Oops...

Take a peak at the Dow and match it with big headline in the news.

I've never seen anything like this -- and I've watched seven of the eight largest point drops live on CNBC. The markets closed at 4pm down 590. Now, fifteen minutes later, trades are still coming through, and the market is down 750 points. I wonder if it will keep going down. The futures (that is, estimates of tomorrow's trades) are down sharply as well. This could be the disaster than so many predicted.

Nasdaq down 10% (third worse percentage ever)
Dow down 7% (largest point drop ever)
S&P down 9% (worse since 1987 crash)

The First Debate: In Review

It's really not my place to say who won the debate, because as the McCain people would say, I'm "in the tank" for Obama. What I will do is list my disappointments:

Obama missed an opportunity to show an FDR streak on the economic crisis. He could have explained the credit meltdown to the American people and how it will effect them. With some sense of savvy, he could have done so without sounding condescending and pedantic. This would have gone a little way toward building greater popular support for something that is wildly unpopular among regular people but necessary for the health of the country. Instead, he listed his principles for the plan, which I don't think was particularly necessary. He should have explained how these principles apply to regular people, instead of just listing them. He also didn't have a good "I feel your pain" moment. I did like this, though:

And that's why it's so important, as we solve this short-term problem, that we look at some of the underlying issues that have led to wages and incomes for ordinary Americans to go down, the -- a health care system that is broken, energy policies that are not working.

Wage stagnation, a disastrous health care system, a bankrupt energy policy, lax regulation, and regressive taxation are the major failures that led to this mess. From an intellectual point of view, I like how he touched upon all of these, but I don't think he succeeded on bringing these down to ground level. The Keynesian in me would have liked him to say, in response to Lehrer's question about cutting back on priorities, "I don't have to cut back my agenda, because not only will it be paid for by cuts in waste and tax breaks, it will help to grow the economy by investing in green energy production and reducing health spending so companies can free up more money to create jobs."

On foreign policy, Obama echoed Kennedy in 1960. How did Kennedy compensate for his lack of experience compared to Nixon? He spoke continuously about how America was less safe by falling behind in the "missile gap". Although this was untrue, Kennedy's tough-on-communism stance made him a respectable choice for middle America. Obama is trying to do the same thing with the Afghanistan issue. In it, he frames McCain as being weak on terror by avoiding the real threat there. He does the same thing with the Pakistan issue, in which he says McCain coddles Pakistan's dictatorial government while al-Qaeda flourishes within its borders. On the other hand, Obama supports diplomacy with Iran and other such nations as well as a concerted effort to improve US standing in the world. His biggest weakness here is his inability to easily explain what he means by sitting down with foreign leaders without preconditions. Overall, however, much like 1960, the distance between the two candidates is not as great as it should be on foreign policy. Obama is playing to center. His tough stance against Russia is also problematic, as is his call for a buildup of troops in Afghanistan. (Don't get me started about "missile defense".) What we have to hope is that some of this is pandering rhetoric and will not be turned into policy in an Obama administration.

On the other side, McCain seemed obsessed with the earmark issue to the point that he came off more senatorial than presidential. (Five straight responses from him were about earmarks, which make up less than 2% of the budget but nearly 15% of his debate time. And this is a foreign policy debate, mind you.) He seems more comfortable in this terrain (earmarks, cost-plus bills, commissions). If I were Obama, I would have said, "John, you have a great handle on the details of the Senate, and I look forward to working with you during my administration to get things done in a bipartisan manner." McCain's consistent rebuttal to Obama's foreign policy remarks were along of the lines of "but I've been to (country) many times and Obama has not". I'm not sure this experience argument flies when Biden has been to all of those countries as well, and Palin never left the U.S. until last year. He also likes to use patriotic anecdotes about soldiers sacrificing for their country, from himself to Eisenhower to Vietnam vets to soldiers in Iraq. The underlying message is always that the Iraq occupation should not be fought in vain, and that we should stay there until we can proclaim victory. Beside earmarks, Iraq (and with it, unconditional love for General Patraeus) is McCain's chief issue. He didn't win the argument on either tonight.

One final note: McCain's rhetoric on Russia was paranoid and hinted at a further disintegration of relations with them if he becomes president.

The verdict (I lied earlier): Obama underperformed on the economic crisis issue but still managed to best John "earmark" McCain. Obama, while too hawkish, did well during the foreign policy side of the debate but wasn't perfect enough to fully match McCain. For the neutral observer, McCain had a slight edge in the second half. Obama was more likable, but McCain was more emotive. Overall, a tie, but one which benefits Obama. (Very similar to the Kennedy/Nixon debate in 1960.)


