Post-Bailout Blues

First, allow me to apologize for the long silence, but there was serious mulling to be done, and spewing half-baked thoughts during the mulling process is not recommended. There was just too much static to get a good sense of what was going on. When you want to get a sense of the Big Picture, think Taoism.  Tao is usually translated as "the Way", which it is. But Tao as an active force, manifested in our own reality, is better understood as "the Rhythm" of life which, in turn, reveals "the Way". In this context, daily events, often lost in the cacophony of life, are but individual notes of the underlying rhythm. Accordingly, it's sometimes best just to sit tight and listen for the rhythms of life.

So, what the hell happened last week? Is the world going to hell in a hand basket? (No.) Will Urkel convince the nation to validate his narcissism? (Probably.) Recent events have changed our perception of the political and economic landscape. It's probably best to start with the economic scene. Two questions are pertinent: Whither the global economy? And, why is the market still in free-fall after the passage of the bail-out?

The global economic outlook is clouded, at best (which contributes much to the market's volatility). The bears are in the driver's seat at this juncture. Panic in the financial markets is the result. There are strong cases to be made for a short and shallow recession, or a long and brutal global malaise. Heck, two of my favorite economists (Don Luskin and Wayne Angell) can't even agree on whether we're facing an inflationary or deflationary monetary outlook. I'm leaning towards the short-and-shallow scenario, but that's just a hunch, one that no prudent investor would risk his capital on. The fact is that Europe is probably headed for a bumpy ride; their delusions that the financial problems are purely American will soon be tested (indeed, the excesses of some European housing markets make the US look tame). That said, a decline in the euro would be helpfully to the less-competitive, export-driven economies in the euro zone (especially France and Italy). China is slowing down, but that's not a bad thing. The Middle Kingdom's growth rate remains white-hot, and a slow-down reduces the danger of over-heating. India has got some structural issues, but is still growing. Moreover, both nations will be helped by the decline in global commodity prices. Japan is as anemic as ever, but what else is new?

If the bail-out has passed, why is the market still falling? The bail-out was never a panacea for the market ills, merely sand-bags on the regulatory levee. Moreover, the struggle over its passage was merely the most prominent concern of market concerns, but by no means the only one. In brief, the passage of the bill meant that the markets could move on to new subjects of worry and hand-wringing. Fears of how far the financial contagion will spread now dominate. It must be recalled that the financial system is the economic equivalent of both the circulatory and nervous systems rolled into one. When it goes out of whack, the whole body suffers terribly. Fear itself can do a lot of damage, as it infects the decision-making process, starving otherwise healthy industries of financial life-blood.

At this point, the panic has to run its course, and policy-makers have to do their best to limit the damage. Markets tend to lurch between fear and greed (evinced by the fat-tailed distribution of annual market returns). The one bit of good news is that there is a ton of capital sitting on the investment sidelines in the form of cash. The trick will be to convince that capital to return to the markets. That will only happen when we hit bottom.

Speaking of hitting bottom, Obama has profited mightily from the chaos. His economic plan would only make matters worse (assuming he could even implement it), but politics is about perception. People blame the GOP for their economic ills and believe that Obama will improve the situation. McCain's economic illiteracy makes it much worse.

The Debate: The Morning After

Last night, I found John McCain's debate performance to be superior, if not by much, to Obama's However, with a night to sleep on it, I get the feeling that the electoral impact will be to the latter's benefit. McCain's answers on the economy were inadequate. He needed to score some points there, especially given his dramatic move on the bail-out plan. He may have squandered any political capital that might have been gained by his sudden descent on Washington. Dick Morris makes this argument, as well.
McCain needs to spend a long weekend with Jack Kemp and Rudy Giuliani, pronto, for a crash-course in economic policy and its verbal articulation. They are some the few (former) politicians able to speak in Reaganesque terms about the virtues of a free market. Otherwise, Obama's promises for a socialist tomorrow will carry the day.

The Debate (Live)

Both men start out a little nervous. The quivering in each voice is obvious.

