Signs of Real Change?

Though they have moderated slightly, political polls of the past few weeks have shown a clear shift in favor of Barak Obama. This, coupled with a general tilt toward Democratic congressional candidates that has never been in doubt this election, has resulted in predictions about the historic nature of this election and the depth and duration of the change it could bring to the nation. For the most part I believe these pronouncements have been overblown; designed more to sell papers or advertisements than to make a thoughtful prediction about what could be in store for the country. Two recent items, however, have caused me to rethink the idea that a sweeping Democratic victory in this particular election does not represent a real and lasting change in the electorate.

First, there was the recent decision by the Connecticut Supreme Court making it the third state to legalize gay marriage. In past elections, similar court decisions have been a call to those opposing such unions to speak out, organize, rally, and generally affect the outcome of an election. Whether you agree that gay marriage should be legal or not is not the point here. This is an issue that has in the recent past mobilized a large section of the electorate in a highly visible way. It is clearly unable to do so this time around. Perhaps it is possible that the issue of gay marriage is really only a second-tier issue to what have been referred to as values-voters. That this time, the magnitude of the financial crisis has simply swamped this issue and deprived it of needed political oxygen.

The second item that caused me to reconsider though, deals with abortion. This is an issue that is absolutely foundational to those that care about it and I don't believe that any amount of financial turmoil could diminish it (perhaps this could occur, but the financial situation would have to approach cataclysmic proportions, a point we are not even close to yet). The item that struck me came up in the third Presidential debate. In response to a question about whether or not Roe v. Wade should be overturned, Obama said the following:

And it is true that this is going to be, I think, one of the most consequential decisions of the next president. It is very likely that one of us will be making at least one and probably more than one appointments and Roe versus Wade probably hangs in the balance.

Calling this throwing down the gauntlet doesn't do it justice. Not long ago it would have been nearly unbelievable that a major party candidate would present the choice in such stark terms to a national audience of millions with the election on the line. This type of language was reserved for the base and then tempered for consumption by those illusive voters in the middle during the larger national campaign. I am not sure it could have been any more clear if he had said that his administration would work to make unrestricted abortion a permanent part of the law of the land, and I am not sure it would change anything even if he had.

Neither of these items seem to have generated any new support for McCain. They have not awoken any slumbering portions of the public that see these as a clear and present danger, the way these issues have resounded in the past.

Several years ago author Thomas Frank wrote a book called What's the Matter with Kansas. His thesis was that the Republican party gets middle-income Americans to vote against their own economic interests by placating them with promises to address moral issues. Promises that then go largely unfulfilled, leaving the average voter worse off economically and with nothing to show for it. His analysis was wrong for the simple fact that unless you are a member of the Karl Marx fan club, it is not at all clear why economic concerns should trump all others. He was correct, however, that the Republican party's work on cultural issues has amounted to almost all talk.

The fact that the issues of abortion and gay marriage, which have been at the fore of the debates about culture over the past several elections, are failing to have any meaningful affect on this election might be a sign that voters have actually come around to Franks' way of thinking after all. Perhaps American voters have decided to cast their lot with whomever they think can deliver when it comes to their wallets. We can debate which party that might be, but the fact that economic concerns, above all else, appear to be driving voting decisions this time around, may be evidence of a real shift in the attitude of voters.

Think Global, Act National

The latest White House response to the continuing financial crisis is the direct investment in our nation's banks by the federal government. Secretary Paulson's statement announcing this new step reads like the forced apology of a child to its sibling after some serious arm twisting by Mom and Dad. I don't think he literally clenched his teeth during the entire announcement, but it is fair to say it was characterized by a hostility that was only thinly veiled.

I wouldn't presume to know the Secretary's personal feelings toward the move beyond those he made explicit, but it wouldn't be unreasonable to surmise that at least some portion of the administration's resentment toward this step is due to the reaction it will generate in Europe. Direct government investment in banks was Europe's answer to the financial crisis and one that they announced and then quickly began to implement. Today's announcement signals that the New World is following Old Europe's lead and parties on both sides of the Atlantic seem to agree that we had no choice.

