No Better in Europe

Der Spiegel this week gives us a piece on Europe's financial prospects for weathering the deepening financial crisis.

If the authors are correct, they are grim in the extreme.

Perhaps most dire is the possibility that Britain could become "a second Iceland," its economy overwhelmed by an even more severe housing crisis than the one that exists in the US. I can recall televisions shows running through a number of modest four bedroom houses (if you are picturing a British home in your head, that's probably what I'm talking about) in the 200k pound range, and then as a teaser cut to the 12 bedroom swimming pooled mansion that could be yours if only you moved to Spain or the US.

As interesting is the dilemma faced by the Eurozone, in which some of the weaker members face bankruptcy. Should the stronger members offer them bridge loans to prop up a fellow member and maintain the value of their shared currency, or does such a policy take away all incentive for governments to make the hard choices that might stave off insolvency in the first place?

Perhaps most striking, the concluding pages of the article range over European economic history going back to the 16th century, pointing out the relative frequency with which national governments had run out of money over the last half millennium. Setting aside the objection that this scope of time runs us all the way back into the declining days of mercantilism, national insolvencies have generally been associated with attempts to pay for wars using economic policies that lacked the sophistication to manage the resulting debt. Considering that we enjoy far more robust mechanisms for debt management today, the apocalyptic sweep of the piece is breathtaking. As is the idea that Europe stands on the brink of some sort of continental prisoner's dilemma with regard to the Euro.

"It's not dark yet, but it's getting there."

Keynes is Our Co-Pilot

I've written in this blog about John Maynard Keynes before, indeed, TPBP was some months ahead of the general revival of Keynes in popular journalism.

This American Life has done a piece in which they interview prominent economists, some of whom are specifically applying Keynesian theory to Obama's bailout plan. As TAL often does, they compress into 7 minutes what I had to read some 1200 pages to get. The audio won't actually be available until 7pm Eastern.

Financial Balance

Here is an excellent article from Foreign Policy, arguing that China's reliance on US dollars for the vast majority of its foreign currency holdings does not constitute the threat to domestic security that many suggest.

Bottom line: As with so very many things, China remains constrained by its own governing system.

Price of Oil Drops 74% From July Peak

Amid the general wreckage of what we are pleased to call the economy, one of the most welcome trends of recent weeks continues in this Associated Press story announcing that light sweet crude fell below 37usd per barrel this morning.

I know I'm not the only one who's been enjoying filling up the gas tank for half of what I'm now used to paying, but I'm also not the only one who bought into the general trend of arguments from two or three years ago, suggesting that the increasing consumption of oil by emerging Asian economies combined with price speculation in deregulated markets were producing a sort of market synergy and generating an unprecedented, permanent new price floor for oil.

Clearly, reality has proven more complicated than such sweeping models allow, and I've lost a long-running argument with my adviser. I guess the questions that need to be answered to better understand this phenomenon are:

1. Was Asian oil consumption actually responsible for driving up market prices, or were increased prices a function of regular market fluctuations?
2. Are we actually consuming less oil now than we were a year ago? Because suddenly OPEC is talking about reducing output, rather than claiming they don't have any additional production capacity to meet our endless demand. Knowing the answer to this would go a long way toward answering question one.
3. What should we see as the fundamental price driver for oil costs at this point?

We'll be watching over upcoming weeks to provide new answers to these old questions. In the meantime, enjoy driving like it's 2001.

You Sorta Have To See It Yourself

I quite like this article on China by Tom Grimmer, it's a decent summary and a better tone than is common in US press coverage.

My only issue is with his characterization of the China Investment Corporation, the government owned strategic investment fund, as, "This is a passive equity investor just looking for a place to park cash; it's not Dr. Evil. (So far, CIC has taken a bath on the likes of Morgan Stanley and Blackstone stock; they are not seers.)"

Well, sort of. It's a government directed investment company that strategically selects targets...er, companies...based on their ability to provide useful things to China. That's why people are so touchy about it acquiring significant holdings in computer companies or airlines, industries with strategic military applications. In fact, it's hard to think of any commodity that a state government could invest in using the amounts of capital China has available that wouldn't tend to raise questions about alternative agendas.

