The guy writing the Forbes article sounds kind of nutty to me. It's certainly interesting to see people challenge the current set of beliefs if only because it helps to ensure that we really are fact-checking. But I don't buy it.
The deposit insurance stuff is really interesting to me. On the face of it, it would seem like a bank run is unlikely - anyone with less than 100k in a bank would be irrational to take out their money, right? But I think there's more to it.
First, it depends on the belief that the government can afford to pay out that money. As is fairly well-documented, the FDIC itself is pretty under-capitalized right now. The FDIC has some $53B in available funds - a worst-case resolution of the Washington Mutual failure would have eaten $20B of that. If there were a systematic bank run (i.e. several national banks in a nation-wide panic, not a few isolated cases) the FDIC wouldn't be able to back all of it. It seems fairly clear that the Fed and Treasury would then bail out the FDIC, but ... would you want your money depending on that?
Second, it depends on the belief that you will get your money back quickly. Given the option, do you want to go through the hassle of having the government figure how much they owe you and pay it out? Best-case that takes a few weeks, and a large number of Americans live paycheck-to-paycheck. Obviously the timeline involved gets much worse if the government has to bail out the FDIC.
Third, there's actually a surprising amount of money outside the limits of what's FDIC-insured. I know a couple people who've had to move money around to get under the per-bank cap, so my guess is it's probably more like 90% of Americans have their deposits fully-covered by the FDIC. This article, http://www.economist.com/finance/displaystory.cfm?story_id=12342681, suggests that some 38% of money in deposits is outside the coverage of the FDIC at the old 100k limit, and that 27% will remain outside the coverage after the bump to a 250k limit (my guess is most of those are retirees' accounts - the truly wealthy fat cats aren't storing their money in savings accounts). So even if people withdraw just what's outside the FDIC insurance, that's 27% of deposits (though presumably some fraction of that would then be deposited in a savings account at another bank).
So it does seem like there's some cause for concern about bank runs. And then there's the example of Washington Mutual. WaMu obviously got itself in trouble through risky mortgages and other financial voodoo. But what pushed the bank from "uh oh" to "oh shit" was that over a ten-day period depositors withdrew some 16.5B - essentially, speculation that the bank was going to go under caused a bank run, which in turn pushed deposits so low that the bank did buckle.
From http://www.economist.com/finance/displaystory.cfm?story_id=12321761:
"Even more alarming, WaMu's demise shows that depositors will flee the most troubled banks, even when their money is backed by the state.
WaMu had been struggling for months. Reckless expansion during the housing boom saddled it with more than $50 billion in option adjustable-rate mortgages, among the most likely to explode when markets turned. But its troubles accelerated after the bankruptcy of Lehman on September 15th. Over the following ten days, frightened depositors yanked almost a tenth of their money, despite a federal guarantee of all deposits up to $100,000."
Which is a long way of saying that while I think a legitimate nation-wide bank run is unlikely, I do think there's a legitimate risk that regulators ought to focus on preventing.
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The other big group that have large accounts in banks, it turns out, are mostly small businesses that have to make payroll. Obviously they have to keep a fairly large amount of cash on hand to pay everyone every month (those of you with real jobs will probably recall on your paystubs that the company parks its payroll money in Wachovia or Wells Fargo or somesuch bank).
So for them it's a double whammy. On one hand they lose the money that they use to regularly make payroll if a bank goes under. On top of that, they have to fight a federal regulator to get out the money that they just had insured. Also, whereas private people can move money around to multiple banks to get under the $100,000 (or $250,000 caps or whatever), this is obviously not a possible strategy for small businesses that use it for payroll and ongoing expenses.
And, in fact, they're relatively more incentivized to figure out what's going on at their bank - if they can't make payroll for two weeks because of a bank problem and all of their checks bounce, customers are going to go away and employees are going to quit.
In the end, bank runs these days are more likely to occur via small and large businesses transferring away money than they are having grannies lining up around the block...
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Thank you for the links J and expanding upon the ambiguities of deposit insurance. Yeah I guess the numbers just don't add up - the FDIC has $53B, which equals only 1.5% of all US bank deposits. But say this crisis gets worse and the FDIC actually needs to clear its shelves and even take loans from the Fed to reimburse customers from more big failed banks. That is kind of an economic doomsday scenario anyway - so I don't think any amount of preparation or safeguards would be enough. $100k, $250k, $1M - people will lose major money and maybe a run on the remaining solvent banks would happen anyway.
Like no matter what they promise, home insurance companies are just physically unable to cover all claims from huge disasters like an 8.0 quake in SF-LA or a Katrina (I guess similar to how AIG couldn't possibly pay out if all their credit-swaps went bad). So they try to weasel their way out through contract loopholes, stall with red tape, or shortchange customers on damage assessments. People should know that before taking out a policy, and probably by now they do. I guess that's why there's a new push to have a disaster relief fund run by Washington and funded by tax dollars, which might give people more "confidence" that the money in their homes will be protected. But those two examples lead me to wonder if it's proper for the government to play the role of guarantor against any and all public catastrophes. Maybe it was feasible in New Deal times, but investments are more costly and complex these days, and the effects of disasters spread further. Shit happens, and human government is not wise and efficient enough to protect us against the larger natural or man-made disasters. Now some insurance is relatively "easier" for the state to guarantee, like retirement and health care, but we just lack the political will for the required sacrifices and reforms (but that's a separate discussion).
Regarding bank runs, hopefully more stable banks will just buy up the struggling ones and cover threatened deposits that way, as was the case with Wachovia, so the FDIC doesn't have to step in. Competitors recognize deals and will pounce when they can. Or the government will force a buyout, like they did with JPMorgan-Bear? But for WaMu's case, they were extraordinary screw-ups, so hopefully other banks won't get in such hot water and incur the justified run. I'm just amazed they were able to pull an Enron for so long and dupe customers into thinking that they would take care of their money. Maybe people assume that large banks are safe (like how I assumed that Palin, being a state governor, would know how to give interviews), or was it the free checking!?! I guess so much of it is psychological as the Economist said - just make sure people at least have a shred of confidence in their banks to let their money stay put, earning 2%. Well, the SEC decided to prohibit short-selling of some stocks, but not others, this month. Can the government prevent bank runs by blocking large withdrawals? It may not be Constitutional, but it's for the greater public good, right?
Well, if the premise behind the Wall Street rescue is that the Fed is large and stable enough, and not burdened by the short-term constraints of a publicly-traded company, to hold onto toxic securities until they turn profitable, can we apply that to private banking too? The Treasury/Fed used to be the "lender of last resort", but obviously that has gone out the window, as commercial entities as well as financial institutions are now getting cash advances. If we can't trust private bank wackos like WaMu to safeguard our money and respect risk, then could private citizens have savings accounts at the Fed instead? Why borrow from China when they can borrow from us? 30-year T-notes aren't flexible enough (though they are considering bringing back the 3-year note). Just thinking out of the box here. Like Freddie and Fannie (in theory), they could offer a safer alternative than commercial banks, and customers can make the choice. It would also incentivize private banks to be more cautious, or risk losing business to Uncle Sam.
To close, some of my coworkers were wondering if our company's cash reserves (in the billions) are similarly protected in case of bank failure. Like A mentioned that small businesses might want to withdraw their cash, because it may exceed the $250k protection limit and they need security because they have daily expenses to cover to stay alive. But of course large companies have billions, so where the heck do they put their cash? And is it any safer? Cayman Islands and Suisse? I guess a lot of big companies just become banks themselves, like GE and Toyota?
Wednesday, October 8, 2008
Monday, October 6, 2008
More on the bailout
Some interesting follow-up links:
A contentious discussion on the crisis between Economics Profs. Reich and Henderson, the former a Clintonite and the latter a Reaganite:
http://www.kqed.org/epArchive/R810060900 (mp3 should be available by Mon. evening or Tues.)
Lehman was lining executives' pockets while begging Uncle Sam for a bailout and cancelling employee severance:
http://thehill.com/leading-the-news/waxman-slams-lehman-brothers-on-executive-pay-2008-10-06.html
http://www.nypost.com/seven/10042008/news/regionalnews/lehman_staff_gets_the_shaft_in_severance_132071.htm
Is the "freezing up of credit markets" exaggerated?
http://www.forbes.com/opinions/2008/09/28/bernanke-bailout-crisis-oped-cx_drh_0928henderson.html
Some justifications for this Wall Street rescue is (1) to increase credit liquidity and (2) to improve depositor confidence to prevent a 1930-like bank run. But...
According to data provided by the St. Louis Federal Reserve Bank, lending by banks for consumer loans and commercial and industrial loans was at an all-time high on Aug. 1. Bank lending for mortgages was only one-quarter of 1% below its level on May 1, when it was at an all-time high. [Forbes.com]
I know people and small businesses are having some problems maintaining or increasing their lines of credit, but obviously many others out there are still lending and borrowing normally. And in response to the Depression, the FDIC has insured accounts up to $100,000 for years (now $250,000), which covers 99% of us. Yes I'm sure some irrational panickers will still withdraw their savings amidst this crisis, but it's very unlikely to see a repeat of 1930, except for smaller cowboy banks like IndyMac that were already on the rocks. But averting Wall Street sell-offs by huge fund managers and high-roller investors is a different, and tougher, problem (as we've seen from >5% losses by the Dow and foreign markets recently, even after the passing of the rescue bill).
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Well, I guess a major lesson learned again is the importance of information. Economics and markets won't work, or won't be fair at least, with imbalanced or highly defficient information. I would hope that investors can do a better job in actually knowing and having accountability for what the hell they're buying and selling, especially risky speculations like higher-order derivatives. Maybe regulation plays a role in that, to parse through and elucidate all these exotic investment vehicles. Maybe regulation will never keep the lid on ever evolving and multiplying casino economics, but at least we can expose bad paper for what it is, and not rescue morons who ignore the warnings and still shoot themselves in the foot.
A contentious discussion on the crisis between Economics Profs. Reich and Henderson, the former a Clintonite and the latter a Reaganite:
http://www.kqed.org/epArchive/R810060900 (mp3 should be available by Mon. evening or Tues.)
Lehman was lining executives' pockets while begging Uncle Sam for a bailout and cancelling employee severance:
http://thehill.com/leading-the-news/waxman-slams-lehman-brothers-on-executive-pay-2008-10-06.html
http://www.nypost.com/seven/10042008/news/regionalnews/lehman_staff_gets_the_shaft_in_severance_132071.htm
Is the "freezing up of credit markets" exaggerated?
http://www.forbes.com/opinions/2008/09/28/bernanke-bailout-crisis-oped-cx_drh_0928henderson.html
Some justifications for this Wall Street rescue is (1) to increase credit liquidity and (2) to improve depositor confidence to prevent a 1930-like bank run. But...
According to data provided by the St. Louis Federal Reserve Bank, lending by banks for consumer loans and commercial and industrial loans was at an all-time high on Aug. 1. Bank lending for mortgages was only one-quarter of 1% below its level on May 1, when it was at an all-time high. [Forbes.com]
I know people and small businesses are having some problems maintaining or increasing their lines of credit, but obviously many others out there are still lending and borrowing normally. And in response to the Depression, the FDIC has insured accounts up to $100,000 for years (now $250,000), which covers 99% of us. Yes I'm sure some irrational panickers will still withdraw their savings amidst this crisis, but it's very unlikely to see a repeat of 1930, except for smaller cowboy banks like IndyMac that were already on the rocks. But averting Wall Street sell-offs by huge fund managers and high-roller investors is a different, and tougher, problem (as we've seen from >5% losses by the Dow and foreign markets recently, even after the passing of the rescue bill).
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Well, I guess a major lesson learned again is the importance of information. Economics and markets won't work, or won't be fair at least, with imbalanced or highly defficient information. I would hope that investors can do a better job in actually knowing and having accountability for what the hell they're buying and selling, especially risky speculations like higher-order derivatives. Maybe regulation plays a role in that, to parse through and elucidate all these exotic investment vehicles. Maybe regulation will never keep the lid on ever evolving and multiplying casino economics, but at least we can expose bad paper for what it is, and not rescue morons who ignore the warnings and still shoot themselves in the foot.
Friday, October 3, 2008
The Wall Street rescue, through the eyes of an economics novice
I guess by now our leaders have done a decent job explaining to us why the bailout package is a "necessary evil". It's not just a blank check to Wall Street at the expense of Main Street. For better or worse, we're like symbiotic organisms; our fates are tied and Wall Street credit is the lifeblood that sustains Main Street activity. Though many times (including now), it seems that Wall Street calls the shots and we are just along for the ride. They tell us it's all about credit availability. Small businesses and local governments need loans to buy raw materials or even pay their workers, not to mention the private citizens that seek car/college/home loans. But is credit the answer for everything, and does it have to play such a crucial role in modern economies? Must we do "whatever it takes" to insure a free flow of credit forever, or face worldwide panic and recession like we see now?
Despite the uproar from some GOP leaders and talk radio of all stripes, America is not "dead set" against this bill, and I bet the House will approve version 2 today (oh, I just now see on BBC that they did), especially with time running out in this Congressional session. All 535 of their asses are up for re-election on November 4 (but only a few incumbents are ever really challenged), and voters/investors are running out of patience for political posturing as the Dow sinks to 10,000. I guess the new bill is 90% similar to the previous version, except for the FDIC insurance limit is increased from $100k to $250k (that's really great news, since most of us have like $240k in our savings accounts and were getting nervous), and about $100B in new tax breaks were included to persuade the holdout Republicans, with no mention how debt-laden Washington will recover that revenue of course. Clearly Main Street, Wall Street, and Washington have problems with borrowing responsibly.
Some of the included tax breaks are pure pork and quite laughable: http://www.taxpayer.net/resources.php?category=&type=Project&proj_id=1429&action=Headlines%20By%20TCS.
Many gripes about the bailout are justified and it won't be a panacea, but unfortunately there's not much room left for further debate. If asked, "Would you risk half a trillion in tax dollars to help Wall Street recover from its mistakes?", most people would instinctively answer "no" without the benefit of additional context. So one can understand why our initial reaction to Bush's plan was skeptical at best. But recent Pew Research poll suggests America is now split roughly 50-50 over the plan, though few Americans are well versed in macroeconomics and fiscal policy to really understand the repercussions either way. If geniuses like Bernanke and Greenspan are grasping at straws, that doesn't bode well for the rest of us. People might not want to throw their tax billions at Wall Street, but they also don't want to see their investments evaporate and commerce dry up around them (and in many cases it already has). When push comes to shove, we'll go to bed with the devil to save ourselves.
That's what really frustrates me about this crisis - it demonstrates how easily Wall Street can manipulate us like a puppeteer. Big firms and private citizens alike made big bucks during the loose credit housing boom, but some got in too deep and hung around too long until they got burned. And all along, the Fed tried to prolong the binge instead of trying to cool off an obviously oversupplied and overvalued housing market. Many huge banks have seen their holdings lose over 50% of their value since 2007, causing financial panic or ruin to millions. So at every mention of a government rescue (despite many economists' concerns), the Dow surged, and when the House balked on the first bailout proposal, the tempermental Dow responded with a record point drop. Was that due to millions of Average Joes going on E*Trade in unison to cut their losses and sell their 50 shares of blue chips, or rather the high-rollers and big fund managers dumping their vast numbers of shares in favor of safer commodities like gold? It may not be deliberately punitive, but it's still blackmail.
Banks might be drowning in debt, scared to invest and lend to each other and us, but they are still sitting on billions of good, liquid assets. They could try to reverse the slide if they wanted, and some have, like the European Central Bank injecting billions into the credit market and Warren Buffet looking for some bargains. But instead they tighten up even further, because why should they risk their money when Washington might do it for them? It's like the "welfare mom with 6 kids" that Newt Gingrich types loved to villify. Why should she make an effort to get a job when Uncle Sam will cut her a check every month? Wall Street said, "OK Washington, if you don't give us the money, we're going to execute hostages until you do." Economic terrorism, right? Ordinary citizens saw the unlucky 777 point drop, and feared even more for their 401(k)'s and other investments. Maybe some who were previously opposed to the bailout changed their minds and started to lobby the bickering Congress to act. Anything to protect our money, right? Maybe I'm just full of crap and don't understand how the market works, but it sure seems like a scam to a simpleton like me.
The selective rescues or facilitated purchasing of some troubled GSEs and financial institutions by our government was huge economic news already. Maybe some people were already musing about a government repository for toxic securities as a potential next step, but the Bush-Paulson plan must have still taken America by surprise, as well as their demand for immediate implementation (hence the huge Dow swings in the last 2 weeks). I guess Congress and citizens had a right to be skeptical of a back-of-the-envelope plan crafted by Treasury, that gives Treasury god-like powers, and promoted by an administration with an unprecedented track record of augmenting executive powers (sometimes in defiance of the Constitution and common sense).
I am tired of hearing Harry Reid-type blowhards stressing the need to work together and pass this bill now, yet blame colleagues like John McCain for "interference", and proclaim that all 100 senators could have written a better bill. Then why didn't they? Don't give us a turd decorated with fancy wrapping paper and a $700B price tag, then expect us to congratulate you. I hate the fact that we have left the disease unchecked for so long that our best course of action left is to cut off our arm before the infection spreads. We've cornered ourselves. Many people in Washington and Wall Street seem very eager to get us to do a bad thing quickly, because the alternative is worse. I suppose that constitutes leadership these days. At least Lyndon Johnson had the dignity to not seek re-election after failing to deliver victory in Vietnam. If the Fed, Treasury, SEC, and Congress had an ounce of self-respect left, half of them should have resigned by now in shame. After Bush's speech to sell the plan to America, PBS had a couple chaps from the House Financial Services Committee on for analysis. At times they were actually smiling and joking about the situation to each other! Millions of Americans are in trouble and getting ulcers from worry, and they, who are in the eye of this storm and maybe contributed to the crisis, are hamming it up. Talk about out of touch; this is why revolutions happen.
