The lesser of two evils

How will I vote on Tuesday? Which candidate would be a better President? Intrade currently favors Obama with roughly 6:1 odds, and it a small wonder. Obama is younger, more charismatic, more eloquent, and more attractive than McCain. Though Palin's experience is roughly on par with that of Obama -- indeed, one could make the argument that she is the most qualified of the four, having the most executive experience -- she seems intellectually unqualified to be Vice-President, let alone President, as she has demonstrated in interview after interview. Despite all this, McCain is still the better choice, for one simple reason: we cannot afford to have another New Deal of Great Society.


The Democratic Congress would likely have sufficient power to overcome all Republican veto efforts, meaning that the Democrats could pass whatever they wanted. As 3/4 of Bush's Presidency, along with history, have proven, the government that governs best governs least. When one party controls all of government, there is no strenuous debate, no moderate policy-outcomes. In the times of both the New Deal and the Great Society, government was controlled by Democrats. It was thus easier to pass policies targeted to one extreme end of the political spectrum than it would have been had there been bipartiate control of Congress. Obama has proposed a cornucopia of new governmental interventions in the free market, and with such a small Republican minority as is probable, there would be literally no limit to the amount of new reuglation that could be imposed on the American people.


Another issue that the American people fail to grasp is that increased taxes on corporations nearly always are passed on to the consumer in varying degree. Excpect in the case of monopoly, which never really happens in real life due to the vigorous enforcement of anti-trust laws, corporations generally deal with increased taxes by hiring less labor, moving production functions away from labor towards capital, and increasing prices. The result? If you are a bad worker, you lose your job. If you consume goods and services, those goods and services become more expensive. Meanwhile, the host of new Federal spending programs incents people to work less, and provides a disincentive for the accumulation of wealth. You can probably figure the rest out. All other things being equal, The Beast eats its own tail until there is nothing left.


All other things, luckily, are not equal. Our system of government works slowly, and does not pass laws that it cannot undo, eventually. With the financial panic sweeping the globe, capital is fleeing to its safehaven -- US bonds -- so there is not as much need to balance the budget. Nevertheless, I am strongly against any new government programs, especially asl we cannot really afford them at the moment. Obama's new regulations would shrink the economy relative to its performance in their abscence, so he''d have to tax more to get the same amount of government income. If McCain can follow through on his promise to cut unnecessary government spending, people could be taxed at the same rate, and more money would be contributed to paying down the deficit.


Ultimately, both candidates are far from perfect. Many of McCain's proposals are absurd, and I have grave reservations about the fear of failure, whether it be on the part of "too-big-to-fail" corporations or "innocent" homeowners who were "tricked" into buying a home mortgage they couldn't afford. I will be voting for McCain because I predict he will be able to pass fewer bills in office, making him the lesser of two evils.

How wrong I was

First and foremost, my apologies. I hypothesized a few weeks ago in Convergence that the prices of McCain and Obama's securities on Intrade would be roughly equal to each other, at least in the short-run. I predicted that "...Obama won't climb more than approximately five points over McCain for the foreseeable future, assuming that no one in the McCain camp makes a political faux pas". How wrong I was.


These are the graphs of McCain and Obama's progress, starting from McCain's high point a few weeks ago.




Obviously, things didn't pan out quite the way I thought they would. Part of the reason for this is that McCain has been making one political error after another. When he proposed calling off the debate to work on the financial mess, his share value plummeted. Sarah Palin has received increasingly negative press after demonstrating a lack of knowledge about numerous key issues, and that cannot have helped McCain either. Also, the fact that Obama has pulled ahead by a measure of roughly 5 percentage points in the polls likely has a compounding effect on the Intrade predictions. McCain has to go on the offense; he must convince voters that experience matters.


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In the last debate, I felt he did exactly that. I took some notes as I watched the last debate. Though Obama certainly held his own, and spoke with a degree of eloquence that McCain lacks, I felt that McCain hammered home his main advantage as a candidate -- experience. Other, scattered observations follow:


McCain's backwards policy to buyout mortgages that homeowners cannot pay would help banks, in the long run. While this would have the advantage of injecting liquidity into the financial system, this is a dumb way to go about doing it.


When Obama was trying to cite experience of going against his own party, he only demonstrated an ability to go against certain special Democratic interests, while McCain has a long history of reaching accross the isle.


On trade issues, Obama said:

I believe in free trade. But I also believe that for far too long, certainly during the course of the Bush administration with the support of Senator McCain, the attitude has been that any trade agreement is a good trade agreement... [W]e should enforce rules against China manipulating its currency to make our exports more expensive and their exports to us cheaper.
And when it comes to South Korea, we've got a trade agreement up right now, they are sending hundreds of thousands of South Korean cars into the United States. That's all good. We can only get 4,000 to 5,000 into South Korea. That is not free trade. We've got to have a president who is going to be advocating on behalf of American businesses and American workers and I make no apology for that.

How is this free trade at all? A fixed exchange rate is by definition currency manipulation, and many developing countries employ this monetary strategy. I am unaware of what strategies a President could use to export more cars, aside from price controls, but I know that I don't believe in price fixing...
Regarding health care, both candidates had some good ideas. McCain's idea of having a natiowide compute system so any patient's history would be instantly avaliable would dramatically decrease testing costs. Obama's proposal of allowing anyone to buy into preexisting insurance groups is good. Saying that insurance companies can't discriminate (read: charge a higher premium) based on preexisting conditions is one of the stupidest things I have ever heard. Does anyone really believe that a 60-year-old smoker should get the same insurance rates as a 20-year-old athlete? I am very fearful of some of Obama's healthcare proposals.
On schooling, both advanced a proposal. Obama would provide more education subsidies, which would likely increase the average education level of our workforce. I was hoping that Obama would address the strength of teachers' unions, but he was sadly silent on that issue. McCain advanced charter schools and a voucher system, which would be a step towards a free market in education. Increasing charter schools would allow more talented students to escape the death that is the American public school system. Even a limited voucher system for procuring education would be an economist's dream come true. Rewarding and punishing teachers would provide them with the incentive to teach well.
In response to McCain's proposed voucher system, Obama said that "[w]here we disagree is on the idea that we can somehow give out vouchers -- give vouchers as a way of securing the problems in our education system". Too bad, because if Obama supported that I'd be much more likely to vote for him. Instead, he is in favor ofthe federal government stepping up its role in providing higher salaries for teachers. This wouldn't really solve anything, because teachers have been failing to deliver a quality education for decades, despite consistent salary increases. Allowing market forces to take effect would be -- and already is, as has been proven in other countries -- the best way to assure a quality education for children.

