoCons in the government apart. Two weeks ago saw our leaders playing political games with a flawed, much bally-hooed $700bn bailout plan that now may never actually be implemented, because they were desperate to avoid this very gambit. But the less socialism-averse Europeans left the US with no real choice.

All told, there are four new measures being implemented in this new, new bailout:

  1. Treasury will invest directly in banks, with half the investment going to the eight largest players and half going to smaller fry. In exchange, Treasury will receive non-voting stock in those companies, and a 5% dividend at first, increasing to 9% later, for its pains. In short, unless the banks actually collapse, Treasury will make money off this deal.
  2. The FDIC will now guarantee bank-to-bank loans. In short, the government will now be co-signing the loans, like a parent helping a child get a car loan or a credit card. This is aimed directly at unfreezing the interbank credit market.
  3. The FDIC will offer, for the next three years, unlimited insurance on non-interest-bearing accounts of the sorts used by companies for their expenses. This is aimed at preventing a run on the banks, and mirrors moves in Europe.
  4. Lastly, in a pinch, the Federal Reserve itself will start buying commercial paper in an effort to unfreeze short-term lending between companies.

The President was at pains this morning to insist that these were temporary measures, that everything was being done to ensure that the free market would eventually reign supreme, once it actually, you know, functioned again.

Yesterday's market surged on just the possibility that this might happen, and today started out pretty peachy as well, not just at home, but around the world. As Tuesday wore on, however, it started to slump again. Once the initial, "Yay! They did something!" euphoria wore off, hard questions remained.

One such question was: will this actually work? Paulson has reportedly told banks that they need not just to take this deal to save America's ass (because, you know, they don't have to sell him an equity stake in their corporations if they don't want to), but to actually deploy the capital to unfreeze the credit market.

Problem is, they don't have to do that, either. The government won't be buying a large enough stake in any of the major players to actually control them, which means that once they have the money, they can do anything they want with it, including hoard it and wait for better days.

Another such question was, what about the rest of the economy? A lot of damage has already done. Consumer confidence is rattled, jobs are being shed, major industrial powerhouses have seen their stock plummet. GM and Chrysler, already struggling before this mess, are looking at merging, which would reduce the Big Three automakers to two. The commodities market has crashed hard--the sole obvious benefit of which is that the price of gasoline at the pump has come down to saner values.

Nobody's got good answers to this, yet. It will be several days before we do.

Meanwhile, once again, we come back to a crisis of leadership. Paulson comes across like an ineffective substitute teacher begging the class to behave and heaving powerless sighs as he continues to get hit with spitballs. America, which should have been leading the charge to solving this crisis, instead is trailing along behind the a lame-duck Scotsman who two weeks ago was having trouble holding on to his own party's discipline and everyone was sure was going to get trounced at the polls.

So: Memo to the So-Called Leader of the Free World. Where's the leadership, bozo?

10 October 2008

On Credit

The word "credit" essentially means "belief".

If I extend you credit, what I'm really saying is that I'm giving you money because I believe you'll pay me back.

That belief is at the heart of the crisis right now. The media pre-occupation with the stock market indexes is not entirely wrong-headed, mind you, because as I've said before, they're the leading indicator of how the economy is reacting to whatever else is going on in the world.

But the heart of this crisis is still not truly a stock problem. It's a credit problem.

All of the bailout proposals, from the original idea of getting bad paper off the books of banks to this week's darling notion that the G7 governments should re-capitalize key banks and take ownership stakes in exchange for the money, are geared toward solving that problem, toward reinstating the belief that Bank A, borrowing from Bank B, will be good for the money.

What the markets are reacting to is partially the failure of various financial corporations and the assumption that more will fail and partially the failure of other credit-dependent industries, like housing and automotive. Companies in these industries are components of the various indexes, so as people flee those specific investments, indexes fall.

The market is also reacting to the idea that a recession, or worse, is now inevitable. Investors are "pricing in" a recession, battening down their hatches, finding relatively unrisky places for their money.

And then lastly, of course, there's the overall, purely psychological, panic-driven capitulation that's going on. Many investors are simply "giving up" on the market, spooked by the drop in the indexes. They're liquidating anything that's tied to the stock market at any price they can get, just to get out. It's that purely herd-like stampede that's really killing the markets right now.

