Mr. Greenspan

I highly recommend reading any article about Mr. Greenspan's Congressional hearing. A few highlights as quoted by J. Chait of The New Republic:

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said.

Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”

Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.

“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

Is this the end of the free market as we know it? I doubt it. While regulation is clearly needed and proposed by both candidates, what will it look like? As I've said numerous times, this crisis is so complex that I'm not sure anyone really knows whats going on. I highly recommend reading the recent Economist article, Link by Link: A short history of modern finance. What's clear is the deregulation has been on the rise since Milton Friedman's arguments finally defeated Keynesian ideas in the 1970s. Friedman emphasized the free market whereas Keynes emphasized government intervention.

As the pendulum swings back and forth between ideological poles, my hope is that it comes to rest in the middle. Perhaps this is one of the reasons I like Obama more and more. McCain seems to be bent on the free market, despite populist outcries at the greed and excess of wall street (can anyone explain how you can be whipping mad at big business yet still want to give them a huge tax break? not to mention the data simply doesn't show that supply side policies will really benefit or "trickle down" to everyone else).

Ironically it is the home of Milton Friedman, the University of Chicago, where Obama has formed his economic thought. This has given him an understanding of the value of the free market and its potential for growth. After all, you can't deny that deregulation has had some very positive outcomes. On the other hand, I think Obama also understands the limits of deregulation and free markets. While this might lead one to believe that soon the government will be back in control, I doubt it. Most impressively, I think Obama is unlikely to see government as the only solution to the problems of the market and will look for market solutions to market problems. I suppose only time will tell, but this is a major reason why Mr. Obama will receive my vote.

On a lighter note, I have been reading a number of endorsements for Obama lately. I have a great affinity for endorsements that are given almost grudgingly, pointing out both flaws and strengths. I respected and admired Colin Powell's greatly. I also had to chuckle when Leon Wieseltier wrote in his endorsement entitled Washington Diarist,

. . . McCain's sense of reality seems to be narrowing. The financial crisis harshly exposed these limitations: it made McCain more dogmatic and more doctrinaire, with his wild refrain about tax cuts and his unmaverick-like refusal to examine his party's cult of corporations. His economics refuted his compassion. McCain feels with his heart, but he thinks with his base. And when he picked Sarah Palin, he told the United States of America to go fuck itself.

Only 11 more days!

Greenspan concedes error on regulation

Spreading the wealth

It would seem that a new four letter word has been added to the political lexicon. That word is "socialist." It's hard for me to understand why this is seen as an automatic insult. Like all systems, it has its merits and its faults. Or perhaps after living in Norway, one of those Scandinavian varieties of "socialist" countries, I am a bit more willing to accept some of its tenets as viable options.

The most recent discussion/controversy revolves around the idea of "spreading the wealth," a notion that is anathema to many. While I think there are many arguments to be made from a social justice and fairness standpoint in favor of a progressive tax structure that "spreads the wealth," this is not the strongest argument.

Moreover, I think the simplest point to be made is that "spreading the wealth" is something that happens irregardless of whatever approach a government takes. The question is really, how will wealth be spread about?

I think its fair to consider regressive and progressive tax policies, in their various extremes, as opposite poles on a spectrum of wealth re/distribution. Flat taxes are for all intents and purposes regressive. While on paper everyone may pay the same percentage, that percentage is a much larger chunk of a lower income than a higher one. In any case, my basic premise is that regressive policies simply spread the wealth upwards while progressive tax policies help to spread the wealth downwards. I might also add that the lower the tax rate the more wealth stays distributed on the top end while higher tax rates are dependent upon what the government decides to do with it.

One might argue that there is no such thing as spreading the wealth upward. By definition a tax is taking money away from one group for the government to spend for either the benefit of the whole or a more specific group. If one ignores the reality of market conditions, this might be true. However, in any competitive market there will be winners and losers. The winners will continue to earn and the losers, well they lost. We currently have the largest income disparity since the 1920s with the richest 10 percent earning an average of $93,000 a year and the poorest 10 percent earning only $5,800 a year*. If such a trend continues the end result gets closer and closer to a monopoly with a few oligarchs perched high above the rest. Clearly such a situation promotes the accumulation of wealth at the top.