As Europe moved toward propping up their banking sector and guaranteeing more deposits, the US was left with no choice but to keep pace or risk the flight of capital. Just as the perceived Missile Gap of the Cold War was unacceptable to US policymakers, we couldn't have allowed a Bank Confidence Gap to force investors to leave the US markets for what was perceived as the safer European sector.

After 7 1/2 years of thumbing its nose at Europe and making unilateral action the basis of our foreign policy, the Europeans have forced the Bush administration to act multilaterally. And for that, undoubtedly, they will enjoy no small amount of glee. This, of course, will be dampened by the weight of their own financial crises, but it will be real nonetheless.

Taking pleasure in the pain of others is known as schadenfreude. This was in evidence not long ago as the crisis began to seriously affect the US, but hadn't yet hit Europe. Several European governments touted their stricter domestic regulatory scheme as a defense against what was ailing the US. As it happened, their domestic regulation didn't prevent European banks from making the same bad bets on US mortgages that our institutions did. In short order the Europeans were facing the same realities that we were and the schadenfreude largely vanished. The US now aping the European response to the crisis should go a long way toward bringing this back.

It's probably only cold comfort for the President, but today he is able to engage in at least a little bit of schadenfreude of his own. He signed into law new legislation that creates an intellectual property czar and aims to help stop the piracy of music and movies among other things. This means the President Hollywood Loves To Hate is making it the law of the land that we help every celebrity from the A to Z list collect royalties from their latest cinematic achievement (be it dubious or Oscar-worthy, or both). Since our tax dollars will be going to help stop a DVD piracy ring in China from flooding the market with illegal copies of Oceans 24 or Sister Act 7, George Clooney and Whoopi Goldberg can spend all their time complaining about the government. I think the least Barbara Streisand could do would be to hold a fundraiser for the Geroge W. Bush Presidential Library. Well Babs, how 'bout it?

Thirsting for a Glass of Rum Punch

Disclaimer: Warning! This post contains negative comments about some current and former members of the Bush administration. My criticism of their clearly demonstrated ineptitude should in no way be taken to mean that I am even considering voting for the current nominee of the democrat party. Politics is not an either/or proposition. I hate the fact that I even have to say this, but there it is.

With the financial crisis taking new twists and turns everyday, our economy seems more like a mass casualty drill than the collective commercial enterprise of the wealthiest nation in human history.

Yesterday, Federal Reserve Chairman Ben Bernanke was heard to shout "Charge to 200. Clear!" then he unleashed his latest version of the monetary defibrillator and announced the Fed would start buying commercial paper. These are those short term unsecured loans that many companies use to finance day to day operations. It is hoped that this will help to increase lending and get money flowing throughout the economy again. Many are hopeful it will help, but let's face it Bernanke is no George Clooney.

Bernanke's curious partner in all of this is of course, Treasury Secretary Henry Paulson. It's widely reported that Paulson made his name, and his fortune, at Goldman Sachs. His real break came when he starred in American Gothic:
The reality of it is both of these men seem deliberative, intelligent and thoughtful. What has been lacking up to this point has been a clear vision and the necessary communication skillsto lead an enormous and unwieldy country out of the economic wilderness. Hopefully they are up to the task, but that remains to be seen.

The sober tone of their now common public pronouncements have me longing for the days when Don Rumsfeld ruled a podium at the Pentagon as if it were the turret of a castle. Every attempt to scale its wall with pesky questions was repulsed with his own rhetorical versions of boiling pitch poured out on the invaders with press credentials gathered below. You have to love bits like this (please ignore the slide at the very end):



One of my all time favorites though, has to be the Vases Of Iraq bit. Here is the quote from the Guardian newspapers website:

"The images you are seeing on television you are seeing over, and over, and over, and it's the same picture of some person walking out of some building with a vase, and you see it 20 times, and you think, 'My goodness, were there that many vases? Is it possible that there were that many vases in the whole country?' "

Just think if he was at Treasury now:
...it was just one CEO walking out of some NY headquarters and you see it 20 times, were there that many golden parachutes....
...it was just one bailout and you are seeing it over, and over, and over. Is it possible there were that many credit default swaps...
...my goodness, were there that many subprime mortgages...