Duck Tales Inflation Lesson

Who would've thought that a children's TV show could have valuable lessons for leaders the likes of Robert Mugabe... Seigniorage does not ever fundamentally solve a country's economic woes. Big surprise. I like Scrooge's thinking.

Dumb and dumber

The debate last night honestly made me question whether it will even be worth my time to vote, seeing as how both candidates seem to be idiots when it comes to most of the crucial issues. (Correction: the candidates themselves may be perfectly intelligent, but they both support idiotic government intervention in everyday affairs. To that extent, I guess they're just hypocrites supporting policies they know will fail.)


In a move that appeared to be the culmination of a campaign of pseudo-intellectual man-on-the-street hogwash, McCain actually proposed a government buyout of mortgages worth less than the value of their homes. The full quote (thanks to the International Herald Tribune):

I would order the secretary of the Treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes — at the diminished value of those homes and let people be able to make those — be able to make those payments and stay in their homes. Is it expensive? Yes. But we all know, my friends, until we stabilize home values in America, we're never going to start turning around and creating jobs and fixing our economy. And we've got to give some trust and confidence back to America. I know how the do that, my friends. And it's my proposal, it's not Sen. Obama's proposal, it's not President Bush's proposal. But I know how to get America working again, restore our economy and take care of working Americans.

Has McCain lost his mind? Does he honestly see this as a realistic way to gain back recent losses sustained at the polls? In times of inflation, (when nominal prices are rising), debtors win and creditors lose. because the real value of any debt -- what a lender can expect to get back -- decreases in real terms. In a time of deflation, or less-than-anticipated inflation, the opposite occurs, and the borrowers are left worse of because the real value of their debt increases relative to its anticipated level. The same applies when an asset is appreciating or depreciating.


How is it any business of the government whatsoever to interfere in these free market transactions? If it is the duty of the government to help debtors in times of asset-depreciation, why hasn't the government stepped in to help poor banks when the bill they receive for a house is less than anticipated in real terms, due to inflation? Though on the surface this seems similar to the proposal to buyout failing subprime mortgage-backed securities (SMBS), there is a world of difference. The earlier proposal actually makes sense, in a twisted sort of way; the SMBS are undervalued in a vicious bear-market right now, and have the potential, indeed, almost the certainty, to increase in value dramatically in the future, at which point the government could liquidate its SMBS assets and make a very healthy return. Aid the financial markets now, profit in the long-run; everybody wins.


Take three seconds or so to think if the above plan is somewhat different from offering to buy mortgages at above-market prices so that homeowners don't suffer the consequences of their depreciating assets. How would the Treasury renegotiate each and every individual mortgage? Does anyone seriously contend that this is possible, let alone worthwhile? If you do, my hat's off to you; you're an idiot and it must be difficult to get along in this hard, cruel world. These mortgages have been packaged into bundles by banks and sold as securities to entities like investment banks, (or banks have sold them to Fannie Mae and Freddie Mac, who did the bundling). The fact that people realized that many of the SBMS were fundamentally worthless is a large part of what got us into this mess.


McCain's proposal is vague, as are most stupid policy proposals, but I know enough about economics to know that it's not a good idea. Buying the mortgages at above-market prices would encourage stupid decisions, just as the government's bailout of firms like AIG encouraged moral hazard. Would the money go to the banks and the owners of SMBS, to take the homeowners off the hook? Perhaps. Would the homeowners be given the injection of capital directly, so they could individually renegotiate the terms of a new mortgage without fear of financial harm? Maybe. The one certain thing is that both ideas steer market actors away from the concepts they should hold most dear: risk and return.


It's no surprise that ever since the selling frenzy hit Wall Street McCain has been seriously down in the Intrade markets. Obama is a populist, taxing the rich to give to the middle-class. McCain is coming off as Obama-light; neither candidate can come up with an economic solution to this problem, but at least Obama is toeing the party line on the issue. McCain must be alienating thousands of conservatives with his Wall Street greed hurt main street dribble, people who would support him if he could get his mind around the fact that more regulation is likely to hurt, not help, the situation.


Obama is planning to increase taxes on the wealthy. If the goal of this less-than-enviable proposal were, say, to bring the fiscal deficit under some semblance of control, McCain would be in a pickle. Yet empirical studies demonstrate that governmental spending programs are notoriously inefficient. Government programs quickly fall into deficit unless one of two things happens: their funding is continuously increased at an increasing rate, or their benefits are constantly redefined to give continually less to each person. I have not witnessed McCain calling Obama out on this; he could point to any of the numerous failures of The Great Society to provide evidence for why increased government spending is not necessarily the answer. He might even get rid of some tax breaks of his own!!


One of the clearest lessons I learned in International Finance class was that monetary action is far, far more likely to be of use in times of economic recession or stagnation than fiscal policy. Monetary policy is fast-acting, while fiscal policy is notoriously slow. Indeed, the recent bailout package did not get passed quickly enough, even though it made its way through Congress in record time. I do not understand Obama's reluctance to do nothing more than emphasize the failures of the Bush administration, and by association, Republicans as group, while promising to raise taxes on the wealthy, reducing the deficit. That is a winning platform. By speaking of ending the Iraq war and starting new government programs, he illustrates both his lack of support of the surge, and alienates fiscal-conservatives who would potentially support a balanced budget. He should not bring up Iraq, becfause his record on it stinks. He voted against a workinbg strategy -- the surge -- and every time he mentions Iraq McCain will hammer him for his inexperience.