Furthermore, I would argue that the market for many laborers, especially the unskilled, is imperfect. This means that supply and demand models simply do not hold for such a group. They do not have the luxury to reject certain jobs and force competition to raise their wages. In fact, competition nearly always favors businesses and pushes their wages down. This is in part because the opportunity costs for the poor are always higher, often exponentially higher than they are for the wealthy.

Consider the value of $150 in forgone income to a family making $800 a month compared to a family making $3,000. For the poor family, losing $150 could mean eviction or not being able to put food on the table. For the wealthier family, it probably only means putting off a luxury purchase of some type until next month. As such, retraining or additional education are often simply not an option for families struggling to put food on the table. This further limits their opportunity for any type of real economic growth along with any meaningful accumulation of wealth.

As I said above, while there are strong social justice arguments to be made for a "fair" system of re/distribution of wealth, the strongest argument revolves around the health of the economy. While I am no expert on this topic, I think a balance needs to be kept between moving wealth up and down to help benefit as many as possible and ultimately, to maintain the healthy competition that allows the invisible hand to work.

On the one hand, spreading the wealth up (tax cuts to businesses, etc.) does help promote economic growth through the creation of new jobs. This can be good provided those jobs actually improve the lives of people. It is problematic if those jobs don't really improve people's lives and they might as well be called a hand-out to big business. We've witnessed this in the last 10+ years. While GDP has grown and executive salaries have risen, the majority of Americans have not seen any real growth in their standard of living.

On the other hand, consumer spending also has the potential to drive the economy and indeed has in recent years. You can have all the jobs you want, but if people can't afford your goods and services it doesn't matter. Moreover, helping those out at the bottom helps to lower their opportunity costs and begin to accumulate meaningful wealth (probably the biggest reason the poor stay poor and the rich stay rich).

Thus, this is not an either or issue. The major reason I think government should be actively involved in spreading the wealth is to keep the free market working. Every game needs a referee to maintain fair competition and the free market is no different. Without competition the indivisible hand starts throwing rights and lefts. With competition it helps out, maybe even gives a nice back rub. When those at the top start earning disproportionately, they effectively limit the opportunities of those below.

What we need to understand is that wealth re/distribution does not and should not mean the extreme of the government making everyone equal. That is indeed anathema to our freedoms and basic rights. However, it does mean that we need to promote fair and continual competition. There will still be winners and losers. Yet it doesn't help anyone if we don't find a way to help those who have fallen to get back in the game. You can call it wealth redistribution if you like, I'd simply prefer to call it pragmatic economic policy.

* Spreading the wealth? US already does it
Also see Spreading the wealth

Joe McCarthy, meet Michelle Bachman

I have a couple of posts in the works (re/distribution of wealth, Ayers, more on "anti-Americanism," etc.) but had to put up a quick post regarding the comments of Michelle Bachman. For one, I can't believe we have not moved passed this type of divisive politics. In so many words, Bachman basically said all liberals are anti-American and that an expose should be undertaken on all members of congress to see who is pro-American and who is anti-American. While Chris Mathews gave her the rope to hang herself, it is unbelievable that such opinions are still alive and well.

Here's a brief passage from an article by Michael Tomasky entitled, "The Republicans have lifted the lid off their rightwing id"

This point was proved most dramatically by a woman named Michele Bachmann, a member of Congress from Minnesota. In an interview last Friday on Hardball, a leading US cable talk show, host Chris Matthews asked Bachmann whether Obama worried her. "Absolutely. I'm very concerned that he may have anti-American views," she said. He asked her what she thought distinguished liberal from hard left from anti-American. If she maintains such distinctions in her mind, she refused to acknowledge them. Then, finally, Matthews - who deftly fed her the rope to hang herself - asked her how many members of the US Congress held, in her view, anti-American views.