Still, on the whole, a good read.

Recession Comes to China

I've been waiting for these stories to start, and am a little surprised they took so long.

The recession hitting Europe and the United States is a terrible phenomenon, but it stands to have disproportionate political consequences for China. The political ramifications of economic downturn, undermining the government's central claim to legitimacy, are beginning to create security concerns in Beijing according to the BBC.

Economic growth has apparently slowed, and the government is projecting that although it will hold its 4.5% unemployment target for this year, it may not be able to do so next year.

These numbers seem optimistic - reports of manufacturing firms imploding overnight are all over the Chinese press, and considering the government's interest in looking good, I have to believe the official numbers run a little bit behind reality. Or ahead, as is expedient.

The no longer functioning video link to protesters in Gansu province is interesting- that western province holds large numbers of the ethnic minorities most likely to have alternative political agendas.

More, no doubt, to come.

Detroit

So the debate over saving Detroit seems to be nearing a middle.

Both Mitt Romney and I grew up around Detroit, so can claim great authority when we opine on the state of American car manufacturing. The difference is that Mitt gets his opinions published in the NYT. Which doesn't really seem fair...but I digress.

His editorial pretty much says it all. The standard narrative runs something like: the Big Three have been running an unsustainable business model for decades now, hamstrung by their unions and seemingly hapless in the face of superior foreign designs. Of course they're failing, reduced to begging us to "buy American," in that we should prefer saving their jobs to purchasing the best available product.

The rub is that even though I find that narrative hard to disagree with, the implosion of the American auto industry would (will) plunge Michigan, already far from the shining economic center of the nation, into a financial wasteland of such remoteness it is hard to imagine how it will ever emerge. Think back to the portrait of the city of Flint in "Roger & Me." Flint is still like that, only more so. I shudder to imagine that malaise spreading across the entire state.

Bailing them out, again, won't save the companies for long. It will, however, stave off the day when Michigan plunges into financial collapse.

**UPDATE**

The AP reports that the bailout deal is on the verge of death, as "negotiations" are reduced to acrimonious finger pointing.

Here, another AP report does a better job of making my point from yesterday- if you think Michigan is in bad financial shape now, wait till the car companies fail and local municipalities lose 30% of their tax base. Numbers do so much to bolster an argument...

More on the Republican Quagmire

The New Republic offers this thorough exploration of the multiple, mutually exclusive, critiques of the Bush administration and efforts to extrapolate lessons for the future of the Republican party.

Probably the best line is the entirety of the third page:

"What part of "overwhelming electoral defeat" does the GOP not understand?"

Then in the NYT, we have a story in which a group of Republicans decide that, “The moderate wing of the Republican Party is dead.”

I am not a member of any political party, but any regular reader of this blog has probably divined my not particularly concealed sympathies for the Left. That said, conservatism does have valuable contributions to make to American political discourse: fiscal restraint, self-reliance, local solutions to local problems, and personal freedom are all the traditional foundations of the conservative movement, at least as I understand it.

People calling for a party grounded on the model of the last 10 years, which so far as I can tell include: tax policies that enrich billionaires, rejection of science and a related unwillingness to acknowledge, let alone confront, a number of global crisis, a desire to cater to a coded "values" agenda, and a rejection of education and nuance at the expense of flag-waving mindless patriotism, may have strong partisans, but cannot command a majority- in short, the vision of the party espoused in the NYT article, seem determined to craft a party that cannot hope to command national office. The article today in which card-holding Republicans overwhelmingly support Palin in 2012 have a lot of ground to cover before we get around to another election, so should be taken with a good sized rock of salt.

While Palin et al lead the Republicans further and further away from electability, the nation suffers from a lack of people espousing the best traditions of conservatism, and producing the tension in policy-making that maintains moderate outcomes. Conservatives of the United States: there is still a place in the public forum for you. In fact, we need you. Let the moose hunters go their own way. They're going to anyway.

End of the Beginning?