In times when belief is in short supply, believable leaders are needed. And there's a painful lack of them right now. Bush and Paulson, for example, are widely seen as being partially culpable for getting us into the mess in the first place. There's not a lot of belief that they can get us out of it. Bush going on the air and saying, "We'll fix it. We'll take aggressive action. Trust us!" doesn't really help, because, let's face it, there has yet to be an instance of Bush taking aggressive action in any context that didn't end up being an utter bungle.

This is actually a dangerous moment. It's important to remember that most extremist movements succeed in taking power by providing that credible-seeming leadership at the moment when everyone's looking for it.

09 October 2008

8579.19?! YIPE

When I made my earlier post today, the Dow was puttering along nicely. It was actually up a little bit.

Sometime between the time I hit "Post", had a bunch of meetings, and came back to my desk, the US indexes plummeted like...great...big...plummety things that are very heavy and make a big hole when they finish plummeting. The Dow closed at 8579.19, off 7.33% on the day, S&P followed like a lemming, giving up 7.62%, while the NASDAQ lost 5.47%.

All three walked off the cliff's edge around 2pm ET. The trigger was an announcement that Standard & Poors Ratings, a service that grades the quality of various organization's bonds, was placing GM under review, meaning there was a good chance that it would cut GM's bond rating in the coming months. This came as Ford's debt rating was also cut.

In both cases, the companies are under scrutiny because the automobile market is sucking so very badly. This, in large part, was caused in part by the spring and summer jump in oil prices, which suddenly killed off demand for trucks and SUVs all at once. Dealerships have lots full of large vehicles they can't sell, and because of the credit crunch, they can't borrow money to buy the kinds of cars that would sell, and even if they could, about half their customers couldn't get loans. So the upshot is that car sales right now suck badly and the two publicly traded US manufacturers are getting hammered for it.

Ordinarily, this would be just one blip, albeit a large one, in a typical day's news, but in the current, highly-charged and emotional climate, this was basically the starting gun for a race to liquidate holdings.

Reports are coming in that retail investors--that is, not investors in Macy's, nor Macy's itself, but people like you and me who don't trade for a living--are engaging in something of a run on the stock market. They're pulling out of stock mutual funds in droves, requiring those funds managers to sell holdings immediately to cash out the departing customers. This, of course, fuels price deflation in the stock market, which causes more investors to want out as soon as possible, setting off a spiral of doom and gloom.

Possibly--stress possibly--exacerbating the problem is that the ban on short-selling expired without renewal. I can't really explain short-selling right now, although it's on my to-do list for a later column, but suffice it to say that a lot of people blame short-sellers for a lot of the bullshit that happens in the market.

Trouble is, the earlier plunges of the last couple of weeks happened while the ban was still in effect. So that dog will only hunt so far without pretty solid evidence.

All of this, sadly, reinforces the point of my last article, which is that none of these confidence-boosting measures various governments are attempting actually appear to be working.

On Gravity, and also on the Uses of Bailout Power

First, a quick update on this week's numbers and what they seem to mean. Most major stock market indexes, not just those here in the USA but around the world, are significantly down for the week. Heng Seng, for example, started the week at 17,600 and hit a low of 15,500. It was up yesterday, but that appears to be bargain hunting.

In fact, in general, the upswings you see in the indexes this week seem to be attributable to bargain hunting. The good news there is that it means that there are people out there still willing to buy stocks. This is important, because while my old friend Ian correctly pointed out elsewhere that the stock market is not the economy, the stock market's health is always a leading indicator, in either direction, of where the economy is likely to go.

So, what we're seeing on the markets right now is a generally downward trend. It's not always precipitous drops, but gravity is definitely still in charge. There is still no broad confidence that the stock market is a good place for investment right now.

Ordinarily, in a situation like this, there'd be a flight of capital to either bonds or commodities, or both. But of course, that's not what's happening now. The bond market is still frozen up like the Northwest Passage used to be. It's not so much that nobody's buying bonds, as that people can only be enticed to buy bonds by increasingly high rates of return. Now, the definition of "high" for the bond market isn't really all that dear--low single-digits. But considering that bonds could be floated just a few weeks ago at fractional-percentage-rate interest, 3% is high. So, the various entities that float those bonds--banks, businesses, colleges, cities, states--are thinking twice about selling because they don't know that they can afford to pay!