It's been almost a two-year campaign. There have been moments we've thought of as memorable, only to see the tide of events erase their mark from the sand. Bachmann's answer, however, will live imperishably: "What I would say - what I would say is that the news media should do a penetrating exposé and take a look. I wish they would. I wish the American media would take a great look at the views of the people in Congress and find out, are they pro-America or anti-America? I think people would love to see an exposé like that."

. . . .

The call for an investigation into the beliefs of every federal lawmaker, and an exposé of those found wanting in their patriotism, certainly takes us into deeply creepy territory. I would not call Bachmann herself a fascist. Odd as it sounds, to do so would be to grant her far too much credit. For one to embrace an -ism, even a repugnant one, one needs to have read a certain amount of history and political philosophy. Bachmann is just an idiot. She wouldn't know Edmund Burke from Billie Burke (she played the good witch in the Wizard of Oz), and she obviously has no idea that, in her rejection of the two bedrock American principles of separation of church and state and freedom of thought, she is the one who is as anti-American as they come.

What's next?

Tonight's debate brought nothing new or at least very little. I will say I think it was McCain's worst debate by far. The first 20 minutes or so I thought were absolutely terrible for McCain. He recovered somewhat, but poorly. My impressions have been wrong about the last two, so we'll see what the polls say.

I still think what to do about the economy was a missed opportunity for both candidates. I also think what to do about the deficit was also a missed opportunity.

I was very impressed with Obama's ability to counter some of McCain's best punches, especially in regards to his voting record and Ayers.

I think McCain dug himself a hole on the personal attacks piece. I almost got the feeling he was trying to play the victim and the "poor me" card.

One observation I have is about their tax policies. I wonder how McCain reconciles the anger for those in wall street (i.e. the rich) yet his insistence on supply side economics. Whatever the merits of supply side economics, do they really square with perceptions of fairness, especially now. I don't think he is selling his position very well.

I still wish Obama would highlight the failure of supply side economics to benefit the majority of Americans. If you look at real income (adjusted for inflation) over the last 20 years, the top 1% has grown by ~11% while the remaining 99% has only grown by ~1-2% (see July 26th, 2008 Economist articles Unhappy America and Workingman's Blues). Perhaps the argument is too hard to make and this is why he sticks to his tax cuts and predominantly demand side economics rather than critiquing supply side policies.

I think there are arguments for both demand side and supply side economics but ultimately this is not an either or question. I think demand side tends to benefit the vast majority of people while supply side is more effective at economic growth (think GDP). The problem is both are needed. The real question to me seems to be: How do you balance these to get the best of both? Which candidate is more likely to find this balance? While I don't think either (or anyone for that matter) is likely to get it perfectly, Obama seems far more likely to do so than McCain.

Whatever your thoughts on tonight's debate the bottom line is - this was no "game changer."

The Last Debate

The final debate is about to start. Here's my bullet points

• The economy is likely to dominate
• Each candidate is likely to expound on new plans to get the economy back on track
• Look for McCain to try and score points, maybe even by taking big risks
• McCain has to change the tone if he's going to stand a chance - I don't think he can afford to go negative

If this debate is anything like the first two, it's likely to be a snoozer.

The Fall of the West

It's official, we are in a recession that is likely to get worse before it gets better. Moreover, this recession may have consequences far greater than our pocket books. The collapse of the US and European financial institutions is likely to herald in a changing of the guard. The sun is rising in the East.

A number of recent articles are starting to address the global nature of this financial crisis, something that I think neither most Americans nor the presidential candidates have come to grips with. Or at least they certainly are not talking about the global reality of the collapse of the financial markets.

John Lipsky states, "The tectonic plates of the global financial system are shifting." This is essential to understand as a global crisis demands a global solution. Lipsky goes on to state, "What is novel is that global and regional responses are necessary for success in the current circumstances, not just national responses -- however bold."