Lehrer starts with the Eisenhower "Security & Solvency" quote. Obama starts, talking about the need for help average Americans. The "McCain = Bush" meme is launched right out of the gate. he defines economic well-being as "fairness", especially for the middle-class. McCain starts classy with the thoughts for Ted Kennedy. Also, good language on bi-partisanship.

Do the candidates favour the bail-out plan? Obama won't answer directly, but simply lays claim to prophetic visions of the financial mess (Then why didn't he propose any corrective legislation?) McCain gives tepid support for the plan, but focuses on the need for accountability (nice touch with the Eisenhower reference). The two men clearly don't like each other.

On the fundamental differences between them. McCain emphasizes his opposition to earmarks, and cites Obama's profligate use of them. (A tactic to get under Obama's skin? The Illinois senator does not react well to being questioned by mere mortals.) Obama dismisses earmarks as a paltry sum. Instead, he sees McCain's support for tax cuts as the real problem. He will cut taxes for 95% of Americans, yet magically pay for myriad new programs.

(Surprisingly, McCain seems to be dictating the pace of the debate.)

McCain gives a great example on the effect of corporate tax rates on job creation in the US versus Ireland comparison, but he doesn't stock with it.

What programs would the candidates be willing to curtail to pay of the bail-out? Neither man really answers. Obama uses it as an invitation to list his pet programs (universal healthcare, education, etc.). McCain talks about shrinking or eliminating federal bureaucracies. His bit on cutting "cost plus" defense contracts was good.

On the lessons of the Iraq war, McCain does a nice job on the surge - he's hitting his stride. Obamam emphasizes his opposition to the Iraq war and cites this as evidence of his superior strategic understanding (although McCain schools him on the difference between strategy and tactics, which clearly annoys Obama). Obama is all about the costs of the Iraq war, and never the benefits. He's Oscar Wilde's cynic. Obama also claims that al-Qaeda is stronger than at any time since 2001. (No human being with an IQ above 35 believes that. Al-Qaeda is now just a video production company run by spelunkers.)

On Afghanistan, Obama repeats the canard that it's a distraction - ignoring that al-Qaeda's own communiques showed it to be their #1 priority. McCain argues that the lessons learned in the Iraq war (i.e. the surge) will be applied to Afghanistan, then goes after Obama on hitting Pakistan. Obama's defense of his position is good, and he (again) contrasts 21st century thinking verses 20th century (a jab at McCain's age).

Speaking on the Iranian threat, McCain notes the threat of a 2nd Holocaust (in a pitch for Jewish votes). More importantly, he cites the threat of a nuclear arms race in the Middle East. The UN is useless, as countries like Russia undermine US efforts. He speaks of Iranian meddling in Iraq, but makes a mistake, saying "the Iranian Republican Guard". (I cringe. Then, a miracle! Obama makes the same mistake!!) Obama blames Iranian resurgence on our overthrow of Saddam Hussein. McCain could nail him on that, but misses the opportunity. He does, however, score some laughs by mocking Obama's verbal responsive to the Iranian president's threats against Israel.

Russian aggression : I missed this one. Sorry.

Lehrer asks about the risk of another 9/11. McCain says it's much less, but there is work to be done, especially in improving US intelligence capabilities. Obama reluctantly concedes that we are "somewhat safer". He stresses the need to get bin-Laden and, borrowing Bill Clinton's line from his DNC speech, says that we must improve US image abroad (a good point). Obama describes Iraq as a distraction, but McCain rightly notes that victory in Iraq will color all of our actions in the eyes of the world. To lose there would be catastrophic.

CONCLUSION: No one landed any killing blows, nor were there any memorable lines. Still, I have to give it to McCain. Both men started out nervous, but McCain soon hit his stride after the bail-out questions. More importantly, he clearly got under Obama's skin, though he did not land nearly as many punches as he could have. Yet, he came across as a stalwart and earnest man, firm in his conviction that service to his country was the highest (and most natural) calling. Obama, in contrast, seemed lawyerly, if not slippery. His answers seldom satisfied, and he was frequently petulant with unappealing facial gestures and body-language. However, I don't think that many minds were changed by this debate.

