A Time of Desperate Journalists

When the well of conventional wisdom runs dry, journalists take the lid off the well of History. This is a sign of intellectual trouble. It means that the stuff their sources usually tell them, and their standard, typical, and familiair explanations, are no longer adding up.

When one of the NYT's best financial journalists Frank Norris says that a book about the 1907 financial panic is one of the most insightful books he has ever read, you know we live in desperate times. Or at least in times of desperate journalists, who realize gradually that the analyses they have been passing faithfully on to their readers for years no longer make sense - and in fact didn't really make sense in the first place.

A couple of notes about the Norris piece:

• it features a recovery wrought by a heroic strongman, JP Morgan, described yet again as locking bankers in his study overnight until they provided liquidity. The photo above says it all - Morgan as god-like visionary. Or Greenspan-like. Greenspan's mistakes depended directly on the willingness of the media to see him as a Morgan-like genius, presiding over all with his laissez-faire wisdom that made America the land of infinite plenty. So spare us your historical strongmen, please.
• It continues to note that this is not just a subprime crisis. This was obvious to the Financial Times in August of last year, and I would like to know whether readers of the NYT business pages, presumably largely business people and executives, still need to be reminded of this obvious fact. If they still don't get it, we really ARE in trouble.

Folks, in terms of figuring out what really happened and what to do, we are on our own.

Missing Bodies

This morning's Financial Times has a headline story called "US banks borrow $50bn via new Fed facility." Doesn't sound too exciting - it starts out by saying the Feds are now better at getting liquidity into the banking system than they were last summer when the wheels went crunch.

But the FT folks have been good at relentlessly unearthing the deeper story:

The move has sparked unease among some analysts about the stress developing in opaque corners of the US banking system and the banks’ growing reliance on indirect forms of government support.

“The TAF ... allows the banks to borrow money against all sort of dodgy collateral,” says Christopher Wood, analyst at CLSA. “The banks are increasingly giving the Fed the garbage collateral nobody else wants to take ... [this] suggests a perilous condition for America’s banking system.”

Where are all of the bodies and timebombs buried? Nobody knows.

That brings us to this chart, from John Authers's column today, "The Short View."

Authers's subject was a Barclay's report that argued that we've been in a period of anomalously low inflation (see the gold line below the red line) that is now over, thanks to cost pressures coming from the booming "developing world."

But there's a more interesting point here. For most of the last century, equity investments gave the investor no gain on retail price inflation.

This brings me to a simpleminded but fundamental point. Overall economies cannot invest their way to prosperity. They have to work their way there, by inventing stuff and then making and selling it. Capital is a prerequisite but not the main vehicle of development. The latter comes from labor. Societies need to be judged by the growth in earned income - what they can and actually do pay their working populations.

On this measure, we're not doing so well.

What for Brains?

You know I'm a faithful reader of Fr. Frank's Sunday sermon, and today is no exception. I would feel better about this piece if I had Obama Fever. But I just can't catch it.

I do like him better than Hillary, who has always struck me as an institutional manipulator whose main goal is her own advantage. Not that this makes her worse than Bill Clinton or most other politicians for that matter in a country as trapped as ours by old ideologies and thus more or less unable to have new social ideas and look for political innovators. But I agree with Sean Gonsalves, who wrote about Hillary, what record? What has she done besides broker a lot of forgettable-to-rotten deals on stuff like enabling the Iraq invasion? That's a non-rhetorical question.

But Obama. I notice that Fr. Frank used to praise him by damning Hillary. Today he's moved on to praising him by damning McCain. He points out how the Republicans are a party of old and wealthy white men who don't represent or resemble America. And . . . ah, so what? That has been true since General Grant, and in the modern period since Ronald Reagan. Reagan turned 70 a month after he was inaugurated. MacCain will turn 72 before election day 2008, but lucky for him 72 is the new 62 - he looks a lot better than Reagan at the same age, leading member of the meat-and-martinis generation. The point is that the Republicans have represented the interests of a tiny white minority since for decades, and this hasn't stopped them from controlling three out of three branches of government for most of that time. We need a better reason for thinking that Obama can actually win.

