Does Paulson’s Plan Really Exist?

Looking ahead, nothing could be more interesting (and terrifying) of this post by our friend Philip Mattera of Dirt Diggers Digest:

Those who regard Treasury Secretary Henry Paulson’s bailout program as a step toward socialism should remember that such a system involves not just government ownership but also some degree of centralized economic planning. With all the twists and turns in Paulson’s actions, it is difficult to determine whether he is indeed trying to guide some aspects of U.S. business but is doing so in a way we mere mortals cannot understand.

Especially puzzling is Treasury’s approach to deciding which banks should receive capital infusions. It was no surprise that the first $125 billion went to nine of the country’s largest financial institutions, since Paulson believes that shoring up the big guys is key to restoring stability to the system. But when he then turned to regional banks for smaller injections, it was unclear why some were on the list and others were not (at least not yet).

As Fortune points out, Paulson seems to have deliberately omitted Cleveland’s National City Bank (which is now being sold to PNC) because of its precarious portfolio of bad home loans, but he included similarly situated ones such as Milwaukee’s Marshall & Isley. Now that Paulson, under pressure, is reportedly planning to extend the capital program to privately held banks, whose finances are less transparent, it will be more difficult to figure out if there is rhyme or reason to Treasury’s picks.

Paulson was so lackadaisical in structuring the bailout that the banks getting the federal investments did not hesitate to signal that they would use the funds not to make loans but rather to finance acquisitions and continue paying out dividends and probably big executive bonuses. Presumably responding to criticism from other quarters, ranging from members of Congress to the United Steelworkers, some banks are promising that they will take steps to ease the credit crunch. Yet it is unlikely these limited gestures will be enough to shore up a financial system that grows weaker by the day.

So, are things going according to Paulson’s plan—or is there no real plan but simply an ad hoc set of measures that desperately seek to prevent a collapse?

Nothing more should be said before a new Treasury Secretary is confirmed by the Senate. If that will happen only when barter will be again the typical tool of commerce over the prairies of buffalo-rich North America is another matter.

November 4: What The Math Tells Us

As we wrote two weeks ago, the race is indeed tightening, but any forecast about the Presidential and Congressional elections of next Tuesday must be based not on the last maneuvering of the candidates, but on long-term political trends. All the more so, given the fact that an important fraction of the electorate already cast their ballots, or decided to do so before November 4. Whatever McCain or Palin could say between today and next Tuesday, about one voter in five already voted, and those who did so largely broke in favor of Obama, particularly in the West and in the South, where the opposite should have happened.

The key point we must bear in mind is that the political trend in recent years has been a strong polarization of the electorate, a factor that was central to Karl Rove's successful strategy. About 90 percent of those identifying with a political party vote for that party's presidential candidate. The exit polls in 2004 showed that John Kerry had won 89 percent of the Democratic vote, George W. Bush 93 percent of the Republican vote. As it is, this translates in a huge advantage for the party that is ahead in what political scientists call "party identification," simply because the pool of voters is larger. 

And what is the situation on this front? The Democratic advantage in September was about 4 points, according to Rasmussen. That disparity is now probably larger because early September was the moment of McCain's convention, the high tide of Republican fortunes this year.

However, imagine that in November the gap remains the same, and that the same 120 million Americans who voted in 2004 will vote (there will be more voters, but we'll talk about that later). If Obama will keep the share of 90 percent of the Democratic vote, that translates into an advantage of several million votes for him. The math is quite simple:

90 percent of 46.8 million votes for the Democratic standard bearer (total: 42.1) against 90 percent of 40.8 million votes for the Republican one (total: 36.7). In a moment of painful economic hardship as this one, there is no way the so-called Independents would split 50-50 between the two parties: more probably they will go 55-45 for the Democratic candidate. That means another 4 million votes in the democratic column (Independents are about a third of the voters, as of today). As there will be new voters, a large majority of them pulling the lever for the democratic candidates because of superior field work by the Obama's campaign, this will bring another 2 million votes net advantage to him.

Question: Can the voters who secretly cannot bear the idea of voting for a "nigger" reverse a 11.5 MILLION VOTES ADVANTAGE on November 4th? The answer is: "No, at this point in the game that is not possible." 

