Times' Endorsements Past

I was looking back at NY Times editorial endorsements from past elections, and I came across ones from 1940 and 1944. It was interesting, because they actually backed Wilkie in '40 but returned to Roosevelt in '44. The main reasoning was that the Democrats foreign policy was better in latter contest. In these two short editorials, one can learn about the agenda of Roosevelt. The paper essentially faulted the president for taking too much control over the economy, advocating deficit spending, and acting imperial (the court packing plan, "purges" of moderate Democrats, etc.). Nevertheless, these editorials made me feel that a) if Roosevelt would have been allowed to do what he really wanted, this country would have been better, and b) if Roosevelt wouldn't have died in 1945, most of his agenda would have been passed. We could have ended up with a country that strived for full employment, national health care, and guaranteed housing. It seems likely that if Roosevelt didn't attempt the Supreme Court power grab in 1937 (which undermined his domestic agenda for good, because it raised the specter of abuse of power) and managed to hang on until 1948, he could have passed most of his Second Bill of Rights. Unfortunately, when he died, his cult of personality died with him. Truman could not fill the vacuum, and a large part of the reason that the Democrats got wiped out in 1946 was a mixture of public dislike of Truman and poor labor-related decisions he made.

This led me to look more critically at Truman's record, and, in fact, it's awful. He dropped the Bomb(s). He recognized Israel without conditions. He twice try seizure, nationalization, and forced enlistment to end strikes. He stoked the flames of the Cold War in '45-'46. All four of his Supreme Court choices were awful, and they decidedly moved the Court to the right and ruined any attempt to solidify a left-leaning majority. (It took Eisenhower's ironic picks of Warren and Brennan to do that.*) His main (and perhaps only) significant domestic contributions were the Housing Act, which has had a mixed legacy, and some civil rights legislation, which was admittedly quite significant. In general, however, his presidency was a failure. The fact that historians have reassessed it positively makes me fear that something like this could eventually happen to Bush's.

What are the implications of this window into the past? It made me realize that the popularity of the president is important. Roosevelt's popularity sustained the Democrats not only in elections, but in the passage of legislation. The same perhaps could have been said of Johnson in 1964-66, following the Kennedy assassination. But the poor popularity of Cater and Clinton (during his first two years) damaged the Democratic party and the respective presidencies. If Obama wins, he will need to keep his popularity high in order to maintain a Democratic majority and allow his policy initiatives to be passed. With these conditions, it's possible the dams could burst and we could finally get Roosevelt's Second Bill of Rights and Truman's Fair Deal passed in full. And it will have taken only 60 years.

One final thing about the Democratic party: There has only been a few periods in the last 100 years in which substantial domestic changes have been passed by the Democrats.

1913-1916
1933-1938
1964-1966
1993

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*A few facts about the Court. The last time that it had a clear 5-4 liberal majority was between the years of 1956-1969. Those were the only 13 years of the entire 20th Century (and arguably the history of the Republic) that this happened. Additionally, it has been 55 years since the Court had a Democratic-appointed Chief Justice. Imagine what the country would have been like if we had something like the Warren Court for the last forty years. Gay marriage probably would have been made legal a decade ago, and gun bans would have been upheld. Instead, the Court today teeters between center-right and full-blown reactionary.

Liberal Laundry List

This is adapted from recent writings by others about what a Democratic majority could bring:

Universal healthcare (perhapsmoving toward single-payer)
Re-regulation of finance, industry, and communications
More power for unions ("card check"; repeal of Taft-Hartley)
Tax increases for top 2% earners
Elimination of payroll tax cap

Doubling of capital gain tax
Regulation of the environment though carbon taxes or cap-and-trade
Increased fuel and clean energy standards
Same-day voter registration
DC representative in Congress

Elimination of No Child Left Behind (or, at least, its flaws)
Loosening of consumer bankruptcy / credit laws
Closing of Guantanamo
Due process for detainees
Net Neutrality

(and, of course)

An End to the War in Iraq

Worst Week Ever

From the open on Monday until the end of trading on Friday, the Dow fell 18.15%, making it either the worse week ever or the second worse. It is worthy of the title crash. (Most foreign markets did worse, between 20 and 25%)

It all depends on how one measures it. If five days are considered a week, then it is not the worse five days ever for the Dow. From Tuesday, July 18, 1933, to Saturday, July 22, 1933, the Dow dropped 18.33%. If this week is compared with any other Monday-Friday or Monday-Saturday, it is the worst week for the Dow ever. I heard on a web video, however, that for the S&P 500, that same week in 1933 was slightly worse than this week. However you look it at, it was really bad.

How does the generally trend over the past 11 months compare with other bear markets?

http://www.nytimes.com/interactive/2008/10/11/business/20081011_BEAR_MARKETS.html

Also, try this on the five year setting (pretty scary looking):

Yahoo chart

Let's Wait for Bottom (Even If It's Zero)

Recently, there has been a growing chorus of right-wing/libertarian investors who suggest that we stop all this government involvement and just the let the market find the bottom (which I say is 0). Once it reaches this bottom, they argue, things will go back to normal. Along the way, they expect mass bankruptcies, but they say that is the normal course of events.