This, of course, gets us back into the credit frostbite situation I've been nattering about since I started this column. A college wants to build a dorm, but they can't float the bonds to do so. In the near term, that means no construction jobs, which in turn means those construction workers have less cash to spend in the retail world, which depresses retail profits, which affects their stocks. Meanwhile, the college either has fewer students, or fewer of them on campus.

So that leaves us with commodities, and even those are volatile. Gold is up noticeably over the last month, but on any given day it's had some precipitous falls, usually on days the stock and bond markets also tanked. Oil, you'll have noticed at the gas pump, is down significantly, around $88/barrel right now, although that's also a factor of the dollar--get this--strengthening versus other currencies. Of course, the only reason that's possible is that so many of the other major economic players are also suffering. If Europe's economy were solid right now, oil would probably be a bit higher because the dollar would be cheaper.

So, herein lies a danger I haven't heard talked about much yet. One of the ways Treasury is going to work its magic is by printing money, creating it from scratch. No-one else in the US can do this, of course, which is what makes Treasury special. The problem, of course, is that if you create too much money, you begin to fuel inflation, which is already high. The dollar begins to weaken because, as with anything, if there's more dollars, they're worth less.


The big news this morning economically was the Treasury's statement that it was prepared to actually invest directly in banks--that is, give them money in exchange for ownership stakes, as opposed to giving them grants or loans or buying up their bad paper. We're not the first to consider this: Britain's already doing it.

The important thing to note here is that Treasury hasn't said that it will do this, only that, thanks to the bailout bill law, it now can, and won't take the possibility off the table. Many lawmakers (notably Charles Schumer, D-NY) favor this notion heavily. On the one hand, they think it's a better idea than just buying the bank's bad debts and then letting them run free. On the other hand, more economically-left folks aren't afraid of a little nationalization if that's what it takes.

The idea, of course, is the put the full faith and credit of the US directly into the private banking system by having the Treasury directly bolster, and take partial control of, struggling banks. However, that theory assumes a market that's thinking optimistically, that's willing and able to trust the government, or indeed, anybody, to save their asses.

That's not the market we have right now. We have a very pessimistic, PTSD market right now that's pretty much afraid of its own shadow and abjectly terrified of the least bump in the night. A move like this could instead send the message that the banks Treasury is trying to shore off are in even worse shape than they appear, leading to a panic and a run on those banks. This, in turn, would trigger a broader panic, because that's how panics work. They play on the fact that somewhere in the depths of human genetics there's a pack animal that's going to freak out because other prominent members of the pack are freaking out, rather than because they themselves actually perceive a problem.

So why is this even being considered? Desperation. Paulson, Bernanke, and others hoped that the enactment of the Bailout would calm markets and bolster confidence. Around the world, various moves by various central authorities have similarly been tailored not just to rescuing specific institutions but toward convincing the markets that it's OK to come out from behind the sofa.

Yesterday saw a coordinated central interest rate cut aimed at the same idea. An unprecedented number of national central banks, including the US Federal Reserve, the Bank of England, the European Central Bank, and the central banks of Canada and Sweden all cut their rate by 0.5%, and P.R. China's central bank quietly went along with the idea and cut theirs 0.7%.

So far, the passage of the Bailout Law failed to win confidence. The interest rate cut yesterday produced, at best, mixed results that still look more like bargain hunting than real reinvestment. In short: nothing's worked yet. Granted, they haven't given it much time, but nothing's worked, yet.

And so, we have the spectacle of some of the most powerful men in the world frantically looking for ways to change course before we hit the rocks. But nothing they've done so far has turned the ship, and it's hard to see how panic, rather than clear, cool thinking, is going to make anything any better.

08 October 2008

Post Pending

I've been distracted quite a bit the last couple of days, including by, y'know ,my day job :-) However, there will be a post to cover the last few days' news later today.

06 October 2008

Bailout != Panacea

I'm stuck in meetings today, but a quick note from the news: the Dow has fallen below 10,000 today, on fears that Europe's financial systems are coming apart.

More later.

Posted with LifeCast

05 October 2008

Right, So...Now What

So, the bailout has been passed and signed, and suddenly the media is struggling to figure out what else to talk about. I mean, it's not so much that the economy has magically been fixed by the bailout's passage (although, more in a minute on that score), but the bailout was good theatre, and now, the show's over.

