Thursday, September 18, 2008
Both candidates are behaving foolishly.
McCain asserted today that he would fire Chris Cox, chairman of the SEC. As if this would actually remedy anything. Earlier in the week, McCain attacked the 'greed' of those 'on Wall Street,' claiming that, if elected, he would fix that problem for good.
As if. I wrote here, in my companion business blog, why that's never going to happen. And you don't want it to happen.
As I pointed out in that piece, few consumers have been hurt by the past two weeks of financial sector upheaval.
Frankly, it is nauseating to watch both candidates attempt to sound as if they know anything detailed about what, for example, AIG actually does. They don't, and they're not going to learn enough in a few hours to make much difference. And neither has access to the information at Treasury, the Fed, or any regulatory agency.
Obama, for his part, blathers about 'not hurting families.' Just what about Lehman running itself out of business is 'hurting families?'
I will, however, note this about the rookie from Illinois. He has been publicly exposed as the third-largest recipient of campaign donations from Fannie Mae, among all sitting US Senators.
That would certainly make him a prime target of blame for what happened with the GSEs.
It brings to mind the history our nation's early financial tussles. In this case, between President Andrew Jackson and president of the Second Bank of the United States, Nicholas Biddle, in the 1830s. Biddle, in a tactic copied by Fannie's and Freddie's management, used his central bank currency-issuance profits to contribute money to members of Congress, in order to buy their votes for supporting the Bank in its fight with Jackson.
Jackson struck back by instructing his Treasury Secretary, Roger Taney (who succeeded two Secretaries who refused to execute Jackson's directive), to transfer all Federal government deposits from the Second Bank of the United States to state banks. This had the effect of draining the 2nd BUS of funding, and led to its demise.
Thus, the tactics by which the heads of Fannie and Freddie kept support on Capitol Hill is nearly as old as the Republic.
It should be noted that two former heads of Fannie who reaped tens of millions of dollars in compensation for what is now seen as wrongful and misleading management- Franklin Raines, former Clinton OMB director, and James Johnson- are prominent in the Democratic party's candidate's campaign.
So, not only has Obama's political fortunes directly benefited from the largess of Fannie and Freddie, but he has placed former CEOs of the former in high places in his Presidential campaign staff.
An imminent post on my business blog will outline my own thoughts on how to attempt to prevent, or at least minimize the recurrence of the behaviors that have led to the current, rapid loss of value in the financial services sector. But, here, for now, I will simply observe that it is almost certain that detailed regulations attempting to get further into the management of financial institutions will not likely work.
As it is, today's Wall Street Journal's editorial by Zachary Karabell explains that the current meltdown of valuations in structured finance instruments has its origin in the Sarbanes-Oxley law. Thanks to Enron's 'creative accounting,' Congress mandated that financial instruments must be marked to market.
When no market exists, problems arise.
Hence, again, the root of the problem is Congress. Its mandatory use of 'mark to market' at all times, rather than something more flexible, to reflect longer term values of securities to be held to or near maturity, is directly responsible for the speed with which firms like Bear Stearns, Merrill Lynch, AIG and Lehman saw value melt off their balance sheets within days.
The last thing we need is two windbags, McCain and Obama, official members of that home of all great windbags, the US Senate, opining on what to do to 'fix' the current financial services sector situation.
Those two, and their 98 colleagues, have done quite enough damage already, thanks very much.
Wednesday, September 17, 2008
As various legislators, Presidential candidates and media pundits search for a place or person whom to blame for the current upheaval in the financial services sector, you need look no further than Bob Rubin and his old boss, Bill "Bubba" Clinton.
Thanks to them, as I noted in this post on my companion blog,
"If this has been only limited to a few mortgage banks, then the damage might have been lessened. But, thanks to Bob Rubin's and Bill Clinton's tacit removal of the firewall between commercial and investment banking, and insurance, with their explicit approval of Sandy Weill's merger of Citibank with Travelers Insurance (which also owned an investment banking operation), commercial banks and insurance companies co-mingled their normal businesses with these securities underwriting businesses, and related swaps trading.