There's the post-boomer belief that they are post-racism: Gonsalves believes this about his people. I don't. I haven't seen a massive movement about white Thirtysometimes to put their kids in majority-Latino public schools for the good of society. What is true is that crude racism toward Obama will sink the Republicans in a second - even comments about how "articulate" he is will be turned into instant CNN crawlers.

What is also still true is that Obama won't be able to Act Black. He'll have to get mad only in that weird resonant TV-preacher way, full of high-minded moral indignation. If he falls off that wagon it will be a huge deal and lots of fun to watch the media tie itself in knots trying to talk about his blackness without actually using the words.

The Change Candidate wasn't in #1 most-emailed position in the NYT today though. That position went to a piece called "Dumb and Dumber," about how Americans don't actually know anything. Well TV Americans, anyway, one of whom thought Budapest was the capital of the country called "Europe." It's tempting to see Obama, who says only what other Democrats have already said, is the candidate of the Dumb Generation(s), who will inherit America and do an even better job than the Meat-and-Martini generation of running the country into the ground.

But there's also the "hope" thing. Obama comes along at a time when leaders have never in recent times been more removed from the majority, more ignorant of it, and more unaccountable. Something about Obama's fervor and commitment makes it seem like he can cross the chasm. I think that's what people really loved about Kennedy's Camelot - he came from a family of bootleggers, but he wasn't a dreary, overstuffed crook. He seemed to have ideals. He wasn't just handsome enough to be a romantic lead, but had enough idealism to be romantic about politics and therefore make politics seem like it was part of people's lives again - of their hopes. He helped people take romanticism seriously. Obama seems to be doing the same thing.

Obama has something else going for him. The president is always the national father, and Hillary threatens that cultural function. Of course the president has always also been the white father, so it looks at first like Obama would be at as much of a disadvantage as Hillary. But "presidentialism," as the American Studies scholar Dana Nelson puts it, involves a deep masculinity function. George Lakoff, the Democratic commentator on campaign language and categories, identifies Democrats with the nurturing parent, which he contrasts with the Republican's strong father. Obama has the air of idealism, but whites, especially white men, will automatically attribute to him a suppressed rage that they will identify with strength. Hope in Obama comes from the sense that his race, ironically, will allow him to appear to be the first strong-nurturer the democrats have had since JFK.

Sunday Politics

I've been avoiding David "Schoolboy" Brooks for a long time, but embarrassed myself by finally biting on his listing as a top-10 most forwarded on the NYT webpage for the past few days. The piece is an "Answer Man" dialog that makes Obama an upmarket "experience" candidate and Hillary a working-class retail gal. Schoolboy improves his grades by getting a B+ this time. College vs. non-college is not a dumb analytic distinction.

You can also see the New anti-Hillary Strategy taking form on the Right. Rush and the rest will trot out the Hillary-hating themes, while Thoughtful Conservatives led in the media by Schoolboy and Bill Kristol will paint Hillary as old-school New Deal - actually a pretty nice lady, but outdated and misguided. This will trick her into moving right, and she will lose exactly the working-class votes she needs to win in November.

The overall Right doesn't actually see working America as defunct. They see the white working-class as the key to their own power, unions as their great political enemy, and their culture war (click Schoolboy label) against colleges and its middle-class grads as one of their two or three essential strategies.

Fr Frank's sermon does a good job of analyzing the "thick deck of race cards" Hillary is playing against Obama.

In October, seven months after the two candidates’ dueling church perorations in Selma, USA Today found Hillary Clinton leading Mr. Obama among African-American Democrats by a margin of 62 percent to 34 percent. But once black voters met Mr. Obama and started to gravitate toward him, Bill Clinton and the campaign’s other surrogates stopped caring about what African-Americans thought. In an effort to scare off white voters, Mr. Obama was ghettoized as a cocaine user (by the chief Clinton strategist, Mark Penn, among others), “the black candidate” (as Clinton strategists told the Associated Press) and Jesse Jackson redux (by Mr. Clinton himself).

The result? Black America has largely deserted the Clintons. In her California primary victory, Mrs. Clinton drew only 19 percent of the black vote.

Can you say "President McCain"?