So stocks seem to have stabilized, and as the government moves to buy parts of all the largest banks in the US (whether they need it or not, to avoid giving investors a clear idea of who is in how much trouble), we have also taken to ordering those banks to lend out the money rather than hoarding it to improve their asset ratios. It's unclear where the government acquired the authority to give that order, but when Nobel Laureate Paul Krugman suggests that Gordon Brown may have saved the world with his financial planning (and Gordo could certainly benefit from something going right with his administration), things might be stabilizing. As is the usual refrain at this point, it remains unclear how credit markets will respond. Although, as this RCP story points out, the administration have done it at the cost of deeply alienating some fiscal conservatives. I don't really believe that George Bush was ever an adherent to Ayn Rand's political theories, or that he has traded in what he does believe for Marxism. I do believe that he's moved a very long way from the economic model informing his policy eight years ago.

In addition, I would refer readers to this WaPo article by Robert Skidelsky. My first project in graduate school was an evaluation of Skidelsky's biographies of John Maynard Keynes, and he has forgotten more about economic history than I will ever know. To see Dr. Skidelsky in the world of journalism is a rare treat.

Returning to Bretton Woods?

Apparently, world leaders are discussing closing the world's financial markets for the amount of time it would take them to negotiate a new Bretton Woods agreement.

Depending on who you ask, Bretton Woods was either the agreement that rebuilt the global economy after WWII (until Nixon broke it in 1973), or the agreement with which the US rigged the global economy to intrinsically favor its own interests (see: the protesters outside every G7 meeting). I suppose the two needn't be mutually exclusive. Any agreement of that scope, re-examining the fundamentals of how money and trade operate, would be enormously complex, and presumably take more than an afternoon to sort out. How long can we go without the world's financial systems?

In short, if there is any truth to this, it's a very big deal.

More to come.

not dark yet, but it's getting there

Just when you think this whole economic collapse thing can't get any more strange. Politically, Still President Bush might as well make the remainder of his public appearances wearing a bill and oversize novelty webbed feet. The lame part will take care of itself. He's lost control of the party that voted him nearly unrestricted war powers. Surely it couldn't get much worse?

Then you look at the economic impact. Both the Dow and NASDAQ closed today lower than they were when Bush took office, meaning that 8 years of value have been wiped from the markets in the last few weeks. There is little to add to this stunning verdict other than context for this statement:

"It's a striking phenomenon," said Robert Shapiro, undersecretary of commerce during the Clinton White House years. "The reckless negligence and mismanagement of the country's financial markets by the White House, the Treasury and the Fed over the last several years has now produced a crisis that has wiped out all of the increase in the market value of America's companies from five years of record corporate profits, strong productivity gains, and reasonable growth. Bush has now run the table on presidential failure."

Read that context here.

Bailout Collapse

Looks like the bailout bill failed in the House. I’m not entirely sure what happens from here. Do they bring it back up for a vote? According to Marc Ambinder, more than 131 Republicans and 94 Democrats voted against. The Dow is dropping like a rock. That’s a pretty large block – I’m not sure that they can really bring this back from that.

Paul Kruman has said that the bill is sufficiently not terrible to be worth passing. It’s not exactly the second coming of the New Deal, but it’s what’s needed right now. If nothing else, it was a pretty remarkable step back from the original Paulson plan. Dodd and Frank were under some pretty tight constraints in what was politically doable, with the president and the Treasury secretary where they are.

The bill really had to have bipartisan support – Krugman talks about this above – because without it, the dissatisfied party can always go and hang a sign reading “$700 Billion Handout” around the other party’s neck. It seems that the Republican backbenchers didn’t feel like they can go home with this plan behind them. I guess we’ll see if they end up ruing that decision here in a month or so.

Playing On...

So as the inscrutable tactical circling in Washington continues, Washington Mutual collapses and is devoured at fire-sale prices by JP Morgan.

I don't know if a bailout plan could have saved WaMu. I do know I passionately dislike their most recent ad campaign, and am therefore disappointed that the commercial side of their operations appears to be unaffected.