This is the same thing that many business leaders said back in the 1930s. They were led by Treasury Secretary Andrew Mellon who famously said:

"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate … It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people …"

It's funny how things never change.

How Low Can You Go!

The limbo game continues. Most argue that the ultimate bottom is about 7500 (the low during the last recession/bear market). If it goes below that, the bottom is 0. I'm old enough to remember 4000 but not anything below that.

We're starting to see some scary echoes of the 1930s. The Republicans are stealthy and not-so-stealthy blaming minorities (black and Hispanics) for this crisis. They are scapegoating them by saying that minority quotas on mortgage lending at Fannie and Freddie (backed by Democrats) led to the subprime crisis. I hope most people understand that this is only about 5% of the whole cause, but I could explain in much greater detail.

In any case, without widespread, definitive, and radical action this weekend by all of the world's major economies, we are looking at what may be the end of capitalism. Not to be dramatic or anything.

Although my dire predictions are usually one day off, tomorrow could very well be Black Friday. (At this point, though, it's going to be the Black Week of October regardless. It may be more accurate to call it the Blood Red Week; we're on pace for a 20% drop.) But I'm sure Bernanke and Paulson know this about tomorrow as well, so I'm sure they will do something drastic in the morning. Unfortunately, they have to compete with Bush. During his pronouncements, the Dow usually loses 100-200 points.

Remember that TED Spread (of which I previously spoke): It's at 4.23.

And, right now, the Nikkei is currently down 11%.

Wall Street Is Laying Another Egg

The market went down 500 points today. This is the 8th loss of more than 350 points (or 3%) this year. The market declined nearly 20% between Oct 2007 and Sept 2008. In the past month, however, it's dropped more than 17% and looks headed for a 20% drop during a period of 30 days.

11 months since Oct 2007 peak - 20% drop

last month - additional 20% drop

That's a rapid acceleration of the crisis.

Combined with the lack of credit between banks, this decline mirrors those in the winter of 1930-31, which continued in extreme until the end of 1931. Then, bank panics riddled the country and the Dow dropped 70%. It's not going to be that bad this time. But the 40-50% decline that we are likely to witness is comparative. So far, this is the worst drop since the 1937 crash. (It will take the Dow dropping below 7500 for it to be the worse since the beginning of the Great Depression. Between Sept 1930 and July 1932, the Dow fell 81.25%, an Armageddon percentage if it were to occur today.)

The past month doesn't compare easily to 1929, because it wasn't as sudden of a purge. But the rate of loss is as bad as October of that year. In no time since then has the market fallen as quickly and consistently as it has in the past 10 days. If the speed and overall panic compares to 1929, the overall negative economic environment and the one year trend of the market decline mirrors the decrease between Sept 1930 and Sept 1931. During that period, the Dow "broke" 42%. So far this year, the market is down almost 29%. If it goes below 34%, it will become the 3rd worst year ever behind 1907 (panic year) and 1931. I'd call it a crash if the market drops below 9000 in the next week or if the market is below 8000 at the end of the year.

9000 would be 20% drop in one month

8000 would be 40% decline for the year

But that's all trivia -- empiricism lagging behind a general atmosphere of discontent.

Why I'm For the Bailout

Not as cogent of an argument as I would have liked, but here it is:

Watch any cable news network in the past two weeks and you will hear countless times that the American people are against this "bailout" package. Anecdotes about congressional offices receiving calls 300-to-1 against the bailout spring from the lips of many congressmen and commentators. One even said that half of the correspondence his office received said "no" to the bailout and the other half intoned "hell no." It's not very popular, one might gather from all of this. Of course, those who are the most worked up about the whole thing will be the ones calling. And save a few brokers and CEOs here and there, no non-lobbying constituent is going to be passionate about supporting it. There's an enthusiasm gap, and the less passionate don't make the effort to send email to CNBC at 3am. The haters, therefore, appear to outnumber the more moderate souls who perhaps believe their politicians.

We shouldn't believe them. We shouldn't even be listening to them. Instead, we should turn to the economists (who have studied past crises -- that is, a relatively small group) and also to those involved with the industry that is failing. Sure, one might say, the latter is biased by selfish concerns and the former are wrong most of the time anyway. But what if they're not wrong, and what if selfish concerns of Wall Street have some relevance to us all? The market -- and by market, I mean not only stocks, but credit and other financial instruments -- is mostly a psychological affair. What those people on Wall Street (and their brethren on Bond St. and elsewhere) believe affects what they do, which affects the way events play out. If Wall Street gets indigestion, the proverbial Main Street ends up with the hiccups. If Wall Street falls off a cliff, Main Street is pulled over the precipice.