A lot of people blame this credit crisis/housing bust on unbridaled personal and corporate greed and irresponsibility coupled with poor government oversight. While that may be partially true, greed and poor oversight have been and will always be a part of human civilization. There's no way around it unless we all become monks and peasants. But maybe the trick is to reduce the opportunities for reckless, greedy bastards to be reckless and greedy, and reduce the policing duties of the government to give them less chances to drop the ball. Yes, less regulation is fine as long as the credit markets and other financial systems are organized in ways where excess and fraud are not just illegal, but impossible. Maybe I'm just dreaming, but what are we paying all those PhD's for? Can commerce be free, but also with failsafe mechanisms? Can we create more ideal markets where human nature is less able to make a negative impact, without sacrificing productivity and efficiency too much? We all operate out of self-interest, and our behavior is affected by external carrots and sticks. Obviously the sticks weren't big enough to prevent even smart people from taking stupid risks in pursuit of very juicy carrots. But incentives and punishments only go so far, especially to powerful entities that think they can dodge accountability/consequences, and often they're right.
Maybe a good first step is reducing our dependence on credit. I know borrowing is necessary for some up-front costs of large investments like businesses and homes. But why can we not spend what we don't have? And do we have to exploit every last dime by loaning it out or investing in others? Can we reinvent economics with less emphasis on credit, because clearly the status quo has some pitfalls. I'm not saying we should bury our cash in the backyard, but there has to be some restraint and moderation. Otherwise, we'll keep getting market panics and crises like this one, except maybe worse and worse as financial institutions become "too big and interconnected to fail". It has gotten so complicated that we don't even know where the money in our savings account really goes, nor the true value of our investments. We are so dependent on large, predatory credit entities - it's too dangerous and unfair. They are the "landlords" and we are the "tennants". They dictate terms to us and only exist to take a piece of our labor and creativity. Microfinance has helped millions out of poverty in the Third World, even if it has its share of criticisms, such as very high interest rates to justify the investment risk. Maybe instead of relying on corporate America to keep our local economies going (where their interests may be quite different than ours), we can form more credit unions and municipal cooperatives. Share and spread the accountability and prosperity, with the goal being collective stability and security, not individual profit. People pay into and withdraw from a general fund based on their economic situations and financial preferences. Members vote on who gets loans and the conditions of those loans in a transparent, democratic fashion. But maybe that's just crazy socialist talk?
In closing, I find myself thinking about my few months as a student in Europe in 2000 (when the dollar was kicking the Euro's butt, so it was great timing). Obviously Paris is a modern metropolis with its share of problems too, but people from many walks of life were not obsessed with money, advancement, and acquisition, as we are. Of course there was plenty of greed and evil, though life was so different. It was a fast-paced, turbulent city, but somehow life seemed saner and more people-centric also. Maybe nostalgia is a rose-colored lens, but the differences were too large to be imagined. Every little neighborhood had several bakeries, convenience stores, and boutiques. Sometimes they would have no customers all day, yet they were still in business, paying the bills and providing for their familes. In America, it seems that all but the best small businesses are hanging on by a thread, while the rest of us whores have to attach ourselves to corporations for career development and financial survival. It is hard to get fired, and even harder to work more than 50 hours a week, yet unemployment was at 10% (though no one was starving to death). Companies weren't merging or going under left and right. Workers left their work at the office and could actually relax at home, often having two-hour long dinners together with the whole family. Maybe they didn't have a big home with a white picket fence, big screen, and station wagon, but they seemed quite happy and comfortable.
No one worried about saving up for tuition, child care, or retirement, because the state assumes most of those burdens. In America, we get nickel and dimed into poverty with "maintenance fees" on our retirement investments and college loan scams. Same goes for medical insurance, obviously, as France's system perennially ranks in the top 5, while ours is about #30-40 near Estonia. Middle-class people went on month-long vacations and could afford it. My uncle was on unemployment insurance for years and no one accused him of being a deadbeat. Taxes run about 50%, but many consider it a patriotic duty in order to maintain their society and quality of life. Maybe that welfare state lifestyle is going the way of the dinosaurs, with an aging populace and rising costs of basic goods and services. There is plenty of evidence for that, with conservatives like Sarkozy coming to power. However, other socialist nations have rejected their Bush-allied conservative leaders in favor of leftists, like Australia, Spain, and Japan. Maybe there is a chance. There has to be an alternative to this insane, and I mean literally insane, American way of life and commerce. Oh yeah, and mainland Europe isn't saddled with war expenses and the accompanying political blowback either.
Some interesting links:
http://www.iht.com/articles/2008/10/01/opinion/edbuchanan.php (using computational models to better understand/predict economic activity)
http://news.bbc.co.uk/2/hi/business/7646863.stm (have banks share more information and maintain accountability for their lending)
http://www.newsweek.com/id/161199 (the menace of the booming 'credit default swap' market and how it could be regulated)
http://baltimorechronicle.com/2008/092908Lendman.shtml (a big economics rant that I haven't even finished reading yet)
This section in italics is pretty lame, so please skip it over unless you want to ridicule my ignorance:
[The market and the past decisions of financiers have left us little alternative. We need to restore confidence and flowing credit in the markets, or the whole machine grinds to a halt. Credit is the "lubricant" of our economy, but does it have to be so? Liberal capitalism is roughly defined as private ownership and exchange of products/services/investments/etc., with prices determined by a free market. Credit is not inherently essential to market economies, but of course in our current industrialized, globalized economy, it is. We already know the dangers of relying on or abusing available credit. Our government is in record debt to foreigners, which contributes to our weak dollar and makes some struggling companies ripe for the taking by offshore competitors. Hyper-consumers with little self control keep taking out new credit cards to cover spending beyond their means, as well as their previous accumulating debt. Yet some of those people were offered huge mortgages without having to provide evidence that they were able to afford them. And sadly, many vendors almost rely on and tailor their business models in expectation of customers over-spending. We know all this already.
But why does our economy need to revolve around credit? I know borrowing and lending are as old as the pyramids, but it's probably no coincidence that usury is a sin in most religions. Micro-finance aside (a relatively recent invention), very few of us possess the vast capital and/or means of production necessary to provide substantial credit to would-be borrowers. So instead, investments and assets are pooled into vast multinational corporate financial entities that become umbrella lending hubs. Millions of people entrust their savings to them, hoping it will grow, and millions others depend on loans from them for various large purchases. Heck, even non-finance related companies make a good portion of their revenues through lending (GE and insurance companies like State Farm to name a few). GE makes jet engines and toasters - why venture into financial services? I think it's because the money is easier. They have all this surplus cash lying around - why not lend it out for a higher return, even if it gets them in hot water at times? It's hard to provide a tangible, desirable product or service to the marketplace, such as a new software application, home appliance, medical therapy, or even a cup of coffee. You have huge development and production costs, may need to file for patents (which could take years), conduct extensive safety and reliability testing, study consumer tastes, and comply with government regulations. And if things go wrong, you had better have deep pockets and some good lawyers/lobbyists. With lending, all you need are a few PCs and MBAs. I know I'm being simplistic, but you can't deny that the infrastructure needs of a company like Citi are much less than ExxonMobil or Toyota.
I know economics is all about maximizing efficiency, so in a sense it rewards "easy money". I guess that is why we may never totally expunge financial "gimmicks" from our society, and it seems that regulators are always playing catch-up as new scams emerge just as the old ones are finally contained. I guess this is the price we pay for freedom and democratic capitalism. ExxonMobil has to search for new oil fields, build wells, pay royalties, and find ways to get the product to buyers in a safe, legal, and cost-effective manner. Investment banks just move numbers on a board, albeit through very ballsy, high-stakes, and heavily-researched transactions. Easy money? There must be a reason why the median salary at places like Goldman Sachs is higher than even highly respected, productive companies like Google or Amazon. A neurosurgeon or Silicon Valley engineer might make good money, but it pales in comparison to the next innovative investment vehicle or shady tax shelter conceived by Wall Street. Maybe that's why the financial sector is the most powerful in our economy, even though it doesn't really do anything tangible. Everyone wants more money, and to grow the money they have. Surely there is a large demand for their services, which is why they exist, but I don't know how we can justify the power they wield. No other industry can bring global commerce to a halt and billions of people to their knees with a simple error.]
Despite the uproar from some GOP leaders and talk radio of all stripes, America is not "dead set" against this bill, and I bet the House will approve version 2 today (oh, I just now see on BBC that they did), especially with time running out in this Congressional session. All 535 of their asses are up for re-election on November 4 (but only a few incumbents are ever really challenged), and voters/investors are running out of patience for political posturing as the Dow sinks to 10,000. I guess the new bill is 90% similar to the previous version, except for the FDIC insurance limit is increased from $100k to $250k (that's really great news, since most of us have like $240k in our savings accounts and were getting nervous), and about $100B in new tax breaks were included to persuade the holdout Republicans, with no mention how debt-laden Washington will recover that revenue of course. Clearly Main Street, Wall Street, and Washington have problems with borrowing responsibly.
Some of the included tax breaks are pure pork and quite laughable: http://www.taxpayer.net/resources.php?category=&type=Project&proj_id=1429&action=Headlines%20By%20TCS.
Many gripes about the bailout are justified and it won't be a panacea, but unfortunately there's not much room left for further debate. If asked, "Would you risk half a trillion in tax dollars to help Wall Street recover from its mistakes?", most people would instinctively answer "no" without the benefit of additional context. So one can understand why our initial reaction to Bush's plan was skeptical at best. But recent Pew Research poll suggests America is now split roughly 50-50 over the plan, though few Americans are well versed in macroeconomics and fiscal policy to really understand the repercussions either way. If geniuses like Bernanke and Greenspan are grasping at straws, that doesn't bode well for the rest of us. People might not want to throw their tax billions at Wall Street, but they also don't want to see their investments evaporate and commerce dry up around them (and in many cases it already has). When push comes to shove, we'll go to bed with the devil to save ourselves.
That's what really frustrates me about this crisis - it demonstrates how easily Wall Street can manipulate us like a puppeteer. Big firms and private citizens alike made big bucks during the loose credit housing boom, but some got in too deep and hung around too long until they got burned. And all along, the Fed tried to prolong the binge instead of trying to cool off an obviously oversupplied and overvalued housing market. Many huge banks have seen their holdings lose over 50% of their value since 2007, causing financial panic or ruin to millions. So at every mention of a government rescue (despite many economists' concerns), the Dow surged, and when the House balked on the first bailout proposal, the tempermental Dow responded with a record point drop. Was that due to millions of Average Joes going on E*Trade in unison to cut their losses and sell their 50 shares of blue chips, or rather the high-rollers and big fund managers dumping their vast numbers of shares in favor of safer commodities like gold? It may not be deliberately punitive, but it's still blackmail.
Banks might be drowning in debt, scared to invest and lend to each other and us, but they are still sitting on billions of good, liquid assets. They could try to reverse the slide if they wanted, and some have, like the European Central Bank injecting billions into the credit market and Warren Buffet looking for some bargains. But instead they tighten up even further, because why should they risk their money when Washington might do it for them? It's like the "welfare mom with 6 kids" that Newt Gingrich types loved to villify. Why should she make an effort to get a job when Uncle Sam will cut her a check every month? Wall Street said, "OK Washington, if you don't give us the money, we're going to execute hostages until you do." Economic terrorism, right? Ordinary citizens saw the unlucky 777 point drop, and feared even more for their 401(k)'s and other investments. Maybe some who were previously opposed to the bailout changed their minds and started to lobby the bickering Congress to act. Anything to protect our money, right? Maybe I'm just full of crap and don't understand how the market works, but it sure seems like a scam to a simpleton like me.
The selective rescues or facilitated purchasing of some troubled GSEs and financial institutions by our government was huge economic news already. Maybe some people were already musing about a government repository for toxic securities as a potential next step, but the Bush-Paulson plan must have still taken America by surprise, as well as their demand for immediate implementation (hence the huge Dow swings in the last 2 weeks). I guess Congress and citizens had a right to be skeptical of a back-of-the-envelope plan crafted by Treasury, that gives Treasury god-like powers, and promoted by an administration with an unprecedented track record of augmenting executive powers (sometimes in defiance of the Constitution and common sense).
I am tired of hearing Harry Reid-type blowhards stressing the need to work together and pass this bill now, yet blame colleagues like John McCain for "interference", and proclaim that all 100 senators could have written a better bill. Then why didn't they? Don't give us a turd decorated with fancy wrapping paper and a $700B price tag, then expect us to congratulate you. I hate the fact that we have left the disease unchecked for so long that our best course of action left is to cut off our arm before the infection spreads. We've cornered ourselves. Many people in Washington and Wall Street seem very eager to get us to do a bad thing quickly, because the alternative is worse. I suppose that constitutes leadership these days. At least Lyndon Johnson had the dignity to not seek re-election after failing to deliver victory in Vietnam. If the Fed, Treasury, SEC, and Congress had an ounce of self-respect left, half of them should have resigned by now in shame. After Bush's speech to sell the plan to America, PBS had a couple chaps from the House Financial Services Committee on for analysis. At times they were actually smiling and joking about the situation to each other! Millions of Americans are in trouble and getting ulcers from worry, and they, who are in the eye of this storm and maybe contributed to the crisis, are hamming it up. Talk about out of touch; this is why revolutions happen.
A lot of people blame this credit crisis/housing bust on unbridaled personal and corporate greed and irresponsibility coupled with poor government oversight. While that may be partially true, greed and poor oversight have been and will always be a part of human civilization. There's no way around it unless we all become monks and peasants. But maybe the trick is to reduce the opportunities for reckless, greedy bastards to be reckless and greedy, and reduce the policing duties of the government to give them less chances to drop the ball. Yes, less regulation is fine as long as the credit markets and other financial systems are organized in ways where excess and fraud are not just illegal, but impossible. Maybe I'm just dreaming, but what are we paying all those PhD's for? Can commerce be free, but also with failsafe mechanisms? Can we create more ideal markets where human nature is less able to make a negative impact, without sacrificing productivity and efficiency too much? We all operate out of self-interest, and our behavior is affected by external carrots and sticks. Obviously the sticks weren't big enough to prevent even smart people from taking stupid risks in pursuit of very juicy carrots. But incentives and punishments only go so far, especially to powerful entities that think they can dodge accountability/consequences, and often they're right.
Maybe a good first step is reducing our dependence on credit. I know borrowing is necessary for some up-front costs of large investments like businesses and homes. But why can we not spend what we don't have? And do we have to exploit every last dime by loaning it out or investing in others? Can we reinvent economics with less emphasis on credit, because clearly the status quo has some pitfalls. I'm not saying we should bury our cash in the backyard, but there has to be some restraint and moderation. Otherwise, we'll keep getting market panics and crises like this one, except maybe worse and worse as financial institutions become "too big and interconnected to fail". It has gotten so complicated that we don't even know where the money in our savings account really goes, nor the true value of our investments. We are so dependent on large, predatory credit entities - it's too dangerous and unfair. They are the "landlords" and we are the "tennants". They dictate terms to us and only exist to take a piece of our labor and creativity. Microfinance has helped millions out of poverty in the Third World, even if it has its share of criticisms, such as very high interest rates to justify the investment risk. Maybe instead of relying on corporate America to keep our local economies going (where their interests may be quite different than ours), we can form more credit unions and municipal cooperatives. Share and spread the accountability and prosperity, with the goal being collective stability and security, not individual profit. People pay into and withdraw from a general fund based on their economic situations and financial preferences. Members vote on who gets loans and the conditions of those loans in a transparent, democratic fashion. But maybe that's just crazy socialist talk?
In closing, I find myself thinking about my few months as a student in Europe in 2000 (when the dollar was kicking the Euro's butt, so it was great timing). Obviously Paris is a modern metropolis with its share of problems too, but people from many walks of life were not obsessed with money, advancement, and acquisition, as we are. Of course there was plenty of greed and evil, though life was so different. It was a fast-paced, turbulent city, but somehow life seemed saner and more people-centric also. Maybe nostalgia is a rose-colored lens, but the differences were too large to be imagined. Every little neighborhood had several bakeries, convenience stores, and boutiques. Sometimes they would have no customers all day, yet they were still in business, paying the bills and providing for their familes. In America, it seems that all but the best small businesses are hanging on by a thread, while the rest of us whores have to attach ourselves to corporations for career development and financial survival. It is hard to get fired, and even harder to work more than 50 hours a week, yet unemployment was at 10% (though no one was starving to death). Companies weren't merging or going under left and right. Workers left their work at the office and could actually relax at home, often having two-hour long dinners together with the whole family. Maybe they didn't have a big home with a white picket fence, big screen, and station wagon, but they seemed quite happy and comfortable.
No one worried about saving up for tuition, child care, or retirement, because the state assumes most of those burdens. In America, we get nickel and dimed into poverty with "maintenance fees" on our retirement investments and college loan scams. Same goes for medical insurance, obviously, as France's system perennially ranks in the top 5, while ours is about #30-40 near Estonia. Middle-class people went on month-long vacations and could afford it. My uncle was on unemployment insurance for years and no one accused him of being a deadbeat. Taxes run about 50%, but many consider it a patriotic duty in order to maintain their society and quality of life. Maybe that welfare state lifestyle is going the way of the dinosaurs, with an aging populace and rising costs of basic goods and services. There is plenty of evidence for that, with conservatives like Sarkozy coming to power. However, other socialist nations have rejected their Bush-allied conservative leaders in favor of leftists, like Australia, Spain, and Japan. Maybe there is a chance. There has to be an alternative to this insane, and I mean literally insane, American way of life and commerce. Oh yeah, and mainland Europe isn't saddled with war expenses and the accompanying political blowback either.