McCain should abandon this populist, anti-business mentaility and simply promise to cut useless government programs and business tax rates, attracting new business to the US and helping the economy deal with the slowdown. If only it were a perfect world...

Wallstreet, meet mainstreet...

I was glancing through the updates to a blog I read, and I came across a video that brings up a very important point. (Kudos to Taki's Magazine.)





The video is, I would say, in line with the title of this blog, in that it lambastes both Democrats and Republicans for their respective decisions to pass the bailout bill, and praises more extreme viewpoints, both on the far-left and the far-right. I have respect for both Dennis Kucinich and Ron Paul as men of principle, and I completely agree that it is disgusting that the addition of pork-barrel spending made the marginal difference in getting the bill passed. However, I think the reprecussions of extending this financial crisis for even longer could conceivably be worse than taking no action at all. Credit markets have contracted severely, at least according to the experts. Banks are far less willing to extend overnight loans to each other, and institutions like Lehman brothers are shutting their doors because they cannot raise capital fast enough to cover the collateral on their subprime-backed security obligations. (I'll look at the FED's website when I have time and pull up some graphs to see for myself.)


While corporations ought to fail, and indeed, must do so in a healthy capitalist economy, when the situation begins to snowball like this, when companies go bankrupt left and right simply from being unable to collateralize their increasingly risky/worthless debts, when the LIBOR fluctuates as it has simply due to fear... That is a much different, and much more frightening, scenario.


It is tempting to make comparisons the Great Depression, not because of the severity of the current situation, but because of the nation's seeming inability to repair itself, both then and now. The Great Depression was unique, in that for much of it, the FED was acting in precisely the wrong manner, making money more expensive to curb speculation rather than reducing the interest rate. Bernanke is handling this in the proper manner, flooding the markets with liquidity, yet the question remains: is there a way out of this? Enter Kucinich and Paul: Why, exactly, should the government do anything at all?, they ask. Shouldn't greedy corporate America be made to suffer for its sins?. The answer to that is an unambiguous yes, provided that the nation's financial system remains intact. In case you're wondering, this has not been the case. Institutions that were too-big-to-fail are failing left and right, and this degenerative process is trickling into every citizen's life whether he realizes it or not.


In his book An Uncertain World, then Secretary of the Treasury Robert Rubin details the tough choice he had to make during the Mexican financial meltdown. The American government gave a huge loan to Mexico to stave off the run on the peso, not because it was popular (it was not), nor because the government would necessarily make money off the deal. Indeed, Rubin stresses that at no point in the decision-making process was he sure of the outcome. He, and other important men, opted to take the risk because the potential gains from a saved Mexican financial system outweighed the certain catastrophe that a Mexican crisis would have on everyday Americans. Bernanke and Paulson don't know that these dramatic market interventions will solve the problem. They do know, however, that the consequences of a collapsing financial system far outweigh the risk that their loan will not pay off.


(I should say, as a postscript, that this crisis is not anything near the Great Depression. In size, scope, and duration, thus far, we should be happy we don't live in the 30s.)

A country of landed farmers, all

I will be the first to admit that this video is blatantly partisan, seeking to portray Democrats in the worst possible way, and seeking to depict McCain as the would-be savior who rode in a a white horse trying, and ultimately failing, to bring regulatory reform to a corrupt system. I am relatively confident that in the discussions about Fannie Mae and Freddie Mac, there were some Republicans who sided with the majority of Democrats, and vice versa.

But the fact remains that ultimately it was the Democrats who implemented a block of the Republican reform-efforts. Doubtless this was done with the best intentions; Democratic Congressmen surely wanted to provide aid to their constituents, the poor and/or minorities who wanted to buy a house. After all, the landed-farmer represents the penultimate American dream held by Jefferson and his cohort. And it must be said that this video is edited to bring out the drama of the issue, and likely to leave out crucial parts of the deliberations that only hours spent watching CSPAN can communicate. Still, the responsibility for this must ultimately fall at the Democrats' feet.
How funny it is that the Republicans, of all people, are the ones calling for more regulation, at least in this instance. We live in a world not of black and white, but of greys. Then again, the Republicans were calling for stricter regulation of an entity that was itself performing a governmental function by distorting the market-equilibrium, giving disproportionate aid to a Democratic base as a result. On second-thought, maybe party-distinctions are crystal-clear...

YouTube etc.

I received an email earlier in the week with a link to a youtube video, that explains in a pretty effective (though admittedly politically biased) manner the origins of the current economic crisis. This is well worth watching.





Now, I should say that I haven't investigated all of the accusations made against Obama and the Democrats in this video. It's simply not worth my time. I will say that the video does a very good job of describing why, exactly, the government is largely responsible for the origins of the current crisis.

Confusion

It's been a week or so since I wrote about anything political, for two reasons: the financial crisis seems much more pertinent, interesting, and fun, to me, and because as far as I can tell, the candidates are acting pretty much as I predicted they would back when I was speaking on a more theoretical plane. (See Striving for the center.) During the first presidential debate, Obama tried very hard indeed to portray himself as the epitome of political moderation, despite the fact that, objectively speaking, Obama breaks with his party line much less frequently than does McCain, if the Senatorial voting record is to be used as an objective measure. McCain tried to echo Reagan, and failed, for the most part. Both spoke elegantly (Obama more so) and touted their records to try to indicate what they would do if elected (McCain more so). On the whole, I was surprised by how civil the debate was, and though neither candidate had me in tears with his masterful rhetoric, on the whole they both did a pretty good job. I will say that Obama stuck it to McCain on tax policy; McCain never offered an effective rebuttal for why the wealthy might deserve more of a tax break than the middle class, (and there are plenty). McCain, (or John McRage as my brother calls him), evidenced more fervour than I expected, and successfully communicated that he, in fact, has a whole lot more experience than does Obama.


