The New York Times: Obama Up By 5%.

September 18, 2008

The polls are getting interesting.  The New York Times has Obama with a 5% lead and most of the country (and the world) skeptical of McCain’s claim to be the agent of dramatic change in Washington.  I find it heartening that we are not dumb enough that merely saying something is not good enough to influence the opinion of most voters.  Apparently the notion still survives that there ought to be some substance to assertions.

Seventy-five percent see Sarah Palin as a gambit by McCain to get elected rather than his choice as most qualified for office.  Think though that 25% of the people believe that she is the most qualified Republican to be vice president and lead the country in a pinch while it is at war and in the middle of a financial crisis.  Skeptical Democrats might go along with that but presumably one in four people accept what McCain says about her as the truth.  These are not inquiring minds.

McCain and the Economy

September 18, 2008

Let’s start adding things up.  The war has cost somewhere between $600 billion and $3 trillion depending on whether you find the administration or Joseph Stigletz, the Nobel economist, more credible.  The Bear Stearns bailout was accomplished by the Federal Reserve using Great Depression procedures of the 1930’s.  The cost was reported to be around $30 billion.  The Los Angeles Times reports additional commitments:

[We are] committed to investing up to as much as $200 billion in preferred stock of the loss-plagued finance giants Fannie Mae and Freddie Mac and at least $5 billion in their mortgage securities; and agreed to provide an emergency loan of $85 billion to American International Group Inc. in return for an ownership stake of as much as 80 percent in the stricken insurance giant.

That brings the total over $300 billion so far this year.  There are still several institutions that will require help, so the total will inevitably climb.

As our commitment to saving the advocates of lower taxes and free markets continues we will approach a total near the administration’s estimate of the cost of the Iraq War.  The war has been a well documented drain on our financial system and has greatly impacted our national debt.  We are in a short period of time undertaking to double that amount of debt.

McCain and his camp, icons of deregulation, are now piously advocating for regulation.  This is madness!  McCain, like Bush on the war, does not feel the slightest sense of owing us an explanation.  What was he thinking in giving free rein to financial institutions?  What was he thinking while he was telling us over the last year that there was no serious problem?  Now without any explanation he is trying to sound like a reformer of the system he created.

Remember McCain advocates a substantial increase in the budget for defense spending and reducing revenue through reducing taxes.  His foreign policy calls for spending the defense budget on greater military activity.

How can he do anything but drive us deeper into debt?  I understand that this has to do with securing petroleum assets but is this the best way to proceed?

Washington Mutual

September 18, 2008

Did you know that Washington Mutual began just after the Great Seattle Fire in 1889? Here is a thumbnail sketch of its history. It has been around over a century and it appears that now its days are numbered.

Washington Mutual appears to have gone the way of Seafirst Bank in the 1980’s. Seafirst was at the time the biggest, baddest bank in the region and its board of directors hankered for more. At that time national banks were getting fat on third world loans and energy loans. Remember that an asset for a bank is a performing loan.

So you make a loan and you have an asset until a few payments are missed, then it flips to the other side of the balance sheet. This makes banks which loan heavily in one sector quite vulnerable to slumps in that sector of the economy. If the sector slows down things can turn around fast for the bank.

Banks hedge their bets by selling portions of their loans to other banks, called “participations.” The problem is that this seems to encourage banks to dive much deeper into a given area, so that the advantage of selling off portions of the loan are lost by the sheer magnitude of the lending. Penn Square Bank, a little shopping center bank in Oklahoma City, started making oil loans by the billions and selling off participations to banks around the country. Seafirst invested hundreds of millions of dollars in these participations, as well as serving as the primary bank in many of the loans and became a big player as rapidly as Washington Mutual.

But the bubble burst and Penn Square Bank folded, sending the biggest banks in the country into insolvency. Seafirst, already strapped with nonperforming third world loans was purchased by BankAmerica.

Ten or fifteen  years later Washington Mutual decided to become a big player by riding the home lending boom. It succeeded and grew exponentially. With the bursting of that bubble, it too has I think reached the end of its days. It has probably not been bought out because of concerns about the market — home loans — into which it plunged. Financial institutions are not sure that the bottom has been reached and are reluctant to jump in even at fire sale prices.

There are only two major investment banks left standing and there are serious questions as to whether either one can survive.  With Barklay’s, a foreign bank, buying Lehman it appears that the pool of potential domestic buyers is reduced if not depleted.  It is at least questionable whether the federal government can afford to prop up Washington Mutual, but the country could ill afford to have a bank of its size fail.

Colossal mismanagement has put us in a situation where we are steeped in debt and watching our financial assets, so far only historic investment houses, taken over by foreign interests.

The Economy: Pouring Gasoline on Fire?

September 18, 2008

The United States does not have enough money to sustain its own activities.  For reasons that I did not understand, nor apparently Alan Greenspan, rather than curb our country’s excesses we went into historic levels of indebtedness.  Our foreign debt has more than quadrupled and our total national debt is over three trillion dollars.

This previously unknown level of debt quite predictably caused the dollar to weaken.  As the dollar fell we have made a variety of efforts to prop it up but the weight of our debt has been too much for the interim measures we have undertaken.

While our leaders were focused on a war we entered into for reasons that have never been adequately explained by our leaders, they did not mind the store at home so that reckless lending practices were allowed to metastasize.  This certainly artificially sustained the economy for a while and just as certainly these practices were unsustainable over the long haul.  They were doomed to fail with fluctuations in the real estate market and like all houses of cards a tremor would be ruinous.

For reasons the Bush administration can best explain we were caught unprepared.   We have been forced to take measures that will be hard for our economy to endure if they are successful in stemming the current disaster.  At a time when we are borrowing money almost as fast as we can, the government is committing its resources to propping up its financial and insurance institutions.  This diversion of funds that are already inadequate to meet expenses will add to our sorry state of indebtedness.

The second measure that we are taking is to print more money.  Yesterday the Federal Reserve announced that it will be dumping $56 billion into the economy.  When you print the stuff that is pretty easy to do. This however will contribute to the downward spiral of the value of the dollar.

I have commented, after reading Naomi Klein’s “Shock Doctrine,” that the United States really has been taking on the attributes of many South American countries.  It has a diminishing middle class; the polarization of wealth distribution is greater than it has been since the beginning of the industrial age, before the first timid implementation of the restraints complained of by Republicans.

Like our neighbors to the south we have promoted the power of the executive to a greatly heightened level. We have reduced oversight of private financial activity while loosening restraint on governmental activity with respect to its citizens.  Like South American countries we have gone deeply in debt and our financial institutions are not stable.  Similar to them our currency is falling.

The current measures to cure the crisis are not the smoke and mirrors approach that we have adopted in the past. At the same time if they avert disaster they will leave us with an economy in worst condition than we thought it was in before the crisis.  In short we will bring the crisis in the wings that we already knew about a few steps closer to center stage.

Bush Will not Confirm McCain’s Economic Assessment

September 18, 2008

Bush’s press secretary refused to confirm the truth of the McCain statement this week that the economy is fundamentally sound.  Ordinarily you would think that this might put the Republican candidate out on a limb, particularly one who has endorsed Bush’s economic policies.  McCain though with characteristic alacrity now denies his own assessment and is calling for regulation of the financial industry.  We can ad this to the list of issues that he has argued first one side, then unblinkingly argued the other side.

Biden has developed a funny bit in discussing McCain’s 180 degree turn on this.  McCain has a little bit of bagage on this isuue, what with 83 Wall Street lobbyists on his staff and his chief advisor, Phil Graham, the senatorial champion of financial deregualtion.