Some interesting links:
http://www.iht.com/articles/2008/10/01/opinion/edbuchanan.php (using computational models to better understand/predict economic activity)
http://news.bbc.co.uk/2/hi/business/7646863.stm (have banks share more information and maintain accountability for their lending)
http://www.newsweek.com/id/161199 (the menace of the booming 'credit default swap' market and how it could be regulated)
http://baltimorechronicle.com/2008/092908Lendman.shtml (a big economics rant that I haven't even finished reading yet)
This section in italics is pretty lame, so please skip it over unless you want to ridicule my ignorance:
[The market and the past decisions of financiers have left us little alternative. We need to restore confidence and flowing credit in the markets, or the whole machine grinds to a halt. Credit is the "lubricant" of our economy, but does it have to be so? Liberal capitalism is roughly defined as private ownership and exchange of products/services/investments/etc., with prices determined by a free market. Credit is not inherently essential to market economies, but of course in our current industrialized, globalized economy, it is. We already know the dangers of relying on or abusing available credit. Our government is in record debt to foreigners, which contributes to our weak dollar and makes some struggling companies ripe for the taking by offshore competitors. Hyper-consumers with little self control keep taking out new credit cards to cover spending beyond their means, as well as their previous accumulating debt. Yet some of those people were offered huge mortgages without having to provide evidence that they were able to afford them. And sadly, many vendors almost rely on and tailor their business models in expectation of customers over-spending. We know all this already.
But why does our economy need to revolve around credit? I know borrowing and lending are as old as the pyramids, but it's probably no coincidence that usury is a sin in most religions. Micro-finance aside (a relatively recent invention), very few of us possess the vast capital and/or means of production necessary to provide substantial credit to would-be borrowers. So instead, investments and assets are pooled into vast multinational corporate financial entities that become umbrella lending hubs. Millions of people entrust their savings to them, hoping it will grow, and millions others depend on loans from them for various large purchases. Heck, even non-finance related companies make a good portion of their revenues through lending (GE and insurance companies like State Farm to name a few). GE makes jet engines and toasters - why venture into financial services? I think it's because the money is easier. They have all this surplus cash lying around - why not lend it out for a higher return, even if it gets them in hot water at times? It's hard to provide a tangible, desirable product or service to the marketplace, such as a new software application, home appliance, medical therapy, or even a cup of coffee. You have huge development and production costs, may need to file for patents (which could take years), conduct extensive safety and reliability testing, study consumer tastes, and comply with government regulations. And if things go wrong, you had better have deep pockets and some good lawyers/lobbyists. With lending, all you need are a few PCs and MBAs. I know I'm being simplistic, but you can't deny that the infrastructure needs of a company like Citi are much less than ExxonMobil or Toyota.
I know economics is all about maximizing efficiency, so in a sense it rewards "easy money". I guess that is why we may never totally expunge financial "gimmicks" from our society, and it seems that regulators are always playing catch-up as new scams emerge just as the old ones are finally contained. I guess this is the price we pay for freedom and democratic capitalism. ExxonMobil has to search for new oil fields, build wells, pay royalties, and find ways to get the product to buyers in a safe, legal, and cost-effective manner. Investment banks just move numbers on a board, albeit through very ballsy, high-stakes, and heavily-researched transactions. Easy money? There must be a reason why the median salary at places like Goldman Sachs is higher than even highly respected, productive companies like Google or Amazon. A neurosurgeon or Silicon Valley engineer might make good money, but it pales in comparison to the next innovative investment vehicle or shady tax shelter conceived by Wall Street. Maybe that's why the financial sector is the most powerful in our economy, even though it doesn't really do anything tangible. Everyone wants more money, and to grow the money they have. Surely there is a large demand for their services, which is why they exist, but I don't know how we can justify the power they wield. No other industry can bring global commerce to a halt and billions of people to their knees with a simple error.]
Thursday, September 25, 2008
Wall Street bailout
Yeah, that figures - thx for pointing that out J! If only we could be like that at work. We'll boss, I'll try to get this project done by that deadline, but if I don't, we can just extend it and get more budget, right?
What did you think of Bush's speech and the recent bailout deal? I thought it was funny how Bush, while he was giving a brief timeline of how we got to this point, failed to mention that the weak US dollar (partially due to artificially low interests rates maintained by the Fed) also contributed to the massive spending spree by foreign banks. And he never really justified to the country why he needs $700B, and where the hell that number came from.
Of course Wall Street is jumping for joy over the news, but like every economist worth a damn out there is fretting, so that should tell us something.
Krugman: http://krugman.blogs.nytimes.com/2008/09/21/thinking-the-bailout-through/
http://www.statesman.com/business/content/business/stories/other/09/23/0923bailoutsider.html
(but there are also plenty of other news links in favor of the bailout)
Congress acts all skeptical and critical, especially because their offices are being flooded with angry constituents protesting the bailout. They might express their displeasure in statements to the press, but only after a week of limited debate they come up with a bill that is fairly similar to Bush's original proposal? Yes they added on pay limits for execs and some oversight, but the "bailout" part is unchanged. Everyone keeps saying that this is a bad idea, but the alternative is worse. Maybe that's true, but it's pure political show again. Wall Street companies give millions each election cycle to both parties' candidates, and now they're calling in a mondo favor. Same goes for the presidential hopefuls, where Lehman/Lynch employees and there families have given $10M to Obama and $7M to McCain so far (1st link below, but I guess all that money didn't save Lehman from its sins anyway). And I don't think that they're just generous, patriotic citizens. This should be a bigger deal to them, because the bailout will mean they have hundreds of billions of public funds less to implement their lofty proposals for health care reform, energy/environment, defense, and education (2nd link).
http://news.yahoo.com/s/bloomberg/20080916/pl_bloomberg/ambsgo09sxvo
http://news.yahoo.com/s/bloomberg/20080917/pl_bloomberg/a8zvtv0iunks
But I hate it how the Congressmen act all outraged that the "humble, honest taxpayer" has to mop up rich and/or irresponsible people's mistakes, but when the chips are down, they let it happen without much resistance at all. As you said about auto emissions, they try to have it both ways. They can tell their constituents that they protested and voiced the people's concerns, so if the bailout fails, then they blame lame duck Bush for forcing it through in the twilight of his presidency, using the panic over growing economic calamity to justify hasty action. No mention of their abandonment of their legislative check and balance duty of course. And if the bailout succeeds, then they take the credit for "saving the economy" and helping Main Street as well as Wall Street.
If Congress had real concerns with this proposal, and frankly there are many details yet to be ironed out, then what is the hurry really? 3 more months of falling housing prices and maybe another bank or two going under won't impact us much more than our current shitty predicament (we'd be dropping from a -9 to -10, big whoop). And it's not like by passing this bill tomorrow, suddenly the economy will rebound and credit will flow like the mighty Mississippi. This will really become President 44's problem. Lawmakers can think things through over the holidays, do more research, and present a better proposal to Congress and the president by then. The economy and markets will get a Christmas shopping bounce as always to tide us over, anyway.
What did you think of Bush's speech and the recent bailout deal? I thought it was funny how Bush, while he was giving a brief timeline of how we got to this point, failed to mention that the weak US dollar (partially due to artificially low interests rates maintained by the Fed) also contributed to the massive spending spree by foreign banks. And he never really justified to the country why he needs $700B, and where the hell that number came from.
Of course Wall Street is jumping for joy over the news, but like every economist worth a damn out there is fretting, so that should tell us something.
Krugman: http://krugman.blogs.nytimes.com/2008/09/21/thinking-the-bailout-through/
http://www.statesman.com/business/content/business/stories/other/09/23/0923bailoutsider.html
(but there are also plenty of other news links in favor of the bailout)
Congress acts all skeptical and critical, especially because their offices are being flooded with angry constituents protesting the bailout. They might express their displeasure in statements to the press, but only after a week of limited debate they come up with a bill that is fairly similar to Bush's original proposal? Yes they added on pay limits for execs and some oversight, but the "bailout" part is unchanged. Everyone keeps saying that this is a bad idea, but the alternative is worse. Maybe that's true, but it's pure political show again. Wall Street companies give millions each election cycle to both parties' candidates, and now they're calling in a mondo favor. Same goes for the presidential hopefuls, where Lehman/Lynch employees and there families have given $10M to Obama and $7M to McCain so far (1st link below, but I guess all that money didn't save Lehman from its sins anyway). And I don't think that they're just generous, patriotic citizens. This should be a bigger deal to them, because the bailout will mean they have hundreds of billions of public funds less to implement their lofty proposals for health care reform, energy/environment, defense, and education (2nd link).
http://news.yahoo.com/s/bloomberg/20080916/pl_bloomberg/ambsgo09sxvo
http://news.yahoo.com/s/bloomberg/20080917/pl_bloomberg/a8zvtv0iunks
But I hate it how the Congressmen act all outraged that the "humble, honest taxpayer" has to mop up rich and/or irresponsible people's mistakes, but when the chips are down, they let it happen without much resistance at all. As you said about auto emissions, they try to have it both ways. They can tell their constituents that they protested and voiced the people's concerns, so if the bailout fails, then they blame lame duck Bush for forcing it through in the twilight of his presidency, using the panic over growing economic calamity to justify hasty action. No mention of their abandonment of their legislative check and balance duty of course. And if the bailout succeeds, then they take the credit for "saving the economy" and helping Main Street as well as Wall Street.
If Congress had real concerns with this proposal, and frankly there are many details yet to be ironed out, then what is the hurry really? 3 more months of falling housing prices and maybe another bank or two going under won't impact us much more than our current shitty predicament (we'd be dropping from a -9 to -10, big whoop). And it's not like by passing this bill tomorrow, suddenly the economy will rebound and credit will flow like the mighty Mississippi. This will really become President 44's problem. Lawmakers can think things through over the holidays, do more research, and present a better proposal to Congress and the president by then. The economy and markets will get a Christmas shopping bounce as always to tide us over, anyway.
Wednesday, September 24, 2008
Congress earns its sub-20% approval rating
http://news.yahoo.com/s/ap/20080924/ap_on_go_co/congress_spending_10
From the AP:
The legislation came together in a remarkably secret process that concentrated decision-making power in the hands of a few lawmakers. They include House Appropriations Committee Chairman David Obey, D-Wis., and [House Speaker Nancy] Pelosi.
Republicans blasted the process by which the measure came before the House. Lawmakers had just a few hours to scrutinize the 357-page measure — along with 752 pages of accompanying explanations and tables of previously secret pet projects — before the vote. Debate lasted less than one hour.
The rush also ran counter to Democratic promises for more open disclosure of billions of dollars worth of home-state pet projects sought by most lawmakers.
-------
Pelosi and Co. played us for fools in 2006 when they promised to make Congressional spending more transparent. Ooh, they're more honest than the corrupt GOP because they *disclose* their pork now. Not to the public of course, but Congressmen had a few hours to read over 1,000+ pages (they probably didn't) and an hour of debate before passing the $630B spending bill 370-58. Talk about moral hazard, who cares if it's taxpayer dollars!?! And this bill doesn't help Main Street very much: some aid for flood/storm victims and heating subsidies, as well as insignificant increases to unemployment assistance/food stamps. During America's worst economic crisis in decades, they pushed through this new spending bill under the radar with 2,322 pet projects totaling $6.6B. We wouldn't even know about all this if it wasn't for Taxpayers for Common Sense (http://www.taxpayer.net/). Actually the timing is fortuitous for them, because everyone is buzzing about the Wall Street rescue plan, so the media might not pay much attention to this (well Congress adjourns next week ahead of the election anyway, so they were in a hurry). And if people were discussing the bill, it was probably regarding the lifting of the offshore oil drilling moratorium portion, even though that won't affect us until 2011 at the earliest.
Bush had vowed to veto such pork-laden bills, but now he's a lame duck and Congress was crafty enough to attach the earmarks to a defense spending bill. The Bushies got a record $488B for the Pentagon, including funding for 20 more futuristic F-22 Raptor fighter planes ABOVE the number requested by the Defense Dept. (which is probably sizeable). Each one costs $138M. That's like me declaring to the IRS that I am due $5,000 reimbursement on my 2007 tax return, and they decide to give me $10,000. Why? During this serious economy crisis, why doesn't the Pentagon have to scale back like the rest of us?
What, our current aircraft aren't killing enough Muslims? Has Al Qaeda upgraded so much that our present fleet is obsolete? The F-22 project is a Boeing/Lockheed boondoggle that has wasted over $60B since 1990. It's almost as bad as the missile shield. I know it pales in comparison to the proposed $700B financial bailout, but at least with the bailout Uncle Sam gets the rights to crappy mortgage securities that *might* turn profitable some day (they did in the case of the Japanese banking crash and bailout in 2002-2006, but not to say I'm a fan of the "Paulson God Mode" plan). Well, I guess we're hoping to sell the fighters to Israel and NATO allies some day, but most of the proceeds will probably go to the defense contractors.
And somehow the auto lobbyists conned Washington into securing $25B in low-interest-loans (read: free money) for Detroit, to give them yet more time to retool their anachronistic business models for the reality of $4 gas. Ordinary citizens with good credit can't get a mortgage to save their life, but Detroit gets $25B to research what everyone else already knows!?! Uh, it's not like this came as a surprise, and look what the competition has done. European companies developed more efficient diesel and constant-variable transmission, and Japan is pumping out new 30-mpg partial-zero-emission family sedans and hybrids every year. But Detroit gives us the Escalade Hybrid, new minivans (nothing mini about them though), and Ford Flex (20 MPG highway - whoopee!). We keep subsidizing these inept morons, yet funding for scientific research, college grants, disability assistance, and various social servies keeps shrinking?
Interesting link about the previous financial bailout in Japan, and it's near success (if it wasn't for the current housing bust):
http://news.bbc.co.uk/2/hi/business/7623779.stm
From the AP:
The legislation came together in a remarkably secret process that concentrated decision-making power in the hands of a few lawmakers. They include House Appropriations Committee Chairman David Obey, D-Wis., and [House Speaker Nancy] Pelosi.
Republicans blasted the process by which the measure came before the House. Lawmakers had just a few hours to scrutinize the 357-page measure — along with 752 pages of accompanying explanations and tables of previously secret pet projects — before the vote. Debate lasted less than one hour.
The rush also ran counter to Democratic promises for more open disclosure of billions of dollars worth of home-state pet projects sought by most lawmakers.
-------
Pelosi and Co. played us for fools in 2006 when they promised to make Congressional spending more transparent. Ooh, they're more honest than the corrupt GOP because they *disclose* their pork now. Not to the public of course, but Congressmen had a few hours to read over 1,000+ pages (they probably didn't) and an hour of debate before passing the $630B spending bill 370-58. Talk about moral hazard, who cares if it's taxpayer dollars!?! And this bill doesn't help Main Street very much: some aid for flood/storm victims and heating subsidies, as well as insignificant increases to unemployment assistance/food stamps. During America's worst economic crisis in decades, they pushed through this new spending bill under the radar with 2,322 pet projects totaling $6.6B. We wouldn't even know about all this if it wasn't for Taxpayers for Common Sense (http://www.taxpayer.net/). Actually the timing is fortuitous for them, because everyone is buzzing about the Wall Street rescue plan, so the media might not pay much attention to this (well Congress adjourns next week ahead of the election anyway, so they were in a hurry). And if people were discussing the bill, it was probably regarding the lifting of the offshore oil drilling moratorium portion, even though that won't affect us until 2011 at the earliest.
Bush had vowed to veto such pork-laden bills, but now he's a lame duck and Congress was crafty enough to attach the earmarks to a defense spending bill. The Bushies got a record $488B for the Pentagon, including funding for 20 more futuristic F-22 Raptor fighter planes ABOVE the number requested by the Defense Dept. (which is probably sizeable). Each one costs $138M. That's like me declaring to the IRS that I am due $5,000 reimbursement on my 2007 tax return, and they decide to give me $10,000. Why? During this serious economy crisis, why doesn't the Pentagon have to scale back like the rest of us?
What, our current aircraft aren't killing enough Muslims? Has Al Qaeda upgraded so much that our present fleet is obsolete? The F-22 project is a Boeing/Lockheed boondoggle that has wasted over $60B since 1990. It's almost as bad as the missile shield. I know it pales in comparison to the proposed $700B financial bailout, but at least with the bailout Uncle Sam gets the rights to crappy mortgage securities that *might* turn profitable some day (they did in the case of the Japanese banking crash and bailout in 2002-2006, but not to say I'm a fan of the "Paulson God Mode" plan). Well, I guess we're hoping to sell the fighters to Israel and NATO allies some day, but most of the proceeds will probably go to the defense contractors.
And somehow the auto lobbyists conned Washington into securing $25B in low-interest-loans (read: free money) for Detroit, to give them yet more time to retool their anachronistic business models for the reality of $4 gas. Ordinary citizens with good credit can't get a mortgage to save their life, but Detroit gets $25B to research what everyone else already knows!?! Uh, it's not like this came as a surprise, and look what the competition has done. European companies developed more efficient diesel and constant-variable transmission, and Japan is pumping out new 30-mpg partial-zero-emission family sedans and hybrids every year. But Detroit gives us the Escalade Hybrid, new minivans (nothing mini about them though), and Ford Flex (20 MPG highway - whoopee!). We keep subsidizing these inept morons, yet funding for scientific research, college grants, disability assistance, and various social servies keeps shrinking?
Interesting link about the previous financial bailout in Japan, and it's near success (if it wasn't for the current housing bust):
http://news.bbc.co.uk/2/hi/business/7623779.stm
Tuesday, September 23, 2008
The financial crisis and bailout
WHEN DOES A COMPANY QUALIFY FOR A BAILOUT?
http://www.newsweek.com/id/158615
Wall Street is consumed with the subject of bailouts. As analysts chewed over the implications of the government's decision to assume the debt of ailing mortgage giants Fannie Mae and Freddie Mac, traders (and their real-estate brokers) wondered whether erstwhile titans Lehman Brothers and Washington Mutual would be next in line for government assistance. Meanwhile, lobbyists for the big three automakers were refining their pitches for $25 billion in loan guarantees. It is sure to be another long weekend for Treasury Secretary Henry Paulson.