Obama

As populist:

And unless we are holding ourselves accountable day in, day out, not just when there's a crisis for folks who have power and influence and can hire lobbyists, but for the nurse, the teacher, the police officer, who, frankly, at the end of each month, they've got a little financial crisis going on.

Award for accurate tax policy analysis:

Now, John mentioned the fact that business taxes on paper are high in this country, and he's absolutely right. Here's the problem: There are so many loopholes that have been written into the tax code, oftentimes with support of Senator McCain, that we actually see our businesses pay effectively one of the lowest tax rates in the world.

Award for accurate tax policy analysis, runner up:

Just one last point I want to make, since Senator McCain talked about providing a $5,000 health credit. Now, what he doesn't tell you is that he intends to, for the first time in history, tax health benefits.

So you may end up getting a $5,000 tax credit. Here's the only problem: Your employer now has to pay taxes on the health care that you're getting from your employer. And if you end up losing your health care from your employer, you've got to go out on the open market and try to buy it.

It is not a good deal for the American people. But it's an example of this notion that the market can always solve everything and that the less regulation we have, the better off we're going to be.

Pretty Good Metaphor:

The problem with a spending freeze is you're using a hatchet where you need a scalpel. There are some programs that are very important that are under funded. I went to increase early childhood education and the notion that we should freeze that when there may be, for example, this Medicare subsidy doesn't make sense.

Maverick? What Maverick?

I just want to make this point, Jim. John, it's been your president who you said you agreed with 90 percent of the time who presided over this increase in spending. This orgy of spending and enormous deficits you voted for almost all of his budgets. So to stand here and after eight years and say that you're going to lead on controlling spending and, you know, balancing our tax cuts so that they help middle class families when over the last eight years that hasn't happened I think just is, you know, kind of hard to swallow.

Highest-polling attack:

And so John likes -- John, you like to pretend like the war started in 2007. You talk about the surge. The war started in 2003, and at the time when the war started, you said it was going to be quick and easy. You said we knew where the weapons of mass destruction were. You were wrong. You said that we were going to be greeted as liberators. You were wrong. You said that there was no history of violence between Shia and Sunni. And you were wrong.

Scary proposition for future policy:

And the problem, John, with the strategy that's been pursued was that, for 10 years, we coddled Musharraf, we alienated the Pakistani population, because we were anti-democratic. We had a 20th-century mindset that basically said, "Well, you know, he may be a dictator, but he's our dictator."

---- Does this mean that we are going to challenge the dictatorships of the Middle-East (Saudi Arabia, for example) in order to be pro-democracy and seek to get the population on our side. This would be an interesting policy.

Weird response that I really like:

Jim, let me just make a point. I've got a bracelet, too

---- I like the way that Obama mocked McCain's use of a sob story to justify his Iraq position. Risky move.

Foreign policy truth-telling:

And ironically, the single thing that has strengthened Iran over the last several years has been the war in Iraq. Iraq was Iran's mortal enemy. That was cleared away. And what we've seen over the last several years is Iran's influence grow.

Funniest line, echoing Rachel Maddow from MSNBC:

[McCain] even said the other day that he would not meet potentially with the prime minister of Spain, because he -- you know, he wasn't sure whether they were aligned with us. I mean, Spain? Spain is a NATO ally.

The juxtaposition, made clear for swing voters:

Look, over the last eight years, this administration, along with Senator McCain, have been solely focused on Iraq. That has been their priority. That has been where all our resources have gone.

In the meantime, bin Laden is still out there. He is not captured. He is not killed. Al Qaida is resurgent.

McCain

Hypocrisy?

And we have former members of Congress now residing in federal prison because of the evils of this earmarking and pork-barrel spending. You know, we spent $3 million to study the DNA of bears in Montana.

--- Sarah Palin's Alaska received a $3 million earmark to study the DNA of seals.

This is a good proposal:

I think that we have to return -- particularly in defense spending, which is the largest part of our appropriations -- we have to do away with cost-plus contracts. We now have defense systems that the costs are completely out of control.

Problem with this time-frame:

Back in 1983, when I was a brand-new United States congressman, the one -- the person I admired the most and still admire the most, Ronald Reagan, wanted to send Marines into Lebanon.

And I saw that, and I saw the situation, and I stood up, and I voted against that, because I was afraid that they couldn't make peace in a place where 300 or 400 or several hundred Marines would make a difference. Tragically, I was right: Nearly 300 Marines lost their lives in the bombing of the barracks.