Obama has been excellent in reassuring independents about his ability to tackle the economic crisis, and he can count on the traditional Democratic constituencies now pouring into the voting boots, especially women, Latinos and young people: they will give the Democrats a comfortable edge. Right now, calculations about the electoral college give the Democratic candidate a solid majority, but the victory might be much larger, with Obama collecting more than 300 votes in the electoral college. His supporters should work hard, but can sleep well.

Obama's "Tax Tsunami"

As we wrote some time ago, conservatives already start complaining about the Obama administration "raising taxes," something that seems a bit premature, giving the fact that before anything could happen on this issue, at least TEN things must happen:

1) Obama should win a majority in the Electoral College on November 4

2) He should survive the plans to assassinate him through January 20, 2009

3) He should be sworn in on January 20

4) He should nominate a Secretary of the Treasury

5) This individual should be confirmed by the Senate

6) A plan to change the tax code should be presented to Congress

7) It should pass in the House

8) It should break an almost-certain filibuster in the Senate

9) It should pass the Senate

and finally, supposing that the bill doesn't need to go to a House-Senate conference to reconcile the differences,

10) It will go to Obama's desk for his signature, and in some time, it will be implemented.

Now, even if points 1, 2, 3 and 4 are reasonable forecasts (John McCain wouldn't agree, but that is that), all other requirements are events that may or may not happen. The Senate could be a stumbling block difficult to overcome, particularly on points n. 5 and 8. In the best case, nothing will happen before April or May next year, and this is a very optimistic forecast.

It sound almost comical, therefore, that former Republican candidate for vice president in 1996 Jack Kemps could write: 

In their new book, "The End of Prosperity," Art Laffer, Steve Moore and Peter Tanous argue that the threat of this tax tsunami is already destabilizing our financial markets and causing capital flight from America.

They write, "Hot capital is escaping over the borders out of the United States and flowing into China, India, Europe, and even Japan. . . Starting in late 2007, foreigners started pulling their money out of the United States, and Americans started investing more abroad. Global investors are losing confidence in the U.S.

These global investors are so terrified by Obama's bolshevik plans that the U.S. dollar went up almost 30% against the euro in just three months (from 0.63 in  July to 0.80 yesterday). "Losing confidence" in the currency, indeed.

Financial Crisis: Thinking Ahead

We have today a guest, economist Joseph Halevi, who thinks ahead to the possible developments of the financial crisis. 

There is no major change in perspectives despite a lot of institutional talk, most of which is not very substantive such as that at the Beijing meeting. 

The centre of gravity of financial vulnerability is now the maze of the derivatives of credit default swaps. They are being hollowed out and, to that effect, I should mention some institutional steps, which are taken individually and are not coordinated except possibly one.

The first is by France and concerns the formation of a State financial institution with the objective of preventing take overs of French industrial companies by hedge funds, In effect this stops hedge funds from trading in firms' stocks. Many people on the "left" would like that but, whatever its merit, it does not address the compelling issue of vanishing investment plans. What it does it will allow the companies to close down and even relocate abroad or shift production to their foreign plants (it is happening with Renault which is shifting output to Roumania and Brazil), thereby firing workers, without their stocks being traded and speculated as junk stocks. The unemployed will be unemployed, period. 

In the same vein the Berlusconi government in Italy is preparing

legislation to guarantee borrowing by firms, that is to underwrite

firms' debt vis à vis banks, while banks are also guaranteed by the

Central Bank, ultimately by the ECB. The crucial issue is that firms

will borrow less because demand is evaporating, hence it does not solve the issue of labor losses nor does it guarantee a recovery. It simply protects capital from every possible direction: banks are even protected twice. 

A credit default swaps clearing house is being planned by the Euro15. In effect this means making the credit default swaps non convertible, i.e. non tradeable. This is an important event if it goes ahead. Credit default swaps were used also to 'cover' for the external deficits of the deficit countries. By rendering them non convertible the deficit countries will have to pay up, hence the external constraint will become visible and binding again (as I always thought it to be in the core of the functioning of the economy). 

On the other hand, CDS are highly toxic because they condense all the other forms of debt. They were not only used to ensure against potential default but also to make money in both directions simultaneously. Since hedge funds hold a great deal of CDS, the decisions to keep hedge funds at bay will reduce the 'value' of the CDS, hence the need of a clearing house for an orderly euthanasia of this type of paper. 