So, in truth, much of the damage wrought in these past few weeks and months is directly traceable to Federal government lapses. The removal of Glass-Steagall, and the feeding and growth of Fannie Mae and Freddie Mac were direct causes of all of this mess.
Despite what John McCain, Barack Obama, the business media and others will tell you, 'greed' is not the cause."
We'll always have greed, or opportunism, and stupidity. But Rubin convinced the rest of Washington's political establishment, due to his stature as ex-Goldman Sachs co-head, that removing Glass-Steagall was a smart idea.
Nice work, Bob. You not only screwed up the firm whose chairmanship you appear to have been given in exchange for greasing the skids for Sandy Weill's proposed merger. You set in motion a chain of events that directly led to this past year's entire financial services sector reckoning with reckless excess.
Oh, and you, too, Bubba. Your acquiesence to Rubin laid the non-regulatory foundation for the biggest, quickest restructuring of the financial services sector in forty years.
Tuesday, September 16, 2008
On the stump, both he and "Lying Joe" Biden are now reveling in their talk about home foreclosures, recession, and how it is all the fault of the 'Bush-McCain' Presidency.
Obama went so far as to churlishly chortle that, to paraphrase his actual words, which I cannot recall exactly,
'Maybe now those on Wall Street will feel some of the pain the workers of the country have felt.'
How caring and sensitive, eh? It goes to my point that, for some reason, nobody with a college degree is ever considered a 'hard worker.'
Anyway, back to my point. I think the freshman Senator from Illinois, and his untruthful sidekick from Delaware risk becoming tarred as permanent gloomsters. And Americans don't actually like electing people who simply preach that the sky is falling.
You see, Obama has to now argue that the economic world in America is collapsing, else, why choose him? But his former message of 'hope' is gone. It's all about blame now.
And, if, as I will illustrate shortly, Obama is painting a picture that most Americans don't actually see, or have the experience of, won't he essentially doom his electoral prospects by being seen by most voters as being out of touch with reality?
To make my point more clearly, with data, consider the following.
Here are some important passages from Donald Luskin's excellent article in the Washington Post this past Sunday,
"Overall, the pessimists are up against an insurmountable reality: In the last reported quarter, the U.S. economy grew at an annual rate of 3.3 percent, adjusted for inflation. That's virtually the same as the 3.4 percent average growth rate since -- yes -- the Great Depression.
Why, then, does the public appear to agree with the media? A recent Zogby poll shows that 66 percent of likely voters believe that "the entire world is either now locked in a global economic recession or soon will be." Actually, that's a major clue to what started this thought-contagion about everything being the worst it has been "since the Great Depression": Politics.
Patient zero in this epidemic is the Democratic candidate for president. As it would be for any challenger, it's in his interest to portray the incumbent party's economic performance in the grimmest possible terms. Barack Obama has frequently used the Depression exaggeration, including during a campaign speech in June, when he said that the "percentage of homes in foreclosure and late mortgage payments is the highest since the Great Depression." At best, this statement is a good guess. To be really true, it would have to be heavily qualified with words such as "maybe" or "probably." According to economist David C. Wheelock of the Federal Reserve Bank of St. Louis, who has studied the history of mortgage markets for the Fed, "there are no consistent data on foreclosure or delinquency going all the way back to the Depression."
The Mortgage Bankers Association (MBA) database, which allows rigorous apples-to-apples comparisons, only goes back to 1979. It shows that today's delinquency rate is only a little higher than the level seen in 1985. As to the foreclosure rate, it was setting records for the day -- the highest since the Great Depression, one supposes -- in 1999, at the peak of the Clinton-era prosperity that Obama celebrated in his acceptance speech at the Democratic National Convention late last month. I don't recall hearing any Democratic politicians complaining back then.