We're also not the only nation on Earth who just bailed our financial sector out. Germany, Denmark and France all moved over the weekend to find ways to rescue or shore up banks that were sliding into the pit of despair. Germany, for example, pledged billions of Euros to bail a bank called Hypo Real Estate, and announced unlimited depositor insurance, the latter matching a move by Denmark. France had to move to save Fortis. Even tiny Iceland has had to move to save a bank this last week.

Some of these moves are real bailouts, designed to fix broken banks. But some of them, and to some degree our own bailout and the politics surrounding it, are about psychology.

Market economic theories mostly rely on the notion that participants in the market are cool and collected, making rational, informed decisions about what to do with their money. As long as this remains true, markets should work.

As soon as emotion gets injected into a market, however, it begins to malfunction. You see, on the one hand, what Greenspan liked to call "irrational exuberance", like the dot-com bubble or for that matter the housing bubble; or on the other hand an irrational, excessive exodus as people get skittish about parting with their money. Emotion leads to such foolishness as believing, because you want optimistically to believe, that the housing market can only ever go up, or that the dot-com boom can go on forever despite a lack of earnings by so many of the companies involved.

Rationality, and even a cursory glance at history, tells us plainly that there's never been a market that went up that didn't eventually come down. The overall trend might continue upward--I doubt, for example that the bottom of the housing market will bring us back to house prices comparable to what they were when I moved to Minnesota in 1995. But there will always come a moment of peak, rather than an everlasting asymptotic rise.

What is remarkable about our current circumstances is how ill prepared many financial institutions, both commercial depository banks and investment banks, were to weather the day when the peak hit and the downward slide began. Large numbers of very intelligent people, all versed in the history of their chosen field, somehow convinced themselves that it couldn't happen to them.

Not everyone was fooled. There was an interview on NPR the other day--I don't remember the fellow's name, but he was a just-retired executive or board member of Washington Mutual, who felt that, now that the company had filed Chapter 11 and functionally no longer existed, his non-disclosure agreement was void and he could speak freely. He'd been telling WaMu's management for years that it was overexposed to bad mortgages and that it was going to suffer for it. Indeed, WaMu had already started to shed some of the bad loans, finally beginning to believe that he may be right.

But it was much too late, and there was much more crap on their books than they imagined. Nobody was willing to believe that the housing market could fall apart, or that it would become a self-fueling trend as foreclosure suppressed neighbourhod value and led to more foreclosure.

Of course, we're in the same sort of denial about so many potential peaks. Peak oil is one that gets talked about a lot. The possibility of reaching a tipping point in the climate, where it will change dramatically and not just gradually, is one that even many who recognize that climate change is happening prefer not to talk about much. We've already passed the peak of America's post-WWII influence over the world, although really, after nearly 60 years, perhaps we were overdue anyway.

We don't really seem to want to think about the troughs, much, either. The housing market has not yet hit bottom. Many people with perfectly ordinary mortgages are believed to be on the brink of default. If you think there's a borrowing crisis now, when sub-prime lending has turned out to be a mistake, wait 'til you see what happens when prime lending starts to fall apart.

And then, there's the really big one: how much debt can the US government rack up before people stop taking our markers? The Iraqi war is a leveraged operation, floated on bonds that are reputed to be held largely by China. I'm sure some doomsayers worry about what happens if China calls those markers in all at once, but I have a much more realistic worry, given all this bailout spending we have in mind: what happens if China stops buying our bonds? What happens when the credit freeze starts to apply to the US Government's own desire to fund its operations on credit?

I think this moment may be coming. I might be entirely wrong--I have yet to see any more educated pundit talking about it seriously--but I don't see any theoretical reason why, if individuals can't get credit on favourable terms, and corporations can't get credit on favourable terms, and cities and states can't get credit on favourable terms, there won't come a moment, very soon, when the US Treasury will find itself unable to float bonds and get money for them.

04 October 2008

Administrivia: changed comment settings

If you've tried posting a comment only to have it not show up, it appears that the embedded comment form doesn't like some browsers and fails silently. I've switched to the "full page" comment form, which means you'll have to actually click a "Post comment" link to add commentary, but it should work in all browsers.

03 October 2008

House Accepts HR 1424: 263-171

The House of Representatives has concurred to the Senate's amendments to HR 1424 (aka The Bailout Bill), without further changes.