Shouldn't the fat cats pay for their sins? Sure, they should feel some pain, but let's not burn down the place to teach them a lesson. The potential for catastrophe is clear. Modeling shows the chain of events that could precipitate a large increase in unemployment and unavailability of credit to large segments of the population, including businesses. It all stems from the failure to act. The time to punish Wall Street, to crucify them on a cross of gold, was a couple years ago, or four years before that, or in the late 1980s. Now, it's too late. We thought we were sticking it to them with Sarbanes-Oxley -- the new regulatory requirements after Enron -- but we used a pin instead of a sword. For thirty years, we could have raised taxes on not just Wall Street fat cats, but all such creatures with bursting wallets. We could have put measures in place to stop the demands for rapid increases in corporate growth, and we could have passed restrictions intended to limit CEO pay. We could have moved interest rates up earlier to prevent the explosion of free money, and we could have cracked down on abusive mortgage practices and fraudulent mortgage-takers. We could have kept Glass-Steagal in place or maintained limits on leverage for investment banks. We could have even de-emphasized home ownership while ensuring that people were able to find affordable, safe, and clean rental properties. Now, we may be able to do some or all of these things, but it won't make a difference. It's no longer about finding a remedy for past ills, it's about keeping US society afloat -- welfare for the nation, paid through Wall Street.

Why would I, as a committed leftist on economic issues, support this package intended to save capitalism? Because I don't think human misery is the right price to pay for most equally distributed resources. The ultimate and irrevocable failure of all "bailout" package proposals would ensure 10% unemployment within six months, and it would greatly damage the country. From this turmoil could spring positive changes, but it would likely also portend demagoguery from the right. We would likely see massive campaigns against immigrants, a revival of dangerous populism, and total disenchantment with the government. The likely result would be problems at home and warfare abroad, once economic decline hits developing markets. Of course, such a situation would provide an opportunity for a great leader to radically change things. I just think this scenario is a bigger gamble than $700 billion. I'm not sure I trust Obama and Biden 100%. And, even with this bailout package, the potential for wide scale change in the economy exists.

By passing a bill, panic can temporarily be averted through a program that will prevent some short-term panics. This will also give the government some breathing room and cover to pass additional, better legislation that addresses this problems more effectively. The bankruptcy laws need to be changed; they are embarrassment now. Credit practices need to be reigned in, so credit card companies don't abuse consumers under the auspices of extending credit more broadly. More than anything, the economy has to be rejiggered so that so many citizens are not dependent on pay day loans, high-interest credit cards, and home equity to pay for necessities. This could be accomplished by large scale government investment in infrastructure, energy, and public transit; control of health care costs through a national health care framework; radical changes in the tax code; and smart investment in education. For Wall Street, liquidity can be boosted by the government buying preferred shares in banks (ie. a nationalization of the banking industry). If absolutely necessary, housing could also be nationalized to a large degree. Finally, the government could abandon its support for 401(k) plans and allow citizens to pool money into secure, fixed yield retirement accounts (that is, movable pensions) used to supplement social security.

The bailout addresses the current debacle by providing massive cash infusions to the banking and financial industry (through the purchase of bad assets and equity). By doing this, confidence in these organizations will increase, averting sell-offs, downgrades, and overall panic. Of course, many institutions are not only illiquid but insolvent, so this is far from a long term solution. Relief will only last a few months at the most. Nevertheless, this plan will allow them to fail in a way that does not damage other institutions. If the financial industry is a big metal chain connecting money to individuals, then a massive institutional failure causes a single link to fall off. The chain breaks. The governments job is to provide a thread that runs through all of the links. If one link falls off, they are still connected by the thread.

It's not a perfect or even good plan by any stretch of the imagination, but the failure to act right now could be catastrophic. Let's hope that the House can pull just enough votes tomorrow morning to get it past.

The Scary Chart...

that most people have never heard of (make sure it is set to 3Y, for maximum effect)

I typically mention the stock market in my updates, but it's also important to look at the credit markets. As you may remember, banks lend to each other at rates closely related to the Fed Funds rate but, in reality, based on the whatever given banks will charge each other. The TED Spread (see scary chart link above) is the difference between the rates that banks charge each other for loans (as calculated by the LIBOR -- London Interbank Offered Rate -- the best measure of short term interest rates on bank-to-bank loans) and the yield of 3-month US Treasury bills (the best measure of short term bond rates -- bank to government loans, that is). Since banks are in the business of giving out money and getting more money back in return, they are always looking for the best place to put their money. Putting consumer and business transactions aside, is it better for banks to lend their excess money to other banks or to lend it to the US government by buying bonds? The safer it is to lend to other banks, the lower the LIBOR rate. When more risky, the rate goes higher. Conversely, when it is safe to lend to other banks, bond sales decrease, causing their yield ("interest rate") to increase. When it is unafe, everyone buys bonds and their yields approach zero in the short term. Therefore, the higher the TED Spread, the scarier the current climate. Right now, it's above 3. The historical average over the past fifty years is less than 0.5. This is what a credit crisis looks like...