Still President Bush just gave another speech regarding the impending bailout plan that will no doubt pass any...minute...now...but it just made him sound even less in control. There is a certain poetry to watching the man who has done so much to extend the boundaries of the imperial presidency overtaken by events I suspect he only partially understands. Ideological certainty, it turns out, is a poor substitute for a clear-eyed evaluation of reality.

An interesting question I would like to see someone answer, or try to answer, in an official capacity, since we are all just waiting around for a compromise bill to emerge is this: WHY is there a sweeping financial crisis of epic proportions? Acceptable answers would not be able to rest on vague concepts like "greed" or "a hangover on wall street." Which policies, exactly, allowed this to happen? Which policies, exactly, will prevent it from happening again? Oh, I realize that's impolitic, but for 700 billion I think we can demand the policy equivalent of some heads on stakes.

Further, as we swing toward our own rapidly improvised version of European socialism, what has the gaping hole in the budget done to both candidates' financial plans? Surely McCain's tax cuts are out. Surely many of Obama's spending priorities in health care and education are now either delayed by years, or only possible in the face of substantial tax increases far further down the income ladder than he originally wanted to go. Either way, it would be interesting to hear how their plans have been altered by our impending economic collapse.

Finally, fallout from the continuing revelations of Palin's ignorance of the world. Is there a chance that middle America, who also knows nothing about McCain's legislative record or the intricacies of Russo-American relations, identify with her befuddled answers and turn toward her in a wave of sympathy and anti-media rage? I don't know for sure- but I still like to believe, in spite of evidence to the contrary, that people will ultimately prefer candidates who give the impression they will be competent at the jobs they want to do.

A Tale of Two (or Three) Plans

It’s incredible to look at the text of the deal that Dodd and Frank hashed out, that was broadly agreed upon, and that apparently John McCain helped scuttle, () and contrast it with the “plans” that House Republicans presented as an alternative. The Democrat plan is not without flaws, I’m sure, but it has most of the things that progressives have been saying it needs to have: homeowner relief, equity stakes for the government, oversight mechanisms, and a handle on the money spigot. This is about as different from the original Paulson plan as it’s possible to get. It was never going to be everything that progressives wanted, but it seems far better than it could have been.

Contrast that with the Republican plans, of which there seem to be two. The first is little more than a joke: a two year suspension in the capital gains tax – despite the fact that the problem is that the assets these mortgages are backing are worth less now than the mortgages themselves. They don’t need to suspend the capital gains tax, because these assets aren’t going to be making any capital gains. The other is slightly less idiotic, and seems to come down to an elaborate, just as expensive plan that avoids more regulation or Congressional oversight.

These Republicans are fundamentally unserious. They’re trapped by rigid, ossified orthodoxies that prevent them from actually engaging the real world on anything other than the most basic, tactical, political level. They aren’t fit to govern and are simply another example of the idea that when you send people who don’t believe government works to run the government, you just get government that doesn’t work.

Is McCain throwing his weight behind them, or is he trapped in a mavericky labyrinth of his own making? My guess is the later. I can’t imagine anyone who seriously expected to be able to compete in the upcoming election to swing from “the fundamentals of the economy are strong” to “We need more regulation!” to a total abandonment of any sort of regulation. It’s entirely possible that McCain is simply this clueless about what’s going on. After all, it takes the kind of interest in detail, patience and willingness to learn that McCain has never possessed to follow this crisis and come up with a reasonable response.

Well well...

What a surprise...

Apparently, the timeline for yesterday goes something like this: a decision on an economic deal is nearly reached, John McCain arrives in Washington, and sits through a 40 minute meeting on the proposal barely speaking, and suddenly the deal falls apart as the Republicans suddenly counter-propose a vaguely worded, clearly rushed alternative.

See my last post for comments on the political expediency of that maneuver for McCain. You might have heard it here first, depending on whether you read us before other news sources.

So we are left with the last great outstanding question regarding the bizarre fiasco that is fast becoming the McCain campaign: will he show in Mississippi tonight?

I'm guessing he does. I'm guessing there will be a fair bit of fallout from that, but far less than if he leaves the stage empty.