Bailouts—the government's stepping in and providing financial assistance or credit guarantees to private-sector companies—are a highly confusing subject. As policymakers hasten to save some companies from the ravages of creative destruction, they leave others to fail. Some 5,644 businesses went bankrupt in July, up 80 percent from July 2007. So are there some objective criteria we can use to determine whether the government will toss a lifeline to a particular company?
It's a truism that the bigger you are, and the more you owe, the more forbearance you're likely to get. In 1984, when Continential Illinois, whose reckless lending practices had catapulted it into the ranks of the nation's 10 largest banks, ran into trouble, the government bought some of its loans and provided extraordinary compensation to depositors. "We have a new kind of bank," complained Fernand St. Germain, a congressman from Rhode Island, "It is called too big to fail." (St. Germain, who shepherded the bill that deregulated the savings-and-loan industry, would be blamed in part for the record-setting bailout of S&Ls later that decade).
But these days, size alone doesn't matter. Earlier this decade, Enron, WorldCom, and Global Crossing, three gargantuan companies, went bust while the government looked the other way. Of course, when the aforementioned companies filed for Chapter 11, nobody lost electricity or was unable to make a phone call. "But if the government envisions that a failure will have a serious adverse consequence on the economy, it's going to step in," said Benton Gup, a professor of banking at the University of Alabama and editor of the collection Too Big To Fail: Policies and Practices in Government Bailouts.
For that reason, certain types of financial institutions are much more likely to be helped than others. A bank that lends to people with dodgy credit in California doesn't pose much of a threat to the Davos crowd. But financial intermediaries like Bear Stearns and the FM twins function like the heart of the global financial system. If they go into cardiac arrest, the whole body is in danger. Since Bear Stearns was a counterparty to (and guarantor of) trades and financial arrangements with the world's major financial players, its failure would have triggered a cascade of losses. In the same vein, huge quantities of the $5.4 trillion in debt issued and insured by Fannie Mae and Freddie Mac sit on the balance sheets of central banks and financial institutions around the globe. For the U.S. government simply to let this debt—which it had been implicitly backing for decades—go bad would have meant inflicting severe damage on America's most significant diplomatic and trading partners. Fannie Mae wasn't too big to fail, one Wall Street wag told me this week. It was too Chinese to fail.
To be eligible for a bailout, firms must also demonstrate a particular genius for screwing up. Before it went bust, Bear Stearns had a monstrous $33 of debt for every dollar of capital, and hedge funds it owned destroyed hundreds of millions of dollars of clients' cash. It got a bailout. Lehman Brothers, which has taken painful measures to reduce its risk, is perversely less likely to get direct government help. "The worst Lehman can do is destroy the firm," said Barry Ritholtz, CEO of Wall Street research firm FusionIQ and author of the forthcoming Bailout Nation. "Bear Stearns, on the other hand, set up the firm so that if they screwed up, they could threaten the entire financial system." That may explain why Treasury Secretary Paulson has thus far resisted providing federal succor to Lehman.
Finally, companies seeking the tender mercies of the taxpayer must have good timing. Nearly all the great corporate bailouts of modern times have come in election years. Congress enacted loan guarantees for Chrysler in January 1980, ensuring that a company that employed about 130,000 people, many of them in the swing state of Michigan, would not go bust on the eve of primary season. So, if your company is in trouble, what should you do? Double down. Establish links to other firms. Export your products with abandon. And hustle. There are only seven more weeks until the election.
PERSONAL NARRATIVES AND EMOTIONS IN ELECTION PSYCHOLOGY
http://www.newsweek.com/id/158749
Narratives have been used to attract voters at least since Lincoln's campaign managers cast him as the rugged rail-splitter from the country's frontier, not the prosperous railroad lawyer and sophisticated writer he was, notes historian Michael Beschloss: voters are drawn to someone they can relate to, and the way to make that happen is by offering them stories. (The human brain is wired so that we can follow a chain of events that have people doing things in chronological order more easily than we can follow abstractions.) But the power of the narrative has grown as party identification has weakened—putting more voters in play—and as the culture has changed. Television has made voters expect to, and think they can, "see into people's souls to take their measure," says Beschloss. To do that, "they need clues," and there are few clues so potent as the challenges a person has faced and how he or she has met them. "The feeling that we need to know who these people are has become so enormous that a good part of Sarah Palin's appeal is her life history, the choices she made, things that let voters form a bond with her," says Beschloss.
The outsized power of the personal narrative today compared with even a generation ago (in 1980, Ronald Reagan ran not on personal narrative, but on hope and the promise of change) reflects something that has become almost a cliché in political analysis—namely, that emotions, more than a dispassionate and rational analysis of candidates' records and positions, determine many voters' choice on election day. The emotion can be hope or fear, pride or disgust. And don't be too quick to pat yourself on the back for thinking you cast your vote based on a logical parsing of a candidate's positions. For all but the most wonkish wonks, what matters is how the prospect of pulling out of Iraq or expanding oil drilling or any other policy makes you feel, and not a pro-and-con analysis of its pluses and minuses, which few people can figure out.
All of this has been true for decades. What's new is that the circumstances of this election have conspired to push people away from the reason- and knowledge-based system of decision-making and more down the competing emotion-based one. The latter is more ancient and has, throughout the course of human evolution, "assured our survival and brought us to where we are," says neuroscientist Antonio Damasio of the University of Southern California, a pioneer in the study of human emotions and decision-making. ...One of the most salient circumstances of this campaign is the sheer amount of information voters are bombarded with, says Damasio. You can barely pass a screen (TV or computer) or overhear a radio without being pummeled with the latest brouhaha over lipstick-wearing pigs or which candidate was cozier with lobbyists for the failed mortgage giants. When FDR was making radio addresses, "people had the time needed for reflection, to mix emotion with facts and reason," says Damasio. "But now, with 24-hour cable news and the Web, you have a climate in which you don't have time to reflect. The amount and speed of information, combined with less time to analyze every new development, pushes us toward the emotion-based decision pathway." And not even emotions such as hope. Voters are being driven "by pure like and dislike, comfort or discomfort with a personality," says Damasio. "And voters judge that by a candidate's narrative."
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The bailout article is interesting, but to me that's mostly because it shows how shamelessly the media is fanning the flames here. The article implies a substantial moral hazard in finance - that management/employees are rewarded (get money) for doing the wrong thing (blowing up the economy). There's certainly some of that, primarily in compensation paid during the boom and liquidated (i.e. not kept in company stock). That's very hard to resolve post-facto (it would be illegal for the g't to take back money already paid, though they can regulate for future booms). But it's not nearly as bad as the article implies.
The bailouts we've seen this year have not been soft landings for the companies involved. They haven't been quite as "Old Testament" as I'd have liked, but they have done a pretty good job of wiping out management, employee and shareholder value. In the year preceding Fannie Mae's "bailout", the stock lost ~90% of its value (from mid-60's to ~6), and since the g't stepped in it's lost another ~95% (to 0.43); that blows up a lot of the moral hazard, particularly given how much company stock was owned by employees and management. Management was fired (and it's not like people are going to be lining up to hire those folks). AIG's stock took a similar path (from mid-60's a year ago to 2.3 today), management was fired, and the money the g't is loaning them is at 850 basis points over the LIBOR (which is to say, borderline usury). Nobody is intentionally going to drive their firm into the rocks in order to lose 99% of its value and get fired.
In terms of the value of the company and assets, the difference between bankruptcy and bailout seems semantic - I mean, that's roughly what happened to Lehman. The article suggests that companies would somehow *want* to set up their company to be so big and entangled that they would get a bailout. The results when they fail seem pretty similar, though. And the big difference is that Lehman had a much better chance of surviving, exactly because they worked to get untangled. Merrill took a similar approach, and managed to get bought, albeit at firesale prices - not an ideal situation, certainly, but better than either bankruptcy or bailout.
The other bit that seems totally over the top is the assertion that the GSE's were bailed out to help Chinese investors. In calendar year 2008, Fannie Mae and Freddie Mac financed 80% of new mortgage issues. If those two companies suddenly evaporated, it would be dramatically harder for people to get new mortgages ... which means fewer home sales, increased mortgage rates, lower housing prices, and generally a steel-toed kick in the balls for the whole housing market. China benefits as well, but the main beneficiary was the American homeowner. Again, I'm not thrilled about it - it's essentially a generational transfer of wealth, as our parents' generation gets bailed out and mails the bill to you and me 20 years from now, in the form of debt.
I mean, I'm not suggesting things are working well. I think the government should have gone further in fully nationalizing the GSE's and then made clear they were going to be completely dismantled and sold for parts. I think the government should also be more transparent in making these determinations. And I think Wall Street compensation should have a large component of long-term results so some of those financial profits could be pulled out of those folks' pockets as we discover years later just how they earned their money (being leveraged 33 times over, for example). At the same time, Paulson and Bernanke have an incredibly hard job which would be challenging to do even if they could see the future.
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Well, I don't think the article was suggesting that these companies deliberately screwed up huge in order to "merit" a bailout. I think the author was being facetious to say that ironically, the biggest greedy morons get more help than those who admitted fault and really tried to help themselves. Like the Prodigal's Son story.
I'm not quite sure what you mean by: They haven't been quite as "Old Testament" as I'd have liked, but they have done a pretty good job of wiping out management, employee and shareholder value.
Definitely upper management played a large role in the crisis, and they should be punished accordingly. Maybe they lost a lot of their assets when the stock's value tanked, but they have plenty of diversified savings left and will recover from this mess, much better than their underlings at least. They will also get hired again, despite this black mark on their CV (maybe not as officers, but definitely into powerful positions). There is plenty of historical precedent for that. But for the ordinary workers, this is a killer, like the telecom and energy trading meltdowns before. Especially because it wasn't really their fault, unless they could have "blown the whistle" to alert others to the unwise business practices taking place, but no one was listening anyway during the housing boom when people were blind with greed. As you said, their savings in company stock has evaporated, and it will be hard to get re-hired quickly, because competing companies are in similar messes, and suddenly thousands of desperate, qualified workers have just entered the job pool. 100,000 financial sector jobs have been lost (maybe only 5-10% of that is management?), so that's 1/6 of total US new unemployment in 2008. So yeah, it wasn't any leader's intent to destroy his or her company, but their decisions contributed to the crisis so they should be held accountable. I don't think companies structure their business plans to make them more desirable for bailout (I hope not at least). But like in law enforcement, it's more efficient and socially preferrable if we can discourage bad behavior before we have to punish it after the damage was done. I don't know how DC can do that effectively though, without major political-economic backlash and accusations of interference in the free market.
How do we mitigate problems so they don't have to reach the bankruptcy/bailout stage? In America, people and companies are free to succeed or fail. Companies can, do, and must fail at times. Even dominant companies like Standard Oil, AOL, and PanAm were destroyed, either by the government, world/economic events, or their own mistakes. So when is a company "too important" to fail? I agree with you that Fannie & Freddie qualify - without them the housing sector grinds to a halt. The American Dream was made possible to millions over the years because of the 30-year-fixed, which no other nation can provide to the masses (so then why the hell did so many people take variable-rate loans instead!?!). However, maybe America doesn't have to have a mortgage-based home ownership system. Other modern nations like South Korea don't give home loans. People pay for apartments and homes with cash. It's a huge upfront cost, but then it's your asset 100% and no more hassles. But America is a borrow & spend culture, so probably we could never accept a change.
Maybe it's in the government's interests to prevent companies in critical sectors from qualifying to be too big to fail. It's horrible precedent to bail out companies with tax dollars, or force rivals to "take one for the team" and absorb another company's debt. Freddie was only created to give Fannie some competition. So maybe more competition/customer choice will keep these companies more honest and risk conservative? There are 5 major i-banks (well, 2 now). Is that too many or too few? Who knows, but I'm leaning towards too few. Other industries like wireless, oil, and airlines are heading down that path with merger-mania.
Regarding the China comments, of course Washington doesn't base its bail-out decisions chiefly on foreign considerations. But at the same time, economic turmoil abroad hurts us at home in this globalized commercial system. It would be bad for everyone if our mortage/financial crisis spread to other continents, and it already has (Asian markets down 5% this week, Europe 3%). The housing bubble also burst in Spain and the UK. European banks have folded or needed rescue too (UK's biggest mortgage bank was just bailed out this week), since they bought up so many American SIVs too. Foreigners must be pissed at us because through no fault of their own, their savings have shrunk because too many dumb Yanks and dumb banks engaged in bad loans.
So a large, troubled American company with significant foreign investment is probably more qualifying of assistance than one without. I think it makes sense. Countrywide wasn't bailed out (unless BofA was "persuaded" to do so by the Feds), and neither were smaller, more regional mortgage banks like IndyMac.
Yeah I agree with you that Paulson, Bernanke, and president 44 will have a hell of a time cleaning up this mess. You really need balls of steel for those jobs, and as you said, even a crystal ball may not save you. That's why it's so idiotic and repugnant for the presidential candidates to claim that they "understand" the economy and know how to "fix" it.
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I guess the problem, is, though, how do you legislate that? Being incompetent isn't (generally) a crime - it's only clear that they were incompetent post-facto (as in, after they were awarded their bonuses, which is an incentive problem I wrote at earlier), so by what mechanism do you decide to take their money away? And how can you make it so that they can't get a well-paying job again? By throwing them in jail?
I think the government did about the best it could, in wiping out nearly 90-95% of many of these company executives' personal wealth, without getting into punishments that would deviate from due-process and legal-based actions. I think it's a generalized problem of American life where well-connected people "fail-upward," as President Bush did, but no amount of legislating, unfortunately, is ever going to stop that problem (short of a total makeover of how society works). It's the same reason that all these political retreads get cushy jobs as political commentators spouting stuff that any idiot on the internet could come up with.
But I think that we do need to come up with, as Obama put it, a way to help out people on Main Street as well as Wall Street. A package that extends unemployment benefits, increases availability of food stamps, extends COBRA programs for those who recently lost their jobs, etc. Krugman and other economists have made the point that average citizens generally aren't as susceptible to the moral hazard problem - after all, most people only buy a few houses in their lifetime and bailing them out once isn't going to radically change their behavior, as it might with banks.
So I hope that the new rescue plan put forward is sufficiently draconian on companies and their executives; some people are actually speculating that the government might make money off of all of this (because no one has the money to buy these assets, many of them have fallen well below their long-term price. So the government, with a good source of capital, can now snatch them up). Hopefully they can use that money to repay the costs of helping out those on Mainstreet...
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Thanks for the comments A, and I agree it's a sticky situation for the government to decide how much to intervene on these economic matters. As you said, it's difficult and controversial for a government to punish business incompetence after the fact, and probably a company's own board is better equipped to punish poorly performing executives instead (unless the executives appointed the board). What do you mean by the government took away 90-95% of the executives' wealth? Because they lost their bonuses and the value of the company stock tanked? Can the government revoke private sector pay for poor performance?
In terms of helping out Main Street, it's clear that economic stimulus checks aren't the long-term answer. Bush's recent effort had only a minor impact for about 2 months at best; a drop in the bucket at the cost of billions borrowed. Unemployment assistance is a good step, but I think Senate Republicans and Bush, while he's around, may try to block it at every turn (they said it was excessive spending, yet they spend 100s of billions on Wall Street "welfare"?). Finally the Dems had to attach unemployment assistance to a war supplemental for Bush to accept it. But maybe now the situation has gotten more dire, and with the election approaching, the GOP should try to shed the stereotype that they don't care about the troubles of the Average Joe (unless it's true).
http://seattletimes.nwsource.com/html/politics/2004469503_apjoblessbenefits.html
http://www.military.com/news/article/bush-threatens-veto-over-gi-bill-adds.html
Unemployment insurance, COBRA, etc. can keep some people afloat for a few more months, but I don't know how we can go about creating over 1M new jobs in the next 12 months (what would be needed to bring unemployment back down to 5%). And minimum-wage service jobs with scant benefits won't cut it. The new jobs from the "green economy" won't materialize as long as this recession persists, lending is tight, and government spending is curtailed by the wars and tax cuts. Gas and food will not get significantly cheaper, even if there is a global economic slowdown (which causes other problems too). GM and some airlines are so deep in the red they might ask for bailouts too (but won't get them). The dollar's gains in int'l money markets may mean that exports slow somewhat. Even China is showing signs of economic cool-off. I don't know how we can get people back to work quickly. It seems like companies are laying low, besides the financial sector snatching up bargains of course, as you said of government takeovers too (that raises another interesting question - what will the Feds do with these companies once they start becoming profitable again?). Everyone is waiting for peak foreclosures to pass and home prices to adjust to rock-bottom (for this cycle at least), so the growth curve can re-commence with restored lending fluidity and market confidence. But who knows when that will be? 6, 12, 24 months or longer?
I agree that citizens are not exposed to the moral hazard like company officers, but nevertheless they can and do make decisions to hurt themselves. In many cases, predatory lenders didn't even need to persuade customers to enter into suicidal mortgages. And some of the same people who didn't learn their lesson after the dot-bomb made the same greedy mistakes in the housing bubble. And they will F up again during the next boom/bust. It's endemic in this greedy society to a certain extent. Some people are just predisposed to gambling, ignoring warnings, and screwing themselves. What do we do about them? I know we can enact some laws to protect citizens from themselves, but how do we do that without adding a new layer of bureaucracy to the already unjust and convoluted lending industry? And it's not like Washington has had a good track record of regulating anything intelligently. What completely sucks is that some speculators obviously got away with it if their timing was right. And the people who played it safe and played by the rules still get screwed by the reckless to some degree, yet they are the ones who get the least reward/assistance for their good behavior, because their situations may not be as dire as the gamblers. Well, I guess "being good" is its own reward, and I doubt they would want to trade places with the desperate.
http://www.newsweek.com/id/158615
Wall Street is consumed with the subject of bailouts. As analysts chewed over the implications of the government's decision to assume the debt of ailing mortgage giants Fannie Mae and Freddie Mac, traders (and their real-estate brokers) wondered whether erstwhile titans Lehman Brothers and Washington Mutual would be next in line for government assistance. Meanwhile, lobbyists for the big three automakers were refining their pitches for $25 billion in loan guarantees. It is sure to be another long weekend for Treasury Secretary Henry Paulson.