--- McCain wasn't even in Congress when the vote to commit troops to Lebanon was passed. He did support ending the commitment, but this was after the bombing.

Oft-repeated line that polled poorly:

Senator Obama doesn't seem to understand....

--- If Obama's performance shows that he does, in fact, understand, then these just look like a baseless attacks. They polled poorly among independents.

Nope:

The point is that throughout history, whether it be Ronald Reagan, who wouldn't sit down with Brezhnev, Andropov or Chernenko until Gorbachev was ready with glasnost and perestroika....

---- Reagan tried to sit down with those Russian leaders (whose McCain, to his credit, named correctly and in order), but they died before he could make it happen. And he met with Gorbachev before glasnost and perestroika.

Pathetic ploy to the Republican base:

I don't even have a seal yet.

---- This is a reference to the pseudo-Presidential seal that Obama had emblazoned on his speaking podium while on the campaign trial. The right used its presence to call Obama presumptuous (read: uppity).

Tacit recognition that Bush has committed war crimes:

And we've got to -- to make sure that we have people who are trained interrogators so that we don't ever torture a prisoner ever again.

The Award for Chutzpah:

And I -- and I honestly don't believe that Senator Obama has the knowledge or experience and has made the wrong judgments in a number of areas, including his initial reaction to Russian invasion -- aggression in Georgia, to his -- you know, we've seen this stubbornness before in this administration to cling to a belief that somehow the surge has not succeeded and failing to acknowledge that he was wrong about the surge is -- shows to me that we -- that -- that we need more flexibility in a president of the United States than that.

Addendum

On what issues does Senator Obama "agree" that McCain is "right":

• more responsibility in Washington
• a reduction in wasteful earmarks
• lobbyists often push for earmarks
• business taxes -- on paper -- are high
• cuts in wasteful spending must be made
• efforts by US troops has reduced violence in Iraq
• presidents should be prudent in their use of language
• negotiations with rogue states are difficult
• we cannot tolerate a nuclear Iran*
  
• the Russia situation*
• the importance of energy independence

*McCain is actually wrong on these things

What Obama doesn't "understand"/"won't acknowledge", according to McCain:

• the difference between a tactic and a strategy
• that we are winning in Iraq*
  
• that a surge needs to be employed in Afghanistan, as it was in Iraq*
• why the surge was so successful
  
• that Pakistan was a failed state in the late-1990s*
• the adverse effect that "defeat" in Iraq will have on Afghanistan*
• that foreign leaders are trying to sucker him into sitting down with them for propaganda purposes*
• that Russia committed serious aggression against Georgia*
• that if we fail in Iraq, al-Qaeda wins*

*Obama doesn't need to understand these, because they are inaccurate

Great Depression Comparison

Many people think of the Great Depression as: stock market crashes, depression immediately ensues, with soup lines beginning in Nov '29. In fact, it took a few years for everything to play out. (I am currently looking at a chronology of 1929-1933 to get a better understanding of how things occurred.) Although 1929 was scary, 1930 saw a little bit of a recovery. It was 1931 that was the real disaster, with hundred of bank failures and contracting credit. And, while Treasury Secretary Mellon sat on his hands and talked about liquidating everything, Hoover did try to take some action Many of his measures were similar to those that we have recently proposed (ie., they were not large enough to make a big difference). It took the concerted effort of dozens of programs in the New Deal to turn things around -- at least a little.

Today, things are again playing out slowly. (If a bailout package doesn't pass, this will change. Everything will speed up, and we will see a week with a 1000 point loss for the Dow. Banks will collapse in scores. The economy will be paralyzed.) When the bailout package passes this weekend, things will slow down. The markets will likely go up for a few weeks. Then, two areas will become the concern. One, Wall Street will analyze how the bailout is working. It likely won't work as well as needed, so confidence will slowly decrease. Two, the real economy numbers (GDP, unemployment, durable goods production, houses prices, etc) will likely decline, causing worries and further decline. The economy right now is structurally unsound, so we are going to see a lot of pain. The extent of it will be a reverse function of the ingenuity of our policymakers.

What If It Doesn't Pass?

What, one might ask, would happen if they don't pass a good bailout plan? Here's a quick summary.

No one will be able to get a mortgage unless they have 780+ credit (top 10%), a large down payment, and high income
- Why? Most banks that give out mortgages will become risk-adverse, because they will not have access to easy credit from other banks (see below)
- Result: Real estate market will crash (further). Houses will not be able to sell. Prices will decline another 20% from peak value.