I didn't pay nearly as much attention to the VP debate as I should have, for a couple of reasons. First, I expected Palin to mess up so substantially that I seriously discounted any positive reaction the debate could have on the Republican chances. However, she didn't flub up anything too serious (how could a Vice-Presidential candidate not know what the Bush Doctrine is in the vaguest of terms?), and Half Sigma, an explicitly conservative political blogger, had some interesting things to say about both Palin as a candidate and the VP debate specifically. Of particular interest, at least to me, was his reflection on taxes:

All discussions of tax issues are these debates (stet.) are so shallow from both sides that I don't even know where to start criticizing. The U.S. has exceptionally high corporate tax rates, and one also needs to understand that corporate income is taxed twice, once at the corporate level, and again when shareholders profit by receiving dividends or capital gains. On the other hand, Obama actually had a valid point during the presidential debate last week when he mentioned that corporations have too many loopholes. Loopholes are evil and need to be closed. If loopholes are closed, then marginal tax rates can be lowered without any revenue being lost. With respect to personal taxes, once again, the tax code is too complicated and has too many deductions, credits, exemptions, and what-have-you (stet.). Obama wants to take us back to the tax code of the 1970s, a decade known for its economic malaise. The marginal federal rate was 70%, but because of so many shenanigans that taxpayers could do involving accelerated depreciation and limited partnerships, a lot of the wealthy had to pay significantly more taxes after Reagan "lowered" taxes.

Tax policy ought to be a big issue in the campaigns, but neither candidate has spoken that extensively about what ought to be done.


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A large peculiarity that I cannot reasonably explain is the behavior of the markets over the past two weeks.




Why is there a bear run on the McCain ticket? Yes, McCain made a huge blunder in proposing halting the first debate to go work in Congress; neither he nor Obama have been present for some time, because they have been campaigning. Yes, Palin seems dumb when she can't answer basic questions, at least from the Democratic perspective, but equally pertinent to the situation is the Republican claim that Biden is a blowhard. One would think these issues would lead to temporary fluctuations in price, but this is looking more and more like a trend leading up to a political certainty come election day. My only hypothesis is that market actors are fearful that, should McCain die, Palin will be incompetant to run the country. This fear strikes me as somewhat unfounded, as she is the only one of the four who has any executive experience. Her approval rating was pretty high, last time I checked...


We'll just have to wait it out to see what happens over the next few weeks... For the record, I sold my shares of McCain at around 52, and bought more when he started doing poorly, at around 47, on the assumption that the race would remain tight and I could profit off of market noise... oops.

Macroeconomic principles: risk-return

I have been in email contact with some of my old professors, and I thought I would share some of the discussion between us, as it is direct;y pertinent to the situation at hand. My last posting was a near-copy of an email I sent my former economics professors. I was uncertain of my understanding of the situation, and I asked the macroeconomists among them to criticize my analysis. I don't really have that good a grasp of the current situation, and what I do know is from reading the Wall Street Journal.


Will Melick is Gensemer Professor of Economics at Kenyon College. A link to his biography is here. He has worked as a Research Associate at the FED, and from having taken classes with him, I can say he knows his stuff.


His response to me goes as follows:

...I think your analysis is pretty much spot on. However, we do not yet have any evidence that velocity is falling, nor is the money multiplier. At the end of 2007Q2, M2 velocity was 1.90. At the end of 2008Q2, M2 velocity was 1.86. Not a precipitous drop.


I am very disappointed with the rush to a bailout. There is no need to act so rashly. Bernanke and Paulson are underestimating the resiliency of markets. Everything is frozen because everyone is waiting to see if the government is a big enough chump to overpay for mortgages and mortgage backed assets. For crying out loud, we have not even seen a decline yet in commercial bank lending. We would be much better of waiting and letting firms fail and saving the $700 billion to hand to the FDIC in the event that commercial banks start to topple and we have to honor the explicit guarantee of deposits. I do not think this will happen. I hope the legislation that is passed is loaded with so many dopey provisions (caps on executive pay, etc) that no firm participates. We likely will get a recession, but so what, one of these comes along about every 10 years. The fate of the U.S. economy simply does not hang in the balance. Paulson and Bernanke only talk to financial types, of course those types think the world is ending because their livelihoods are at stake as the bloated financial sector starts to shrink. This is democracy at its worst. Congress should resist the "doomsday" gun that is being pointed at its head. The election year only compounds the problem. I am very disappointed.

Will Melick also has a podcast explaining the current economic situation, as well as possible solutions, explained in layman's terms. I can't recommend it enough.


Another economist-friend of mine sent me an article by Thomas Sowell, an influential economic and social theorist, which I'll repost here in case the link goes down:

SOWELL: A political 'solution': Part II

Thomas Sowell
Friday, September 26, 2008

COMMENTARY:
Estimates how much money a government program will cost are notoriously unreliable. Estimates of the cost of the current bailout in the financial markets run into the hundreds of billions of dollars, and some say it may reach or exceed a trillion.
Many people have trouble even forming some notion of what such numbers as billion and trillion mean. One way to get some idea of the magnitude of a trillion is to ask: How long ago was a trillion seconds?
A trillion seconds ago, no one on this planet could read and write. Neither the Roman Empire nor the ancient Chinese dynasties had yet come into existence. None of the founders of the world's great religions today had yet been born.
That's what a trillion means. Put a dollar sign in front of it and that's what the current bailout may cost.
Will that money be spent wisely? It is theoretically possible. But don't bet the rent money on it or you could end up among the homeless.
Whenever there is a lot of the taxpayers' money around, politicians are going to find ways to spend it that will increase their chances of getting re-elected by giving goodies to voters.
The longer it takes Congress to pass the bailout bill, the more of those goodies will find their way into the legislation. Speed is important, not just to protect the financial markets but to protect the taxpayers from having more of their hard-earned money squandered by politicians.
Regardless of what Sen. Barack Obama or Sen. John McCain may say they will do as president, after a trillion dollars has been taken off the top there will be a lot less in the federal treasury for them to do anything with.
Already Sen. Christopher Dodd, Connecticut Democrat, is talking about extending the bailout from the financial firms to homeowners facing mortgage foreclosures — as if the point of all this is to play Santa Claus. The huge federal debts we already have are the ghosts of Christmas past.