After reflecting over a cigarette in the light rain, I was reminded of U.S. Grant's Memoirs. After his elevation to supreme military command over the Union forces in early 1864, Grant had to extensively re-shuffle the command structure. Looking back, he noted that the best men never sought their own advancement or promotion, but merely did their duty and did it well. Tonight, I saw one young man, whose entire life had been dedicated to the pursuit of his own career advancement. The other man, in contrast, seemed to be the one who would do the best job if the American people saw fit to promote him.

Joe Biden, Sarah Palin and Prince Eugene's Mule

During the early modern period, European military institutions began to place an increasing emphasis on skills other than just combat experience. A famous example of this can be found in Shakespeare's Othello, in which the antagonist, Iago, comes to resent Othello for promoting a Florentine siege-expert, Cassio, as his second-in-command. The battle-seasoned Iago despises the bookish Cassio, a man Iago claims, "That never set a squadron in the field, Nor the division of a battle knows". (Act I, Scene 1) In a similar vein, there was an old saw about "Prince Eugene's Mule". This mule, it was said, had served in every campaign with the great Austrian commander, Prince Eugene of Savoy (1663-1736), but knew no more about the art of war at the end of his career than he did at the beginning.

Another sterile (figuratively speaking), ass-hybrid reminiscent of Eugene's Mule is, of course, Senator Joe Biden. In the recent issue of Forbes, Peter Robinson points out the dubious value of the Gaffe-o-Matic Biden's experience in Congress. This is particularly true when comparing him to Sarah Palin. The MSM, liberal and "conservative", tends to look down their noses at Gov. Palin, as she did not attend the right schools, nor did she spend her entire life in and around Washington DC. Palin speaks from the heart and the gut, which regular folks (a.k.a. voters) relate to. Biden, in contrast, reminds voters only of the importance of high school American history courses, and of the aesthetic perils of hair restoration. His verbal gaffes, problematic in someone aspiring to be a world leader, are of the type most of us only make when knee-deep in empty beer cans.

Ergo, on the issue of judgment, McCain: 1 Obama: 0. (That said, Palin does need to work on her interviewing skills. I've seen her do very well when interviewed on CNBC prior to her elevation as McCain's VP, but the Couric and Gibson interviews were not up to par.)

McCain and the Paulson Plan

As a former card-carrying member of the Libertarian Party, the idea of a massive government bail-out makes me ill. However, the sad state of the US (and, by extension, the global) financial system requires some sort of action. To disappoint investors' expectations for some kind of a bail-out plan would be to risk a serious panic. This is especially true of foreign investors, who are more accustomed to government intervention in the capital markets. Further panic-induced shocks to the financial system could turn the current economic sniffles & headache into a life-threatening case of pneumonia. Principles must, on occasion, give way to the unhappy reality in which we live.

That said, the Paulson plan is deeply unsatisfying for several reasons. First, it commits too much money to buying-out questionable debt, as opposed to only the most distressed assets. The bail-out should be a back-stop for financial institutions, not a gift. To the taxpayers, it looks too much like a former investment banker (Paulson) bailing-out his buddies still on Wall Street. Second, the plan gives too much unfettered power to the Treasury Department. Washington does not need another unaccountable, bureaucratic monstrosity. Finally, the Paulson plan, especially when viewed in light of the proposed Democratic amendments, looks like a massive power-grab by the same Washington politicians who did so much to create this mess. Government should encourage free markets to work their magic, not supplant them.

In light of all of this, McCain's recent maneuvers, ably-seconded by the GOP Congress (it lives!), were both bold and brilliant. The dominatrix, Mistress Nancy, and her gimp, Harry Reid, thought that they had the Bush administration over a barrel. Suddenly, they find themselves outmaneuvered by McCain and (suddenly) a no longer spineless GOP Congressional leadership. The Democrats are as desperate for a bail-out as the Bush administration, and will quickly give in to many GOP demands so as to prevent McCain from getting all the credit for a much improved, and more taxpayer friendly, bail-out plan. Of course, they'll fight a tough rear-guard action in the media, and we do not know yet what the final package will look like. However, I suspect that we'll have deal in place when the markets open on Monday.