Not Doing Enough

After spending almost the entire editorial blasting Bush and McCain for their complicity in the financial crisis, and McCain’s manic swings from position to position, the New York Times editorial board throws this in:

Mr. Obama has been clearer on the magnitude and causes of the financial crisis. He has long called for robust regulation of the financial industry, and he said early on that a bailout must protect taxpayers. Mr. Obama also recognizes that the wealthy must pay more taxes or this country will never dig out of its deep financial hole. But as he does too often, Mr. Obama walked up to the edge of offering full prescriptions and stopped there.

This is almost as if they have to say something negative about Obama in an editorial that also lays (far more severely) into McCain. As best I can tell, what the NY Times editorial board is saying here is that, “Obama seems to understand what the problem is and how large it is, has long advocated our preferred cures for the current crisis and has been, in short, right on this before even the current crisis came about. But he hasn’t offered a specific, detailed plan.”

It’s not the job of presidential candidates to offer specific, detailed plans. In fact, I think it’s foolish to do so for a couple of reasons, not least of which being it has no chance of becoming law. Obama (and, lest we forget, McCain) are not on the relevant committees to deal with this crisis and the bailout deal. Sen. Dodd seems to be doing a fine job without either of them, and I think it would be best if they both avoided getting involved and trying to blatantly take credit for a plan that they A) didn’t write and B) aren’t in charge of.

Obama, should he be elected, won’t be president until January. He’s currently a senator, but he isn’t on any of the right committees. Offering his own plan on this would be entirely presumptuous and would open himself to attack by Republican surrogates of McCain, as well of McCain’s campaign itself. There’s no reason for Obama to go stepping on the toes of Chris Dodd or Barney Frank. The best thing he could do is exactly what he has done: outline what he feels like the major problems are, the things he’d like to see the bailout address and then step back and let the rest of his colleagues in Congress hash out the details.

Cracks in the Wall

It's 7:05am here, and the news suggests that the 700 billion bailout plan is not getting the job done. The US dollar suffers its largest single day drop in 7 years on CNBC. The price of oil jumped up in a single day record. The Dow lost some 370 points yesterday. See those fun stories here.

The scary part, is that while the US government debates, the bleeding continues abroad. The Royal Bank of Scotland Group and Deutchebank both lost some 3% of their value overnight, and the international recriminations have only just begun in the NYT. I'm still waiting on other media sources to pick up the European banking declines. Similar numbers are coming from Singapore and Tokyo.

So far, the MSM story of the day is about the argument about to play out between the President and congress. Let's hope that argument actually matters. Here's the first think piece in The Weekly Standard musing on the "D" word. Here's more good news from Politico: there really is no plan B. None of this is exactly good news.

I suspect markets and commodity prices will continue to swing wildly, and keep these unpleasant doubts alive.

All Sorts of New Developments

Man, you go away for a few days and things just keep getting crazier. Catching up on the news about the Bush plan to bailout financial companies to the tune of seven hundred billion dollars with little to no oversight is obviously insane. We can only hope that the Democrats seize on this issue and ride it as far as it’ll go. The idea of McCain jumping onto the regulation bandwagon is absurd. I wonder how that will play with fiscal conservatives like Phil Gramm? Obviously he wasn’t all that concerned about regulating the economy up until a few days ago. I wonder what happened?

Through The Looking Glass...

The interest rate on Federal 10 Year Treasury Bonds went negative this morning. That means that investors are paying the federal government money to hold their money.

Also, I ate some of the brownies in the tupperware container, and now the lamp won't stop staring at me.

Both sentences suggest madness. Only the first one is true. I mean, the point of investing is to gain money, not lose it more slowly in one place rather than another. If George Bush calls a press conference this afternoon and tears off his face, revealing that a cabal of insectoid aliens have been running the government ever since the Nixon administration, it will not be an appreciable addition to my amazement.

Watch the lights flicker off on the ticker at RealClearMarkets.

No End in Sight?

This is the best writing I have seen thus far on what has been happening to the economy over the last year.

It uses phrases like "...worst crisis since the 30's," and "...no end in sight."

And it uses those phrases with clinical precision.

I believe this is what the ancient Chinese curse, "May you live in interesting times," refers to.