Even if Obama is right that the foreclosure rate is the worst since the Great Depression, it's spurious to evoke memories of that great national calamity when talking about today -- it's akin to equating a sore throat with stomach cancer. According to the MBA, 6.4 percent of mortgages are delinquent to some extent, and 2.75 percent are in foreclosure. During the Great Depression, according to Wheelock's research, more than 50 percent of home loans were in default.
Moreover, MBA data show that today's foreclosures are concentrated in that small fraction of U.S. homes financed by subprime mortgages. Such homes make up only 12 percent of all mortgages, yet account for 52 percent of foreclosures. This suggests that today's mortgage difficulties are probably a side effect of the otherwise happy fact that, over the past several years, millions of Americans of modest means have come to own their own homes for the first time.
Here's another one not to be too alarmed about: Obama is flat-out wrong when he frets on his campaign Web site that "the personal savings rate is now the lowest it's been since the Great Depression." The latest rate, for the second quarter of 2008, is 2.6 percent -- higher than the 1.9 percent rate that prevailed in the last quarter of Bill Clinton's presidency.
And Obama's infection by the Depression-exaggeration bug goes way back. His first outbreak came on Oct. 2, 2002, in his famous speech opposing the invasion of Iraq, delivered when he was an Illinois state senator. He said that the invasion was "the attempt by political hacks like Karl Rove to distract us from" a litany of economic troubles including "a stock market that has just gone through the worst month since the Great Depression."
Quite an exaggeration. When state senator Obama made that remark, the Standard & Poor's 500 had just dropped 11 percent for the month of September 2002. But stocks dropped twice that much in October 1987. Since the Great Depression, the stock market has had bigger one-month drops on four occasions. Obama's pessimism on stocks then happened to be as ineptly timed as it was factually incorrect. Exactly one week later, stocks hit bottom, and over the next five years the S&P 500 more than doubled, surging to new all-time highs.
So much for Obama's hyperbole about our terrible economy.
The damage has been heavily concentrated in the financial sector -- banks, investment firms and mortgage companies. If you exclude that sector, stocks are off 14.8 percent.
Some economic indicators -- export growth and non-defense capital goods orders such as industrial machinery, for example -- are running at levels associated with brisk expansion. Others are running at middling levels, such as the closely followed Institute for Supply Management manufacturing index. But it's actually difficult to find many that are running at truly recessionary levels.
There have been 11 recessions since the Great Depression. And we're nowhere close to being in the 12th one now. This isn't just a matter of opinion. Words -- even words as seemingly subjective as "recession" -- have meaning.
In a new working paper, economist Edward Leamer of UCLA's Anderson School of Management shows that changes in the unemployment rate, payroll jobs and industrial production almost precisely explain every recession as officially determined by the National Bureau of Economic Research. At present, only the unemployment rate exceeds the recession threshold. The other two factors are far from it. According to Leamer's paper, we'll only fall into recession "if things get much worse."
This would suggest that anyone who says we're in a recession, or heading into one -- especially the worst one since the Great Depression -- is making up his own private definition of "recession." And probably for his own political purposes.
McCain campaign adviser and former U.S. senator Phil Gramm was right in July when he said that our current state "is a mental recession." Maybe he was out of line when he added that the United States has become "a nation of whiners." But when it comes to the economy, we have surely become a nation of exaggerators.
Whatever the political outcome this year, hopefully this will prove to be yet another instance of that iron law of economics and markets: The sentiment of the majority is always wrong at key turning points. And the majority is plenty pessimistic right now. That suggests that we're on the brink not of recession, but of accelerating prosperity.
Maybe this will turn out to be the best of times -- at least since the Great Depression. "
Sunday, September 14, 2008
I don't know if that means they both lose their shows entirely, but it would seem so. I don't watch MSNBC.
What else can either talk about right now on an hourlong show that isn't the election?
Here are some relevant YouTube video clips. The first one captures the Olbermann-Matthews on-air tiff.
This clip apparently captures an accidentally open microphone of Olbermann's in a three-way conversation with Matthews and Joe Scarborough, as discussed by Fox News anchors.
Here are two additional, fully-video clips of Fox News programs discussing the firings.