Pufferfish

Crazy Train

It once was conventional wisdom that Alan Greenspan was the smartest man alive:

And this brings us to Alan Greenspan, whom I've known for over 50 years and who I regarded as one of the best young business economists. Townsend-Greenspan was his company. But the trouble is that he had been an Ayn Rander. You can take the boy out of the cult but you can't take the cult out of the boy. He actually had instruction, probably pinned on the wall: "Nothing from this office should go forth which discredits the capitalist system. Greed is good."

Not that we're showing any inclination of learning from our mistakes. (I'm finding it difficult to write this post while saluting Time Magazine with a double middle finger salute.) Here's Greenspan's disciple in May, 2007:

"Importantly, we see no serious broad spillover to banks or thrift institutions from the problems in the subprime market," Bernanke said. "The troubled lenders, for the most part, have not been institutions with federally insured deposits."

He was wrong. Five of the 10 largest subprime lenders during the previous year were banks regulated by the Fed. Even as Bernanke spoke, the spillover from subprime lending was driving the banking industry into a historic crisis that some firms would not survive. And the upheaval would shove the economy into recession.

And he was wrong again:

The Fed let Citigroup make vast investments without setting aside enough money to cover its eventual losses. The company would need more than $45 billion in federal aid.

The Fed watched as National City made billions of dollars in subprime loans that were never repaid. Regulators would arrange its sale to a rival, PNC.

And the Fed approved Wachovia's purchase of a California mortgage lender shortly before California mortgage lenders led the nation into recession. Wachovia, on the verge of collapse, was bought by Wells Fargo with government help.

And again while serving on the Fed's Board of Governors:

The dangers of securitization were underscored the very next month by the collapse of energy giant Enron, which had abused the same accounting rules to conceal losses from investors. But in 2003, the board that writes accounting rules backed away from planned reforms after banks protested that Enron was an exception. The Fed sided with the industry, telling the board that securitization was safe and important to the economy, according to people familiar with the deliberations.

And how about one more time:

In January 2005, National City's chief economist had delivered a prescient warning to the Fed's board of governors: An increasingly overvalued housing market posed a threat to the broader economy, not to mention his own bank and others deeply involved in writing mortgages.

The message wasn't well received. One board member expressed particular skepticism -- Ben Bernanke.

"Where do you think it will be the worst?" Bernanke asked, according to people who attended the meeting, one in a series of sessions the Fed holds with economists.

"I would have to say California," said the economist, Richard Dekaser.

"They have been saying that about California since I bought my first house in 1979," Bernanke replied.

Woops. Apparently "they" were right. Routinely. Not that Bernanke's resume is going to keep the senate from rubber-stamping his bid for a second term as Fed chairman. He did the only thing that matters: left bankers alone and bailed them out when they fucked up. If only we could all be coddled for our incompetence.

How About

Them apples:

Between 600,000 and 1.6 million jobs were created or saved through September as a result of the American Recovery and Reinvestment Act, according to a Congressional Budget Office report.

The data, released Monday, say the real inflation-adjusted gross domestic product was 1.2 percent to 3.2 percent higher than it would have been had the $787 billion stimulus package not passed in February. Also, the stimulus lowered the unemployment by between 0.3 and 0.9 percentage points, according to the report.

Too bad for the Obama administration the media grades these things against what Republicans are saying.

Down Goes Dubai

This might actually be bigger news than what Tiger Woods and his penis have been up to. What it could mean:

You have to remember that the Great Depression only became “great,” that is, global, when an obscure Austrian bank went under in 1931, and set off a massive financial explosion around Europe. Capitalism is an irrational system that is often full of unpleasant surprises. The collapse of Dubai World may turn out to be nothing. But it could also turn out be one of those unpleasant surprises.

What it definitely means:

The complexities involved in modern finance sometimes make what is going on seem inscrutable and hard to understand. Economists consequently argue endlessly about the real causes of the global financial crash in language that they layman has a difficult time deciphering. But when you look more closely at the flashpoints of disaster, whether in Dubai or in New York, the real problems seem to be caused by bad decisions by stubborn executives, whether blinded by greed or stupidity or the satisfaction of excess.

And here's a big number to noodle: Dubai's exposure ($59 billion) is less than 1/10th of Lehman's ($600 billion) at the time the investment bank collapsed. Jeebus.

Debt

There's lots of ways to look at it:

* In the long term--after 2020--we get health care spending under control or else.

* In the medium term--between 2012 and 2020--we don't have a debt and deficit problem if congress sticks to PAYGO; we do if it doesn't.