I'm actually surprised Cheney hasn't emerged to announce that what we are witnessing are the "last throes of the crisis" and there are "nothing left but a few dead-enders". Perhaps Paul Wolfowitz could predict the ability of the financial sector to fund its own recovery.

On second thought, maybe we should just take our chances with stoic Hank and gentle Ben and leave verbal sparring with reporters the coaches of the NFL (click here!).

DIY Campaigin Ad

I had heard the Obama campaign had a tremendous coordinated effort all over the country, but when I saw this it looked like targeted campaigning had reached a new level:


Who knew men in their mid-thirties who drive Buicks, brown-bag it to work, make just enough on one salary to support their family of 8, don't have cable, are pro-life, pro-gun, and pro-universal healthcare, listen to NPR, and read Pat Buchanan's books would be the much sought after swing demographic of '08 just like the soccer moms of the past.

It turned out that it wasn't a campaign, but my own in-house political saboteur that did this. It's not that convincing when you look at it closely, but at first glance it sure looked real.

Til Debt Do Us Part

One of the most often repeated responses to the current financial crisis goes something to the effect of why can't people just stop borrowing like there's no tomorrow and live within their means. This is a response that I am inclined to agree with. Often, however, this principle of sound household management is then applied to business, which is a mistake. The fact of the matter is that not all debt is created equal.

Most would agree that no debt should be incurred unless there is a reasonable expectation that it can be repaid. This is a standard that can be applied to both individuals and businesses. Implicit in the judgement as to whether or not a debt can be repaid are assumptions about future prices and income. In both the short and long run, these types of predictions are difficult to make with much certainty. Given this, it is prudent to always tend toward the conservative side when making forecasts about future prices and income.

Clearly, this was not happening in the mortgage markets. This fact is at the heart of the problem and we are all suffering for it. The thousands of small, individual decision made about lending over the last several years have brought us to this point. Some previous economic theorists have espoused the notion that private vices breed public virtue. That is to say, individuals serving their own self-interest in pursuing profit, will increase the material well being of all by increasing total economic output. I am not sure the current crisis totally discredits this notion, but it certainly gives one pause. In it we have a demonstrated cases where individuals, making decisions in their own interest, have actually subtracted not added to the total economic activity. In fact, individuals have traded personal, short term gains for the well being of the whole. Certainly somewhere there was a mortgage lender, investment banker, CEO, etc. who thought I can do this because it is just one little loan, but if everyone did this it wouldn't work. Well, apparently everyone was doing it.

The consequences of the course pursued in mortgage lending are broadly distributed and visible to most, even if the causes of what is happening are less so. An understandable response to irresponsible lending is to clamp down on lending. The problem lies in the possibility of this restriction of lending going too far. Resulting in a situation where no bad loans are made and no good ones either. This situation will only worsen our economic circumstances, not improve them.

Credit Where Credit is Due
In any society there are going to be people who, for whatever reason, have a substantial amount of financial resources. There will also be those people or groups of people that have ideas & know how. These could be ideas about a new product or service or a better way of doing something. These ideas could be as simple as recognizing an un-served market (nothing groundbreaking there, just realizing there are some people willing to buy something that no one is selling them). In almost every case though, it takes money to put these ideas into action.

A market based system relies on the ability of the people with the ideas to borrow from the people that have money. Without this mechanism, only those that have financial resources to start with would ever be able to put their ideas into action. It's not hard to see how this situation will lead to a less than favorable outcome. Even without central planning, an economy run in this manner may end up looking like that of the Soviet Union - never enough of what people want and need. Additionally, an economy run like this is in direct opposition to a core American value. Namely, a value that recognizes that good ideas can come from anywhere, not simply from those with money.

The danger with a credit contraction then, is that the people with the good ideas, those that will be profitable and add to economic growth, won't get the money they need to put their ideas to work. This is a situation that affects the start of new businesses and the growth of existing ones. It is by and large, a long-term phenomenon though. Every business venture that doesn't start today, won't affect today's economy, but these missing economic players will affect the economy of tomorrow. There is another side to the credit crunch, one with more immediate impact.