Senate Banking Committee Chairman Sen. Christopher Dodd, D-Conn., center, is followed by reporters as he returns to his office on Capitol Hill in Washington, Monday, Sept. 22, 2008. Associated Press.

Financial institutions are not being bailed out as a favor to them or their stockholders. In fact, stockholders have come out worse off after some bailouts.
The real point is to avoid a major contraction of credit that could cause major downturns in output and employment, ruining millions of people, far beyond the financial institutions involved. If it was just a question of the financial institutions themselves, they could be left to sink or swim. But it is not.
We do not need a replay of the Great Depression of the 1930s, when the failure of thousands of banks meant a drastic reduction of credit — and therefore a drastic reduction of the demand needed to keep production going and millions of people employed.
But bailing out people who made ill-advised mortgages makes no more sense that bailing out people who lost their life savings in Las Vegas casinos. It makes political sense only to people like Mr. Dodd, who are among the reasons for the financial mess in the first place.
People usually stop making ill-advised decisions when forced to face the consequences of those decisions, not when politicians come to their rescue and make the taxpayers pay for decisions the taxpayers had nothing to do with.
The Wall Street Journal, which has for years been sounding the alarm about the riskiness of Fannie Mae and Freddie Mac, recently cited Mr. Dodd along with New York Sen. Charles Schumer and Massachusetts Rep. Barney Frank, also Democrats, among those on Capitol Hill who have been "shilling" for these financial institutions, downplaying the risks and opposing attempts to restrict their free-wheeling in the mortgage market.
As recently as July of this year, Mr. Dodd declared Fannie Mae and Freddie "fundamentally strong" and said there is no need for "panicking" about them. But now that the chickens have come home to roost, Mr. Dodd wants to be sure to get some goodies from the rescue legislation to pass out to people likely to vote for him.
Don't make any bets on how this situation will turn out - except that we can predict politicians will blame the "greed"of other people. You can bet the rent money on that.
Thomas Sowell is a nationally syndicated columnist.

This clairvoyant and concise column pretty much sums up my opinion of the situation. My only question is whether a bailout is necessary at all. After all, if we use unemployment or economic growth as indicators, the situation is nothing like the Great Depression. Furthermore, the FED is loosening the money supply, while at the beginning of the Great Depression they actually contracted the money supply severely in order to curb speculation. In either event, I find it ridiculous that we are contemplating helping out the idiots who obtained adjustable-rate mortgages when the interest rate was low, expecting it to stay that way forever. The entire model for macroeconomic activity, boiled down to only its most fundamental part, is the dichotomy of risk-return. These people took a big risk, and the decision bit them in the ass. They should be made to suffer the consequences.

Collapse? Not quite...

It's been quite awhile since I wrote anything, because I've been trying to wrap my head around the financial crisis taking place.  The following is my understanding of what has been happening the past few months...

My impression of the situation is that the FED set a somewhat dangerous precedent when it bailed out the investment bank Bear-Stearns, essentially establishing the public perception that gains from taking risks are private, while the losses are public.  This would, naturally, increase moral hazard.  If the FED is perceived as being only a little bit more likely to bail a failing firm out, a firm will be marginally more likely to make risky business-decisions.  Which is especially bad in troubled economic times...

Fannie and Freddie failed because they agreed to underwrite risky subprime mortgages after the government, in 1992, essentially mandated that the two organizations underwrite subprime mortgages so that low-income bad-credit home buyers could have a chance at a part of the American dream.  Lo and behold, when the interest rate shot up last summer, and subprime mortgage dependent home-buyers started defaulting left and right, these securities they had underwritten became essentially worthless.  Bye-bye, Fannie and Freddie.

The FED wasn't going to make the same mistake with Lehman Brothers, and it (wisely, I believe) allowed that investment bank to fail.  Everything would have been peachy, except that money markets started essentially drying up because investors were scared.  For instance, the LIBOR doubled overnight, which is historically unprecedented, and banks actually stopped lending to each other, which is unheard-of.  AIG insurance had previously issued many credit-default swaps (or subprime mortgages), and as a result was having to pay the collateral in massive amounts because they were losing their bets in massive amounts.  AIG started frantically borrowing money in the hope of paying off their debts from the credit-default swaps, to such an extent that its credit-worthiness rating was downgraded.  Remember commercial paper?  A substantial portion of the commercial paper held was issues by AIG, and thus a whole lot of people ran the risk of getting screwed if AIG became financially insolvent.  Money markets would have dried up  So the financial markets froze up, because a lot of people were invested in AIG's debt, and as a result the velocity of money plummeted.  Bernanke and Paulson concluded that it was a better option to loan AIG massive quantities of money at a high interest rate (making a pretty penny if AIG pulled through) than have the economy potentially collapse, and that pretty much leaves us where we are today.  Whew.