Japan and China are the only countries that have initiated policies from the spending side. Japan's new package is an extended version of that passed in July or August. Public works and some income support schemes. However it is just a "stay afloat like a dead corpse strategy" reminiscent of the 1990s when they did everything to absorb production without much success.

Japan has huge structural problems since it is the perfect Marxian

"overproduction cum disproportionality"  economy, given the size of its heavy industry and capital goods sectors. It is very difficult to bring up domestic demand to the level needed to ensure recovery. And now they are also subjected to the revaluation of the yen vis à vis the US $ without the mitigating factor of US growth; hence they experience hyper revaluation vis à vis the Euro where demand is also not doing well.

Furthermore, an important Japanese export market for heavy machinery (and thus for Japan's external surpluses, which are now dwindling), the Korean, is just drifting away because of the deep Korean crisis. Japan is really in a big blackish hole. Nothing much can be expected from those keynesesque measures therefore.

China has undertaken the only noticeable spending program. It is based on placing orders at its own heavy industry through very large programs of structural investments. But many consumption goods sectors are being affected by the fall in demand in the USA and it is difficult to see how the sectoral composition of the economy can be changed in the short, or even medium, run. Moreover if the spending programs are based on the heavy industry sectors, the slow down and actual crisis in the exporting sectors like toys etc. will exacerbate the gap between domestic production and domestic consumption demand. Thus China can find itself in a dynamic version of the Japanese situation. 

We should also expect major real crises in Latin America, given what is happening to Brazil and Argentina. The fall in oil revenues prevents Venezuela from acting as a benevolent lender. After all they helped Argentina to pay the rest of the debt by buying it themselves. Notice that through Venezuela and the energy-raw materials surpluses of Argentina, Brazil some others, the Latin America economy is more dollarized than ever. But now raw materials prices are falling and the values of the Real and the Argentinian Peso are falling drastically. They are back in a real deflation+ price cum interest rates inflation crisis. Indeed Brazil had to increase interest rates sharply to stem the outflow of capital.

India: India has the fourth largest trade deficit in the world. They make up for it through capital inflows on the capital accounts and invisibles on the current account. With the credit crunch underway the ability to make money by sending money to India will be severely limited. Hence the situation is wobbly but I think they will still expand in their own Indian style.

Notice that, in spite of all the talk about coordination there is none.

They present their trips to Camp David, Paris, Beijing as coordination, but there is nothing concretely there. Every country uses its own finances, the only common elements are: to throw money at banks and - for the USA-EURO15 relations - the unlimited unsecured and non recourse lending of $ by the US Federal Reserve to the ECB. As to the common ASEAN fund supported by China, Japan and Korea fund we should judge it

when we see it, if we will see it. I cannot possibly figure the Asean

countries being capable of managing that fund given their litigious relations, it will have to be done by Japan with China and Korea. 

The crisis is generating fragmentation in the world economy.

Democracy, the Treasury and the Federal Reserve

As the financial crisis unfolds, it may be important to discuss not only various technical solutions to the current mess, but also what the recent events tell us about the functioning of "democracy" in Washington, DC. 

I put "democracy" into quotation marks because it appears that the long decline of Congress relevance vis-à-vis the President, the Treasury, and the Federal Reserve has now possibly reached a non-return point.

These are the remarks of Sam Peltzman, Professor Emeritus of Economics at the University of Chicago, a couple of weeks ago, commenting on the bailouts:

The Federal Reserve and the Treasury (...) have the demonstrated ability to act without serious democratic restraint. 

How else can one interpret the sudden revelation that $29 billion of the full faith and credit of the 

US Treasury had been committed to the Bear Stearns transaction, or the equally sudden 

undebated and unvoted announcement that $85 billion of government funds had been loaned to 

AIG? If there is any principle that emerges from these announcements – and non- 

announcements like the decision not to rescue Lehman Brothers – it seems to be that amounts at 

least as large as $85 billion can be appropriated, or not, at the discretion of official Washington.