Bailouts—the government's stepping in and providing financial assistance or credit guarantees to private-sector companies—are a highly confusing subject. As policymakers hasten to save some companies from the ravages of creative destruction, they leave others to fail. Some 5,644 businesses went bankrupt in July, up 80 percent from July 2007. So are there some objective criteria we can use to determine whether the government will toss a lifeline to a particular company?
It's a truism that the bigger you are, and the more you owe, the more forbearance you're likely to get. In 1984, when Continential Illinois, whose reckless lending practices had catapulted it into the ranks of the nation's 10 largest banks, ran into trouble, the government bought some of its loans and provided extraordinary compensation to depositors. "We have a new kind of bank," complained Fernand St. Germain, a congressman from Rhode Island, "It is called too big to fail." (St. Germain, who shepherded the bill that deregulated the savings-and-loan industry, would be blamed in part for the record-setting bailout of S&Ls later that decade).
But these days, size alone doesn't matter. Earlier this decade, Enron, WorldCom, and Global Crossing, three gargantuan companies, went bust while the government looked the other way. Of course, when the aforementioned companies filed for Chapter 11, nobody lost electricity or was unable to make a phone call. "But if the government envisions that a failure will have a serious adverse consequence on the economy, it's going to step in," said Benton Gup, a professor of banking at the University of Alabama and editor of the collection Too Big To Fail: Policies and Practices in Government Bailouts.
For that reason, certain types of financial institutions are much more likely to be helped than others. A bank that lends to people with dodgy credit in California doesn't pose much of a threat to the Davos crowd. But financial intermediaries like Bear Stearns and the FM twins function like the heart of the global financial system. If they go into cardiac arrest, the whole body is in danger. Since Bear Stearns was a counterparty to (and guarantor of) trades and financial arrangements with the world's major financial players, its failure would have triggered a cascade of losses. In the same vein, huge quantities of the $5.4 trillion in debt issued and insured by Fannie Mae and Freddie Mac sit on the balance sheets of central banks and financial institutions around the globe. For the U.S. government simply to let this debt—which it had been implicitly backing for decades—go bad would have meant inflicting severe damage on America's most significant diplomatic and trading partners. Fannie Mae wasn't too big to fail, one Wall Street wag told me this week. It was too Chinese to fail.
To be eligible for a bailout, firms must also demonstrate a particular genius for screwing up. Before it went bust, Bear Stearns had a monstrous $33 of debt for every dollar of capital, and hedge funds it owned destroyed hundreds of millions of dollars of clients' cash. It got a bailout. Lehman Brothers, which has taken painful measures to reduce its risk, is perversely less likely to get direct government help. "The worst Lehman can do is destroy the firm," said Barry Ritholtz, CEO of Wall Street research firm FusionIQ and author of the forthcoming Bailout Nation. "Bear Stearns, on the other hand, set up the firm so that if they screwed up, they could threaten the entire financial system." That may explain why Treasury Secretary Paulson has thus far resisted providing federal succor to Lehman.
Finally, companies seeking the tender mercies of the taxpayer must have good timing. Nearly all the great corporate bailouts of modern times have come in election years. Congress enacted loan guarantees for Chrysler in January 1980, ensuring that a company that employed about 130,000 people, many of them in the swing state of Michigan, would not go bust on the eve of primary season. So, if your company is in trouble, what should you do? Double down. Establish links to other firms. Export your products with abandon. And hustle. There are only seven more weeks until the election.
PERSONAL NARRATIVES AND EMOTIONS IN ELECTION PSYCHOLOGY
http://www.newsweek.com/id/158749
Narratives have been used to attract voters at least since Lincoln's campaign managers cast him as the rugged rail-splitter from the country's frontier, not the prosperous railroad lawyer and sophisticated writer he was, notes historian Michael Beschloss: voters are drawn to someone they can relate to, and the way to make that happen is by offering them stories. (The human brain is wired so that we can follow a chain of events that have people doing things in chronological order more easily than we can follow abstractions.) But the power of the narrative has grown as party identification has weakened—putting more voters in play—and as the culture has changed. Television has made voters expect to, and think they can, "see into people's souls to take their measure," says Beschloss. To do that, "they need clues," and there are few clues so potent as the challenges a person has faced and how he or she has met them. "The feeling that we need to know who these people are has become so enormous that a good part of Sarah Palin's appeal is her life history, the choices she made, things that let voters form a bond with her," says Beschloss.
The outsized power of the personal narrative today compared with even a generation ago (in 1980, Ronald Reagan ran not on personal narrative, but on hope and the promise of change) reflects something that has become almost a cliché in political analysis—namely, that emotions, more than a dispassionate and rational analysis of candidates' records and positions, determine many voters' choice on election day. The emotion can be hope or fear, pride or disgust. And don't be too quick to pat yourself on the back for thinking you cast your vote based on a logical parsing of a candidate's positions. For all but the most wonkish wonks, what matters is how the prospect of pulling out of Iraq or expanding oil drilling or any other policy makes you feel, and not a pro-and-con analysis of its pluses and minuses, which few people can figure out.
All of this has been true for decades. What's new is that the circumstances of this election have conspired to push people away from the reason- and knowledge-based system of decision-making and more down the competing emotion-based one. The latter is more ancient and has, throughout the course of human evolution, "assured our survival and brought us to where we are," says neuroscientist Antonio Damasio of the University of Southern California, a pioneer in the study of human emotions and decision-making. ...One of the most salient circumstances of this campaign is the sheer amount of information voters are bombarded with, says Damasio. You can barely pass a screen (TV or computer) or overhear a radio without being pummeled with the latest brouhaha over lipstick-wearing pigs or which candidate was cozier with lobbyists for the failed mortgage giants. When FDR was making radio addresses, "people had the time needed for reflection, to mix emotion with facts and reason," says Damasio. "But now, with 24-hour cable news and the Web, you have a climate in which you don't have time to reflect. The amount and speed of information, combined with less time to analyze every new development, pushes us toward the emotion-based decision pathway." And not even emotions such as hope. Voters are being driven "by pure like and dislike, comfort or discomfort with a personality," says Damasio. "And voters judge that by a candidate's narrative."
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The bailout article is interesting, but to me that's mostly because it shows how shamelessly the media is fanning the flames here. The article implies a substantial moral hazard in finance - that management/employees are rewarded (get money) for doing the wrong thing (blowing up the economy). There's certainly some of that, primarily in compensation paid during the boom and liquidated (i.e. not kept in company stock). That's very hard to resolve post-facto (it would be illegal for the g't to take back money already paid, though they can regulate for future booms). But it's not nearly as bad as the article implies.
The bailouts we've seen this year have not been soft landings for the companies involved. They haven't been quite as "Old Testament" as I'd have liked, but they have done a pretty good job of wiping out management, employee and shareholder value. In the year preceding Fannie Mae's "bailout", the stock lost ~90% of its value (from mid-60's to ~6), and since the g't stepped in it's lost another ~95% (to 0.43); that blows up a lot of the moral hazard, particularly given how much company stock was owned by employees and management. Management was fired (and it's not like people are going to be lining up to hire those folks). AIG's stock took a similar path (from mid-60's a year ago to 2.3 today), management was fired, and the money the g't is loaning them is at 850 basis points over the LIBOR (which is to say, borderline usury). Nobody is intentionally going to drive their firm into the rocks in order to lose 99% of its value and get fired.
In terms of the value of the company and assets, the difference between bankruptcy and bailout seems semantic - I mean, that's roughly what happened to Lehman. The article suggests that companies would somehow *want* to set up their company to be so big and entangled that they would get a bailout. The results when they fail seem pretty similar, though. And the big difference is that Lehman had a much better chance of surviving, exactly because they worked to get untangled. Merrill took a similar approach, and managed to get bought, albeit at firesale prices - not an ideal situation, certainly, but better than either bankruptcy or bailout.
The other bit that seems totally over the top is the assertion that the GSE's were bailed out to help Chinese investors. In calendar year 2008, Fannie Mae and Freddie Mac financed 80% of new mortgage issues. If those two companies suddenly evaporated, it would be dramatically harder for people to get new mortgages ... which means fewer home sales, increased mortgage rates, lower housing prices, and generally a steel-toed kick in the balls for the whole housing market. China benefits as well, but the main beneficiary was the American homeowner. Again, I'm not thrilled about it - it's essentially a generational transfer of wealth, as our parents' generation gets bailed out and mails the bill to you and me 20 years from now, in the form of debt.
I mean, I'm not suggesting things are working well. I think the government should have gone further in fully nationalizing the GSE's and then made clear they were going to be completely dismantled and sold for parts. I think the government should also be more transparent in making these determinations. And I think Wall Street compensation should have a large component of long-term results so some of those financial profits could be pulled out of those folks' pockets as we discover years later just how they earned their money (being leveraged 33 times over, for example). At the same time, Paulson and Bernanke have an incredibly hard job which would be challenging to do even if they could see the future.
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Well, I don't think the article was suggesting that these companies deliberately screwed up huge in order to "merit" a bailout. I think the author was being facetious to say that ironically, the biggest greedy morons get more help than those who admitted fault and really tried to help themselves. Like the Prodigal's Son story.
I'm not quite sure what you mean by: They haven't been quite as "Old Testament" as I'd have liked, but they have done a pretty good job of wiping out management, employee and shareholder value.
Definitely upper management played a large role in the crisis, and they should be punished accordingly. Maybe they lost a lot of their assets when the stock's value tanked, but they have plenty of diversified savings left and will recover from this mess, much better than their underlings at least. They will also get hired again, despite this black mark on their CV (maybe not as officers, but definitely into powerful positions). There is plenty of historical precedent for that. But for the ordinary workers, this is a killer, like the telecom and energy trading meltdowns before. Especially because it wasn't really their fault, unless they could have "blown the whistle" to alert others to the unwise business practices taking place, but no one was listening anyway during the housing boom when people were blind with greed. As you said, their savings in company stock has evaporated, and it will be hard to get re-hired quickly, because competing companies are in similar messes, and suddenly thousands of desperate, qualified workers have just entered the job pool. 100,000 financial sector jobs have been lost (maybe only 5-10% of that is management?), so that's 1/6 of total US new unemployment in 2008. So yeah, it wasn't any leader's intent to destroy his or her company, but their decisions contributed to the crisis so they should be held accountable. I don't think companies structure their business plans to make them more desirable for bailout (I hope not at least). But like in law enforcement, it's more efficient and socially preferrable if we can discourage bad behavior before we have to punish it after the damage was done. I don't know how DC can do that effectively though, without major political-economic backlash and accusations of interference in the free market.
How do we mitigate problems so they don't have to reach the bankruptcy/bailout stage? In America, people and companies are free to succeed or fail. Companies can, do, and must fail at times. Even dominant companies like Standard Oil, AOL, and PanAm were destroyed, either by the government, world/economic events, or their own mistakes. So when is a company "too important" to fail? I agree with you that Fannie & Freddie qualify - without them the housing sector grinds to a halt. The American Dream was made possible to millions over the years because of the 30-year-fixed, which no other nation can provide to the masses (so then why the hell did so many people take variable-rate loans instead!?!). However, maybe America doesn't have to have a mortgage-based home ownership system. Other modern nations like South Korea don't give home loans. People pay for apartments and homes with cash. It's a huge upfront cost, but then it's your asset 100% and no more hassles. But America is a borrow & spend culture, so probably we could never accept a change.
Maybe it's in the government's interests to prevent companies in critical sectors from qualifying to be too big to fail. It's horrible precedent to bail out companies with tax dollars, or force rivals to "take one for the team" and absorb another company's debt. Freddie was only created to give Fannie some competition. So maybe more competition/customer choice will keep these companies more honest and risk conservative? There are 5 major i-banks (well, 2 now). Is that too many or too few? Who knows, but I'm leaning towards too few. Other industries like wireless, oil, and airlines are heading down that path with merger-mania.
Regarding the China comments, of course Washington doesn't base its bail-out decisions chiefly on foreign considerations. But at the same time, economic turmoil abroad hurts us at home in this globalized commercial system. It would be bad for everyone if our mortage/financial crisis spread to other continents, and it already has (Asian markets down 5% this week, Europe 3%). The housing bubble also burst in Spain and the UK. European banks have folded or needed rescue too (UK's biggest mortgage bank was just bailed out this week), since they bought up so many American SIVs too. Foreigners must be pissed at us because through no fault of their own, their savings have shrunk because too many dumb Yanks and dumb banks engaged in bad loans.
So a large, troubled American company with significant foreign investment is probably more qualifying of assistance than one without. I think it makes sense. Countrywide wasn't bailed out (unless BofA was "persuaded" to do so by the Feds), and neither were smaller, more regional mortgage banks like IndyMac.
Yeah I agree with you that Paulson, Bernanke, and president 44 will have a hell of a time cleaning up this mess. You really need balls of steel for those jobs, and as you said, even a crystal ball may not save you. That's why it's so idiotic and repugnant for the presidential candidates to claim that they "understand" the economy and know how to "fix" it.
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I guess the problem, is, though, how do you legislate that? Being incompetent isn't (generally) a crime - it's only clear that they were incompetent post-facto (as in, after they were awarded their bonuses, which is an incentive problem I wrote at earlier), so by what mechanism do you decide to take their money away? And how can you make it so that they can't get a well-paying job again? By throwing them in jail?
I think the government did about the best it could, in wiping out nearly 90-95% of many of these company executives' personal wealth, without getting into punishments that would deviate from due-process and legal-based actions. I think it's a generalized problem of American life where well-connected people "fail-upward," as President Bush did, but no amount of legislating, unfortunately, is ever going to stop that problem (short of a total makeover of how society works). It's the same reason that all these political retreads get cushy jobs as political commentators spouting stuff that any idiot on the internet could come up with.
But I think that we do need to come up with, as Obama put it, a way to help out people on Main Street as well as Wall Street. A package that extends unemployment benefits, increases availability of food stamps, extends COBRA programs for those who recently lost their jobs, etc. Krugman and other economists have made the point that average citizens generally aren't as susceptible to the moral hazard problem - after all, most people only buy a few houses in their lifetime and bailing them out once isn't going to radically change their behavior, as it might with banks.
So I hope that the new rescue plan put forward is sufficiently draconian on companies and their executives; some people are actually speculating that the government might make money off of all of this (because no one has the money to buy these assets, many of them have fallen well below their long-term price. So the government, with a good source of capital, can now snatch them up). Hopefully they can use that money to repay the costs of helping out those on Mainstreet...
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Thanks for the comments A, and I agree it's a sticky situation for the government to decide how much to intervene on these economic matters. As you said, it's difficult and controversial for a government to punish business incompetence after the fact, and probably a company's own board is better equipped to punish poorly performing executives instead (unless the executives appointed the board). What do you mean by the government took away 90-95% of the executives' wealth? Because they lost their bonuses and the value of the company stock tanked? Can the government revoke private sector pay for poor performance?
In terms of helping out Main Street, it's clear that economic stimulus checks aren't the long-term answer. Bush's recent effort had only a minor impact for about 2 months at best; a drop in the bucket at the cost of billions borrowed. Unemployment assistance is a good step, but I think Senate Republicans and Bush, while he's around, may try to block it at every turn (they said it was excessive spending, yet they spend 100s of billions on Wall Street "welfare"?). Finally the Dems had to attach unemployment assistance to a war supplemental for Bush to accept it. But maybe now the situation has gotten more dire, and with the election approaching, the GOP should try to shed the stereotype that they don't care about the troubles of the Average Joe (unless it's true).
http://seattletimes.nwsource.com/html/politics/2004469503_apjoblessbenefits.html
http://www.military.com/news/article/bush-threatens-veto-over-gi-bill-adds.html
Unemployment insurance, COBRA, etc. can keep some people afloat for a few more months, but I don't know how we can go about creating over 1M new jobs in the next 12 months (what would be needed to bring unemployment back down to 5%). And minimum-wage service jobs with scant benefits won't cut it. The new jobs from the "green economy" won't materialize as long as this recession persists, lending is tight, and government spending is curtailed by the wars and tax cuts. Gas and food will not get significantly cheaper, even if there is a global economic slowdown (which causes other problems too). GM and some airlines are so deep in the red they might ask for bailouts too (but won't get them). The dollar's gains in int'l money markets may mean that exports slow somewhat. Even China is showing signs of economic cool-off. I don't know how we can get people back to work quickly. It seems like companies are laying low, besides the financial sector snatching up bargains of course, as you said of government takeovers too (that raises another interesting question - what will the Feds do with these companies once they start becoming profitable again?). Everyone is waiting for peak foreclosures to pass and home prices to adjust to rock-bottom (for this cycle at least), so the growth curve can re-commence with restored lending fluidity and market confidence. But who knows when that will be? 6, 12, 24 months or longer?
I agree that citizens are not exposed to the moral hazard like company officers, but nevertheless they can and do make decisions to hurt themselves. In many cases, predatory lenders didn't even need to persuade customers to enter into suicidal mortgages. And some of the same people who didn't learn their lesson after the dot-bomb made the same greedy mistakes in the housing bubble. And they will F up again during the next boom/bust. It's endemic in this greedy society to a certain extent. Some people are just predisposed to gambling, ignoring warnings, and screwing themselves. What do we do about them? I know we can enact some laws to protect citizens from themselves, but how do we do that without adding a new layer of bureaucracy to the already unjust and convoluted lending industry? And it's not like Washington has had a good track record of regulating anything intelligently. What completely sucks is that some speculators obviously got away with it if their timing was right. And the people who played it safe and played by the rules still get screwed by the reckless to some degree, yet they are the ones who get the least reward/assistance for their good behavior, because their situations may not be as dire as the gamblers. Well, I guess "being good" is its own reward, and I doubt they would want to trade places with the desperate.
