This Time Will Be Different. No Really, I Mean It.

I am going to keep this short. If it runs on too long, conditions are likely to change and the opening sentences of this blog may be outpaced by conditions on the ground.

A summary of the steps taken thus far to address our economic situation would likely be incomplete since it is highly likely that right now our policymakers are concocting another financial trick play. Imagine a schoolyard football game taking place in a marble hall rather than a sand lot. A game in which the players all wear Brooks Brothers suits and the plans are drawn up by the point and click of a mouse rather than in the dirt with a stick.

Paulson and Bernanke are loath to let a week (or sometimes even a few days) go by without unveiling and trying to implement some new tactic. They appear to be doing so in response to the incessant drumbeat from most corners of the populace to do something, anything. Even the previously unflappable President-Elect Obama has entered the fray this week (most likely to his detriment, and ours).

With every new policy prescription, press release, and public comment crafted to reassure a frightened public, it has become increasingly clear to me that government most likely will never be the answer to slumping economic growth nor will it be the mechanism to prevent these same circumstances from recurring in the future.

I realize that it is beyond fashionable and nearly mandatory for all members of the political-celebrity class to denigrate deregulation and frown upon free markets, but with a little reflection it would seem this anger is really misplaced. The fact of the matter is that since the Great Depression government intervention into the economic sector has increased, not decreased.

This increased presence has taken many forms. Taxation as a percentage of income, for instance, was about 12% in 1930. In 2008, it was about 31%. These numbers come from the Tax Foundation, click here for a link to the data.

The last 80 years have also seen a proliferation of law making. It is hard to quantify since it depends on what you count as a law, but I don't think anyone believes we are actually reducing and simplifying the rules that govern the US.

Also, look at how FDR's cabinet was about half the size of George W. Bush's cabinet. With much of the increase coming from the promotion to cabinet-level of the heads of various regulatory agencies which didn't even exist under FDR.

Then there are Fannie Mae & Freddie Mac. They were chartered then regulated by the federal government. That wasn't enough to keep them out of trouble so the government stepped in to bail them out. The fact that they haven't flourished under their latest incarnation should be a surprise to no one.

We've had Hoover trying to put chickens in our pots, a New Deal, a Fair Deal, crossed into a New Frontier, and created a Great Society. We even had President Ford try to whip inflation, as if it were some sort of playground bully. (I heard he waited by the White House flagpole until 3:30, but inflation never showed.)

One can try to tar the policies of Reagan, either Bush, or even some of Clinton's as being lax regulatorily. But a case for ours being a highly unregulated economy is simply not supported by the facts. It is almost indisputable that the last 80 years have constituted an increasingly complex interventionist regime and yet we still find ourselves in a state of financial crisis.

I'm reminded that at least once, insanity has been defined as doing the same thing over and over again but expecting different results. If that definition is correct, it is clear we have gone completely insane as a nation. At this point, I'm not sure what it will take to snap us out of it.

Coming Soon: The Chevy Nostradamus

It is looking increasingly unlikely that there will be a bailout of GM or other US automakers, at least not before the new Congress is sworn in next year.

Whether or not we should bailout the Big Three is an extremely tough question, particularly in light of the amount of money we have already thrown at the financial sector. There are reasonable people making arguments on both sides of the issue. Over the weekend and into today, news coverage included many of these folks making their arguments in public.

The one thing that many of them seemed to agree upon was that what GM was experiencing was a failure of their business model. The fact that this assertion was repeated in one form or another by many different people, from various backgrounds, on diverse platforms immediately makes me suspicious. It's as if they all got together before hitting the weekend news circuit and decided on how to present the current situation, but I doubt this is the case.

More likely is that this is just another example of the way a meaningless shorthand, composed of code words, has supplanted careful reasoning in so much of our national debate. This scenario is repeated time and again where policymakers and opinion peddlers fan out for an assault on the nation's mental beaches with nothing more than a microphone and a quiver full of conventional wisdom.