Behold, the power of pork.

And now, back to the crisis

I'll have more to say about the debate in a little while, but for now, a round up of this morning's economic disaster news.
  • Wells Fargo agreed to buy Wachovia lock, stock and barrel for the equivalent of $15bn. This as opposed to an earlier deal in which Citi would have bought just Wachovia's banking operations while the Feds would figure out what to do with the rest. The Feds won't be involved in this deal at all--it's entirely a private sector stock-swap transaction. On the surface of it, it doesn't make a lot of sense: why would a bank with almost no exposure to the crisis absorb one that's failing because of it? Answer: Wachovia is all over the east and southeast, where Wells Fargo isn't. Now, Wells Fargo becomes a national franchise, coast to coast (they conqured the middle of the country when they bought Minneaoplis-based Norwest a few years back).
  • The jobs report that came out today was crap on a cracker. If it was the only relevant news, stocks would probably be tanking, but it's not. The Wells Fargo deal cheered the markets much more than the jobs report depressed them, and then, of course...
  • The House is debating, as we speak, the revised bailout bill. Unless something really bizarre happens (and I don't rule out bizarre right now), there will be a vote sometime mid-day. 

    I honestly am not certain which way that vote will go. Pelosi, Boehner and Blunt would not have let the measure come to the floor if they didn't think they knew it would pass, but they thought it would pass on Monday, as well, and were left flat-footed when it failed. At any rate, I expect a narrow margin, either way.
There was some talk this morning of various members trying to attach yet more provisions to the bill, but Pelosi et alia will likely resist any changes. Changing so much as a semicolon will require it to go back to the Senate, or to a conference committee, and nobody wants to take the time.

02 October 2008

Debate Round-up

I did wind up watching all but the first minute or three of the debate in real time. Notes taken on the fly appear below.

General thoughts: Palin was well coached. She did not come across as dumb. She came across as holding the McCain neocon line firmly, but she did not drool on herself or fumble for answers. She did play what, thanks to my friend Teffan, I can call the Barbie card, putting on a bit of a giddy delivery in her manner--not her words, mind you, but her manner. Teffan and I are actually of opposite minds on this one. I think she's spent her life training herself to appear cute and harmless to win her way up in a male-dominated hierarchy. Teffan thinks she was coached to go after female sympathies. Either way, I think the Barbie-mode was my biggest disappointment. I didn't expect to agree with her, after all.

Biden spent a lot of the debate not sounding particularly excited or exciting. As the debate progressed, he got more animated. This was key. We need non-zombies, and for a moment I was wondering if his brains had been eaten. But no, he woke up eventually. He managed to avoid anger for the most part, though, which was really key. He was respectful, throughout, despite temptation. Post-debate the commentators on ABC noted that Biden even resisted the temptation to correct her on the name of the current commander in Iraq.

This was not, I repeat not, a slam dunk for Biden, not because he was bad, but because Palin was better than anyone expected. She held her own. Coached or not, she held her own. The whole debate was actually much better than anyone expected and, apparently, much better than last week's Presidental debate (which I didn't watch).

I will be surprised if McCain-Palin don't get a bounce off of this.