Monday, September 22, 2008
New Yorker: Palin, Stevens, and AK politics
For the record, I don't know squat about AK politics and I don't think that this article is the singular, definitive authority (one source can never be). It's just a knowledgeable writer's viewpoint, but it presents an interesting story during this unique political period.
http://www.newyorker.com/reporting/2008/09/22/080922fa_fact_gourevitch
It's amazing how Palin's brief political career has already been well exposed and analyzed in the mainstream press, so really this article doesn't offer much new, but instead does a good job thematically piecing together what we know about Palin. It describes an interesting schizophrenia and conflict-of-message surrounding the GOP presidential ticket and Ted Stevens-style traditional Alaskan politics. That's like most other states and communities too of course. According to this source, AK society is torn between a fiercely libertarian independent, live-off-the-land frontiersman mentality at odds with the meddling federal government, and a literal dependence on playing the political game to secure federal dollars for the state's very survival (since it is one of the harshest climates in America). The author coined this cultural phenomenon as "subsidized subsistence".
So on one hand, you have 40-years-in-the-Senate Ted Stevens, who was voted "Alaskan of the Century" and proclaimed "Senator for life" (metaphorically) by his constituency. He is a "Rockefeller Republican" believing in fiscal conservatism and minimal federal interference in state's affairs. Yet every 6 years he is re-elected on a platform of "AK first", meaning that he will do everything in his power to secure as much resources for the impoverished state as possible, and being a former President Pro-Tem and senior member of the Appropriations Committee helps a lot. And to get things, we all know you have to give things. An FBI corruption probe of AK politicians' dealings with oil companies has already ended several careers since 2006, and Stevens is heading to trial this month. Combative McCain doesn't have a ton of friends in the Senate (GOP or otherwise), and is at odds with Stevens and others whom he views as "pork-peddlers", which puts Palin in an awkward position. Even if Stevens is found not guilty and wins re-election in November, business as usual will have to change. Some Alaskans really fear the post-Stevens and post-earmark-reform days ahead, where they feel that AK will be set on a starvation course.
25% of Alaskans are registered with the GOP, vs. 15% with the Dems, and many others do not choose to affiliate with a party. While the state could be labeled as "conservative" (it went red the last few elections and most of its top leaders are Republican), it also happens to be one of the most socialistic in America, with each Alaskan enjoying thousands of dollars in state dividend payments from collectively-owned natural resources (in good years or lean), as well as many protectionist laws for state workers and minorities. So I guess they try to have it both ways, and maybe it has to be. Much of AK is barren or Third World, and the cost of living can be quite expensive due to the need to import even basic goods. Although over a million barrels of crude a day flow from AK's soil to the lower 48, soaring energy costs have really hurt Alaskans who may need to drive 100 miles or even boat/plane to the nearest town, and heavily heat their homes when it's -50 degrees outside.
So where does that leave Sarah Palin? She is AK's favorite daughter now, but she was born in Idaho and actually her politics are very different than the AK norm. She has touted her anti-corruption and reform credentials on McCain's "Country first" ticket, yet her record suggests she has operated within the "AK first" political mindset. Most Alaskan conservatives are secular, pragmatic Rockefeller Republicans like pro-choice Stevens, yet Palin's dogma and views appear more "Bush-like" Southern conservative. So if Obama wants to paint McCain as "more of the same", actually he should start with Palin. Former sports journalist Palin became mayor of Wasila (part of Alaska's small evangelical "Bible Belt" in the Mat-Su Valley) by first rubbing elbows with the State GOP and getting on the city council. Gradually she booted out the other councilmen that she once sucked up to, and as mayor dismissed them as "good ol' boys". As mayor, she raised taxes, networked with the well-connected to secure millions in public-works earmarks for her community, while also driving Wasila into legal trouble and debt over an ill-conceived sports complex.
As governor, she wanted creationism to be taught alongside evolution in schools, but did not call for any anti-abortion legislation. She is pro-capital punishment, but did not try to overturn the state's no-dealth-penalty tradition. She has doubts that humans contribute to global warming, but now must back McCain's environmental policy. Well, McCain was originally against ANWR drilling (Palin and Stevens have always supported it), but now that gas is $4 and the Dems showed political weakness on energy, he pounced. So Palin has strong Southern Republican-esque beliefs, but as AK's youngest and first female government, she knew not to rock to boat too much and enjoyed an 80% approval rating (the highest of any current governor). So is she a reformer who took personal risks to challenge entrenched interests and the status quo, or not? Actually she feels that the highlight of her tenure in Juneau is delivering on a long-stalled new natural gas pipeline project. She claims that she thumbed her nose at Big Oil when they wanted their palms greased, and instead gave the contract to a Canadian firm with no kickbacks. This is another Palin half-truth, because currently the project is still stalled over $500M that the legislature can't come up with (administrative costs that the state promised to the Canadian firm before they break ground). And actually the upstream gas producers haven't even agreed to ship product through the pipeline yet, so the project won't do anyone any good if the pipe is empty. She may have to suck up to Big Oil after all. All political mavericks learn that in order to survive, you have to get along and go along sometimes. Change usually comes from the inside, and you can't force change down people's throats, especially powerful people who you still need to get things done. This has and will apply to Obama as well.
I thought this article did a good job of presenting the current headlines on Stevens and Palin (Troopergate, Bridge to Nowhere, etc.) within the context of the unique AK political mindset. I find it interesting that if McCain and Palin get the chance to make good on their promise of "cleaning up Washington", they may actually have to start with AK appropriations, even if many Alaskans depend of subsidy for survival. Something's gotta give. It's hard to be a true fiscal, or even social, conservative if you come from AK. But maybe that shows how rugged, independent AK is more representative of America than we might think. Maybe us in the "lower 48" have become too engrossed in party ideology and accepted this artificial, simplistic, binary political identity for too long. There is no such thing as being totally liberal or conservative, and anyone who is really scares me. Each voter is unique and each issue means different things to different people, depending on the circumstances - which can change constantly. That's why I think the political flip-flop argument is really laughable in most cases. Obviously AK's circumstances are much different than Washington's, and therefore that state produces singular leaders like Stevens and Palin.
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Some highlights of the article:
Many Alaskans enjoy being disconnected from the Lower Forty-eight, which is sometimes referred to as if it were a foreign country. There is pride in this sense of apartness, and that pride has been stung repeatedly since 2006, when the F.B.I. began raiding state lawmakers' offices in an ever-expanding anti-corruption campaign. There have been indictments and guilty pleas. Oil-industry executives who were caught on videotape in the Baranof Hotel, in Juneau, the state capital, giving cash handouts to a state legislator have coöperated in pointing out other state legislators who liked to get paid before voting on oil-industry tax rates. Last year, the F.B.I. hit the home of Ted Stevens, Alaska's six-term senator, and he became a favorite figure of ridicule on "The Daily Show": an angry little man, with an uncanny resemblance to Mr. Magoo, who had once made himself seem even older than his eighty-plus years by describing the Internet as "a series of tubes"; Jon Stewart called him a "coot," and portrayed him as a bully and a crook. As I travelled around Alaska in mid-August, Alaskans wanted me to understand that, sadly, he might well be all of that—and a very good thing for the state, too.
So Ted Stevens may have saved my life—and that was something a great many Alaskans could say as they looked about at the roads and bridges, the hospitals and flood-control systems, the satellite weather and global-positioning relay stations, the sprawling Army and Air Force bases, the rural landing strips and postal air-cargo flights that sustain existence in Alaska as it enters its fiftieth year of statehood. Much of this infrastructure was the result of Stevens's work on the Senate Appropriations and Armed Services Committees, and he made no apologies for his transactional approach to politics. On the contrary, as he brought Alaska the highest number of federal dollars per capita in the nation, he boasted that he was doing his job. Still, Stevens's decision to launch a reëlection campaign in the middle of a federal investigation required more than ordinary moxie.
...
Ralph Seekins, a former state senator who runs the Ford dealership in Fairbanks and serves on the Republican National Committee, told me, "There's a natural suspicion among most Alaskans of the federal government, and the leader of the resistance against that federal government is Ted Stevens." It was a curious description of a man who had done more than any other to wring from the federal budget the funds to make Alaska thrive and grow toward self-sufficiency. But it made sense. Confronted with the choice between subsistence and subsidy, the Alaska patriot has traditionally favored the pragmatic compromise: subsidized subsistence.
...
Back in Bethel, I met a dentist, a man who ran a janitorial-supplies service, and a man who ran a fuel service. I asked them how they thought Bethel and the villages it supported would fare without Ted Stevens in the Senate, in a time without earmarks. The dentist said, "We're fucked," and the janitorial-supplies man said, "There will be ghost towns." The fuel-oil man pointed to a hard black, jagged, wedge-shaped object on his desk, and asked if I knew what kind of tooth it was. "Mastodon," he said.
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"It's the most momentous political season I've lived through in Alaska," Pat Dougherty, the editor of the Anchorage Daily News, the state's largest newspaper, told me—and that was three weeks before the governor, Sarah Palin, became the human cannonball of the Presidential campaign and blasted into overlapping orbits of political and tabloid super-celebrity. Just about everyone in Alaska knew that Palin was on John McCain's list of potential running mates, but no one in the state's insular, Republican political world had seen any indication that the campaign was checking her background. That made sense to Dougherty. Palin was forty-four years old and had served only a year and a half as governor, and he said, "The idea of her as Vice-President is ridiculous. She'd be way in over her head."
Then again, two years ago Dougherty hadn't considered Palin ready to be governor, even after she prevailed in the Republican primary against the deeply unpopular incumbent, Frank Murkowski, who had previously spent twenty-two years as Alaska's junior senator. "We endorsed the Democrat in her race," he said. "We didn't think she had the experience." Looking back, Dougherty allowed that he had underestimated Palin. After twenty months in office, she enjoyed an eighty-per-cent approval rating—the highest in the nation—and although he said he wouldn't yet call himself an admirer, he described her performance as "great spectator sport." Dougherty was particularly impressed by her tough, you-deal-with-Alaska-on-Alaska's-terms attitude toward the big oil producers on whom the state's economy largely depends.
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Palin's record as the mayor of Wasilla, a town forty miles north of Anchorage, told a somewhat different story. According to "Sarah," a biography by Kaylene Johnson, Palin had got into politics after she befriended the man who was then mayor and his police chief at a step-aerobics class. She made them her allies and ran for City Council. Then she challenged them for control of City Hall, and drove them out. As she purged her former friends and patrons, she denounced them as "good ol' boys," although her takeover of Wasilla had been aided from the start by Alaska's Republican Party establishment.
Palin's style of governing was unorthodox and at times impulsive. Although she boasts of a record as a fiscal conservative, she raised the sales tax while she was in office. She left the town saddled with millions of dollars in debt from the building of a new sports complex, and with legal fees, because she had failed to secure title to the land on which the complex was built. Casting herself in the Ted Stevens mold, however, she had proved herself skilled at collecting federal earmarks for Wasilla, bringing in twenty-seven million dollars for her small town in three years.
Palin's biggest difference with Alaska's Republican establishment, then, was not so much fiscal as it was social. Ted Stevens is one of the last of the Rockefeller Republicans—the real thing, as he supported Nelson Rockefeller over Barry Goldwater in the 1964 Presidential race. He is essentially secular and skeptical of government, and favors abortion rights—a common profile in Alaska, a state that attracts a strong streak of libertarians and rugged individualists. By contrast, Palin belongs to the state's small evangelical community, which is centered in the Mat-Su Valley, around Wasilla. She thinks that creationism should be taught in the public schools alongside Darwinian evolution, she was called the town's "first Christian mayor" by a local TV station, and she asked the town librarian about banning books, but did not follow through.
As governor, Palin has done nothing to impose her religious or social views. Alaska has no death penalty, and during the campaign she said that she would support one, but never made an issue of it; she opposed abortion even for pregnancies caused by rape, but this was a personal opinion, not a legislative cause. In fact, she refused requests to put abortion bills on the agenda during a special legislative session this summer, preferring to discuss the natural-gas pipeline, which she pursued in such a bipartisan manner that she ultimately won more solid support for it from Democrats than from Republicans. While Republicans hold most of the state's top political posts, only twenty-five per cent of Alaskan voters are registered Republicans. Fifteen per cent are Democrats, and three per cent belong to the Alaska Independence Party—the extremist states' rights, quasi-secessionist faction to which Todd Palin once pledged his allegiance. A solid majority of Alaska's electorate claims no party affiliation. Alaskans kept telling me that Alaskans vote for the person, not the party.
So it was startling to see Palin emerge in the last days of August as an icon of the evangelical base of the Republican Party, and as a fierce—often vituperative—partisan scourge, mocking Barack Obama's character and positions. It was startling, too, to hear her, in her début speech to the Republican National Convention, reading a script that consistently distorted her own record. She said that she had put her predecessor's jet for sale on eBay, which was true, except that this is how government property was often disposed of in Alaska, and the plane didn't sell online; it had to be unloaded through a private deal, at a loss of half a million dollars.
Palin also said that she told Congress "thanks but no thanks" for the notorious Bridge to Nowhere—a Ted Stevens and Don Young earmark project that had long been a target of John McCain's ridicule. (The bridge, which would have cost nearly four hundred million dollars, was intended to provide access from one island to an airport on a smaller island, with a population of fifty people.) In reality, Palin had supported the bridge in her gubernatorial race, even after Congress revoked the earmark, but abandoned it following the election and directed the money Alaska had received to other projects.
And, of course, Palin touted her gas-pipeline project. "I fought to bring about the largest private-sector infrastructure project in North American history," she said. "And, when that deal was struck, we began a nearly forty-billion-dollar natural-gas pipeline to help lead America to energy independence." That was not entirely accurate. She was still waiting for the state legislature to release the five hundred million dollars she'd promised the pipeline company to help pay for administrative costs. But the crowd loved it. Many of the delegates wore lapel buttons that said, "Coldest State, Hottest Governor."
That same week, Rick Davis, McCain's campaign manager, announced, "This election is not about issues." What mattered, he said, was the "composite view" that voters would form of the candidates. On a talk show, the Washington bureau chief of Time told Nicole Wallace, a McCain spokesperson, that it was still unclear whether Palin was ready "to answer tough questions about domestic policy, foreign policy." Wallace laughed. "Like from who? From you?" And she asked, "Who cares if she can talk to Time magazine?"
Attacking the press is nothing new in the playbook of political defense, but it took a bold twist when the McCain campaign contrived to transform a family problem—the pregnancy of Palin's unmarried seventeen-year-old daughter, Bristol—into a vindication of Palin's Christian family values. Surely, it had not been part of McCain's plan for his untested Vice-Presidential pick to start Day Four of her rollout by announcing Bristol's plans to marry the baby's father, Levi Johnston, who, as the Times reported, recently dropped out of high school. The campaign said that it was going public in order to quash offensive rumors that were circulating on the Internet: that Sarah Palin's five-month-old baby, Trig, who has Down syndrome, was not really hers but Bristol's, and that the Governor had faked her pregnancy in order to cover for her unwed daughter. This Faulknerian story had been making the rounds in Alaska for months—I heard versions of it in Anchorage and Juneau within twenty-four hours of arriving in each city—and it derived from the peculiar circumstances surrounding Trig's birth.
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Sarah Palin's makeover was just beginning, but the campaign had scored a critical victory: the press, in asking about the least-known potential President in recent memory, had been made to look contemptible. When, at last, Palin appeared at the Republican National Convention in St. Paul, most of the forty million Americans who watched her on TV were seeing her for the first time.
The control of Palin by the McCain campaign was one of many ways in which it transformed her into someone largely unrecognizable to people who knew her in Alaska, where she hadn't shown a great interest in national economic issues other than energy policy, or in international affairs, and where she was viewed as more often seeking the attention of the press than avoiding it. For her first two weeks on the Presidential ticket, Palin was kept cocooned by handlers, except at rallies, where she read an adumbrated version of her Convention speech over and over, even as many of its claims were being debunked. When a Fox News anchor demanded to know when she could be interviewed, Rick Davis explained that he would allow access only to reporters who showed "deference."
http://www.newyorker.com/reporting/2008/09/22/080922fa_fact_gourevitch
It's amazing how Palin's brief political career has already been well exposed and analyzed in the mainstream press, so really this article doesn't offer much new, but instead does a good job thematically piecing together what we know about Palin. It describes an interesting schizophrenia and conflict-of-message surrounding the GOP presidential ticket and Ted Stevens-style traditional Alaskan politics. That's like most other states and communities too of course. According to this source, AK society is torn between a fiercely libertarian independent, live-off-the-land frontiersman mentality at odds with the meddling federal government, and a literal dependence on playing the political game to secure federal dollars for the state's very survival (since it is one of the harshest climates in America). The author coined this cultural phenomenon as "subsidized subsistence".
So on one hand, you have 40-years-in-the-Senate Ted Stevens, who was voted "Alaskan of the Century" and proclaimed "Senator for life" (metaphorically) by his constituency. He is a "Rockefeller Republican" believing in fiscal conservatism and minimal federal interference in state's affairs. Yet every 6 years he is re-elected on a platform of "AK first", meaning that he will do everything in his power to secure as much resources for the impoverished state as possible, and being a former President Pro-Tem and senior member of the Appropriations Committee helps a lot. And to get things, we all know you have to give things. An FBI corruption probe of AK politicians' dealings with oil companies has already ended several careers since 2006, and Stevens is heading to trial this month. Combative McCain doesn't have a ton of friends in the Senate (GOP or otherwise), and is at odds with Stevens and others whom he views as "pork-peddlers", which puts Palin in an awkward position. Even if Stevens is found not guilty and wins re-election in November, business as usual will have to change. Some Alaskans really fear the post-Stevens and post-earmark-reform days ahead, where they feel that AK will be set on a starvation course.