Small companies will not be able to get loans and credit issuers will likely decline their line of credit/credit limit
- Why? Bank will become weary of lending without collateral (but then, they won't except a house anymore, anyway) and credit issuers, stung by high defaults and low cash flow, will look to shore up their books by reducing potential liabilities
- Result: Several small businesses go bust; their employees are layed off; business investment crashes

Large companies, especially large banks, will not be able to access enough money to shore up their balance sheets.
- Why? Fear in the market causes investors to hoard cash and treasury bonds. This contracts the money supply.
- Result: This will cause investors to lose confidence, creating a self-fulfilling prophecy in which: 1) the stock price decreases; 2) the bank's commercial paper (read: bonds that companies use to raise money for operations) loses value; 3) rating agencies downgrade their rating of this paper; 4) investors sell this paper; 5) bank cannot find buyers for this paper; that is, they can't find people to lend them money for their operations; 6) their cash flow decreases to the point at which they can no longer give out loans and, eventually, allow withdrawals from accounts (ie. no ATM); 7) the bank fails. For every bank that fails, other can potentially fail, because banks lend to other banks. Eventually, if enough large banks fail, half of the banking industry could collapse.

Local banks fail.
- Why? Because they invested in larger banks, rapidly falling equity securities, or in mortgage-backed securities
- Result: This will kill small business across the country; damage local governments; create rampant unemployment; and essentially eliminate the ability of any consumer to get credit, mortgages, car loans; student loans; etc.


General results:

1) The auto industry in Detroit will completely collapse, even perhaps with government intervention, due to its ability to sell cars to the US market. (That is, consumers can't get car loans.) This will send Michigan into depression-like conditions. The US Auto industry will be unable to recover its standing in the world.
2) The banking industry in the US will be decimated. Much of it will be nationalized and in the hands of a couple large banks, like JPMorgan. At least 2-3 other large banks will likely fail. Wachovia is at the top of the list. Wells Fargo has recently become a good candidate. And Bank of America may as well, due to their recent acquisitions.
3) The shadow banking industry (hedge funds, credit default swaps, private equity) will likely collapse, destroying a trillion dollars of wealth, if not more.
4) The Dow Jones Industrial Average will sink below 7,000, representing a more than 50% decline from its Oct 2007 peak value.
5) Unemployment will top 8% by year's end and may hit double digits by April of next year.
6) The insurance industry will suffer catastrophic losses, which will damage several reinsurance companies in Europe.
7) Consumer spending will contract at rate that hasn't been witnessed since the early 1930s
8) Downward spiral ensues


Fortunately, most of this will not come to pass, because Congress will pass a good package to help prevent it. Right? Well, the package presented today is probably too vague to be successful. They need to insert more safeguards and work to ease lending between banks. If they don't do this -- or if the Republicans roadblock the plan in general -- well, see above.

Yes, yes, I know that I'm not an economist. But I spent a few hours on Friday running some numbers, doing so modeling, and analyzing data. So, here's my chain of causes, with a (knowing me) predicable conclusion. Each item is linked to its cause.

Why?

(--> = caused by)

credit freeze & stock market panic
--> the collapse of a handful of large institutions
--> institutions did not have enough cash
--> devaluation of mortgage investments owned by institution*
--> large number of defaults on sub-prime mortgages by homeowners
--> atypical lending: adjustable rate mortgages, fraudulent mortgages, and other devices*
--> (a) interest rates were too low*
--> economy was in recession following dot com crash
--> dot com bubble
--> income inequality (see below)
--> (b) people could not afford to buy houses
--> price of housing was too expensive in many markets
--> (1) workers wages were stagnant

--> excessive profit-taking (see below)
--> (2) speculation
--> income inequality / excessive saving & investment among high income people
--> excessive profit-taking / extraordinary high wages at top, stagnant at bottom
--> (1) successful new business models
--> opening of world market, tech boom, market excess, etc
--> (2) upper bracket taxes too low
--> Ronald Reagan, the Chicago school, Laffer, Howard Jarvis, and Republican in general




* these three situations were also caused by the failure of government regulation/oversight

The early 1980s tax rate cuts for high earners (and its legacy) has completed altered the course of the economy. The United States, which saw slow growth in the 1970s, traded moderation for chaotic dynamism. And at what cost! The glut of money concentrated at the top contributed to the ridiculous surge in the stock market leading up to the 1987 crash, the savings & loan crisis of the late 1980s, the dot com bubble, and the housing bubble. What happened is: when upper income people have too much money, they don't spend. They save/invest it. This is supposed to be a good thing. The result, however, is that they heavily tilt the balance in favor of demand for securities and, therefore, bid up their prices. (Additionally, in recent years, income inequality abroad has also hurt us. The foreign rich are also increasing demand for security. A large portion of the blame for this is the US's failure to move away from oil consumption.)