Arguments and counterarguments

In response to my previous posting, a fb friend said this:

The reason looking at historical voting records of each party doesn't really work is because the parties have changed greatly in the past century. Where once democrats generally included slave owners in the deep south (founded as it was by jefferson, madison, etc), that demographic has pretty much been swept away since the civil rights movement. And where once an intellectual from illinois could comfortably call himself a republican, it is safe to say that that, too, has changed. The current republican party, and this administration in particular, upholds few, if any, of the many moral prinicples it uses to get votes, demonstrating a startling level of hypocrisy. Smaller government? They've gone out of their way to put the unitary executive theory into work, trying their best (as many of them did during the nixon administration) to make the president a quasi-monarch, while tapping our phones for freedom, altering well defined laws of torture and habeas corpus, and putting our country into greater and greater debt. Gay marriage? While Karl Rove and Dick Cheney were openly opposing gay marriage, making it a huge national issue during election election years to distract their homophobic base from any real issues, they consistently asked for 'privacy' when it came to their own families. While everyone knows that Cheney's daughter, Alan Keye's daughter, Newt Gingrich's daughter, etc are open lesbians quietly loved and supported by their families, few know that Karl Rove, while trying to put a gay marriage ban in the constitution, often visited his gay stepfather (who he always called dad) and his stepfather's partner in Palm Springs. Family values? One can only imagine the unholy hate-filled shit storm that would have spewed from the right had a democrat announced a female vp with 5 kids, a six month old with downs syndrome, and a pregnant 17yr old. In short, the republican party of today stands for nothing and just wants power, nothing else.

I figured it was a shame typing up a long, politically-intelligent response and not posting it to my blog, so here is my response, in full:

Why so partisan? The whole purpose of political debate is to further the discourse, ultimately developing a policy that is acceptable to most representatives of both parties, The whole reason I wrote this was that Mr. Herbert's arguments are so blatantly partisan that anybody with half a brain could poke holes in them. Which I proceeded to do. Now, I am neither a Republican nor a Democrat. Bigger government scares the shit out of me, as does God in government, as does the nanny state, as do countless other things about both parties. Your point about the evolution of the parties is valid, and I agree wholeheartedly that neither party today is the same as it was 25, 50, or 100 years ago. I found the argument that long-past conduct is a justification for present political control to be ludicrous. Thus Mr. Herbert's insistence that Liberals have a track record to be proud of is not quite true; the modern parties bear no resemblance to those of 40 years ago. Republicans have co-opted the JFK-style Liberalism, and the old-Democrats have evolved (or regressed, depending upon how you feel about it) to Progressivism. It is ridiculous to claim that the modern Democratic party should be proud of FDR's accomplishments, just as it is pointless to suggest that modern Republicans bear any similarity to those of Lincoln's day. If you want to term the evolution of party ideals as hypocrisy, that is fine by me, but I would ask that you recognize that the Democrats are just as guilty of this hypocrisy as the Republicans, and that you consider which is more likely top be successful: a party that stays stagnant, never changing its ideals, or a party that evolves to meet its constituents' wants. I agree that the current administration has been awfully hypocritical, saying one thing and then doing another. However, I invite you to consider the complexities of the issue: would the Democrats have attacked Bush as lax on security if he had not taken precautions, like wiretapping? Although the courts have ruled that habeas corpus extends to enemy combatants, (a bad decision in my view), before that ruling the law only extended to citizens within their own country; enemy combatants without a country were not protected. Historically, in times of war the president has always had the power to curtail certain civil liberties for the sake of security. The courts have taken a new stand, hurting Bush a lot, but restrictions on freedom such as wiretapping are nothing new. Remember that the government rounded up Japanese during WWII and interned them. These restrictions of freedom by the Federal government are nothing new. Although I agree that unbridled executive power is extremely dangerous, speaking as an individual, it's ok with me if they wiretap my phone and subject the tapes to computer analysis to make sure I'm not a terrorist. Just a personal opinion, and I completely see how that wouldn't be ok with you. Debt? Look at the government's fiscal deficit over the past 75 years. We were in debt most of the time. Clinton's surplus was the happy result of increased taxes and a new, flourishing economic sector. I agree that the current debt is bad, (lots of crowding out), but it's nothing new nor particular to the Republican party. Lastly, regarding gay marriage, abortion, and what people do with their genitals in general: I think it's an awful shame people care about this so much. John Edwards had to drop out of the race because it was revealed he had cheated on his wife. If Bill Clinton hadn't lied under oath, I wouldn't care one hoot about his infidelities. Giuliani would have been a great president, I think, but his past spouses reflected poorly upon him. I think that in general, we should all care a whole lot less about what politicians do in their spare time, and instead focus on their policies.

Palin's actions can all be framed in her belief in the right to life and the wrongness of abortion. That is her in a nutshell. She appeals to a lot of people because, well, a lot of people think abortion is wrong. Very wrong. Most Democrats would say they don't think abortion is a walk in the park, I think. What could they do if elected to overturn Roe v. Wade? Nothing, in practical terms, because that was a Supreme Court decision. Personal views, in this case, aren't worth a hoot. As for Republicans trying to define marriage as between a man and a woman, while at the same time having gay children, isn't the simplest reason because they really, really believe in it? Enough to put it above family? I'd like to think that they wouldn't hurt their children just to get votes, but it could just be me. As for a hate-filled shit-storm, as you so-eloquently put it, I don't myself know, but I find it likely that the Republicans could use that as a political leverage device, just as the Democrats are currently doing so wholeheartedly. Again, just a hypothesis.

The whole point of this email is not to support Republicans, because many of the things they do are not supportable. I am merely trying to keep you from demonizing the opposition party. Aside from the political spin in an election year, a crime of which both parties are guilty, their views are founded upon real principles, just as are the Democrats. While I don't agree with all the arguments I have made here, at least I am able to remove myself from the discourse sufficiently to approach the discourse compassionately.

In response to Mr. Herbert

A facebook friend of mine, who shall remain anaoymous, posted an article that so too me back that I felt compelled to respond.  The article is Hold Your Heads Up, by Bob Herbert, and it's so monumentally stupid that I have to quote it here, in full, before offerng refutations.  These refutations, I would like to believe, are common sensical, and at times I will refer to econometric studies that I have read and read about.  So without further ado, here is the article as quoted by my friend:

Hold Your Heads Up 

By BOB HERBERT

Ignorance must really be bliss. How else, over so many years, could the G.O.P. get away with ridiculing all things liberal?