The International Monetary Fund (IMF), an organization that is supposed to be the watchdog for global economic crises, has been in the hot seat lately. Moreover, the free market ideology or the Western consensus of the IMF, which has dominated its policies, often to the chagrin of developing and emerging economies, is experiencing a dramatic role reversal. The West has become the cause of this crisis, not the solution. The emerging economies of the world have become the victims, rather than the culprits.

What is clear is that stability within the financial markets is sorely needed. If credit markets were hell they have indeed, frozen over. No one is lending to anyone, creating the ultimate "mood killer." As I've said before, I don't think anyone has any real clue what's happening here, the problem is simply too big. However, I think Lipsky's point that "a new multilateral framework for macro-financial stability" in order to "break the negative feedback loop between dysfunctional financial markets and a weakening global economy" is heading in the right direction.

This however, is easier said than done. It is important to understand that as a response to some of the IMF's former bullying (or advice depending on one's point of view), developing nations such as China are not to keen to get in line with its policies. Moreover, these nations turned to foreign assets to help protect themselves against future foreign shocks and not be left holding the bag as the IMF pushed them to do in the past*. Currently those reserves make up more than $4,000 billion (yes that's 4 trillion dollars).

It is these very same reserves which has financed much of America's credit**. Philip Stevens quotes a Chinese official as saying, "America drowned itself in Asian liquidity." Moreover, these reserves could provide some much needed help, perhaps even the stimulus needed to get credit markets moving again. Katie Hunt quotes Oxford economist Ngaire Woods as saying, "These countries are sitting on large stockpiles of dollar reserves and their dollars could keep [the] 'world economy afloat.'"

Think about this for a moment. The West is in the midst of financial crisis and the beginning of what could be a major recession. The West is indebted to developing economies, especially China. These developing economies have massive stockpiles of dollar reserves. The West is fiending for an infusion of dollars - lots of dollars. While this is quite the role reversal, we should also remind ourselves that the writing has been on the wall. China's 10%+ growth rate has been the distant drumbeat of an emerging economic empire.

As the IMF and other global institutions work to unravel the financial mess we are in, it is highly unlikely that China and other developing economies are going to play by their rules, especially considering they are already underrepresented in such organizations. Thus, an effective global solution to this financial crisis is not only likely to restructure the global economic order, it is required.

While our next President must and should fight to keep America as one of the central powers in the world, the days of Western dominance would seem to be coming to a close. Whether we like it or not, our next President is going to have to navigate a world in which the American economy may no longer be top dog and we're going to have to get used to the idea.

*The IMF opposed moves by Asain governments to bail out their financial institutions in 1997-98.
**These reserves bear little if any responsibility for the crisis - the triple A rating giving to mortgages as securities for these loans definitely was!

Crisis marks out a new geopolitcal order - Philip Stevens
Navigating the Storm - John Lipsky
Time to Reform the IMF - Katie Hunt

Thank you!

Thankfully, the focus of tonight's debate was on policy and no gloves came off. While a few jabs were thrown, we saw the better sides of the candidates rather than the worst in them. I would give tonight's debate a slight edge to Obama, although I think it was pretty even. By no means do I think this debate will have any impact on the current trends. While McCain did just fine, he didn't do enough to change the game.

However, I think both candidates have yet to realize the opportunity inherent in the financial mess. I think Obama does a far better job connecting with the issues most of us face, but I think the major opportunity lies in a larger plan to get things moving again. McCain may have come closest by offering something new tonight, namely the government buying mortgages and allowing people to keep their homes. As I mentioned in an earlier post, I thought this should have been a key element of the bailout package. In any case, it will be interesting to see how this idea plays out for McCain, especially as an ardent supporter of small government.

I also think part of the issue here is that no one really knows whats going on. The financial system might as well be the mythical Gordian knot. While Alexander the Great may have untied the knot by simply cutting it in two with a sword, I doubt such a simple solution exists for the current mess we're in. Moreover, any solution will likely be nuanced, complex, and detailed, something that simply does not fit with a campaign message.