As the Constitution reserves to Congress, and Congress alone, the power of appropriating public money, it appears that another legacy of the Bush administration will be the ultimate irrelevance of Congress in serious matters like war or economic catastrophe. This irrelevance is duly reflected in the current standing of Congress in the court of public opinion, where its current approval rate is about as good as Wall Street's credit, around 8% of approval. However, this is a profoundly unhealthy situation, and Barack Obama will be wise in reflecting on it, resisting the temptation of using the quasi-dictatorial powers he will inherit from George W. Bush, even for good purposes. 

When Readers Are Wiser Than Pundits

The discussion inside the fractured conservative camp continues, and this comment by a Californian reader of Bill Kristol's column in The New York Times seems perfectly on target:

Joe the Plumber is exactly the problem of the Republican party. He has never benefited, and will never benefit, from the Republican policies. While Joe is too ignorant to realize that, most of the other Plumbers (the smart ones) are dumping the Republican party as quickly as they can. Which leaves the party without both those that read books and those that do not (but are smart). What is left? Joe the Plumber and Sarah Palin. A promising future, no doubt...

This reader's opinion about about the beneficiaries of Republican policies is supported by a Nobel-class analysis about the income decline  for average Americans during the last eight years.

Now Conservatives Think Ahead To President Obama

Another week is over, and a quick assessment would go something like this:

1) Whatever John McCain says, the voters don't believe it, not even if Joe the Plumber supports it.

2) Whatever the Bush administration does, the Wall-Street-types don't believe it for more than a couple of hours.

In other words, this is a crisis of trust in the ability of Republicans of all stripes to solve the economic mess, and this feeling can't possibly turn around before the election.

3) All this is perfectly clear to any conservative with an IQ in the 90-110 range, as shown by the last Matthew Kaminski's column in the Wall Street Journal.

What is interesting in Kaminski's piece is the fact that in his 1300-word column, nowhere the possibility that Barack Obama will NOT be elected is mentioned. The very title, "The Axelrod Method. The 'change' president could be in for a rough ride on Capitol Hill," indicates that while McCain's campaigns launches its last fireworks, conservatives start thinking to a completely different subject: the possible failure of Obama's first term.

Kaminsky writes about the election of Deval Patrick, governor of Massachusetts:

As a path to power, the Axelrod method appears to be the best thing going today. Coming into the 2006 race, Mr. Patrick was a political novice with 1%-2% name recognition in a state that's 6% black . He faced off against a sitting state attorney general favored by the Democratic Party establishment. The former Clinton administration lawyer energized the grass-roots and youth vote with superior organization and stirring oratory. The candidate himself was the message; the campaign dwelled on his personal story, not the issues. (...) Massachusetts never saw anything like it. Mr. Patrick upset the favorite in the Democratic primary and won the general election by 21 points.

Then Kaminski, goes into the details of the difficult relationship between the governor and the Democratic legislature:

That crusading optimism, so critical to his election victory, fast bumped up against established Democratic interests such as the police unions and power brokers on Beacon Hill. They didn't know Mr. Patrick, didn't appreciate him jumping the queue to the governor's chair, didn't buy his reformist outsider message, and frankly liked things as they were. Great speeches or popular support were insufficient for Mr. Patrick to get his way.

And Kaminski makes his final point forecasting "a rough ride" for Obama, when dealing with "the Democratic warhorses on Capitol Hill."

Well, no doubt that the Republican candidate for president  will be happy to hear THAT (with still 17 days to go) but let's put aside John McCain's feelings, and discuss the scenario offered by the Wall Street Journal.

First, Kaminski could have found a better example than the one of a first-term governor: in fact, president Carter's relationship with Democratic Congress between 1977 and 1981, would be much more significant. 

Jimmy Carter, indeed had trouble in having legislation passed by Congress, as had Bill Clinton in 1993-1995. It would be fair to say that all Democratic presidents, including Franklin Roosevelt, had sooner or later strong difficulties in implementing their agenda because of resistance from Congress. Only Roosevelt in his first term (before the "Court-Packing" episode) and Lyndon Johnson after the 1964 landslide were able to lead Congress in the direction they wanted.

Carter and Clinton, on the contrary, were both governors of backward Southern states, real outsiders in the party. Clinton was more well-connected than Carter, but his first term began in worst possible way, with troubles in confirming his cabinet, and the public relation disaster of gays in the military. Clinton got only 43% of the popular vote, and no senator or representative felt obliged to him for his election.

