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September 30, 2008

"Wall Street Vs. Main Street" Mantra Misses The Point

The bailout bill is a complicated matter. Both proponents and opponents alike have tried to simplify the discussion by reducing the issue to one-line talking points. A common theme is to frame this in terms of "Wall Street" versus "Main Street."

The characterization masks the real danger. It suggests that the risk of not acting is limited to those who deal with few financial services companies. In reality, the crisis is global in scale, as indicated by this Wall Street Journal piece (quoted by Mish):

The financial crisis makes clear how much the interests of foreign lenders have become a top concern in Washington. A big reason the Fed and Treasury stepped in to rescue mortgage giants Fannie Mae and Freddie Mac, say U.S. financial officials, was to reassure foreign leaders including China, which holds roughly $1 trillion in U.S. debt, that U.S. securities were safe. "Superpowers do not normally ask their diplomats to reassure other nations on questions of credit-worthiness," says former U.S. Treasury Secretary Lawrence Summers.

Foreign lenders have a great deal of sway. If they were to dump U.S. government debt -- or be unwilling to buy more -- the interest rates needed to attract buyers of Treasurys would soar. The already fragile U.S. economy would absorb yet another hit.
. . .
Domestically, the reliance on foreign money means a loss of autonomy that Americans are simply going to have to get used to. Part of the accommodation is already occurring. The controversy over investments by sovereign-wealth funds has been reversed. Last year, lawmakers worried the funds would gain political influence by investments in U.S. companies; now U.S. policy makers are worried that they won't buy new stakes. Efforts to erect restrictions against foreign trade may also lose momentum. The U.S. needs the world's money more than it thought it would and won't want to rile potential lenders.

Our entire system of international finance is in peril. If foreign investors lose confidence in the American economy (and dollar) and begin withholding their money, our pain is going to get a lot worse. It's imperative that the federal government act quickly to address this and shore up confidence in our capital markets; otherwise the international community will withdraw support from American institutions and we will fall into a deep recession.

September 26, 2008

Financial Crisis Reveals Bush's "Political Capital" Is Now An Illiquid Asset

Assorted musings as Washington grapples with the financial sector meltdown:

  • It's clear we have a major problem in the credit markets which requires a drastic response. Financial institutions are hoarding cash and don't even want to lend to one another. How much time does Washington have to act? That's a good question. I don't know how close we are to an outright meltdown. My gut tells me that the White House has played the panic card as a negotiating tactic--to pressure Congress to pass Treasury's proposal. I don't believe the world will collapse if a bill isn't hammered out this weekend.

    That being said, something must be done soon. And the longer negotiations drag out, the greater the chance the bill will be bogged down with clutter.


  • This episode makes one thing clear: President Bush has little, if any, clout left on Capitol Hill. Remember after the 2004 election when he boasted of his supposed "political capital"? That's now been downgraded to an illiquid asset, which the treasury may wish to repurchase at a bailout fire sale at $0.10 on the dollar.

    Bush no longer has the support of members in his own party. Had this situation occurred two or three years ago, House Republicans would have fallen in line behind the plan. But with Bush on his way out the door with a 20 something percent approval rating, many of them are pursing their own agendas.


  • Senator Corker had a local radio interview this morning in which he said that there was a bailout deal worked out at 1 p.m. yesterday. At a minimum this agreement included Senate Democrats and Republicans and House Democrats. I'm not clear to what extent House Republicans were on-board. Then, during the White House meeting which was allegedly held to facilitate a bipartisan compromise, things blew apart. According to Corker, "presidential politics" was interjected and the deal disintegrated. He would not elaborate on what happened, but I don't know how you can interpret the comment any other way than that it was directed at McCain. Senator Obama had no reason to blow up a deal the Democratic leadership had worked out. Rather it appears McCain sided with rebel House Republicans in throwing a wrench in negotiations.

  • Thus far McCain has demonstrated no bipartisan leadership, which was the alleged reason he went to Washington to facilitate an agreement.

  • This bill, though necessary, has virtually no popular support; it has no natural constituency, apart from the financial industry. Most people don't understand the crisis, or even the potential fallout from it. There's no external push for lawmakers to pass a bill. The legislation remains bogged down, it make take severe repercussions in the financial markets to get the process unclogged. Let's hope things don't come to that.