I am interested to see what Obama comes up with on this. I do believe he has far more economic expertise than McCain. His 12 years at the University of Chicago, the home of Milton Friedman and the Chicago School of Economics, and the interactions he had with the economics department is a pretty big stick. What I especially like about Obama is that he supports the free market, yet with an understanding that it is not perfect, that it needs a referee. Moreover, I like his interest in using market solutions to solve market problems. I wish we'd here more about these, although they might just be too wonkish for the campaign trail. I highly recommend David Leonhardt's article, Obamanomics.

I was also surprised that McCain didn't get called out for the ridiculous amount of pork in the bailout bill. For someone so anti-pork that must have been a hard pill to swallow. But perhaps that is a double edged sword and is simply not worth the political risk for Obama to bring up, especially considering he voted for it too.

The big question is, what happens next? Will the next days be filled with discussions of policy or will we revisit ghosts of the past?

postscript: After writing this, insta-polls gave Obama the clear victory in tonight's debate.

Who?

I am entirely disappointed with the current state of affairs in this presidential race. If trends continue, we are about to introduced to a whole slew of individuals few of us (at least of my generation) have ever heard of. We've already heard of William Ayers and now Charles Keating.

Here's a list of potentials we may here more about (some of whom have already been brought up):
Jeremiah Wright
John Hagee
Rod Parsley
G. Gordon Liddy
Antoin Rezko
Phil Gramm

It is sad that it has come to this. Politically, it is clear that McCain needed to do something to change the trends. Politically, it is also clear that the Democrats will not allow what happened to Dukakis and Kerry happen again - they will fight back hard and fast. I don't think either side can argue that this kind of trash is helpful for the country, in fact they argued against it just a few months ago. Whatever one's political persuasion, I also think it's hard to deny that McCain is responsible for heading down this road (a move which I think is likely to backfire as it does not support his "character" argument). While political necessity can never justify these attacks, it does offer an explanation, however disappointing.

Mathew Yglesias, in an article entitled, Obama, Ayers, and Guilt by Association, does a great job highlighting the perils of such attacks along with the faulty logic of guilt by association. I also think he makes a great point about those who were active during the Vietnam Era,

The truth is that the Vietnam era was a time of political extremism in the United States. And part of the way that era was brought to a close was by turning away from efforts to banish the extremists from public life. Segregationist politicians went on chairing their congressional committees. Black Panthers ran for congress and won. Liddy got a radio show and Ayers became a professor.

If the blast from the past continues, many will once again feel the Presidential election is a choice between the lesser of two evils. Lets hope tomorrow's debate will return to the issues and that Americans might actually have a chance of choosing the "better of two goods."

For McCain's sake, I hope he chooses to take the high road. The recent Rolling Stone article, Make-Believe Maverick, does not paint a pretty picture of John Sidney McCain III. I don't expect perfection in a Presidential candidate and I for one wouldn't hold his past flaws against him. However, there is always a choice to put your best foot forward or your worst. It would seem McCain is choosing the latter as his decision to start these attacks is far too similar to the worst parts of his character and history.

Whatever the case, it will be very interesting to see how tomorrow night's debate plays out.

Is the worst yet to come . . .

I had hoped the worst of this election was behind us - evidently not. Governor Palin today accused Barrack Obama of "palling around with terrorists." This is in reference to Obama's connection with Bill Ayers, a founding member of the Weather Underground. A more accurate statement might be about a lack of connection. The very same New York Time's article Palin quotes from points out that there is no substantial connection between Ayers and Obama and that Obama has denounced the radical actions of Ayers. More importantly, one should remember that when Ayers was a part of this radical group, Obama was eight years old.

It is interesting to note that this is not new news. Hillary Clinton brought this connection up in the primaries and it was shown to be nothing. So why now?

I think there is something in the wind. If you look at what the polls are saying, this is an act of desperation. A quick look at RealClear Politics shows that if today's polls are accurate, Obama has 353 electoral votes. Remember you need 270 to win. When you categorize states as either solid or leaning, Obama has 264 electoral votes whereas McCain only has 163 with 111 still up for grabs. While you can't always believe the polls, this is clearly a substantial lead for Obama.