My friend Susan's son Arnault has grown up in Paris with dual US-French citizenship, and asked me at dinner the other night whether the Clintons weren't good people whom liberals etc. should support. I gave him a short lecture on the Clinton Republocrat completion of the Reagan Revolution (wall street economy, end of welfare as we know it, acceptance of the evil of New Deal social democracy that, I added, is our only bulwark against barbarism and the "planet of slums) - poor kid. But I will send him this link on Bill Clinton in action. His deep driver was always to attract, be with, be liked by, be supported by the rich, and then become one of them.

This whole generation of post-60s politicians offers a sellout idealism that just makes me miss FDR - or CLR.

Coming Democratic sea-change

Here's an interesting piece from the Financial Times that strikes me as a real possibility, and it is not written by an advocate of a shift to the left, but by an opponent.

***
Beware the coming Democratic sea-change
By David Frum
Financial Times: February 7 2008

The conservative ascendancy in American politics is coming to an end. For three decades, the right has dominated, with the Republicans winning five of the seven presidential elections since 1980. Conservatives did more than just win elections: even when liberals gained power, they governed on conservative terms.

What were the most important accomplishments of the Clinton presidency? Balancing the budget, welfare reform and the expansion of Nato - not exactly left-of-centre projects. And of Jimmy Carter's? The deregulation of the airline and natural gas industries.

Neither president set out to accomplish these goals. Indeed, they often resisted them. In the end they had to accept the limits of the possible - just as Republican presidents Dwight Eisenhower and Richard Nixon accepted the limits of the possible in the liberal era from 1930 to 1975.

Neither Mr Clinton nor Mr Carter created a single, major, permanent new national social programme. Mr Clinton failed to bequeath power to his chosen successor; Mr Carter failed even to win a second term.

John Mitchell, Richard Nixon's attorney-general, predicted in 1970: "This country is going so far right you won't recognise it." His prophecy was vindicated. Now its time is up: 2008 is shaping up to be the first decisive Democratic victory since 1964 - a 1980 in reverse. The signs are gathering everywhere. Three-quarters of Americans now describe the country as "on the wrong track". Almost 90 per cent express strong dissatisfaction with the costly healthcare system.

In primaries and caucuses, Democratic contests have drawn more voters than Republican ones. An early estimate after Super Tuesday suggests that, thus far, 11m Americans have cast ballots for Republican candidates, while more than 15m have voted for Democratic ones. Democrats outpolled Republicans by 20 per cent even in the state of South Carolina, maybe the most conservative in the nation.

Usually pundits expect that the party that chooses its nominee first will win the election. That will probably not be true this time. Although the Hillary Clinton-Barack Obama contest looks likely to continue longer than John McCain's march to the Republican nomination, Democrats tell pollsters they like both candidates - they are just deciding which they like best. Republicans remain divided, with Mr McCain, Mitt Romney and Mike Huckabee each passionately disliked by opposing factions within their party.

In polls, Americans express preference for Democrats over Republicans on almost every issue surveyed, including such traditional Republican advantages as taxes, ethics and competence.

In 2002, equal numbers of Americans identified as Republicans and Democrats. In the six years since, Republican identification has collapsed back to the level recorded before Ronald Reagan. The decline has been steepest among young voters. If they eat right, exercise and wear seatbelts, today's 20-somethings will be voting against George W. Bush deep into the 2060s. Most ominously, US polls show an ideological sea change: a desire for a more activist government, a loss of interest in the tax question and a shift to the left on most social issues (although not, interestingly, abortion).

As things are going, the Democratic nominee will win a majority of the votes cast (unlike Mr Clinton). They will almost certainly gain an increased majority in Congress (unlike Mr Carter). If the present mood lasts, that nominee will have a green light to move the US in new policy directions (unlike either Mr Clinton or Mr Carter).

The stage has been set for the boldest and most dramatic redirection of US politics since Reagan's first year in office. Of course, there are no guarantees in politics. An inept president could bungle his or her chances. Unexpected events could intrude: a nuclear test in Iran, a major terrorist attack on US soil or some attention-grabbing political scandal. But given moderate luck and skill, the next president could join Reagan, Lyndon Johnson and Franklin Roosevelt as one of the grand reshapers of politics and government.