* In the short term--between now and 2012--our problem is not that our deficit is too large but that it is too small.

Which is why Obama signaling a move to deficit reduction over job creation is deeply troubling. He's capitulating to the GOP-sponsored stereotype that liberals are lascivious with public dollars (please forget the actual economic records of recent administrations) and the Wall St.-backed hype that more borrowing could hurt the bond market (because hey, after all someone has to look out for the big guys). Meanwhile, the economy needs another injection of cash to stem unemployment:

In December 2008 Lawrence Summers, soon to become the administration’s highest-ranking economist, called for decisive action. “Many experts,” he warned, “believe that unemployment could reach 10 percent by the end of next year.” In the face of that prospect, he continued, “doing too little poses a greater threat than doing too much.”

Talk about what the fuck. Worrying about the deficit is political suicide when all 2010 is going to be about is the unemployment rate. Deficit reduction doesn't put food on the table.

Zugzwang

On the incoherence of Palin's America:

In the congressional debate over financial regulation, conservatives have proven themselves to be slavishly loyal to the interests of large financial firms. And in the congressional debate over taxing the wealthy to expand access to health care, conservatives have proven themselves to be slavishly loyal to the interests of rich financiers. But via their meaningless denunciations of bailouts, they’ve positioned themselves as on the side of anti-banker public opinion. And yet precisely because this rhetoric is so non-credible, they continue to receive generous financial support from big finance and from big business in general.

Hail conservative populism! Where rubes push back on government action that Econ 101 says saved us from Depression 2.0. Despite the disconnect, Republicans are in an excellent position to be rewarded by voters in 2010, even though the party is still championing the very policies that led to the implosion of the capital markets and the dramatic rise in unemployment. That leaves Obama with a zugzwang economy:

Democratic leaders in the House of Representatives are talking up a new jobs bill. Good luck getting the Senate to go along! In the game of chess, the word "zugzwang" describes a situation in which any move made by a player weakens his position. Obama is rapidly nearing that dead-end. If he pushes for more spending, he feeds his political opponents. If he pushes for debt reduction, he runs the risk of disemboweling the recovery.

Truly remarkable.

How To Frame It

I'm not sure whether Robert Reich has the policy right when calling for a second stimulus (although I'm inclined to agree), but he definitely has the politics right:

Public approval of Obama’s handling of the economy has slipped to 46 percent in an Oct. 30-Nov. 1 CNN poll, from 59 percent in March. Remember, Obama was elected in part because the public didn't have confidence in McCain's ability to manage the economy. In exit polls last November, almost two-thirds of voters listed the economy as the nation's top issue. If the job numbers don't start moving in the right direction, not only will Obama's poll ratings continue to drop but congressional Dems will all be in trouble.

That should be Obama's selling point to the Blue Dogs. He should tell them the economy needs a bigger stimulus in order to show improved job numbers by the mid-term elections. And he should make sure they understand that they're more politically endangered next November if the the job numbers aren't moving in the right direction by then than if they vote for a larger stimulus now.

But I'm also sure the politics of going back for more money could be fatal. Blue Dogs everywhere will be feeling damned if they do, damned if they don't. This was always the danger when not asking for enough money the first time.

Clipper Capitalism

This isn't a post meant strictly to bash the Yankees (although there is that added benefit) insomuch as it's a post to bash capitalism as currently constructed. During the 1977 World Series, Reggie Jackson smacked five home runs and became known as Mr. October. The Yankees paid him $330,000 that year, which at the time was considered an embarrassing amount of riches. When adjusted for inflation, Reggie made $1 million. Put another way, Reggie was paid $32 million less than Alex Rodriguez -- a much better player than Reggie though nonetheless one of similar stature -- who this year pulled in $33 million. But the huge bump in earnings for the top bracket isn't the only thing that's changed for the economic elite in this country: Since Reggie's mammoth World Series, the top tax rate has fallen dramatically. Reggie spent 70 percent of his income on taxes in 1977. Today A-Rod is taxed at 35 percent. And because A-Rod is making so much more money, the rest of us are making that much less:

Wages of average Americans are roughly stagnant, or a little better than that, since 1973. During roughly the same period, top marginal tax rates on the wealthy have been cut in half, and average earners have somehow been convinced that if Robinson Cano had to pay more than 39% on every dollar he earned above, say, $2 million, it would constitute class warfare -- not against Cano, but against them. Go figure.

Despite the redistribution of wealth, many Americans will steadfastly defend Rodriguez's salary as something he "earned" -- even if that salary had to come at the expense of someone else; there are only so many dollars in the universe. And that someone is the middle class.