Both presidential candidates sent clear, unmistakable messages to the voters this week. McCain underscored that he is a man of action, willing to swim against the tide in order to serve the public interest (this is not to say that he isn't also trying to score some political points here). Barack Obama announced that nothing is more important than him becoming president, and that we should call him and leave a message during times of crisis, or whenever leadership is called for. I just hope that he has some good tunes playing while the nation is on hold waiting for him to respond during future crises.


What about the debate tonight? I think that McCain should still do it. The subject is foreign policy, and Urkel is a tepid and uninspiring debater, so McCain doesn't need much preparation. He should show up at the last minute, with some good footage of him walking briskly across the tarmac after just flying in from Washington. Then, let the voters decide which candidate they would trust when the sh*t hits the fan.

Excellent Debate Advice from the Architect

He may be evil, but he's no fool.

Ungreatful

The sublime Mark Steyn makes a brief, but very important, point about the Great Depression. Only in America is it called the "Great" Depression. In Europe, it's just called the Depression. Why the difference? Europe was spared the attentions of FDR and his cabal of economically-illiterate lawyers (a concoction leavened by a sprinkling of Comintern agents). The massive federal power-grab contemplated by the New Deal, and the Keystone Cop regulators behind it, did much to make the Depression a "Great" Depression here in the United States.
The US Bureau of Economic Analysis provides handy historical data to anyone who doubts this. After a disastrous few years (1929-32), exacerbated by such Obama-esque policies as the elimination of tax cuts (the Revenue Act of 1932) and trade protectionism (the Smoot-Hawley Tariff Act of 1930), the US economy started to recover, with growth resuming by 1934. Private investment, in particular, soared in 1934-35 (growing by 80% and 85%, respectively). However, 1935 was also the year that the New Deal's legislative program kicked into high-gear, and the effect was dramatic. Private investment was sharply curtailed, and actually started to decline by 1938 (it fell 33.9% that year). The US economy followed suit, slipping back into a depression by 1938. After a few anemic years, real growth did not resume until 1941. By then, that growth was not coming from private investment, but from the massive increase in federal spending as the US prepared for possible entry into World War Two.
However, it's not just the historical record that suggests the failure of the federally-managed economy. There's also that most bitter foe of contemporary liberalism, known as "common sense." Two points are worth making in this regard:

1. Free markets represent the collective intelligence of millions of economic decision-makers. The notion that some smart-ass lawyer, even graduates of Mammon University (a.k.a. Harvard) or the Leviathan Technical Training College (a.k.a. Yale), could out-smart that collective intelligence is beyond absurd. Only the most egotistical fool would imagine it so.
2. The economy is a non-linear phenomenon. As such, it lacks the principle of additivity (i.e. the notion that the combined effect of multiple causes equals the sum of those causes). In a linear system, where additivity is present, 1+1=2, 2+2=4, and so on. This is not true in a non-linear system, where 1+1 may or may not equal 2. Therefore, there is no guarantee that piling on more regulations will achieve any beneficial effect. Indeed, the historical record suggests the opposite.

This is not to suggest that all regulation is bad, but that the real issue is not more or less market regulation, but good versus bad regulation. Good regulation acts like an attractor, embracing the non-linear market dynamic and attempting to encourage beneficial behavior. Bad regulation, like the indescribably awful Sarbanes-Oxley Act, merely attempts to overwhelm the non-linear market dynamic with linear strictures, usually with disastrous outcomes. FDR's creation of the Great Depression should remind us all of this fact.
McCain needs to make this point on the regulatory issue in his debate with Obama. Urkel will promise to solve all of the market's problems with the hammer-and-sickle combination of regulation and taxation. McCain needs to point out the fallacy of both. On taxes, he can corner Obama by getting him to admit that tax hikes would not be good for the ailing US economy. And, if McCain makes a clever argument on "good" versus "bad" regulation, he can out-flank and flummox Urkel, who knows little beyond what he already believes to be true.