September 25, 2008

Senator McCain Calls Time Out To Fix The Fundamentally Strong Economy

I guess I shouldn't have been surprised to see Senator McCain "suspend" his presidential campaign yesterday. After all, he's a Maverick! But I didn't expect him to show up in the Senate again--where he hasn't cast a vote in over five months.

From all accounts I've heard, Congressional leaders are making notable progress on a bailout compromise, apart from McCain airdropping himself in for a photo op. If this plays out as I expect, it will be pretty obvious that McCain was a non-factor in getting the legislation hammered out.

One of McCain's supposed advantages in this race is that, due to his age experience, he is perceived to be better at handling a crisis. To me this maneuver is just more evidence that the opposite is true. Obama has retained a calm, even-keeled presence throughout this financial crisis. In contrast, McCain has been downright erratic.

I want the commander-in-chief with a steady hand on the wheel.

September 23, 2008

Economic Reads For 23 September 2008

The fiancial meltdown has dominated the news recently. Here are some related takes from around the Internet:

  • Bill Moyers interviews Kevin Phillips. Among other things, Phillips identifies seven "sharks" plaguing the economy:
    [T]he first is financialization because we're so dependent on this industry that's sort of half lost its marbles. The second is that you have this huge buildup of debt, absolutely unprecedented anywhere in the world. The third is you've now got home prices collapsing. The fourth is you've got global commodity inflation building up.

    The fifth is you've got flawed and deceptive government economics statistics. The sixth is that you've got what they call peak oil where the world is, to some extent, running out of oil. So it's not just commodity inflation, it's a shortage of oil. And then the last thing is the collapsing dollar. Now, whenever you get this sort of package in one decade, you got a big one. And when Greenspan says it's a once a century, I think it's another variation but on a par with the Thirties.


  • Donald MacKenzie in an informative piece, "What's in a Number?", discusses the importance of Libor and how it is calculated

  • The Big Picture has "13 Questions for Paulson & Bernanke" during their Congressional testimony

  • Calculated Risk similarly has "Paulson Plan: Questions for Congress to Ask"

  • Mish, who opposes the Paulson bailout plan, summarizes his objections in "Open Letter To Congress On The $700 Billion Paulson Bailout Plan"

  • macroblog answers "What's a swap line?"

  • I see Senator McCain is continuing his comedy tour. Recall that last week he first insisted that the fundamentals of our economy are strong, then proceeded to contradict himself for a couple days.



    Now McCain is criticizing Obama for not showing enough "leadership" during the crisis:
    "Sen. Obama has declined to put forth a plan of his own. At a time of crisis when leadership is leaded, Sen. Obama has simply not provided it," McCain said. "The truth is we don't have time to wait for Sen. Obama's input for our nation to act."
    The absurdity of this attack, coming from a man who can't even offer a coherent set of talking points, is self-evident.

    Of course we want to know how a presidential candidate would respond to such a crisis and the principles he would follow. But it necessary Obama rush out a "plan"? After all, such a plan is moot, because he would not assume office for months, and whatever emergency plan we take will have long since adopted. More importantly, why shouldn't people be taking a few days to deliberate over a solution to this mess? Emergency legislation that gets rammed through Congress inevitably has problems, as we're seeing with Paulson's plan. In this case, we're dealing with hundreds of billions of dollars. We don't need to create an even larger mess by hurriedly adopting a bad plan. It's perfectly acceptable (even desirable) to weigh options for a few days.


  • Billmon: "Things Become More Serious."

  • Funny: Buy My Shitpile.

September 21, 2008

People Seemingly Living In An Alternative Universe During The Financial Meltdown

A glimpse behind the walls on Capitol Hill:

It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.
. . .
"When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.
I'm surprised they were so surprised. I'm no financial expert; heck, I don't even subscribe to the Wall Street Journal. All I do is read news headlines and commentary on blogs. And yet even I could see that, in a highly leveraged system, we can't absorb record foreclosures and companies writing off billions of dollars without serious consequences.

Perhaps these legislators are surprised because, until now, they have exclusively been getting their financial analysis from Treasury Secretary Henry Paulson's talking points:

"Our banking system is a safe and a sound one," Paulson insisted on CNN's "Late Edition." He had earlier told CBS, the list of troubled banks would grow.