Tragically, that reshaping is likely to be for the worse. The things that Mrs Clinton and Mr Obama want to do are likely to prove costly and counterproductive, if not outright disastrous. A greater government role in healthcare, higher taxes, tighter regulation, more social welfare, an increased flow of low-skilled migrants with amnesty for those already here, a cut-and-run from Iraq: these are not measures likely to improve US competitiveness or enhance America's standing in the world.

To prevent these negative consequences - to retrieve victory from impending defeat - would require more creativity and responsiveness than Republicans and conservatives have displayed for many years. Unless American conservatism can rejuvenate itself, the odds favour the liberal left holding sway until the day that its own errors and delusions lay it low again.

The writer, a resident fellow at the American Enterprise Institute, is the author of Comeback: Conservatism That Can Win Again

The Thrifty Middle Class - Not!

A good piece today gets at one of my worries about the U.S. economy's ability to avoid long-term decline. That is the failure of Americans to spend less than what they earn, i.e. save.

The hook is that some Americans are actually waiting to have the money before they spend it! This is news only because we haven't been doing this. "In 1984, Americans were still saving more than one-tenth of their income, according to the government. A decade later, the rate was down by half. Now, the savings rate is slightly negative, suggesting that on average Americans spend more than their disposable income."

The article suggests that there's going to be a cultural shift against having debt-fueled stuff.
"In homes now saturated with debt, conspicuous consumption and creative financing have come to seem a sign of excess not unlike that of a suntan in an age of skin cancer." See the quotations from people trying to get over their low-grade envy of the Cadillac next door.

But there are a couple of problems. One is that the economy depends on overspending. And people overspend not just because they like Cadillacs, but because they don't make enough money. Individual wages for the bottom 80 percent have barely budged for 35 years.

Given our low-cost low-wage economy, will employer be able to imagine how to raise wages so that people can save?

PS: See also a nice column last month by David Leonhardt on the direct conflict between spending on social development and spending on the war in Iraq.

Meltdown Continued

Dean Baker is clearer today about why homeowners are defaulting on their houses before they default on their credit cards.

Glen Ford projects a historic loss of wealth for people of color. The report on which his piece is based suggests that African Americans will achieve home-ownership parity with whites in only 5, 423 years!

Very unpleasant data on US contraction sent the Dow and S&P 500 into a tailspin - they are around 3 percent down in one day. Markets were especially shocked by a survey of non-manufacturing sector managers that looked like the service economy in the US is going off a cliff. European bankers may be figuring out a US decline will start to sink them too.

The frequently awful Martin Wolf of the Financial Times is scared into making real sense today. He points out that "the banking sector is the recipient of massive explicit and implicit public subsidies," makes risk public and profits private, suffers from "massive agency problems," while society lacks the ability to monitor transactions until long after they're over. This is the FT equivalent of Bolshevism, and ends in a call for - regulation!

Take a careful look at that graph above. See where the US makes its money. Nearly half of all profits in the U.S. now come from the financial sector. This is about double their share at the end of the decade. Meanwhile, the last employment report showed that manufacturing employment in the U.S. feel for the first time in known history below 10 percent of the total.

Now look at the one below. See how much financials make.



I had a great day with Gaye and Chuck visiting from out of town - aside from the moment when Chuck predicted Mitt Romney will be the Republican candidate.

I tried to find something economically relevant on the candidates' websites. Well they do say things: Hillary Clinton for one; Barak Obama for another. He at least calls for raising the cap on social security taxes to pick up higher-income folks - some minimal tax fairness. They don't know what to do about the larger picture.

While you're waiting for the candidates' to say something effective, have fun with the NYT's class graphic.

The absence of a clear explanation of what's happening that people can understand - it's fairly mindboggling.

The absence in the mainstream of a coherent policy alternative to Blairite-Clintonish finance capital is equally interesting.

But it will come. As Chuck said, "The Giants won the Super Bowl on Sunday. Anything is possible."

Drips from the Meltdown

Instability among private financial firms - that is, rampant opacity in asset vs. liability valuations - hasn't kept the guardians of middle-class economic propriety from continuing to bash the more-efficient public sector. The economist Dean Baker writes the following:

The Wall Street Journal did the standard "Social Security, Medicare, and Medicaid" trick to argue for the need to cut Social Security. As BTP readers know, the projected increase in Social Security spending is relatively modest. By contrast, Medicare and Medicaid spending are projected to soar, driven primarily by higher health care costs. This means that anyone seriously concerned about reducing the long-term deficit would focus on fixing the health care system rather than cutting Social Security.