Some of the reporting on the economic crisis has included the information that it was the state of the short term credit markets that convinced the Treasury and the Federal Reserve that they had to act. This short term credit market is where businesses can access money to meet immediate cash needs. This is a market that has functioned very well in the past, was very liquid, and was seen as very safe since defaults on these short term loans were relatively rare.

But why should businesses need short term loans, don't they have enough money to pay their bills? The short answer here has to do with the lag between the time businesses make something and the time it takes to get paid for it. A simple example would be a firm that manufactures some item. The firm receives an order for its goods, buys the raw materials, completes the manufacturing process, then collects payment for the goods. This is not an instantaneous process. In most cases, the raw material supplier and the workers that perform the manufacturing demand payment before the firm is paid. Even Wal-Mart has to buy the merchandise they put on the shelves (and pay the people to put it there) before you go to the store and buy it.

But why can't the firm just put away cash during those periods where payment from their customers exceeds debits from suppliers and workers? They can, and some do. Every business has to make decisions about its cash holdings. Some firms also realize that cash is another product that they have to sell. That is to say, if they have more than they need, they can lend it to businesses in need of cash and make a profit. This is where those short term credit markets come in. Businesses turn to these markets to let their excess cash turn a profit and to borrow cash for those short-term periods where costs have been incurred, but payment from customers just hasn't been received yet. If over the long run, the payments received from customers are not enough to pay back the short term borrowing and secure a profit for the firm's owners, the firm will cease to be in business. But the fact that the firm has to do short-term borrowing during the course of business, is no reason to think that the firm shouldn't exist at all.

No doubt there are many businesses of all sizes out there that do not need to turn to these short-term credit markets ever. But for those that do, these markets provide a valuable resource and contribute substantially to overall economic production.

If these credit markets, both short and long term cease to extend credit to people and businesses with good ideas the economy will suffer, which means that ultimately, people will suffer.

A Debt in the Family
This defense of debt in the business community should not be used to defend household debt. Within the restrictions noted above (reasonable expectation of repayment, conservative estimates about the future) households should be able to incur some debt. What we have seen over the last few years though, doesn't come close to meeting these restrictions.

Entering into adjustable rate mortgages whose payments exceed monthly income, wiping out all (and in some cases more than existed) home equity, and an addiction to credit card usage. These are just some of the despicable and dangerous behaviors that US households have engaged in over the last few years. Let's face it, putting your home up as collateral on a loan to buy a plasma television, botox, or a trip to Disney World is so stupid it approaches criminality. And this is exactly what many of our fellow Americans have done. These actions are not sustainable and it would appear the bill has come due. While I hope that thrift will once again be a trait both demonstrated and imitated by households throughout the county, I am not convinced we are on the verge of this becoming a reality.

Before any change in the way US consumers use credit can take place, individual people and households have to recognize and accept their role in this crisis. I don't believe this recognition will ever take place as long as leaders refuse to confront people with their individual responsibility and instead offer alternative explanations for the crisis. Unsurprisingly, this refusal to tell it straight affects people throughout the political spectrum. Sadly, if individuals cannot come to grips with their own role in this, meaningful and valuable reform to address the problems in the financial sector and the economy as a whole cannot and will not take place.

This discussion has focused on households and businesses. The government obviously has a role to play in coming to terms with its own attitude toward debt. But in the midst of this crisis, it would seem that the correction of this problem requires the immediate attention to be paid to households and businesses, that is, individual Americans. Only when we put our own houses in order, will we be able to put our national house in order.

On Second Thought

Now that the House has reversed course and the bailout legislation has become law, we will get to see just how much the federal government is able to impact the economy. There seems to be a broad consensus that things are going to get worse before they get better, but how bad and for how long no one knows. No doubt the next months and years will bring forth many accounts of how we got here from there, similar to what happened in the wake of Enron, only a much larger scale.

Why Did We Need To Do Anything?

Much of the coverage of the economic news over the last few weeks has focused on individual firms (Lehman, AIG) or on a stock index like the Dow. While these make for better narrative in news coverage, they are not the reason federal action was necessary. Largely buried in the news were references to the status of credit markets. These references usually included words like crunch, squeeze, tightening, or freeze. These descriptions are in contrast to the normal state of affairs in which credit markets are generally very liquid.