But "this is a very manageable situation ... our regulators are focused on it." Five U.S. banks have failed this year, compared with an annual average of about 250 during the U.S. savings-and-loan industry crisis in the 1980s, Paulson said..

He said about 99 percent of the 8,500 U.S. banks, holding about 99 percent of bank assets, fell into the highest category of capitalization, a measure of financial health.

Perhaps if the only person you listened to told you that banking is "safe and a sound" and that 99% of banks are healthy, then it might come as a surprise to discover that the world was suddenly on the verge of financial Armageddon.

But if that were the case, you should have second thoughts when then came to you asking for $700 billion to "fix" things, with time of the essence. And regardless of what else is in the proposed legislation, anything containing this should raise a red flag:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Friday I listened to the first half of comedian Rush Limbaugh's show. It was as if the guy were broadcasting from another planet. Here we were on the heels of the Treasury announcing the biggest proposed bailout in history, along with an unprecedented restriction on short selling. And yet this self-styled "conservative," who regularly pontificates on keeping government out of the marketplace, only made passing reference to the situation. He spend more time ranting about some inconsequential comment Michelle Obama made than he did discussing a $700 billion intervention.

It boggles the mind that many of his listeners apparently consider him to be a serious issues analyst.

September 18, 2008

Candor From Congress On The Financial Meltdown

Senate Majority Leader Harry Reid stepped into the no-spin zone yesterday when addressing the financial crisis:

Senate Majority Leader Harry Reid, asked today what new regulatory actions Congress can take, said, bluntly, "No one knows what to do. We are in new territory here. This is a different game. We're not here playing soccer, basketball or football, this is a new game and we're going to have to figure out how to do it."

A Reid spokesman said neither Treasury Secretary Paulson nor Fed Chairman Ben Bernanke offered up any suggestions for new regulatory legislation when they met with Reid in the Capitol building Tuesday night, either.

In other words, Washington doesn't have an answer for the financial crisis. The treasury and fed are working 24/7 manning the pumps simply to keep the ship from sinking. Whether or not they will succeed in averting a catastrophe remains to be seen.

Meanwhile, it's refreshing to hear an elected official talk about the situation without calling for an empty generic "solution" to the problem (e.g., more regulation, deregulation, whatever). Despite their rhetoric, I doubt either presidential candidate has a good answer for what's currently happening. Senator McCain doesn't even appear to understand what the problem is. Perhaps that's the reason Obama is getting a mini bump in the latest polls.

September 16, 2008

Senator McCain's Plan To Lose The Election

I've noted that Senator McCain's campaign strategy appears to be to ignore discussing the economy. Of course on days like yesterday, when the financial services meltdown dominated the headlines, that's not practical. In that case, Plan B is apparently denial (via TPM Election Central):

Text:

"You know that there's been tremendous turmoil in our financial markets and Wall St. And it is -- people are frightened by these events. Our economy, I think still -- the fundamentals of our economy are strong. But these are very, very difficult times."
An enterprising reporter might ask the senator specifically what he considers to be "strong" in our economic environment. Housing prices down 20%? Residential and commercial construction at a standstill? Eight straight months of job losses? Auto manufactures asking for $10s of billions in government loans? Wall Street firms going bankrupt? The only good economic news we had this summer was export manufacturing, but even that appears to be diminishing as the US dollar rebounds and our trading partners slip into recession.

Inquiring voters may wonder who to believe: Senator McCain or their lying eyes? The GOP game plan is to content that things are basically OK, presumably because a contrary admission would be an indictment of President Bush's economic policies. So we have Republicans such as comedian Rush Limbaugh, who just last week claimed that the economy is better now than it ever was during the Clinton administration. That's major-league denial.

McCain does concede we have economic issues, but he pretends as if the problem can simply be solved with a few Wall Street regulations:

"I promise you we will never put America in this position again," McCain said. "This is a failure. We've got take every action to build an environment of robust energy supplies, lower inflation, control health care costs, access to international markets, low taxes and reduce burden of government to allow people to move forward toward a future of prosperity. The McCain Palin administration will replace the outdated patchwork quilt of regulatory oversight and bring transparency and accountability to Wall Street, we will bring transparency and accountability and we will reform the regulatory bodies of government."
Again, an enterprising reporter might ask McCain which of the Bush energy, health care, or tax policies he considers to be a failure.