What about president Obama? If the Democratic ticket wins on November 4, it will be largely because a perfect campaign that has reshaped the political geography of the country. Axelrod's and Plouffes' efforts in mobilizing activists and voters from North Dakota to Louisiana will benefit local Democratic candidates for the House and the Senate, many of whom will enter Congress only because of Obama's coattails.

Obama will win with more than 50% of the popular vote (FiveThirtyEight's forecasts, the best in the business, give him 52%) and a large majority in the electoral college. He will bring to Washington a NEW Democratic majority in the Senate, a majority that today exists only in name (the party controls 49 seats, and only the conditional support of two independents allows Harry Reid to claim the mantle of Senate Majority Leader). Democratic candidates for a senate seat might win in states like Texas, on November 4: will they forget in a minute who is the leader that propelled them over the top? And representative who will win in arch-conservatives districts will give Obama a "rough ride?"

Maybe.

However, a more plausible scenario is that President Obama will start with strong majorities in both houses of Congress, and that the bulk of these senators and representatives will be grateful to him, and decided to implement his agenda to turn the page after eight years of George W. Bush. The sense of urgency created by financial chaos will add to the discipline of the troops, exactly as happened during Franklin Roosevelt's first term. The fact that the mood of the country changed, and that Democrats will be on the verge of a filibuster-proof majority in the Senate will strengthen the administration enormously.

What Barack Obama will be able to do is another matter. Two wars and a depression will tax his abilities enough, Congress will not be the top of his concerns.

McCain Should Have Trusted His Istincts

In less than two weeks, the conservative camp appears to be reduced to shambles. Polls are cruel, of course, but the amount of finger-pointing, and the speed of defections from the McCain campaign are nevertheless astonishing. It started in September with several voices critical of the choice of Sarah Palin (most prominently, George Will). In October, we already reported the grumbling on the Right after the second debate, with writers from the National Review and the Weekly Standard clearly distancing themselves from John McCain. 

Last Saturday, it was the turn of Christopher Buckley, booted from the same National Review that his father founded because of his endorsement of Obama, and Monday Bill Kristol, editor of the Weekly Standard, proposed quite seriously of firing the entire McCain's team. 

The same day, former Bush's speechwriter David Frum had this to say in his blog: "Do my correspondents truly believe that - but for my pitiful media and social ambitions - nobody in America would have noticed that Sarah Palin cannot speak three coherent consecutive words about finance or economics? In the past month, Sarah Palin's negative ratings have risen by 12 points. She briefly boosted the McCain ticket, but that effect subsided by the end of September. Blue-collar white women (!) now reject Palin as unqualified for the presidency 48-43, according to the Wall-Street Journal/NBC poll.

On Tuesday, Matthew Dowd, a political consultant and former chief strategist for George W. Bush's in 2004, proclaimed during the Time Warner Summit panel that, in his heart of hearts, McCain knew he put the country at risk with his VP choice and that he would "have to live" with that fact for the rest of his career. And the show goes on.

Actually, Dowd said something very interesting: "They didn't let John McCain pick the person he wanted to pick as VP, when Sarah Palin got picked instead of Joe Lieberman."  His idea is that a candidate must trust his own instincts, and not let his handlers take vital decisions. This is precisely what reporter Joe Klein wrote a few years ago in a book about the rise of political consultants,a process that trivialized American politics and debased the democratic process.

In Politics Lost, Klein wrote that in 1976, when he tried to snatch the republican nomination from Gerald Ford, Ronald Reagan hired a consultant named John Sears, whom he didn't know and who didn't share his right-wing instincts. But when he ran for president again in 1980, Reagan fired Sears, trusting his gut when it mattered most. By contrast, Gore in 2000 and Kerry in 2004 lacked the self-confidence to fire the consultants who kept them from saying what they really believed. Gore, a passionate environmentalist, wanted to talk about global warming. But when he did, he was sabotaged by his own advisers, who forced him back to poll-tested standbys like Social Security and prescription drugs -- and, in the process, turned him into a robot. Kerry's anti-Vietnam activism went to the core of his political soul. But high-priced consultants such as Bob Shrum considered the subject too risky to mention. So Kerry didn't tell Americans about this crucial aspect of his political and moral development and left the so-called Swift Boat Veterans who smeared him to do it instead.