Troglodytes on the right are no respecters of reality. They say the most absurd things and hardly anyone calls them on it. Evolution? Don’t you believe it. Global warming? A figment of the liberal imagination.

Liberals have been so cowed by the pummeling they’ve taken from the right that they’ve tried to shed their own identity, calling themselves everything but liberal and hoping to pass conservative muster by presenting themselves as hyper-religious and lifelong lovers of rifles, handguns, whatever.

So there was Hillary Clinton, of all people, sponsoring legislation to ban flag-burning; and Barack Obama, who once opposed the death penalty, morphing into someone who not only supports it, but supports it in cases that don’t even involve a homicide.

Anyway, the Republicans were back at it last week at their convention. Mitt Romney wasn’t content to insist that he personally knows that “liberals don’t have a clue.” He complained loudly that the federal government right now is too liberal.

“We need change, all right,” he said. “Change from a liberal Washington to a conservative Washington.”

Why liberals don’t stand up to this garbage, I don’t know. Without the extraordinary contribution of liberals — from the mightiest presidents to the most unheralded protesters and organizers — the United States would be a much, much worse place than it is today.

There would be absolutely no chance that a Barack Obama or Hillary Clinton or Sarah Palin could make a credible run for the highest offices in the land. Conservatives would never have allowed it.

Civil rights? Women’s rights? Liberals went to the mat for them time and again against ugly, vicious and sometimes murderous opposition. They should be forever proud.

The liberals who didn’t have a clue gave us Social Security and unemployment insurance, both of which were contained in the original Social Security Act. Most conservatives despised the very idea of this assistance to struggling Americans. Republicans hated Social Security, but most were afraid to give full throat to their opposition in public at the height of the Depression.

“In the procedural motions that preceded final passage,” wrote historian Jean Edward Smith in his biography, “FDR,” “House Republicans voted almost unanimously against Social Security. But when the final up-or-down vote came on April 19 [1935], fewer than half were prepared to go on record against.”

Liberals who didn’t have a clue gave us Medicare and Medicaid. Quick, how many of you (or your loved ones) are benefiting mightily from these programs, even as we speak. The idea that Republicans are proud of Ronald Reagan, who saw Medicare as “the advance wave of socialism,” while Democrats are ashamed of Lyndon Johnson, whose legislative genius made this wonderful, life-saving concept real, is insane.

When Johnson signed the Medicare bill into law in the presence of Harry Truman in 1965, he said: “No longer will older Americans be denied the healing miracle of modern medicine.”

Reagan, on the other hand, according to Johnson biographer Robert Dallek, “predicted that Medicare would compel Americans to spend their ‘sunset years telling our children and our children’s children what it was like in America when men were free.’ ”

Scary.

Without the many great and noble deeds of liberals over the past six or seven decades, America would hardly be recognizable to today’s young people. Liberals (including liberal Republicans, who have since been mostly drummed out of the party) ended legalized racial segregation and gender discrimination.

Humiliation imposed by custom and enforced by government had been the order of the day for blacks and women before men and women of good will and liberal persuasion stepped up their long (and not yet ended) campaign to change things. Liberals gave this country Head Start and legal services and the food stamp program. They fought for cleaner air (there was a time when you could barely see Los Angeles) and cleaner water (there were rivers in America that actually caught fire).

Liberals. Your food is safer because of them, and so are your children’s clothing and toys. Your workplace is safer. Your ability (or that of your children or grandchildren) to go to college is manifestly easier.

It would take volumes to adequately cover the enhancements to the quality of American lives and the greatness of American society that have been wrought by people whose politics were unabashedly liberal. It is a track record that deserves to be celebrated, not ridiculed or scorned.

Self-hatred is a terrible thing. Just ask that arch-conservative Clarence Thomas.

Liberals need to get over it.

Aside from the blanket statement about Republicans, which do nothing to further the American political discourse, Mr. Herbert speaks of the second Amendment as if its negativity were a foregone conclusion.  It is a fact that gun ownership saves lives every year that might not be saved if the would-be victims of crime were forced to resort to calling the police.  It is a fact that in countries in which guns are banned, like Britain, deaths by stabbing have increased dramatically.  (Fancy that -- some people will kill others, regardless of whether the government steps in and bans their method of choice.)  Personally, were I robbed, I'd prefer to be able to equalize the level of force-potential with a gun than have to worry about my personal strength in a gun- or knife fight.  But I disgress.

And fancy a liberal, changing his or her status to support the death penalty?  Wonder of wonders!  It's apparant that Mr. Herbert didn't bother actually researching the issue.  In studies of this issue, the death-penalty has been found to be a statistically significant reducer of crime (fancy that!  Criminals are worried that they'll get killed!).  Though it is a morally contentious issue where one could make grounded arguments on either side of the issue, by making a blanket statement and deriding his opponents Mr. Herbert only shows the weakness of his own views.

Mitt Romney made an insulting statement about Democrats at the Republican convention?  The surprises just keep coming!  I can't believe that he would do such a thing, in a ceremony that 99% fluff and 1% actual politics.  Well, at least the Democrats didn't do anything of that sort...

Civil rights?  Yes, liberals fought for equality among races, against other Democrats.  While there were Republicans opposed to the Civil Rights Act, a quick examination of the percentages of Democratic and Republican support reveals:

"The original House version:^[9]

• Democratic Party: 152-96   (61%-39%)
• Republican Party: 138-34   (80%-20%)

The Senate version:^[9]

• Democratic Party: 46-21   (69%-31%)
• Republican Party: 27-6   (82%-18%)

The Senate version, voted on by the House:^[9]

• Democratic Party: 153-91   (63%-37%)
• Republican Party: 136-35   (80%-20%)"

As can be clearly seen from a quick examination of these percentages, the Republicans were more for the Civil Rights Act than the Democrats.  And let's not forget which party Abe Lincoln was from.  Nor ought we to forget that the Southern Democrats were the ones largely responsible for the Civil War;  those same Dixiecrats voted in droves against the Civil Rights Act.