Cheering For The Yankees Is Your Patriotic Duty

Andrew Leonard is trying to take away what I love most to hate. Here's the Wall St. Journal:

Since 1930, the Yankees -- who would clinch their 27th World Series trophy with a win tonight -- have been a harbinger of average 5 percent GDP growth in years following a series victory.

And here's Leonard on the economic carnage that followed the few times Philadelphia won the World Series:

Last year needs no embellishment. In 1980, writes Weckselblatt, "interest rates were above 20 percent, and unemployment remained at high levels (about 7.5 percent) through the end of 1981."

But the last time Philadelphia won two straight World Series? The A's, in 1929-1930. And we all remember what happened then.

Say what you will about small sample sizes and correlation-is-not-causation, but based on this analysis, it's hard to argue with the data: the unlikely event of a Philadelphia victory would all but ensure a vicious double-dip recession. For the sake of the children, we should be rooting for the Yankees to close this thing out, preferably tonight.

So the question looms, would I prefer to see the financial well-being of my fellow Americans improve more than enjoying the smiting an enemy that can affectionately be regarded as the Halliburton of sports? Meh. Bring on the double dip recession.

Tales Of Subprime Epic Failings

Just how bad a bank was Washington Mutual? Check out Fay Chapman, WaMu's chief legal officer from 1997 to 2007:

"Someone in Florida had made a second-mortgage loan to O.J. Simpson, and I just about blew my top, because there was this huge judgment against him from his wife's parents," she recalled. Simpson had been acquitted of killing his wife Nicole and her friend but was later found liable for their deaths in a civil lawsuit; that judgment took precedence over other debts, such as if Simpson defaulted on his WaMu loan. "When I asked how we could possibly foreclose on it, they said there was a letter in the file from O.J. Simpson saying 'the judgment is no good, because I didn't do it.'

If the bank note fits, you must acquit!

And yet banks are fighting off regulation with claims that it will stifle innovation ... the innovation to repackage crap loans. I find myself falling back on the illustrious business advice of Tommy Boy, who apparently has more sense than the brain trust at WaMu:

Tommy: Let's think about this for a sec, Ted, why would somebody put a guarantee on a box? Hmmm, very interesting.

Ted Nelson, Customer: Go on, I'm listening.

Tommy: Here's the way I see it, Ted. Guy puts a fancy guarantee on a box 'cause he wants you to fell all warm and toasty inside.

Ted Nelson, Customer: Yeah, makes a man feel good.

Tommy: 'Course it does. Why shouldn't it? Ya figure you put that little box under your pillow at night, the Guarantee Fairy might come by and leave a quarter, am I right, Ted? [chuckles until he sees that Ted is not laughing too]

Ted Nelson, Customer: [impatiently] What's your point?

Tommy: The point is, how do you know the fairy isn't a crazy glue sniffer? "Building model airplanes" says the little fairy; well, we're not buying it. He sneaks into your house once, that's all it takes. The next thing you know, there's money missing off the dresser, and your daughter's knocked up. I seen it a hundred times.

Ted Nelson, Customer: But why do they put a guarantee on the box?

Tommy: Because they know all they sold ya was a guaranteed piece of shit. That's all it is, isn't it? Hey, if you want me to take a dump in a box and mark it guaranteed, I will. I got spare time. But for now, for your customer's sake, for your daughter's sake, ya might wanna think about buying a quality product from me.

Everyone Gets A Trophy

Kevin Drum reacts with the appropriate apoplectic dismay at the news Wall St will be handing out record-breaking bonuses:

I sort of feel like I've run out of things to say about this. There's an insanity here that's almost beyond analysis. Wall Street can spark an economic slowdown that misses destroying the planet and causing a second Great Depression only by a hair's breadth — said hair being an 11th hour emergency infusion of trillions of taxpayer dollars — and then turn around and use those trillions to return to bubble levels of profitability within 12 months. And they can do it even though the rest of the economy is still suffering through the worst recession since World War II. It's mind boggling.

Is there any silver lining here? Probably not, but I'll try: If Wall Street can shrug off the worst recession of our lifetimes as if it's a minor fender bender and get the party rolling all over again in less than 12 months, it means the next bubble is already in the works and its collapse will be every bit as bad as this one.

With the economy in the dumps and Wall St enjoying a roaring comeback it's tough to tell which is the leading indicator. But it would seem we're in for a massive correction. One way or another. If Drum's right at least we'll have a front seat while watching the American economy circle history's cloaca maxima.