  • Palin looks downright smug. As she pimps McCain (which I suppose is part of her job) and make her ticket sound like superheroes, she has this smug, insulting smile on her face. Maybe that's just how her face looks naturally--I haven't paid enough attention--but it's not at all clear to me what she has to be smug about.
  • Palin has been well coached. Anyone who was hoping to watch her drool all over herself like she reportedly did on Couric's show will be disappointed.
  • Palin plays the "hockey mom" card almost as often as she mentions McCain.
  • Yes, I'm focusing on Palin, because for good or ill, her performance is the one that's interesting. That may be because she's the one I disagree with, of course. But I just don't find Biden all that remarkable. Not boring, just...expected. We really didn't really know what to expect from Palin.
  • Ah, the sectional interests card, whining about "east coast" lawmakers standing in the way of energy-producing states' ruining their environment....er...drilling for oil.
  • Climate change denial! Well, denial that humans are affecting climate. Of course, I do the same thing sometimes, so I can't blame her for that one, I suppose.
  • 30m in. The smug smile is gone. I wonder if she got coached at some point about that and remembered to moderate her expression.
  • 32m: Ooooo. Biden just suggested drumming up an industry we could export technology to clean up China. As someone who has seen first-hand what a disaster the Chinese environment is, that makes me happy.
  • 33m: Palin admits outright that she believes in "Drill, baby, drill!"
  • 34m: "Safe, environmentally friendly drilling offshore..." G-d, I wonder if she really believes that.
  • 36m: Biden clearly in favour of same-sex benefits, declares it will be federal policy as much as possible under Obama/Biden. Brave! 
  • 37m: Palin, of course, defends het marriage, but it is worth noting that Alaska provides same-sex benefits at the state level. 
  • Oh, G-d...the war...Palin defending the surge, of course.
  • "With all due respect, I didn't hear a plan". Bravo, Biden.
  • Also Bravo Biden: McCain also voted against the bill Obama was accused of voting against.
  • Palin plays the "surrender" card. Surprise (not).
  • Hate to say it: brava Palin: Biden just defended Obama voting against funding, but Biden voted FOR it. 
  • Biden stresses Pakistan's danger. Clearest case anyone's made in a while, but probably much too late.
  • Palin says 'nookyoolar'. Who's surprised?
  • Palin stresses Iran danger, pillories Obama for being willing to talk to Ahmedinijad. On the other hand, while she can't say nuclear, she can say Ahmedinijad.
  • Palin gets a chance to name-drop getting to talk to Kissinger.
  • Oh, dear. Israel. Of course someone had to mention Israel.
  • Palin pushing two-state, of course, defending Rice's efforts. Wants embassy in Jerusalem.
  • Biden also defends Rice(!) Not the administration, but Rice, particularly her recent efforts. But pillories the administration otherwise, pointing out Hamas' success in Palestine, Hizbollah in Lebanon.
  • Oh, G-d, she said "maverick" again. But she's got Biden on the whole "looking back" thing.
  • OK, now Biden's getting energetic. Good. Now he's interesting. Stressing how McCain won't change policies, won't bring real reform.
  • ZING: McCain voted against the Nuclear Test Ban Treaty. Forgot about that. 
  • Biden gets a chance to shine in favour of intervention in Darfur &c.
  • Palin gets Biden on the flip-flop on voting for the war authorization but now opposing the war. Claims having led plans to divest Alaska's investment in Sudan.
  • "John McCain, who knows how to win a war..." He does? We lost Viet Nam, remember?
  • Nothing really interesting from either candidate on the question, "What would you do differently if you wind up as President?"
  • Smug smile's back. 
  • Whoa...did Sarah just diss No Child Left Behind? Wow.
  • Those can't be Biden's real teeth.
  • Palin pushing for a stronger role as VP. 
  • Biden: "Vice President Cheney has been possibly the most dangerous Vice President in history..."
  • Biden's getting tired, slurring a bit. He's also actually wrong about the VPs role. John Adams, for example, was much more active in the Senate than most modern VPs.
  • Palin goes Barbie and pulls the just-plain-folks card again. And she's wandered off topic and partially off planet. Either she's getting tired, too, or she knows she only has 10 minutes yet and needs to pimp the ticket more. She completely avoided the question about what her Achilles' Heel might be.
  • Biden just choked up a bit when referring obliquely to Palin's challenge with her Down's Syndrome child. I'd like to believe that was for real. Unlike his teeth.
  • Sarah, STOP SAYING MAVERICK! G-d, where's an anvil when you need one...
  • Ooooo! Biden's saying what I just said! Well, not literally, but he's going after the "maverick" thing. Good. About time.
  • "Up there in Alaska..." see? See how much of an outsider I am? We do things differently up there! Yeah. Whatever.
  • Can someone help me verify Palin's claim to have appointed across party lines?
  • Second time Biden's called this the most important election of our lives. He may be right, at least, for anyone who couldn't vote in 1932.
  • Post-debate, they talk privately, off-mic. Looks amicable, probably even was. This was the first time they met.
  • Baby! Within minutes off the stage, she's got her baby in her arms. Almost certainly genuine, but also just looks good.

Calm before the storm? Also, the VP debate.

[Update: While I doubt that anyone interested in the debate was relying on me to get the time of it, I want to correct myself for the record: the debate began at 2100ET, 2000CT].