It it easy to think that what happens in the credit markets doesn't impact the average person unless they are in the market for a house or a car right now. But these markets, where money moves from where it isn't needed to where it is needed, is central to the functioning of the economy as a whole. When these markets are discussed, they are often compared to blood or grease - something that keeps systems moving. The latest turmoil has inspired many comparisons to the Great Depression, so it is useful to look at that period in history to see just how important credit is to the economy. Historian Niall Ferguson, writing on Time.com, invokes Milton Friedman on this point:

Yet the underlying cause of the Great Depression — as Milton Friedman and Anna Jacobson Schwartz argued in their seminal book A Monetary History of the United States: 1867-1960, published in 1963 — was not the stock-market crash but a "great contraction" of credit due to an epidemic of bank failures.

Given this, it's hard to see how the federal government could not act.

Shelly says my extreme ideology should only be taken in small doses, so I will stop there.

Up next: Why can't we just stop borrowing and live within our means?

Something Fishy

I was talking to a coworker recently when the conversation turned toward last night's supper. It turned out that he had had fish sticks. The way that he said it though was almost confessional. It was like he was apologizing or thinking longingly of some ideal supper that he missed out on for a few oblong battered fish pieces.

Admittedly, whenever I hear that we are going to have fish sticks it seems like I regress to about age 5. I have a tendency to whine and stamp my foot. But the funny thing is, once we sit down and eat them I always enjoy them. The anticipation of the fish sticks is far worse than the actual fish stick experience!

I am not sure what this little nugget (or fillet, if you will) of insight might mean for the rest of life as a whole, but I am pretty sure there is something there. Heck, some smart TV guy could probably get an entire Hallmark Sunday Night Movie out of it, or at least a Lifetime network movie. Does anybody know if the Mom from Family Ties is still working?

Veepstakes

On this eve of the vice-presidential debate, it is appropriate to consider the office and its place in our government. The particulars on each of the candidates have been well documented, but the influence of the job itself, not so much.

This is a job that no one stoops to lobby for (at least publicly). Historians also tell us that VP candidates rarely affect the outcome of elections. John McCain is on the record with his disdain for the job, and Barak Obama bypassed the job without mention. So why should it even matter to us?

The short answer is that it remains a lever of power that voters can wield over a president, even one who has been elected to a second and final term. The fact of the matter is, under our system one of the ways that the people wield power is through their vote. We elect representatives empowered to conduct the national business on our behalf. Some of these are bound by more local, particular, interests and have to be re-elected at frequent intervals. While other representatives have a wider area of concern and have longer terms.

Presidents obviously fall into the latter category, but they still have to be elected. As such, they are forced to respond to the desires of voters. This power is largely diminished in a second term. Second-term president's cannot be re-elected and with this comes a large degree of freedom from the will of the people. Second-term presidents however, do typically look to the future and their legacy. Often, the work of securing this legacy is wrapped up in having an anointed successor elected to the presidency.

When the vice-presidency is occupied by an individual with no reasonable hope of ascending to the top job, there is no voice inside the White House that depends on public approval for continued political viability. Loosed from these bonds of political concern, presidents are then left to succeed or fail strictly on their own. This is a major lesson of the Bush/Cheney era. A lesson that is certainly among the most painful of the last eight years.

Had Cheney had any presidential ambitions of his own I can only imagine how different the handling of Iraq, Katrina, & the economy would have been.

One might wonder if it has to be the vice president though. Couldn't a President secure a legacy with another successor? Again, G.W. Bush would seem to be the case study. His brother Jeb clearly had an eye on the presidency, but this wasn't enough to avoid the succession of blunders of the last several years. Before we chalk this up to a Republican-only phenomenon, keep in mind that the combined political aspirations of Al Gore and Hillary Clinton couldn't (and, apparently, still can't) keep Bill in check.

Unfortunately, this is a lesson that seems completely lost on both of the current presidential candidates and one which may have to be learned all over again.