For some actual data on auto sales, click here. The fact is that sales are down for automakers across the globe. Not surprising since it is also conventional wisdom that we are in a global recession. Why falling sales represent a failure of their business model for US automakers, but not so for Japanese automakers is less clear. This argument seems to rely on the 1970's paradigm of Japanese automakers being profitable, efficient, & quality focused versus US automakers being unprofitable, inefficient, & making shoddy products. I really thought this notion had been put to rest ever since the film Gung-Ho came out, but apparently its political half-life is somewhere just this side of nuclear waste.

Sometimes implicit and often explicit to the the failing business model argument is the corollary that Detroit only makes gas-guzzling SUV's and trucks, not the high fuel economy, emission free vehicles we need to respond to global warming. You'll notice in the sales data, however, that these pick up trucks are still among the top 20 sellers. I am not sure providing products that are demanded by the market constitutes a failed business model. A credible case can be made that this summer's spike in gasoline prices combined with tremendous reduction in the amount of credit available to make automobile purchases have combined to result in the current situation. The GM business model may be a failure in the current conditions, but that is because conditions have changed.

Perhaps it is the case that the Japanese, for a whole host of reasons, are better suited to adapt to the changing conditions and succeed in the future. That is not the same thing as Japan being able to predict what specific types of cars people will demand years into the future. After all, if the Japanese had been so forward-looking they wouldn't have introduced their own lines of full size pick-up trucks in the not so distant past. They did so in response to market signals and I'm reasonably sure that not responding to clear market signals would constitute a failure of one's business model.

The fact is that we could use more foresight from US automakers. But what is true for Detroit is doubly true for Washington D.C. Maybe what's good for GM is good for America after all.

Will Paulson Cover His Buick With A TARP This Winter?.......

................only if Barney Frank tells him he can.

So we heard from Secretary Paulson this week that Treasury was changing course and that the 700 billion fronted them by the Congress would no longer be used to purchase mortgage backed securities, but would instead be used to make direct investments in companies. In a related, but little reported story, the Secretary also announced that the day that comes after Monday would henceforth be referred to as 'Tuesday' and the period of time when the sun doesn't shine will be called 'night'.

Describe it as a fait accompli, de facto, or in any of the other Romance languages, it remains the case that what the Secretary announced was simply a recognition of what has already taken place.

Think back the long six weeks to when the bailout was passed by Congress. The initial plan was that Treasury would buy the now worthless mortgage backed securities from the institutions that hold them in an attempt to restore stability to the financial system. So far, none of these assets have been purchased. Instead, the substantial action to date has been direct investment in some of the nation's banks.

In fairness, the announcement wasn't entirely old hat. In describing the new course of action the Secretary indicated that investments would be made in both banks and non-banks. I'm no taxonomist, but couldn't that conceivably be everything? I mean something, anything, is either a bank or it isn't, isn't it?

Regardless, it is clear that over the last few days the calls from the Democrats have been to include General Motors in that non-bank category and that it was time for Paulson to send a check to a Detroit zip code. Now it seems it won't be that easy.

Early indications were that the Democratic leadership believed that the legislation already passed gave Treasury the authority to extend bailout cash to GM. Now we are told that the House Financial Services Committee (Chairman - Barney Frank D-Mass.) will hold hearings next week on this topic. I have seen it reported that a refusal from Secretary Paulson to bailout GM is what has forced the hearings, but I find that hard to believe. It is possible that there are members of Congress, including some Democrats, who feel they voted for a bailout of the financial sector and that now sending this money to US automakers is akin to a billion dollar bait and switch.

So now Frank will have his hearings. If they result in legislation that comes before Congress and the President we will see where the line is being drawn (at least at that particular moment). Are we at the point where AIG is still salvageable and worth saving, but GM is just too far gone to help or not worthy of help for reasons ideological or otherwise?

With the Secretaries announcement though, one thing is certain: The bailout is dead. Long live the bailout.

P.S. The fact that there is confusion about whether or not the original bailout legislation allows for direct monetary aid to US automakers raises a whole host of troubling questions about how we pass laws in this country. Chief among them, do the people that make our laws actually know what is in them? And secondly, and possibly more frighteningly, if they don't, then who does?

P.P.S. If brevity is the soul of wit, I am afraid these posts are getting increasingly soulless, or worse, witless.

The More Things Change............