Gore and Kerry paid the price for not being true to themselves, and so will John McCain, who never was a right-wing nut like George W. Bush and his cronies. He understood that in a year when the winds blow in the Democratic sails, independent voters will be a key constituency. He appealed to them, and Lieberman, a Democratic turncoat, would have been the natural choice to give the ticket a coherent profile.

It's not his fault if the Republican political machine is dominated by zealots, who never loved him and imposed a Karl Rove protege, Steve Schmidt, as chief of his campaign. It was Schmidt, who only knows Rove's strategy of "mobilizing the faithful" who vetoed Lieberman and picked Sarah Palin, with the effect of energizing the base... and alienating everybody else. But it was his fault to accept Schmidt and let him manage the campaign.

John McCain should have trusted his instincts: maybe he would have lost anyway, but he would have spared himself, and the Country, the sight of angry mobs chanting "Kill him! Kill him!," not to mention the embarrassment of someone like Sarah Palin in the spotlight. 

Obama's Lead Will Shrink in The Next Three Weeks

A new poll by The Washington Post gives a large advantage to Obama, 53 per cent to 43 per cent, and these numbers are close to those of many respected pollsters. The race has solidified, and Obama's victory is hardly in doubt (Howard Wolfson wrote as much in The New Republic on October 5).

However, it's important to know that in the next three weeks this large gap will shrink. When the ballots will be counted the real margin could be close. This year may be different, and a Democratic landslide is a possibility, but the historical experience tells us that in a polarized political environment the results are more likely to be 51% to 49% than 55% to 45%.

At mid-October in 1992, Bill Clinton held a 14-point advantage over incumbent George H.W. Bush but he won the election by six points only. In 1976, Jimmy Carter had a lead of 13 points over incumbent Gerald Ford in Gallup polling; in the end, Carter defeated him by two points only.

The 1976 election is of great interest to us because it was surprisingly close, given the fact that it was the first one after a political catastrophe like Watergate that hit the Republicans at least as hard as the current economic catastrophe is striking them.

Actually Ford, had small amounts of ballots shifted in his direction in just two states, could have won.

In many states, the two candidates finished neck-and-neck: in Ohio, Carter won by less than 6,000 votes out of 4 million cast. In Mississippi, the Democratic candidate received only 15,000 votes more than the Republican. These two states had 32 votes in the electoral college, and that would have been enough to give Ford a majority of 272 votes, keeping the White House in Republican hands.

It's fair to say that would have been a truly amazing development, because Carter had a 1,700,000 ballots edge in the popular vote (50% to 48%), a much larger margin of Al Gore (who won the popular vote by about 550,000 votes). One may also stress the fact that Ford already was extremely lucky in winning 240 electoral votes, because he prevailed over Carter by the slimmest margin in California and Illinois (2%), and sneaked through in Iowa (22,000 votes) New Mexico (10,000), Nevada (9,000) and Maine (4,000 votes).

Nevertheless, the Ford performance should remind us of the amazing ability of Republicans in winning even after they brought disaster to the country. In 2008, that shouldn't happen but one should note that the race card, reactivated by McCain's campaign with its last ads, will play a role on November 4. It will not be a role as large as it had been in the past, but many voters who simply dislike Obama and look for a good reason for NOT voting him, will cast a ballot and these ballots will be counted. That will bring closer results than many pollsters and pundits forecast today.

More Conservatives Ready To Give Up

While Republicans launch a new ads campaign against Obama, linking him to Bill Ayers, of Weatherman Underground fame, Weekly Standard editor Bill Kristol said on “Fox News Sunday”: “[T]he main thing to say about these negative ads [is] they haven't worked. Obama's favorable rating is as high as it's been in three months. It's actually gone up in the last month. So it's a stupid campaign.”

Coming from the son of Irving Kristol, a die-hard neoconservative, it's quite an endorsement for the Republican ticket (by the way, another scion of a blue-blood conservative dynasty, Christopher Buckley, let know yesterday that he will vote for Obama).

After The Debate, Many Conservatives Seem Ready To Give Up/2

There is a VERY interesting picture posted on Flickr by Brett of FiveThirtyEight, my blog of choice for political statistics analysis. The photo (here the Flickr gallery) shows Sarah Palin signing a "Palin 2012" placard.