Not only this, such demand caused security sellers to devise new ways to attract investors in the highly competitive environment. As a result, instruments such as junk bonds (in the 1980s), unwise mortgages (in the 1980s and 2000s), mortgage securitization (2000s), and hedge funds (2000s) were developed or expanded. If one needed any evidence of the glut of money at the top, one need not look any further than the hedge funds, which have seen a ten-fold increase in the money they manage over the past five years. Bubbles occur when too much speculation occurs. Excessive speculation is caused by excessive money or access to it through loans. In the early years of this decade, we had the perfect storm: steep income inequality and extremely low interest rates (= easy access to money). Combined with the failure of government regulation, something that has been problematic for at least a decade and as many as three (one could chart this all the way back to the deregulation of banking in 1980 -- something for which we can blame the Democrats of that time), this excess of money to save or invest yielded the situation that we have to day.

At the same time, the situation for average Americans worsened as wages remained flat, prices increased (albeit slowly), and stealth inflation occurred in the widespread rise of credit fees, interest rates, (and due to speculation) house prices. Even if someone was trying to plan an economic catastrophe, I don't think they would be this successful. Ah, the invisible hand of the free market, working wonders.

How to fix it?

Stave off panic
Find a way to keep enough credit available, so business can function
(have govt buy equities stake in financial corporation that are in trouble)
then
Government should subsidize employment in the short term
Government should renegotiate mortgage terms/principle for some houses to stop excessive foreclosures
Top 0.1% tax rates should be raised above 60% (they were above 65% for all but one year between '45 and '75)
Top 1% tax rates should have a 40% floor (they never dropped below 42% until 1981)
Financial industry should be regulated (hedge funds, derivatives, credit default swaps, cap executive pay)
Financial industry should be re-regulated (reinstate Glass-Steagal, reinstate usury laws, reinstate leverage limits)

If nothing else, this crisis should be the stake through the heart of voodoo (supply-side) economics and its thirty year legacy.

Palindome: Just Another Page from the Same Playbook

The Palin-dome speech broken down:

Begin

Part 1:

Her family, her small-town-ness, her record of reform(?)

Part 2:

On the attack:

-Mocks Obama for being a "community organizer" (x 2)

-Bogeyman of big government/excessive spending mentioned (x 4)

-Washington/media elites bashed (x 3)

-Bashing Obama's campaign branding or stagecraft (x 3)

-Bashing Hollywood (x 1)

-Obama will raise your taxes (x 9)

-Attack on Obama the "author" (x 1)

-Obama = a surrender monkey/weak on terror/un-American (x 4)

-Obama condescends to real "small town people" (x 3)

Policy:

-Drill for more oil (x 3)

-Small town people are better than everyone else (x 5)

-Government/Washington needs to be "reformed" (x 4)

-She is a real, small town American (x 2)

-She opposed the Bridge to Nowhere (x 1) - inaccurate

Part 3:

John McCain is a POW war hero, so you must vote for him

The End

So, like campaigns of the past, this is about the small town/big city divide, big government, and higher taxes. It's about how the Democratic candidate is weak on national defense. It's the same playbook as 1972, the same as 1980, and the same as 2004. The sole new issue is oil and how we should drill for it in every last corner of the earth. The other issues she mentioned were vague notions of government reform (that is, government destruction) and the "war on terror". It feels like an amalgam of 2000 and 2004. McCain has been swallowed by the Bush base. He's no m-word, he's a pandering hypocrite with a smug, ignorant, and classless VP. But can they repeat Bush's success, or will Palin take the ticket down? I'm still leaning toward an Eagleton.

Palin = Eagleton

Palin is starting to look like Eagleton.

Similarities:

• She was a last-minute pick
• She was not thoroughly vetted
• She is in her mid-40s
• She has been in a major office for less than 4 years
  
• She was a desperation pick when the preferred choices were unavailable (Potential VPs did not want to be on a losing ticket in '72; today, the conservative base refused to consider Lieberman or Tom Ridge, both pro-choicers who McCain wanted)
• She has personal issues that draw headlines (pregnant daughter vs. shock therapy treatment)