25% of Alaskans are registered with the GOP, vs. 15% with the Dems, and many others do not choose to affiliate with a party. While the state could be labeled as "conservative" (it went red the last few elections and most of its top leaders are Republican), it also happens to be one of the most socialistic in America, with each Alaskan enjoying thousands of dollars in state dividend payments from collectively-owned natural resources (in good years or lean), as well as many protectionist laws for state workers and minorities. So I guess they try to have it both ways, and maybe it has to be. Much of AK is barren or Third World, and the cost of living can be quite expensive due to the need to import even basic goods. Although over a million barrels of crude a day flow from AK's soil to the lower 48, soaring energy costs have really hurt Alaskans who may need to drive 100 miles or even boat/plane to the nearest town, and heavily heat their homes when it's -50 degrees outside.
So where does that leave Sarah Palin? She is AK's favorite daughter now, but she was born in Idaho and actually her politics are very different than the AK norm. She has touted her anti-corruption and reform credentials on McCain's "Country first" ticket, yet her record suggests she has operated within the "AK first" political mindset. Most Alaskan conservatives are secular, pragmatic Rockefeller Republicans like pro-choice Stevens, yet Palin's dogma and views appear more "Bush-like" Southern conservative. So if Obama wants to paint McCain as "more of the same", actually he should start with Palin. Former sports journalist Palin became mayor of Wasila (part of Alaska's small evangelical "Bible Belt" in the Mat-Su Valley) by first rubbing elbows with the State GOP and getting on the city council. Gradually she booted out the other councilmen that she once sucked up to, and as mayor dismissed them as "good ol' boys". As mayor, she raised taxes, networked with the well-connected to secure millions in public-works earmarks for her community, while also driving Wasila into legal trouble and debt over an ill-conceived sports complex.
As governor, she wanted creationism to be taught alongside evolution in schools, but did not call for any anti-abortion legislation. She is pro-capital punishment, but did not try to overturn the state's no-dealth-penalty tradition. She has doubts that humans contribute to global warming, but now must back McCain's environmental policy. Well, McCain was originally against ANWR drilling (Palin and Stevens have always supported it), but now that gas is $4 and the Dems showed political weakness on energy, he pounced. So Palin has strong Southern Republican-esque beliefs, but as AK's youngest and first female government, she knew not to rock to boat too much and enjoyed an 80% approval rating (the highest of any current governor). So is she a reformer who took personal risks to challenge entrenched interests and the status quo, or not? Actually she feels that the highlight of her tenure in Juneau is delivering on a long-stalled new natural gas pipeline project. She claims that she thumbed her nose at Big Oil when they wanted their palms greased, and instead gave the contract to a Canadian firm with no kickbacks. This is another Palin half-truth, because currently the project is still stalled over $500M that the legislature can't come up with (administrative costs that the state promised to the Canadian firm before they break ground). And actually the upstream gas producers haven't even agreed to ship product through the pipeline yet, so the project won't do anyone any good if the pipe is empty. She may have to suck up to Big Oil after all. All political mavericks learn that in order to survive, you have to get along and go along sometimes. Change usually comes from the inside, and you can't force change down people's throats, especially powerful people who you still need to get things done. This has and will apply to Obama as well.
I thought this article did a good job of presenting the current headlines on Stevens and Palin (Troopergate, Bridge to Nowhere, etc.) within the context of the unique AK political mindset. I find it interesting that if McCain and Palin get the chance to make good on their promise of "cleaning up Washington", they may actually have to start with AK appropriations, even if many Alaskans depend of subsidy for survival. Something's gotta give. It's hard to be a true fiscal, or even social, conservative if you come from AK. But maybe that shows how rugged, independent AK is more representative of America than we might think. Maybe us in the "lower 48" have become too engrossed in party ideology and accepted this artificial, simplistic, binary political identity for too long. There is no such thing as being totally liberal or conservative, and anyone who is really scares me. Each voter is unique and each issue means different things to different people, depending on the circumstances - which can change constantly. That's why I think the political flip-flop argument is really laughable in most cases. Obviously AK's circumstances are much different than Washington's, and therefore that state produces singular leaders like Stevens and Palin.
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Some highlights of the article:
Many Alaskans enjoy being disconnected from the Lower Forty-eight, which is sometimes referred to as if it were a foreign country. There is pride in this sense of apartness, and that pride has been stung repeatedly since 2006, when the F.B.I. began raiding state lawmakers' offices in an ever-expanding anti-corruption campaign. There have been indictments and guilty pleas. Oil-industry executives who were caught on videotape in the Baranof Hotel, in Juneau, the state capital, giving cash handouts to a state legislator have coöperated in pointing out other state legislators who liked to get paid before voting on oil-industry tax rates. Last year, the F.B.I. hit the home of Ted Stevens, Alaska's six-term senator, and he became a favorite figure of ridicule on "The Daily Show": an angry little man, with an uncanny resemblance to Mr. Magoo, who had once made himself seem even older than his eighty-plus years by describing the Internet as "a series of tubes"; Jon Stewart called him a "coot," and portrayed him as a bully and a crook. As I travelled around Alaska in mid-August, Alaskans wanted me to understand that, sadly, he might well be all of that—and a very good thing for the state, too.
So Ted Stevens may have saved my life—and that was something a great many Alaskans could say as they looked about at the roads and bridges, the hospitals and flood-control systems, the satellite weather and global-positioning relay stations, the sprawling Army and Air Force bases, the rural landing strips and postal air-cargo flights that sustain existence in Alaska as it enters its fiftieth year of statehood. Much of this infrastructure was the result of Stevens's work on the Senate Appropriations and Armed Services Committees, and he made no apologies for his transactional approach to politics. On the contrary, as he brought Alaska the highest number of federal dollars per capita in the nation, he boasted that he was doing his job. Still, Stevens's decision to launch a reëlection campaign in the middle of a federal investigation required more than ordinary moxie.
...
Ralph Seekins, a former state senator who runs the Ford dealership in Fairbanks and serves on the Republican National Committee, told me, "There's a natural suspicion among most Alaskans of the federal government, and the leader of the resistance against that federal government is Ted Stevens." It was a curious description of a man who had done more than any other to wring from the federal budget the funds to make Alaska thrive and grow toward self-sufficiency. But it made sense. Confronted with the choice between subsistence and subsidy, the Alaska patriot has traditionally favored the pragmatic compromise: subsidized subsistence.
...
Back in Bethel, I met a dentist, a man who ran a janitorial-supplies service, and a man who ran a fuel service. I asked them how they thought Bethel and the villages it supported would fare without Ted Stevens in the Senate, in a time without earmarks. The dentist said, "We're fucked," and the janitorial-supplies man said, "There will be ghost towns." The fuel-oil man pointed to a hard black, jagged, wedge-shaped object on his desk, and asked if I knew what kind of tooth it was. "Mastodon," he said.
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"It's the most momentous political season I've lived through in Alaska," Pat Dougherty, the editor of the Anchorage Daily News, the state's largest newspaper, told me—and that was three weeks before the governor, Sarah Palin, became the human cannonball of the Presidential campaign and blasted into overlapping orbits of political and tabloid super-celebrity. Just about everyone in Alaska knew that Palin was on John McCain's list of potential running mates, but no one in the state's insular, Republican political world had seen any indication that the campaign was checking her background. That made sense to Dougherty. Palin was forty-four years old and had served only a year and a half as governor, and he said, "The idea of her as Vice-President is ridiculous. She'd be way in over her head."
Then again, two years ago Dougherty hadn't considered Palin ready to be governor, even after she prevailed in the Republican primary against the deeply unpopular incumbent, Frank Murkowski, who had previously spent twenty-two years as Alaska's junior senator. "We endorsed the Democrat in her race," he said. "We didn't think she had the experience." Looking back, Dougherty allowed that he had underestimated Palin. After twenty months in office, she enjoyed an eighty-per-cent approval rating—the highest in the nation—and although he said he wouldn't yet call himself an admirer, he described her performance as "great spectator sport." Dougherty was particularly impressed by her tough, you-deal-with-Alaska-on-Alaska's-terms attitude toward the big oil producers on whom the state's economy largely depends.
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Palin's record as the mayor of Wasilla, a town forty miles north of Anchorage, told a somewhat different story. According to "Sarah," a biography by Kaylene Johnson, Palin had got into politics after she befriended the man who was then mayor and his police chief at a step-aerobics class. She made them her allies and ran for City Council. Then she challenged them for control of City Hall, and drove them out. As she purged her former friends and patrons, she denounced them as "good ol' boys," although her takeover of Wasilla had been aided from the start by Alaska's Republican Party establishment.
Palin's style of governing was unorthodox and at times impulsive. Although she boasts of a record as a fiscal conservative, she raised the sales tax while she was in office. She left the town saddled with millions of dollars in debt from the building of a new sports complex, and with legal fees, because she had failed to secure title to the land on which the complex was built. Casting herself in the Ted Stevens mold, however, she had proved herself skilled at collecting federal earmarks for Wasilla, bringing in twenty-seven million dollars for her small town in three years.
Palin's biggest difference with Alaska's Republican establishment, then, was not so much fiscal as it was social. Ted Stevens is one of the last of the Rockefeller Republicans—the real thing, as he supported Nelson Rockefeller over Barry Goldwater in the 1964 Presidential race. He is essentially secular and skeptical of government, and favors abortion rights—a common profile in Alaska, a state that attracts a strong streak of libertarians and rugged individualists. By contrast, Palin belongs to the state's small evangelical community, which is centered in the Mat-Su Valley, around Wasilla. She thinks that creationism should be taught in the public schools alongside Darwinian evolution, she was called the town's "first Christian mayor" by a local TV station, and she asked the town librarian about banning books, but did not follow through.
As governor, Palin has done nothing to impose her religious or social views. Alaska has no death penalty, and during the campaign she said that she would support one, but never made an issue of it; she opposed abortion even for pregnancies caused by rape, but this was a personal opinion, not a legislative cause. In fact, she refused requests to put abortion bills on the agenda during a special legislative session this summer, preferring to discuss the natural-gas pipeline, which she pursued in such a bipartisan manner that she ultimately won more solid support for it from Democrats than from Republicans. While Republicans hold most of the state's top political posts, only twenty-five per cent of Alaskan voters are registered Republicans. Fifteen per cent are Democrats, and three per cent belong to the Alaska Independence Party—the extremist states' rights, quasi-secessionist faction to which Todd Palin once pledged his allegiance. A solid majority of Alaska's electorate claims no party affiliation. Alaskans kept telling me that Alaskans vote for the person, not the party.
So it was startling to see Palin emerge in the last days of August as an icon of the evangelical base of the Republican Party, and as a fierce—often vituperative—partisan scourge, mocking Barack Obama's character and positions. It was startling, too, to hear her, in her début speech to the Republican National Convention, reading a script that consistently distorted her own record. She said that she had put her predecessor's jet for sale on eBay, which was true, except that this is how government property was often disposed of in Alaska, and the plane didn't sell online; it had to be unloaded through a private deal, at a loss of half a million dollars.
Palin also said that she told Congress "thanks but no thanks" for the notorious Bridge to Nowhere—a Ted Stevens and Don Young earmark project that had long been a target of John McCain's ridicule. (The bridge, which would have cost nearly four hundred million dollars, was intended to provide access from one island to an airport on a smaller island, with a population of fifty people.) In reality, Palin had supported the bridge in her gubernatorial race, even after Congress revoked the earmark, but abandoned it following the election and directed the money Alaska had received to other projects.
And, of course, Palin touted her gas-pipeline project. "I fought to bring about the largest private-sector infrastructure project in North American history," she said. "And, when that deal was struck, we began a nearly forty-billion-dollar natural-gas pipeline to help lead America to energy independence." That was not entirely accurate. She was still waiting for the state legislature to release the five hundred million dollars she'd promised the pipeline company to help pay for administrative costs. But the crowd loved it. Many of the delegates wore lapel buttons that said, "Coldest State, Hottest Governor."
That same week, Rick Davis, McCain's campaign manager, announced, "This election is not about issues." What mattered, he said, was the "composite view" that voters would form of the candidates. On a talk show, the Washington bureau chief of Time told Nicole Wallace, a McCain spokesperson, that it was still unclear whether Palin was ready "to answer tough questions about domestic policy, foreign policy." Wallace laughed. "Like from who? From you?" And she asked, "Who cares if she can talk to Time magazine?"
Attacking the press is nothing new in the playbook of political defense, but it took a bold twist when the McCain campaign contrived to transform a family problem—the pregnancy of Palin's unmarried seventeen-year-old daughter, Bristol—into a vindication of Palin's Christian family values. Surely, it had not been part of McCain's plan for his untested Vice-Presidential pick to start Day Four of her rollout by announcing Bristol's plans to marry the baby's father, Levi Johnston, who, as the Times reported, recently dropped out of high school. The campaign said that it was going public in order to quash offensive rumors that were circulating on the Internet: that Sarah Palin's five-month-old baby, Trig, who has Down syndrome, was not really hers but Bristol's, and that the Governor had faked her pregnancy in order to cover for her unwed daughter. This Faulknerian story had been making the rounds in Alaska for months—I heard versions of it in Anchorage and Juneau within twenty-four hours of arriving in each city—and it derived from the peculiar circumstances surrounding Trig's birth.
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Sarah Palin's makeover was just beginning, but the campaign had scored a critical victory: the press, in asking about the least-known potential President in recent memory, had been made to look contemptible. When, at last, Palin appeared at the Republican National Convention in St. Paul, most of the forty million Americans who watched her on TV were seeing her for the first time.
The control of Palin by the McCain campaign was one of many ways in which it transformed her into someone largely unrecognizable to people who knew her in Alaska, where she hadn't shown a great interest in national economic issues other than energy policy, or in international affairs, and where she was viewed as more often seeking the attention of the press than avoiding it. For her first two weeks on the Presidential ticket, Palin was kept cocooned by handlers, except at rallies, where she read an adumbrated version of her Convention speech over and over, even as many of its claims were being debunked. When a Fox News anchor demanded to know when she could be interviewed, Rick Davis explained that he would allow access only to reporters who showed "deference."
Saturday, September 20, 2008
Newsweek comments about bailouts
WHEN DOES A COMPANY QUALIFY FOR A BAILOUT?
http://www.newsweek.com/id/158615
Wall Street is consumed with the subject of bailouts. As analysts chewed over the implications of the government's decision to assume the debt of ailing mortgage giants Fannie Mae and Freddie Mac, traders (and their real-estate brokers) wondered whether erstwhile titans Lehman Brothers and Washington Mutual would be next in line for government assistance. Meanwhile, lobbyists for the big three automakers were refining their pitches for $25 billion in loan guarantees. It is sure to be another long weekend for Treasury Secretary Henry Paulson.
Bailouts—the government's stepping in and providing financial assistance or credit guarantees to private-sector companies—are a highly confusing subject. As policymakers hasten to save some companies from the ravages of creative destruction, they leave others to fail. Some 5,644 businesses went bankrupt in July, up 80 percent from July 2007. So are there some objective criteria we can use to determine whether the government will toss a lifeline to a particular company?
It's a truism that the bigger you are, and the more you owe, the more forbearance you're likely to get. In 1984, when Continential Illinois, whose reckless lending practices had catapulted it into the ranks of the nation's 10 largest banks, ran into trouble, the government bought some of its loans and provided extraordinary compensation to depositors. "We have a new kind of bank," complained Fernand St. Germain, a congressman from Rhode Island, "It is called too big to fail." (St. Germain, who shepherded the bill that deregulated the savings-and-loan industry, would be blamed in part for the record-setting bailout of S&Ls later that decade).
But these days, size alone doesn't matter. Earlier this decade, Enron, WorldCom, and Global Crossing, three gargantuan companies, went bust while the government looked the other way. Of course, when the aforementioned companies filed for Chapter 11, nobody lost electricity or was unable to make a phone call. "But if the government envisions that a failure will have a serious adverse consequence on the economy, it's going to step in," said Benton Gup, a professor of banking at the University of Alabama and editor of the collection Too Big To Fail: Policies and Practices in Government Bailouts.
For that reason, certain types of financial institutions are much more likely to be helped than others. A bank that lends to people with dodgy credit in California doesn't pose much of a threat to the Davos crowd. But financial intermediaries like Bear Stearns and the FM twins function like the heart of the global financial system. If they go into cardiac arrest, the whole body is in danger. Since Bear Stearns was a counterparty to (and guarantor of) trades and financial arrangements with the world's major financial players, its failure would have triggered a cascade of losses. In the same vein, huge quantities of the $5.4 trillion in debt issued and insured by Fannie Mae and Freddie Mac sit on the balance sheets of central banks and financial institutions around the globe. For the U.S. government simply to let this debt—which it had been implicitly backing for decades—go bad would have meant inflicting severe damage on America's most significant diplomatic and trading partners. Fannie Mae wasn't too big to fail, one Wall Street wag told me this week. It was too Chinese to fail.
To be eligible for a bailout, firms must also demonstrate a particular genius for screwing up. Before it went bust, Bear Stearns had a monstrous $33 of debt for every dollar of capital, and hedge funds it owned destroyed hundreds of millions of dollars of clients' cash. It got a bailout. Lehman Brothers, which has taken painful measures to reduce its risk, is perversely less likely to get direct government help. "The worst Lehman can do is destroy the firm," said Barry Ritholtz, CEO of Wall Street research firm FusionIQ and author of the forthcoming Bailout Nation. "Bear Stearns, on the other hand, set up the firm so that if they screwed up, they could threaten the entire financial system." That may explain why Treasury Secretary Paulson has thus far resisted providing federal succor to Lehman.
Finally, companies seeking the tender mercies of the taxpayer must have good timing. Nearly all the great corporate bailouts of modern times have come in election years. Congress enacted loan guarantees for Chrysler in January 1980, ensuring that a company that employed about 130,000 people, many of them in the swing state of Michigan, would not go bust on the eve of primary season. So, if your company is in trouble, what should you do? Double down. Establish links to other firms. Export your products with abandon. And hustle. There are only seven more weeks until the election.