This is truly unprecedented: the very existence of this sign, created by her supporters, means either that they think John McCain will win, but not survive his first term, or that they think Obama will win, and prepare themselves for 2012. In both cases, John McCain's should not be too happy. The truth is that his campaign is simply irrelevant to them, something rather odd for the true believers when the election of November 4 will tke place in three weeks.

Don't Expect Things Go Better Before January 20, 2009

The week is over, and a quick assessment would go something like this: 

1) Whatever the Bush administration does, the markets don't believe it.

2) Whatever John McCain says, the voters don't believe it (look at the last polls and trends here). 

In other words, this is a crisis of trust in the ability of government to solve the financial chaos and the sentiment can't possibly turn around before the world is sure that the Bush-Cheney crowd has packed its luggage for good. That means things might start recover not on November 5, but more likely on January 20, when Obama will be sworn in (a McCain's victory will bring the country back to the era of barter, so this possibility will not be discussed here).

Everything started with the real estate bubble, therefore we should start from there.

Houses are normally purchased on credit, and while an individual can pay back his mortgage debt by selling the house to someone else, society as a whole can’t do that. Mortgage servicing, therefore, has to be financed from its own income (real estate is only marginally influenced by foreigners's buying), income which is derived from selling goods and services. The ratio of asset prices to consumer prices gives the best measure of how hard or how easy that is to achieve. While there is no obvious “magic number” for the ratio (and the servicing cost of debt will rise and fall with changes in interest rates), its level tells us how sustainable house prices are at any point in time. A low ratio implies very affordable housing; a high one implies expensive housing, and one that lasts in the long term implies a bubble.

The bubble in US housing prices is obvious: between 1892 and 1995, the average for this index was 103, while its previous peak value–set over a century ago in 1894–was 133.6. This long run maximum was breached in 1989, and the housing bubble continued even after the Stock Market "dot com" bubble temporarily burst in 2001. The house index peaked in 2004 at 228, over twice the historic norm, and 70% above the highest level the index had reached in 1894. If the index reverts to anything like its historic norm, then US house prices have much further to fall. Even now, after a 10-15% fall from its peak, the index is still almost twice the pre-1995 long term average. 

This means that the banks will become owners of more and more houses, because less and less families will be able to pay their mortgages, set at high and unrealistic levels. And the prices for more houses will go down more and more, stressing the balance sheet of the soon-to-be-nationalized banks even further. Nobody knows where the bottom is. Read this about the Panic of 2008.

After The Debate, Many Conservatives Seem Ready To Give Up

In the last 10 days, polls have been hard to swallow for Republicans. Nevertheless, it's remarkable that many right-wing commentators already start to accept the obvious: McCain will lose, and lose badly. A few excerpts from what was published last night immediately after the debate in Nashville:

"If McCain were running in a year when his party wasn't getting crushed by a series of calamities, he might be winning this race. But tonight obviously wasn't enough. Obama, meanwhile, just has to appear plausible and he did" (Rich Lowry at National Review).

"John McCain had a very strong debate tonight. It's too bad for him that it came on a night when Barack Obama was nearly flawless. The debate began with questions on the economy and for thirty minutes Obama answered those questions with the kind of substance that I suspect anxious voters wanted to hear and with exactly the right tone--empathic, aggravated, and determined. Most important, he spoke to voters in their own language." (Stephen Hayes at the Weekly Standard).

"Does any of this change the fundamentals of the presidential race? Probably not. Those fundamentals are being determined in a global financial crisis that neither candidate did anything to cause or prevent. (...) Sometimes being in a presidential campaign is like trying to steer a glacier. You do what you can, but you are mainly along for the ride. Tonight, McCain did what he could. But the party with executive power – the party more closely identified with banking and Wall Street – is being blamed for the current crisis." (Michael Gerson at Washington Post).

"With due respect, I think tonight was a disaster for our side. I'm dumbfounded that no one else seems to think so. Obama did everything he needed to do, McCain did nothing he needed to do." (Andy McCarthy at National Review).