As for a regulatory fix for our economy, I'm unclear what regulation will successfully and painlessly deflating the biggest housing bubble in American history. Or that will wipe out the burden of debt, food inflation, health care, and high energy costs that is weighing down consumers. That would be remarkable regulatory oversight and transparency.

In 1992 James Carville famously quipped, "It's the economy, stupid." The same is true today. Senator McCain is offering Senator Obama a huge opening by dancing around the problem, if not pretending it simply doesn't exist. Will Obama capitalize on this error and ride an economic agenda to victory?

September 14, 2008

Economic Turmoil, Local And Abroad

It's been an interesting weekend of economic stories. Locally, people have been focused on a temporary, yet jolting gasoline shortage. In just two days prices shot up as much as $1.30 a gallon, pushing the price at some stations over $5/gallon. A few stations are completely out of gas. It's a costly reminder of how fragile our system is.

The always-informative Oil Drum forecasts what we can expect in the gasoline market in the aftermath of Hurricane Ike. Notably,

It is likely that we will have product shortages for at least the next three to four weeks, because of shut in refinery capacity and reduced refinery runs.

I have said that it is likely to take a week or two to get refinery production up to pre-Ike levels. Suppose it takes 10 days. Adding 10 days to the date of the hurricane (September 12) brings us to September 22. If it takes an average of 18.5 days to get product from Texas to New Jersey by pipeline, it will take until approximately October 10 before supplies are back to normal. It could be a little shorter than this, or quite a bit longer.

Hopefully a shipment or two of gas will calm the Knoxville market down in short order. I certainly don't want to pay $5 a gallon until October.

The much larger story, however, is the continued meltdown of the financial sector. Lehman Brothers is filing for bankruptcy, Bank of America is taking over a faltering Merrill Lynch, and American International Group is seeking a huge infusion of capital.

Nouriel Roubini warns that more dominoes may fall:

If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system.
. . .
This is indeed the most severe financial crisis since the Great Depression and occurring at a time when the US is falling in a now severe consumer led recession. The vicious interaction between a systemic financial and banking crisis and a severe economic contraction will get much worse before there is any bottom to it. We are only in the third inning of a nine innings economic and financial crisis. And the only light at the end of the tunnel is the one of the incoming train wreck.
Even the cautious Alan Greenspan today described the crisis as a "once-in-a-century type of event."

We've got serious economic problems, and few good solutions. This is a particular problem for presidential candidate John McCain, who fails to redress the woes facing working-class Americans. As I noted before, look for the McCain campaign to continue to grasp at lipstick distractions in an effort to avoid discussing the economy. Ultimately, I don't think this ploy will succeed--the economic malaise is too widespread. But it won't be for a lack of trying.

September 9, 2008

Against Government, Yet Cashing The Checks

A brief Alaska snapshot to put the anti-spending Governor Palin in context:

Of the 50 states, Alaska ranks No. 1 in taxes per resident and No. 1 in spending per resident. Its tax burden per resident is 2 1/2 times the national average; its spending, more than double. The trick is that Alaska's government spends money on its own citizens and taxes the rest of us to pay for it.
. . .
As if it couldn't support itself, Alaska also ranks No. 1, year after year, in money it sucks in from Washington. In 2005 (the most recent figures), according to the Tax Foundation, Alaska ranked 18th in federal taxes paid per resident ($5,434) but first in federal spending received per resident ($13,950). Its ratio of federal spending received to federal taxes paid ranks third among the 50 states, and in the absolute amount it receives from Washington over and above the amount it sends to Washington, Alaska ranks No. 1.
This should include the $223 million federal transportation earmark money--originally designated for the bridge to nowhere--which Palin kept.