PERSONAL NARRATIVES AND EMOTIONS IN ELECTION PSYCHOLOGY
http://www.newsweek.com/id/158749
Narratives have been used to attract voters at least since Lincoln's campaign managers cast him as the rugged rail-splitter from the country's frontier, not the prosperous railroad lawyer and sophisticated writer he was, notes historian Michael Beschloss: voters are drawn to someone they can relate to, and the way to make that happen is by offering them stories. (The human brain is wired so that we can follow a chain of events that have people doing things in chronological order more easily than we can follow abstractions.) But the power of the narrative has grown as party identification has weakened—putting more voters in play—and as the culture has changed. Television has made voters expect to, and think they can, "see into people's souls to take their measure," says Beschloss. To do that, "they need clues," and there are few clues so potent as the challenges a person has faced and how he or she has met them. "The feeling that we need to know who these people are has become so enormous that a good part of Sarah Palin's appeal is her life history, the choices she made, things that let voters form a bond with her," says Beschloss.
The outsized power of the personal narrative today compared with even a generation ago (in 1980, Ronald Reagan ran not on personal narrative, but on hope and the promise of change) reflects something that has become almost a cliché in political analysis—namely, that emotions, more than a dispassionate and rational analysis of candidates' records and positions, determine many voters' choice on election day. The emotion can be hope or fear, pride or disgust. And don't be too quick to pat yourself on the back for thinking you cast your vote based on a logical parsing of a candidate's positions. For all but the most wonkish wonks, what matters is how the prospect of pulling out of Iraq or expanding oil drilling or any other policy makes you feel, and not a pro-and-con analysis of its pluses and minuses, which few people can figure out.
All of this has been true for decades. What's new is that the circumstances of this election have conspired to push people away from the reason- and knowledge-based system of decision-making and more down the competing emotion-based one. The latter is more ancient and has, throughout the course of human evolution, "assured our survival and brought us to where we are," says neuroscientist Antonio Damasio of the University of Southern California, a pioneer in the study of human emotions and decision-making. ...One of the most salient circumstances of this campaign is the sheer amount of information voters are bombarded with, says Damasio. You can barely pass a screen (TV or computer) or overhear a radio without being pummeled with the latest brouhaha over lipstick-wearing pigs or which candidate was cozier with lobbyists for the failed mortgage giants. When FDR was making radio addresses, "people had the time needed for reflection, to mix emotion with facts and reason," says Damasio. "But now, with 24-hour cable news and the Web, you have a climate in which you don't have time to reflect. The amount and speed of information, combined with less time to analyze every new development, pushes us toward the emotion-based decision pathway." And not even emotions such as hope. Voters are being driven "by pure like and dislike, comfort or discomfort with a personality," says Damasio. "And voters judge that by a candidate's narrative."
Friday, September 19, 2008
"The politics of fear" (not what you think)
http://sciencenow.sciencemag.org/cgi/content/full/2008/918/2
Researchers at the Univ. Nebraska did a study of 46 local middle-aged white people surveyed to have strong political beliefs. They subjected them to sudden, startling visual and auditory stimuli (such as loud static noise or violence-themed images), then measured skin conductivity due to finger perspiration and eye blinking amplitude, as estimates of fright/alarm.
They found that the more "skittish" people were also more likely to be politically conservative ("protective"). Those who had a stronger physiological reaction to the disturbing stimuli were more likely to favor typical GOP political views, such as anti-abortion/immigration and aggressive law enforcement/national security. I guess anthropologically speaking, it seems logical that individuals who are predisposed to panic from sudden threatening stimuli also favor policies that are ostensibly designed to neutralize threats to their perceived security, whether personal, social, or national. So there may be a biological element to political support for policies aimed to "protect" family/ideology/nation such as strict immigration control, strict interpretations of marriage, aggressive counterterrorism, and such. A person with a strong fear response might be inclined to favor a swift bombing of Afghanistan in retaliation for 9/11 and its associated emotional trauma, while a less fearful person might prefer to deliberate and analyze instead.
Of course this is not to say that people vote Republican because they're scaredy-cats. Maybe it applies to some, but on the flipside, you could also insinuate that Democrats are more naive or blase to the dangers of the world. Obviously, the middle ground is preferrable to an over-reaction or indifference to the many threats out there. Respond strongly to serious threats, but tolerate smaller or false threats. Nature and evolution function to improve survival fitness over time. It's not biologically advantageous for super-jittery organisms to freak out every time they feel the least bit alarmed (like a lapdog), nor to be indifferent to real threats (like a Dodo bird). And we see this in the social experiment of human civilization too. Warmongering, paranoid, fanatical nations destroy each other (Nazi Germany vs. USSR, The Crusades, Arab-Israeli Wars). And passive, complacent peoples get easily conquered (Native Americans, Chinese during the Colonial Era).
Maybe all of this seems brutally obvious, but it's interesting to see a controlled scientific study on the subject. Of course there are many limitations/flaws in their work, and correlation doesn't necessarily imply causation. Their sample size was very small and homogeneous. There are plenty of fearful liberals and relaxed conservatives. Hearing a sudden uncomfortable noise or seeing a picture of a bloodied man may elicit different levels of fear/discomfort in different people, depending on their personality and background. And probably political beliefs are more heavily molded by social influences than biological ones. But scientists have identified genes that predispose people to certain behaviors (violence, infidelity, obsessive traits, etc.), so it seems reasonable that our genes may affect some of our politics too. The amygdala region of the brain is active in both threat responses and political decisions via the epinephrine pathway. Maybe this study is an early step in explaining why political beliefs aren't very malleable and why political conflict seems so universal. My genes may not allow me to see the world as you do, and therefore I can't understand or agree with your views. But then again, I'd hope that our education, reason, communication, and tolerance can overcome humanity's genetic limitations.
Tuesday, September 16, 2008
A California budget "solution"
http://www.sacbee.com/111/story/1239210.html
"I know that we're not sending [Governor Arnold Schwarzenegger] the budget that he wanted," [Assembly Speaker Karen] Bass said. "But this isn't the budget that any of us wants."
Yet this is what we're getting!
The Dems and GOP can't agree on whether to raise taxes (in a state with some of the highest taxes in the US) and/or cut critical spending to public services to balance the $15B budget deficit, which caused the budget to be about 80 days late this year (a new record in tardiness for a state that has only passed 4 budgets on time). So what do they do instead? Borrow against future budgets of course! Arnold's billions of dollars of bonds did not sustainably fix CA's budget woes, as he promised when running to oust Gray Davis. Regardless, there have been some painful cuts, such as smaller doctor reimbursements for Medi-Cal, smaller or suspended cost-of-living increases for schools/seniors, cuts to disability/SSI, and many teachers/public workers laid off. Of course this mostly hurts the poorest and weakest of us, who don't really matter. At least they managed to close some tax loopholes on the rich and privileged (the famous yacht/RV deduction), or so they claim. But plenty of other holes remain.
So now the CA legislature (with a Congress-like 19% approval rating, compared to Bush and Arnold's 38%) has decided to play some accounting tricks to appear to balance the budget. I love the Sac Bee term for it: "employing accounting maneuvers". So basically CA will take 10% larger income tax witholdings in the first half of the calendar year, and then take less in the second half or give it back to us as reimbursement later (we can opt out of this though, but probably most people won't). By the way, tax reimbursements for archaic paper filers (such as idiots like myself) can take up to 6 months for delivery, according to the CA Franchise Tax Board. Well, I filed my 2007 return in February, and haven't got my meager reimbursement yet in September! I emailed, mailed, and called the FTB about it, and they said they didn't know why there was a delay, but would "flag" my file for fast action. That was 3 weeks ago, with no results. I can't stand how the state just decides to sit on your money (money that you could have invested to collect interest, or more like watch it evaoprate in the turbulent market!), and you just have to wait until they get around to returning the money you earned months ago back to you. So for them to seek to balance the budget by increasing income tax witholdings, I can just see our wages stagnating in Sacramento's coffers for months, if not years. And can you imagine the sea of confused filers and complaints that will flood the FTB, an agency that's not exactly known for outstanding customer service? Obviously Lehman and Fannie aren't the only financial institutions that are terribly mismanaged and make poor decisions that hurt themselves and their customers.
So the legislature will pick up the budget shortfall in year X by siphoning tax revenue from year X+1. But what happens when the budget for year X+2 comes around? Now you have to take even more money from the future pot to compensate for the money you withdrew last year. Pretty soon we'll be paying for the 2015 budget with 2030 money, which is like a no-interest bond for them! The state doesn't have to pay interest to the taxpayers that it borrows from without our consent. Of course this is just a stopgap measure to buy them some time in order to draft a "real" budget that could persist. Well considering their track record for cooperation and punctuality, I think it's more likely that we'll win the lottery!
Well speaking of that, come November the voters will get to decide whether we want to borrow from future lottery revenues to help balance the budget too. So buy more scratchers! But the lottery is just a sick social experiment. Critics say the CA lottery is terribly underperforming versus other states, needs to vastly improve marketing, and should be privatized. Well maybe so, but as we know, most gambling/lottery operations prey on and hurt lower income individuals the most. And those are the vulnerable people who depend on state services to literally stay alive. So they're getting the double-whammy in CA: cuts to their services, as well as greedy Wall Street involvement in the lottery. So for the few lucky winners, they'll get less money because some will be shipped off to investors. And of course the lottery causes many social problems that push more people into financial ruin, force more desperate families to file for state support, and have less spending money to infuse into the state's economy. Is it any sort of budget solution to promote the lottery - where sales tax dollars just become lottery revenues instead? That's like Enron accounting.
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why not just sue the estate of ken lay for the money enron stole from the state? i think it's around 16 billion? oh, that's right, arnie dropped any charges or possible lawsuits against him or enron. that's how he funded his recall.
Wow, he really gave them immunity?
Yep, it appears so! Davis-Bustamante were preparing a $9B suit/refund against Enron for the CA energy scam, but Arnold dropped it. Well $9B would have gone a long way to balancing our current budget.
http://baltimorechronicle.com/oct03_Palast.shtml
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I guess the last budget proposal was "j/k", and this is the real one:
http://www.sacbee.com/111/story/1249171.html
It's sad that it took 81 late days and state childcare/medical facilities scrambling for stopgap funding in the meantime (or just flat out closing their doors to the needy public) for the CA legislature to realize that they can increase revenues by actually getting corporations to pay their taxes! So instead of using private citizen taxpayers as "ATM machines" as Arnold said, they will scrap those short-sighted, disrespectful accounting gimmicks and instead collect more revenue by actually enforcing the corporate tax code. They will make late payment penalties larger, which will either net them more money in penalties or increase on-time payments. Wealthy persons and companies that owe more than $1M in back taxes will be penalized 20% instread of 10%, and some tax amnesties will be cancelled. Small companies are supposedly exempt.
Actually I have to give credit to Arnold for standing firm on this and not just signing the previous stupid budget to get it over with. It's more than I can say of the spineless Democrats and ideologue Republicans in the legislature. What if their salaries and benefits froze up for 81 fretful days, so they could see what it's like for lowly state workers and the clients who depend on them?
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Also... what do you think about the huge infusion of public cash into the money markets by the Feds? So much for small government and laissez-faire. Maybe such a drastic move is unavoidable at this point, to restore some lost confidence and rescue the financial sector. But it sends a dangerous message of course, like the market is the misbehaving spoiled teen, and the government is the rich father who will always pull major strings to bail the kid out of trouble. Maybe instead of rescuing greedy idiots every time they shoot themselves in the foot, we can overhaul the entire system so that our economy is not so dependent on overborrowing, overspending, and lusting for larger and larger profits? I must be smoking. Well, at least some people got their money back in the market with this "good news". The Dow swung from 11,300 to 10,600 to 11,400 in half a week, sheesh.
http://biz.yahoo.com/ap/080919/financial_meltdown.html
"I know that we're not sending [Governor Arnold Schwarzenegger] the budget that he wanted," [Assembly Speaker Karen] Bass said. "But this isn't the budget that any of us wants."
Yet this is what we're getting!
The Dems and GOP can't agree on whether to raise taxes (in a state with some of the highest taxes in the US) and/or cut critical spending to public services to balance the $15B budget deficit, which caused the budget to be about 80 days late this year (a new record in tardiness for a state that has only passed 4 budgets on time). So what do they do instead? Borrow against future budgets of course! Arnold's billions of dollars of bonds did not sustainably fix CA's budget woes, as he promised when running to oust Gray Davis. Regardless, there have been some painful cuts, such as smaller doctor reimbursements for Medi-Cal, smaller or suspended cost-of-living increases for schools/seniors, cuts to disability/SSI, and many teachers/public workers laid off. Of course this mostly hurts the poorest and weakest of us, who don't really matter. At least they managed to close some tax loopholes on the rich and privileged (the famous yacht/RV deduction), or so they claim. But plenty of other holes remain.
So now the CA legislature (with a Congress-like 19% approval rating, compared to Bush and Arnold's 38%) has decided to play some accounting tricks to appear to balance the budget. I love the Sac Bee term for it: "employing accounting maneuvers". So basically CA will take 10% larger income tax witholdings in the first half of the calendar year, and then take less in the second half or give it back to us as reimbursement later (we can opt out of this though, but probably most people won't). By the way, tax reimbursements for archaic paper filers (such as idiots like myself) can take up to 6 months for delivery, according to the CA Franchise Tax Board. Well, I filed my 2007 return in February, and haven't got my meager reimbursement yet in September! I emailed, mailed, and called the FTB about it, and they said they didn't know why there was a delay, but would "flag" my file for fast action. That was 3 weeks ago, with no results. I can't stand how the state just decides to sit on your money (money that you could have invested to collect interest, or more like watch it evaoprate in the turbulent market!), and you just have to wait until they get around to returning the money you earned months ago back to you. So for them to seek to balance the budget by increasing income tax witholdings, I can just see our wages stagnating in Sacramento's coffers for months, if not years. And can you imagine the sea of confused filers and complaints that will flood the FTB, an agency that's not exactly known for outstanding customer service? Obviously Lehman and Fannie aren't the only financial institutions that are terribly mismanaged and make poor decisions that hurt themselves and their customers.
So the legislature will pick up the budget shortfall in year X by siphoning tax revenue from year X+1. But what happens when the budget for year X+2 comes around? Now you have to take even more money from the future pot to compensate for the money you withdrew last year. Pretty soon we'll be paying for the 2015 budget with 2030 money, which is like a no-interest bond for them! The state doesn't have to pay interest to the taxpayers that it borrows from without our consent. Of course this is just a stopgap measure to buy them some time in order to draft a "real" budget that could persist. Well considering their track record for cooperation and punctuality, I think it's more likely that we'll win the lottery!
Well speaking of that, come November the voters will get to decide whether we want to borrow from future lottery revenues to help balance the budget too. So buy more scratchers! But the lottery is just a sick social experiment. Critics say the CA lottery is terribly underperforming versus other states, needs to vastly improve marketing, and should be privatized. Well maybe so, but as we know, most gambling/lottery operations prey on and hurt lower income individuals the most. And those are the vulnerable people who depend on state services to literally stay alive. So they're getting the double-whammy in CA: cuts to their services, as well as greedy Wall Street involvement in the lottery. So for the few lucky winners, they'll get less money because some will be shipped off to investors. And of course the lottery causes many social problems that push more people into financial ruin, force more desperate families to file for state support, and have less spending money to infuse into the state's economy. Is it any sort of budget solution to promote the lottery - where sales tax dollars just become lottery revenues instead? That's like Enron accounting.
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why not just sue the estate of ken lay for the money enron stole from the state? i think it's around 16 billion? oh, that's right, arnie dropped any charges or possible lawsuits against him or enron. that's how he funded his recall.
Wow, he really gave them immunity?
Yep, it appears so! Davis-Bustamante were preparing a $9B suit/refund against Enron for the CA energy scam, but Arnold dropped it. Well $9B would have gone a long way to balancing our current budget.
http://baltimorechronicle.com/oct03_Palast.shtml
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I guess the last budget proposal was "j/k", and this is the real one:
http://www.sacbee.com/111/story/1249171.html
It's sad that it took 81 late days and state childcare/medical facilities scrambling for stopgap funding in the meantime (or just flat out closing their doors to the needy public) for the CA legislature to realize that they can increase revenues by actually getting corporations to pay their taxes! So instead of using private citizen taxpayers as "ATM machines" as Arnold said, they will scrap those short-sighted, disrespectful accounting gimmicks and instead collect more revenue by actually enforcing the corporate tax code. They will make late payment penalties larger, which will either net them more money in penalties or increase on-time payments. Wealthy persons and companies that owe more than $1M in back taxes will be penalized 20% instread of 10%, and some tax amnesties will be cancelled. Small companies are supposedly exempt.
Actually I have to give credit to Arnold for standing firm on this and not just signing the previous stupid budget to get it over with. It's more than I can say of the spineless Democrats and ideologue Republicans in the legislature. What if their salaries and benefits froze up for 81 fretful days, so they could see what it's like for lowly state workers and the clients who depend on them?
--------
Also... what do you think about the huge infusion of public cash into the money markets by the Feds? So much for small government and laissez-faire. Maybe such a drastic move is unavoidable at this point, to restore some lost confidence and rescue the financial sector. But it sends a dangerous message of course, like the market is the misbehaving spoiled teen, and the government is the rich father who will always pull major strings to bail the kid out of trouble. Maybe instead of rescuing greedy idiots every time they shoot themselves in the foot, we can overhaul the entire system so that our economy is not so dependent on overborrowing, overspending, and lusting for larger and larger profits? I must be smoking. Well, at least some people got their money back in the market with this "good news". The Dow swung from 11,300 to 10,600 to 11,400 in half a week, sheesh.
http://biz.yahoo.com/ap/080919/financial_meltdown.html
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