And among the rank-and-file the spirits are quite low as well:

"The debate was a draw. It seems that both candidates are willing to play it safe -- surprising, at least, for McCain, given that he's behind. (...) McCain was effective, but there were many missed opportunities and anyone hoping this debate would be a game-changer is bound to be disappointed. (Carol Platt Liebau at TownHall.com)

"Well I have gone outside and pulled up my Mcain/Palin sign. This election is over. I will vote for Mcain but I know that come Nov. 5 Obama will be our president-elect. I feel sorry for Sarah Palin. A once promising career will be permanently connected to the landslide loss of John McCain." (email message to Mark Steyn at National Review).

A final comment by a TPM reader: 

"My intuition is that McCain conceded tonight. Sure, he shot a few across the bow but he did not go nuclear. He did not engage Obama in the way Palin does on the stump with her references to Ayers, Rezko and Wright. It's as if McCain couldn't bring himself to do so. All his attacks were kind of half-hearted. He's given it his best shot, but when the time came to go for the killer punch, or at the very least, attempt one on prime-time national TV, he blinked." 

The Race Has Taken Its Shape

Today, The Washington Post has a story about Republicans' strategy that begins this way: "Sen. John McCain and his Republican allies are readying a newly aggressive assault on Sen. Barack Obama's character, believing that to win in November they must shift the conversation back to questions about the Democrat's judgment, honesty and personal associations," One may ask: "And what did they do so far, if not talking about Obama's character and personal associations?" Their entire panoply of TV ads focused on one theme only: "Not Ready to Lead." Remarkably consistent, but not particularly convincing for voters, so far.
Now, the situation in the field is this: Obama has gained a 7-10 point margin over John McCain in the last ten days, depending from the polling organisation, and he seems to be ahead among men and women, among independents, and in all swing states. The financial crisis of the last two weeks, and the first debate, clearly made voters say they are ready to vote for him.
That means he should easily win in November: he will need only to keep the blue States where John Kerry prevailed in 2004, and win in states like Iowa, Colorado and New Mexico where he enjoys comfortable margins in the polls: +5% in Colorado, +11% in Iowa, +8% in New Mexico. That would make 273 votes in the Electoral College, more than the "magic number" of 270. Even a loss in New Hampshire (a vague possibility) would give Obama 269 votes, and a tie which would be decided by the House of Representatives, where Democrats will enjoy a very large margin.
This, however, is an extremely conservative forecast: polls give him good chances of winning in Florida, Virginia, Ohio, Nevada and even North Carolina, creating a large majority in the Electoral College for a Democratic President who will have strong Democratic majorities in Congress (the party should pick several seats in the House, and Democrats are on the brink of a filibuster-proof majority in the Senate).
During the last month of campaign everything can happen, but the race has taken its shape: voters are ready for change, as they were in 1980 when they broke for Reagan after a long period of balance between him and incumbent president Jimmy Carter.
John McCain will have a hard time in convincing voters that, on November 4, the main issue should be Obama's character and not the tragic situation of the economy.

Is General McClellan Winning in Afghanistan?

General McClellan will prevail, said Sarah Palin, the folksy former Mayor Of Wasilla, now a Vice president candidate, during the St. Louis debate last night. She definitely thinks that "Yes," he is leading U.S. troops to victory in the remote valleys of Asia, where those British and Soviet wimps were defeated.

And, no doubt, he will win because he is a true American hero, here shown with his comrades (right in the middle of the picture you can spot president Lincoln, too).

(Note for the few ones who care: today, the name of the general in charge of American troops in Afghanistan is McKiernan, David D. McKiernan).

Russ Feingold Speaks

Senator Russ Feingold of Wisconsin voted "Nay" to the bipartisan financial bill passed by the Senate 74-25, because "it fails to offset the cost of the plan, leaving taxpayers to bear the burden of serious lapses of judgment by private financial institutions, their regulators, and the enablers in Washington who paved the way for this catastrophe by removing the safeguards that had protected consumers and the economy since the great depression. The bailout legislation also fails to reform the flawed regulatory structure that permitted this crisis to arise in the first place. And it doesn't do enough to address the root cause of the credit market collapse, namely the housing crisis. Taxpayers deserve a plan that puts their concerns ahead of those who got us into this mess."
Now, will the 95 Democrats in the House who voted "No" last Monday have enough political courage to resist the lobbying of their disgraced leadership that sold out to the fat cats?