It's been a quiet news day today, especially compared to the rest of this week so far. The House Rules Committee is debating the Senate version of the bailout bill right now. There was some thought that it might come to the floor tonight, but I'll be surprised if it does. The House leadership doesn't need to be be humiliated twice in one week; they'll wait until they're absolutely certain they have the votes to pass it. If that means another day or two of hearings, then hearings there shall be.

The market sank a bit more today, uncertain as to the outcome. My guess is you'll see some uptick in the morning from bargain hunters, and which way it goes after that will depend on whether and how the House votes. If it doesn't look like the House is going to vote tomorrow at all, I would expect the market to drop quite a bit before the closing bell.


Before we continue, in case there are any strangers tuning in (and that'd be nice, but I don't really expect it, yet), let me be clear about my politics. I don't belong to any party; I loathe them all equally as perversions of both democratic and republican (small d and small r) principles.

If the Republican Party were running a candidate that didn't scare the hell out of me, I would consider voting for him or her. But they're not. The previous two elections, I sat back and mostly just watched, cynically convinced it didn't matter who won. The last eight years have proven me very, very wrong.

And so, while I have misgivings about him, I am, and have been since the primaries, a vocal proponent of Obama's candidacy. Of the candidates who came out this time around, I think he's got the best balance in his politics and in his abilities. I think, by far, he will do more to rehabilitate the US's standing in the world than the continued ham-fisted neoconservatism McCain carries with him.

Moving right along...


The one and only debate between the candidates for Vice President is tonight at 2000ET. At one point I was thinking of making a point to watch it in real time, but right now I'm thinking I'll try to catch a feed later.

I'm a little bit worried about this debate. As another of my friends has pointed out, I'm not really sure Biden can win. That sounds absurd, I know, given whom he's debating, but in this case, the definition of "win" has nothing to do with "make his points more strongly, more coherently, and more persuasively." The definition of "win" is, "Come out not looking like a complete jerk while still managing to highlight the fact that Palin is a bad choice, and by extension that the man who chose her shouldn't be trusted."

That's a delicate balancing act, and Biden's many sterling qualities do not really include delicacy.

Biden's best possible strategy (and this is damned easy for me to say, I know, 'cos I'm never going to have to go before the cameras and face this sort of thing) will be to avoid engagement. Indeed, my understanding of the rules is that this "debate" is going to be more like a parallel interview, where they're not supposed to engage one another. This in direct contrast to the previous debate, where Obama and McCain were supposed to talk to each other, but mostly talked to the audience. Palin has already demonstrated that she doesn't really need to be debating someone to dig herself a hole when answering tough questions.

Palin is playing on one of the deepest-seated populist myths: that in a country where any citizen is permitted to become president or vice-president, any citizen, no matter how "Joe six-pack", is qualified. In a world where justice and fairness prevailed, John McCain would be automatically disqualified from continuing his campaign for allowing himself to be associated with the arrant hypocrisy of, on the one hand, allowing his VP choice to spout such rubbish, and on the other hand, insisting that Obama is unqualified.

Unfortunately, this myth is one that persists throughout the electorate. Bill Clinton, one of the most intelligent men in politics, got elected, not for his intelligence, but because he's capable of coming across like one of the guys. George W. Bush, one of the least intelligent men in politics, got elected for the same reason. More to the point, Al Gore and John Kerry lost to W because they don't.

Obama is in real danger here, because while his eloquence has become almost proverbial, he has a bad habit of sounding like he's lecturing a classroom. Granted, he's a very passionate lecturer, but lectures don't play well at barbecues. It's the beer and barbecue crowd that propelled Clinton and Bush both to office, and that, as much as toward the women's vote, is where McCain is cynically aiming with Palin.

01 October 2008

Short Take: Senate Passes Bailout 74-25

The Senate has passed the bailout bill, as amended, 74-25 with one absence (Senator Kennedy).

The revised bill contains a number of provisions pretty much designed to suckerconvince naysayers in the House to vote for it. The actual bailout provisions are almost unchanged, but the following sweeteners have been added:
  • Authorize the FDIC to insure depositors for up to $250,000 per institution, rather than $100,000.
  • Patch the provisions of the Alternative Minimum Tax to allow for the drift of inflation.
  • Extend various tax breaks that were set to expire soon.
  • Enact new tax breaks, including credits for the use of renewable energy.
  • Provide virtually no new revenue or spending cuts to offset any of it.
The new bill is 4 times as voluminous in its language and basically filled with the sorts of things that never would have made it to the floor a week ago, because the committees kept wrangling over offsets and the like. Now, they're the most golden of golden carrots dangled in front of House members eager to get home and start fighting to keep their seats.