Sadly, perhaps the worst is yet to come. McCain's pull-out of Michigan may be an admission that the polls aren't far off. It may also be the reason for the start of what could be some of the nastiest attacks we've seen yet. I wouldn't be the first to say that the Republicans may go extremely negative in order to try and reel this election back in. Moreover, I have to wonder if Palin isn't going to become the sacrificial lamb. If the attacks don't work, she'll be the one to take the fall while McCain stays above the fray.

In either case, it's a sad day for American politics, especially in an election that at first, seemed that it might actually be different. So much for country first.

Palin doesn't bomb

Immediate reflections on the debate:

Palin did much better than I and probably most expected. Whether or not this was because the expectations were so low or not, I'm not sure. Whatever the case, I think you have to admit that she held her own. My impression was that her rhetoric was good, but I don't think her answers had the same depth as Biden's. Whether that matters to the average voter or not remains to be seen.

Biden did just fine as well, but this was no knockout. My guess is he'll get the credit with the victory, based on the substance of his answers. In my opinion his answers were able to give more specifics, but again, whether that resonates or not remains to be seen.

Questions - reflection points:

An interesting critique of Palin that caught my eye after the debate was her simplification of complex problems that only need some common sense. Was this Palin's stance? Is this something that is effective either with voters or in reality?

We're Palin's answers canned? One reviewer said Palin seemed to be hanging on for dear life, that the points she made would have been made irregardless of the questions. Agree/disagree?

How about Biden - on debating points he won, but on perception?

Lastly, was this a game changer? (my two cents: no)

More to come - hopefully I'll have time for some substance on their policy. As always, comments welcome!

The VP Debate: Much Ado About . . .

The much anticipated Vice Presidential debate is set to take place tomorrow night. You can bet we'll be watching and hope to offer some immediate reflections post debate.

So what will tomorrow night bring? All of Palin's recent interviews have not gone well, and that's giving her the benefit of the doubt. At the same time, Biden seems to have a fondness for verbosity and stretching the truth a bit. I almost wonder if we couldn't call this debate Barbie vs. Paul Bunyan. No matter what happens, it is bound to be entertaining and I for one will already be looking forward to Tina Fey's next SNL skit.

Yet in all seriousness, this debate could be a potential game changer, with big risks for both sides. As far as Biden is concerned, there are some who say that he will have to tread very lightly, that he cannot afford to "take off the gloves" and let her have it. I'm not so sure about this, but we'll see. My guess is Biden will let Palin dig her own grave, we'll see. Biden also needs to be careful not to make any more gaffes (my personal favorite being FDR talking about the stock market crash in 1929 on TV!).

That said, at least Biden can give a coherent answer. Try and make sense of Palin's answer in regards to a question about the 700bn bailout:

That’s why I say, I, like every American I’m speaking with, we’re ill about this position that we have been put in, where it is the taxpayers looking to bailout. But ultimately, what the bailout does is help those who are concerned about the healthcare reform that is needed to help shore up our economy, helping the—oh, it’s got to be all about job creation, too, shoring up our economy and putting it back on the right track. So, healthcare reform and reducing taxes and reining in spending has got to accompany tax reductions and tax relief for Americans. And trade, we have—we’ve got to see trade as opportunity, not as a competitive, scary thing, but one in five jobs being created in the trade sector today. We’ve got to look at that as more opportunity. All those things under the umbrella of job creation. This bailout is a part of that.

Clearly, the expectations for Palin are extremely low and some have even stated that as long as she doesn't look like a total idiot she'll be ok. It will be very interesting to see what she comes up with. Will it be rambling sound bites thrown together that make absolutely no sense? Will it be memorized sound bites that she sticks to despite the question? Will she actually try to answer questions? I predict that she'll be working on damage control rather than trying to hit one out of the park.

My favorite headline about what Palin needs to do is: "Palin must avoid 'embarrassing massacre' in VP debate."

Whatever the case, it is sure to be entertaining!