Social Security, Unemployment Insurance, Medicare and Medicaid were all Democratic endeavours, true, and were all fiercly opposed by Republicans.  And such programs unambiguously decrease the incentive to work, and increase adverse selection and moral hazard amongst the 'insured'.  It has been proven -- proven -- that unemployment insurance, like Welfare, decreases the incentive to work, thereby prolonging the very unemployment it seeks to relieve.  Remember Welfare reform in 1996?  That was a Republican initiative.  Social security is a benefit to society only in that it forces present-consumption-biased consumers to save a lttle -- a very little -- for the future.  Let's remember that the real value of the money a citizen puts into Social Security over a lifetime actually decreases.  Significantly.  All of Mr. Herbert's social programs are net detriments to society, and all have had consequences far beyond their original reach.  Google Medicare / Social Security / Welfare deficit, if you want to teach yourself something.

I agree with one point the author makes, that "[w]ithout the many great and noble deeds of liberals...  America would hardly be recognizable to today's young people".  But in my view, the author has failed to mention a singal significant accomplishment that liberals can be proud of, aside from part of the Democratic party's noble support of the Civil Rights Act.  All of his examples follow a simple formula:  restrict basic liberties and rights, and attempt to legislate around the consequences, with an ultimate 'solution' that is worse than the problem it was originally trying to fix.

I could go on.  In fact, I think I will.  Head Start was a noble cause, for certain, aside from the fact that it has been econometrically demonstrated to be a failure.  Food Stamps restrict the freedom to purchase of the poor, forcing them to spend their handouts on food rather than what they really want.  I have a feeling legal services were provided in this country with the advent not of Liberals, but of lawyers.  I have no idea how Liberal government has made children's toys safer.  The workplace is safer, yes, but with the cost of a restriction of individual freedom.  (For the record, this is one thing that I think Liberals can be proud of, but I'm on a rol, and just wanted to point out the two sides to this issue.)

As a last point, I would like to say that there are many, many things modern of which Liberals (or more rightly termed Progressives) can be proud.  I am not a Republican, though I'll admit that of late I vote like one.  The reason this article so infuriated me is that it actually weakens Liberals' position on issues where they have a lot to contribute towards a bipartisan conslusion.  Far from helping his party I believe Mr. Herbert has pushed undecided voters away from the Democratic party.

Should I stay or should I go?

Now comes the big question for me: should I stay in the political market, or should I cash out and reap my sweet reward? McCain futures were currently selling at 51.5-52, which is their lifetime high. It's also pretty high considering that McCain and Obama do not split this market 50-50 (their prices do not add up to 100) -- a small discount exists for unlikely possibilities, like Hillary somehow getting the nomination, or McCain dying. If I cash out now, closing my positions and having a check mailed to me, I win; I have made about 60% of my original investment, which is damned good considering the short time I've been involved in the market. If McCain is selling at an even 50.0, with each share worth $5, I would gross $4.95 per share, because the trading fee is only $0.05. Good returns by any measure.


Another option is to try to make marginal gains from short-term fluctuations in price between McCain and Obama. This is an inherently dangerous strategy, but it has its merits. If this price changes by as little as 0.6 (or $0.06) I stand to make a small gain. But there is a whole lot of information that I cannot know that is being taken into consideration by this market; by my reasoning, using a short-trading strategy, I stand to lose as much if not more than I do to gain.


There is also the fact that the debates are fast approaching, and I think the Republicans are going to get trounced, to put it bluntly. Obama is a far more elegant speaker than McCain, policy questions aside, and I think that despite Palin's energy her lack of experience is really going to hurt her in the VP debate. Which again, is telling me that I should sell McCain now, possibly even more than I have, in the expectation that the price will drop by a few points during the debates. This strategy is very attractive, to me, but the reality is that it is far more short-term and far less certain than the strategy I have adopted thus far. Which fills me with a nervous excitement.

Convergence

First, a quick update on the prediction markets. Lo and behold, my thinking a few months back seems correct; $3.20 / $10 = 32% was far too low a value for the McCain stock contracts. The appreciation I am seeing on my assets is the reward for my clairvoyance. Since a picture is worth a thousand words, I'll give you the latest intrade charts, and say that Palin is energizing the Republican party, or at least the markets.







The prices of the two contracts -- and therefore the relative probabilities that each candidate will win, as assessed by the market -- are converging. The media's opinions -- read educated spin -- are giving way to market participants' experiences of the candidates, their platforms, and the implications of the policies they would enact if elected. When I started drafting this piece a few days ago, what I said was: "My prediction, based purely on instinct and a coin flip, is the McCain will edge closer to the 50% line as the weeks pass. Bottom line: I think this contract is undervalued, resulting in a long-selling opportunity that is greater than the trading fee, at least as of today". Oh well. I guess the market outpaced me.


What is particularly interesting is the performance of the markets over the past week. I haven't actually examined those charts with any scrutiny yet, but if I had to make an educated guess, (and I do), it's that Obama will have slipped a couple of points after some gaffes he made that have riled the Repiblican party, and women in general, at least according to the media. Something about comparing Palin to a pig, though I don't follow these things closely...






Fancy that, right again! I amaze myself sometimes. Though I dare say that anyone should have been able to see that a selling price of 32/100 for McCain was substantially undervalued, unless he was giving undue weight to say the probability that McCain would have to drop out due to health issues (let's face it -- he is pretty old). I predict Obama won't climb more than approximately five points over McCain for the foreseeable future, assuming that no one in the McCain camp makes a political faux pas.