I'm not surprised to see some of the biggest beneficiaries of government spending railing against the public sector. I hear it all the time in East Tennessee. It's ironic once you consider the list of the area's largest employers:

  1. U.S. Department of Energy - Oak Ridge Operations
  2. The University of Tennessee, Knoxville
  3. Knox County Public School System
  4. Covenant Health
  5. St. Mary's Medical Center
  6. University of Tennessee Medical Center
  7. City of Knoxville
  8. County of Knox
  9. Clayton Homes
  10. State of Tennessee, Regional Offices
Seven of the largest ten employers are government-related. Add TVA, the Great Smoky Mountains National Park, and all the highway spending to the mix and it becomes clear that government spending fuels this region's economy.

But bashing government institutions sure makes for a good sound bites.

Sarah Palin, The Trojan Moose

It's been entertaining listening to the right-wing noise machine the last ten days. After weeks of depicting Senator Obama as a "celebrity" candidate, they have been fawning over Governor Palin like a school boy with a crush.

Since no one knew about Palin prior McCain's selection, rightists been busy constructing a glowing caricature out of what had been a blank slate. And so we are presented with a wonder-woman hockey mom who fights corruption and government spending. Talk radio has been praising her because she lives the "American life," whatever that is. She even wears a skirt!

Some of the bloom may finally be coming off the Palin rose, at least in print and on TV news:

We've now had a week of blaring headlines and one-liners about Sarah Palin as the mavericky, pork-busting reformer from Alaska. But we seem to be witnessing the first stirrings of a backlash and a dawning realization that the 'Sarah Palin' we've heard so much about over the last few days is a fraud of truly comical dimensions.
But regardless of what we learn about the true Palin, she has served a purpose. As Arianna Huffington notes, she's been a useful distraction from the real problems confronting America:
The point is that Palin, and the circus she's brought to town, are simply a bountiful collection of small lies deliberately designed to distract the country from one big truth: the havoc that George Bush and the Republican Party have wrought, and that John McCain is committed to continuing.

Every second of this campaign not spent talking about the Republican Party's record, and John McCain's role in that record, is a victory for John McCain.

Her critics like to say that Palin hasn't accomplished anything. I disagree: in the space of ten days she's succeeded in distracting the entire country from the horrific Bush record -- and McCain's complicity in it. My friends, that's accomplishment we can believe in.

I'll be more specific--every day not spent discussing the economy is a victory for McCain. It was no accident that the economy was barely mentioned at the Republican convention. The fact is that it is in worse shape than government statistics indicate. It's the trump card in the Obama hand, if the campaign stays on message. Therefore Obama must resist the temptation to be sidetracked by the Trojan Moose.

September 4, 2008

The American Oil Refinery Shortage Myth

According to rightists, the second-most common response to energy crisis, behind "Drill! Drill! Drill!", is that gas prices are high because environmentalists have prevented America from building any new oil refineries in 30 years (or whatever duration it is).

How does this claim square with marketplace reality? According to an oil industry executive, it doesn't:

U.S. refineries will continue to run at current reduced utilization rates in the next few years due to slowing demand for fuel, a ConocoPhillips executive said on Wednesday.

"Utilization rates have come off from their highs of the last few years... we expect this trend to continue for the next few years," James L. Gallogly, ConocoPhillips executive vice president of refining, marketing, and transportation, said in a presentation to market analysts.

So at a time of record high gasoline prices, refineries have not been running at full capacity?
Refineries had been operating at an average above 90 percent of capacity, but this year refineries have been operating at much lower capacities nearer to an average of 85 percent, according to Gallogly.
Why have refineries slowed down? (Emphasis added)
Historically, utilization rates peak during the U.S. summer driving season to meet demand, but this year, refineries failed to ramp up production due to poor profit margins and weak demand.
Ahh, there's a key phrase rightists never seem to mention: profit margins.

Unlike rightist pundits, I'm not going to pretend to be an oil industry expert, when I'm not. Perhaps we should build a refinery somewhere. But clearly there are more factors to the this economic equation (e.g., industry consolidation and profitability) than simply the evil environmentalists scapegoats that we always hear about.

Bold 2012 Election Predictions

  • Advocates will refer to the contest as "the most important election of our lifetimes."
  • Candidates will proudly proclaim their outsider (of Washington, DC) credentials, while simultaneously embracing the long-time politicians and interest groups that make the capital what it is.
  • Whoever the Democratic nominee is will be described as one of the most liberal members of X group in America.