In my last post, I considered the possibility that the 2008 election represented a fundamental change in the way people cast their votes. Some recent conventional wisdom held that middle and lower middle class voters we duped by the Republican party into voting against their own economic interests in return for promises to address their moral concerns (promises which went unfulfilled). I thought that there might be some evidence that this voting pattern had come to an end and that voters were ready to embrace economic concerns fully and abandon almost all others. It's clear now that I needn't have worried. Here is John Dickerson writing in Slate on Obama's victory:

People also seemed to vote against their economic self-interest, something liberal critics said only witless Republican voters did. Fully 70 percent said Obama would raise their taxes, while 60 percent said McCain would. They voted for Obama, anyway.

Apparently, voting against your own economic interest is still fashionable among the electorate of at least two of the parties (yes Virginia, there are other political parties!). We can see now that both Democratic & Republican voters consider factors other than economic ones when deciding which way to vote. But if an electorate can vote against its economic interest on two occasions, one resulting in a G. W. Bush presidency and one resulting in a Barak Obama presidency, what exactly are these other factors being considered?

With Bush, they seem to be easily identifiable and fall under the category of moral concerns. These are the same cultural issues that have been driving our politics for the last 20 years or more: abortion, gay marriage, the assault on the traditional family. Obviously, these were not the issues that drove people to vote for Obama. Also, I doubt it was a desire on the part of voters to destroy these issues once and for all that resulted in the election's outcome. While I fear Obama's commitment to provide completely unfettered access to abortion, I am not convinced that voters in Pennsylvania looked around and thought, " wow, we don't have enough abortion clinics around here, let's vote Obama."

I am willing to concede that many Obama supporters cast their ballot with a heartfelt belief that they were doing so based on moral concerns. No some of them did this with as much zeal as Bush voters did in 2004. The moral concerns for Obama voters just happen to be different ones than those that have resulted in recent Republican electoral victories. Instead of abortion and gay marriage, they can site numerous other social ills that desperately need to be addressed. Items like 40 million without health insurance, poverty, a large percentage of public schools clearly failing our children (and these in one of the richest nations on earth) all come to mind. There is, however, at least one other possibility.

Some historians have noted that elections often come down to a referendum on the current administration. It is possible, even likely I would argue, that a large portion of the Obama vote yesterday, was really a vote against George W. Bush. This is not take to diminish Obama's skills as an orator or his demonstrated thoughtfulness and grace under pressure. I don't believe that simply any Democrat could have won. But let's face it, the dissatisfaction with the current administration is deep and widespread. Perhaps voters saw their chance to punish Bush by voting for Obama.

That's exactly right you might say. Voters express their displeasure by punishing incompetence and removing it from office. What happens though, when the failing administration is no longer on the ballot? Is it possible we punish the party of the poor performer? If so, there is a very real chance that we could actually end up not choosing the best candidate just because of his party affiliation. Think about it, just because two people share a party, doesn't mean they will govern the same way. They may in fact govern in dramatically different ways. But if voters are unable or unwilling to examine candidates independently from an outgoing administration with which they are angry, they very well could end up making a bad decision. A decision that goes against their interests, economic or otherwise. Choosing a President out of spite is a horrible idea. If elections really are a referendum on the current administration, the one on Clinton got us eight years of Bush.

So perhaps voters are making decisions that go against their own interests, but not for the reasons that have been advanced so far. Not just because they are duped by the promise of addressing some long held grievance, but because they are looking for retribution. If voters that went Republican on empty promises were merely fools, what are voters, of either party, if they are motivated by vengeance?

If I am wrong about the election being a referendum on Bush, and the evidence shows that voters don't vote strictly on economic grounds, perhaps there are in fact moral concerns that drive voting decisions. It is abundantly clear and heartbreakingly sad that both of the major parties, and the majority of voters, have yet to embrace the entire slate of these issues. Preferring instead to pick and choose based on their particular taste rather than any moral or logical consistency.

In the run up to this election much has been said about Barak Obama being a transformational, or post-partisan political figure. The campaign made it perfectly clear that when it came to moral issues, Obama is not the the President to finally bridge the existing divide. That is one change for which some of us continue to wait.