While all the experts cited in the article seem to share the WSJ's desire to see Social Security cut, the WSJ was good enough to include a chart with the article. The chart shows clearly the contrast between the projected explosion in Medicare and Medicaid costs with the modest projected increase in Social Security spending. In effect, the chart contradicts the thrust of the article.

The article gets a few other important items wrong. For example, the article asserts that the Medicare drug benefits "costs almost $80 billion a year." According to the Congressional Budget Office, the benefit will cost $44 billion in the current fiscal year.

Also, when discussing plans to cut Social Security benefits, it would have been appropriate to mention that the Social Security trust fund is projected by the Congressional Budget Office to be fully funded for almost 40 years. Cutting benefits in this context effectively amounts to defaulting on the bonds held by the trust fund. If the government is going to default on bonds designated to fund workers' retirements, then the public may want to consider defaulting on other government bonds as well.

There was also a piece last week in the Financial Times on housing foreclosures. It was interesting because it's author clearly didn't know what his real theme was. Dean Baker thought it was that banks and securitizers of housing loans "did not take loan to value ratios into consideration. As a result, they are surprised that homeowners with negative equity are defaulting on their loans." If true, this is an amazing fact: lenders didn't care about lending more than the underlying asset was worth. That can be explained by the next item.

This was the little piece that caught my eye this morning. It sounds at first like it will bore your ass off: "The leveraged loan market begins the week in “disarray” following the collapse of efforts to syndicate $14bn of the debt used to finance the $30bn buy-out of Harrah’s Entertainment, bankers say." But there's not only a story of banker panic, which is always interesting. There's one of the huge stories of the whole crisis: banks are unwilling to loan money even to good companies unless they can simultaneously get rid of the liability. This means, in the case above, that banks didn't care that the house was worth less than the loan becuse they were going to sell the loan to somebody else. That somebody had no idea what house any loan was tied to - in fact, the security rolled all individual loans into one ureadable lump.

There's more. High returns correlated not with high risks taken by hairy-chested pirate-bankers giving the gift of liquidity to the global system. High returns correlated with no risks - dumped risks, dispersed and scattered risk, invisible risks, risks passed on to Somebody Else. Like me, and you.

We're not yet close to the bottom of that particular kind of unaccountability, or the corruption it has caused.

Sprawl Ain't Just Ugly

Sprawl isn't just ugly. It's dumb - economically. Michael Klare explains how all that commuting increases U.S. oil dependence which worsens the balance of payments which makes the dollar drop which drives up US prices which makes people broke, which stops them from buying which tanks the economy.

See! Economics is easy. It's people that are hard to understand.

For a compelling alien-abduction theory of inexplicable Republicanism, see Jeff Cohen's funny and yet obviously true Stepford Husbands theory of right-wing voting.

And see Naomi Klein's interesting link between the home-ownership society and the growing number of Americans (now almost half) who think they live in a society divided by class (haves vs. have-nots).

No Wonder We're Broke

I'm distrcting myself from the irrelevant news of the day, like Microsoft bidding for Yahoo! - can't create it? go buy it! -which does not give me hope for the American Innovation System. For some reason I remembered Chalmers Johnson, the International Relations expert, and his estimate that military and military-related spending in the U.S. was $1.1 trillion last year.

How dumb can we get, throwing money away like that? Then I found the reason why.

Why of course the people don't want war. Why would some poor slob on a farm want to risk his life in a war when the best he can get out of it is to come back to his farm in one piece. Naturally, the common people don't want war; neither in Russia nor in England nor in America, nor for that matter in Germany. That is understood. But after all, it is the leaders of the country who determine the policy and it is always a simple matter to drag the people along, whether it is a democracy or a fascist dictatorship or a Parliament or a Communist dictatorship ... voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same way in any country.

Thank you, Hermann Goering at the Nrember trial, April 18, 1946 (from "Nuremberg Diary" by G.M. Gilbert, via hottub Eskimo.