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.
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.
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.
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...
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.)
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...
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.
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.
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.