I will be shocked almost-but-not-quite-speechless if anything like the 218 former naysayers retain the courage to vote no in the face of such temptation.

Credit Frostbite: Government Spending

Because some writers talk of a "credit freeze", I in turn like to talk about "credit frostbite"--the damage done by the freeze.

Today, the New York Times has an article on how the freeze is affecting city spending.

Cities and states are good examples, you see, of a business that relies heavily on borrowing to do its day-to-day work. A road needs paving? Let's sell bonds to raise the cash. New park? Sell bonds. This sort of thing allows a government to work around its tax budget for a given year to get things done that seem to need doing. It's also a good way to finance longer-term projects. You know (or at least hope) you're going to get the tax revenue for it, but the contractors want to be paid now. So you float a bond, pay your contractors, and pay the bond off with property taxes, rather than paying for the project with taxes directly.

So far, so good. But now, there are two concurrent problems:
  1. Property values are still slumping, taking property tax revenues with them. The first-order cause we all know about: the sub-prime debacle causing massive foreclosure and otherwise a sudden glut of available housing. There's now a second-order cause, however, at least in big financial-center cities like New York, which is that, as financial institutions fail and consolidate, jobs are eilminated, and commercial real-estate needs dry up. 
  2. The bond market is sluggish to stopped, along with most other debt-related markets. It's virtually impossible for even a well-rated city to float a bond issue right now to raise cash.
Results? Some projects that have been in the queue for years, confidently waiting their turn, are simply not happening. The Times article, for example, cites a new emergency room project in Billings, Montana, and a highway project in Maine.  

These should have been easy targets to raise money to construct, but the bond market is hibernating.

New York City just tried to kick the bond market in the pants by offering higher rates of return on its bonds, but that option isn't necessarily open to everyone, and wasn't entirely successful--the bond issue didn't sell out. A small town may simply not feel it has the revenue to support a higher rate of return, especially with revenues slumping.

So: credit frostbite has claimed the bond market, claimed the projects that could only be funded on the bond market, and will almost certainly start claiming the jobs associated with those projects that will now not happen.

Could it all just be a matter of words?

One thing you may hear quite a bit about in today's coverage is the phrases "marking to market" and "fair value", and how that may really be the root cause of the Financial Meltdown of 2008. Indeed, the Senate version of the "rescue" bill that will be debated and voted on tonight includes a "magic wand" provision allowing the SEC to waive the "fair value" requirement for certain types of assets, and that's likely to be a point of contention.

The theory behind marking to market is so simple and so common-sensical that you might wonder what the fuss is about. It says that, at any given point in time, the assets on one's books have to be valued at then-current fair market value. So, if you have a house, you value the house at what you could sell it for at the moment you're asked, "What's it worth". Seems simple, right?

One problem, however, is that marking to market can be abused in a situation where you have an asset that has no obvious "market value", because there is no day-to-day market, or because the asset is complex enough to have no intrinsic, obvious value. Enron used this to their advantage and used a "mark to model" standard that of course could be manipulated by manipluating the model.

Out of that scandal came a set of rules defining "fair value". This defines a hierarchy of markets and market-like data sources that were to be used in assessing mark-to-market value.

This leads us to our other problem: if an asset becomes "toxic", like mortgage-backed securities have become, there ceases to be a market at all. Under the "fair value" rules, if there is no market at all, then the assets essentially have no value at all, even though that's not strictly true. Even with housing values having crashed, one could foreclose a house, fulfill at least part of the mortgage with the foreclosure proceeds, and thus provide value to the securities. But since nobody right now wants to buy them, they're considered valueless.

And so, many economists are now arguing that the entire crisis basically comes down to a mistake in accounting rules, and that simply changing the rule might eliminate the crisis without spending an additional penny of taxpayer money.

So, as I said, the Senate version of the rescue bill will apparently include a provision that will allow the SEC to wave a magic wand and waive the "fair value" rule on a selective basis. It will also direct the SEC and other agencies to conduct a thorough study of both "mark to market" and "fair value" rules.