Obama - Tea Party Founder

It's easy to dismiss the Tea Party. For one thing, they seem fond of a 18th century lifestyle that preceded the age of big corporations, big government, and life expectancies that extended much beyond one's thirties. But while they seemingly lack intellectual appeal, they do resonate emotionally with a chunk of voters. Enough voters, in fact, to cost Obama the 2012 election.

In the decade of the 00s, bankers made billions and then cost us trillions. As CEO of Goldman Sachs, Hank Paulson made $37 million in 2005 alone. He left banking with a net worth of $700 million when he became the US Treasury Secretary. Not only did he engineer a bailout of trillions for the banking industry (including billions for Goldman Sachs) but included in the bailout legislation clauses protecting bankers from any liability for the financial meltdown of 2008.

The financial meltdown cost millions to lose jobs and homes and wiped out retirement accounts for millions more. No one has gone to jail for this bank robbery. Countrywide CEO Mozilo did have to pay $67.5 million in fines and settlement fees, which sounds like a lot until you realize that he made $470 million in just the six years leading up to the bursting of the bubble. Not only did Mozilo escape jail time or financial hardship, but even the ratings agencies that assured bond holders that packaged subprime bonds deserved AA and AAA ratings were allowed to continue to do business without any penalties for their egregious failures to warn investors.

What Obama should have done is appoint someone as savvy as Elliot Spitzer to investigate the players in the drama leading up to the costliest financial collapse in history and found people to penalize and even imprison. Not only would this have bolstered his support among his base, it would have won over so many of the independent voters whose outrage at Wall Street led them to join forces with the Tea Party. By failing to address the injustice of systemic abuse of American taxpayers, Obama fed the emotional energy that the Tea Party has tapped.

And to prosecute would not just salve the anger of Americans. Prosecution would have helped to curtail bad behavior by bankers, letting them know that while the American government could not afford to let the financial system collapse, it certainly could afford to prosecute and jail a number of bank executives. As much as trillion dollar bailouts, prosecution would have helped to strengthen the banking system by making bad behavior costly.

Obama's apparent disdain for the emotional cost of the 2008 crisis may cost him re-election. And may even give him a place in history as the co-founder of the Tea Party.

Policy (not political) Reasons The Republicans Will Win So Big Today

One of the reasons that Obama's democrats will lose so many seats in today's election is unavoidable. Obama's recovery from the Great Recession is in the road building phase of recovery. By that I mean when traffic is bad and the crews come in to widen lanes, the initial approach simply worsens things. The construction crews make traffic even worse before their work makes things better. Obama is trying to stimulate the economy and while that has done little to (visibly) reduce unemployment, it has quite visibly raised the deficit. Given his approach, it seemed unavoidable that he'd lose seats in this election.

But I don't think that he had to lose so many seats. Part of the problem, I think, is that when he bailed out the banks, no one paid for that. Some banks did engage in unsafe practices. The system did need to be protected from collapse. (The equilibrium point for a cash only economy is considerably lower than current levels of GDP.) Obama (as Bush before him) had no choice but to rescue banks to keep the financial system working. He did have a choice about how to do it.

I'm not sure the best policy on this. I would propose that the net worth of executives in rescued banks be taxed at 80%. Or that bonuses that can be positive in good years can be negative in bad. Or any of a number of things that would have made the little guy who was not rescued feel as though the rich guys who were had not been subsidized by their taxes. Obama never quite seemed to appreciate the visceral reaction people had to the bank rescue. Bush got this and - while it was a complete non sequitur - he gave the people a war after 9-11. Obama did not even try to sate Americans' desire for some kind of retribution and now, the Tea Party has made him the one who pays.

How To Save a Trillion Dollars

One of my most awkward moments teaching seminars came in an event that included a contingent from a chain of pawn shops. The "finance" company wasn't called a pawn shop, but that is what it was and they had been making a ton of money. When I learned how they operated - a lunch time conversation - I challenged them. This did not go over well and made the next 2 1/2 days awkward. Pawn shops in Florida (and I suppose most states) can essentially charge exorbitant rates to people desperate for money. Even credit card companies cannot charge such high fees. But because they are not banks, pawn shops' interest rates are not regulated like banks.

After the Great Depression, the government regulated banks to make financial markets safer.

After World War II, nonbank corporations found a way around that regulation by offering many of the same products and services as banks. This has proven problematic. Not just to people forced to pawn their goods but to the economy as a whole as the offerings of nonbank corporations has grown to more closely resemble that of commercial and investment banks.

Elizabeth Warren, Obama's expert on consumer finance, a woman who knows her stuff, has written a piece explaining how the Obama administration is passing legislation that will regulate products and services regardless of whether they are offered by banks or nonbanks.

The great news is that the Obama administration appears to be on track on making the reforms that will make it less likely that we'll need bailouts that cost trillions. Financial market regulation has been overlooked for too long. The sad news is that they have to start by solving such seemingly obvious problems.

There's gold in them thar banks

Thanks to a good quarter, the average employee at Goldman Sachs is on track to earn $900,000 this year. This only months after the US government bailed out the big banks with $125 billion.

I like this, though. It shows restraint. You'll note that the average pay will be under $1 million. Very crafty of those bankers to stay off the radar like that. And to think some people say that their inflated sense of self worth clouds their judgment when it comes to managing public perception.

A Private Sector Bailout for Detroit

Last year, GM lost $30.9 billion.

Exxon made $45.2 billion.

The solution to Detroit's woes seem obvious to me: Exxon buys GM and simply begins a give away program, getting the money back at the pumps. It's like giving away razors in order to sell the replacement blades. If people weren't driving cars, Exxon would have trouble making money. They need the auto industry. Why not simply buy it in order to keep it safe?

Besides, Exxon's profits were more than Google's and Microsoft's combined. If they can't make the auto industry profitable, maybe it's time we tried biking.

From Boom to Bust(ing up big companies)

Eliot Spitzer demonstrates over at Slate why I was so grieved when we lost him to libido. Given the importance of financial markets, it seemed to me that his savvy about them was incredibly valuable to good government.

Spitzer says that the "too big to fail" model for banks is the problem and that rather than prop them up with subsidies, we ought to let them fragment into smaller pieces.

Yesterday, I had an exchange with my cousin Scott and he suggested the same thing about the auto industry. Let the little start ups offering new and innovative (and typically more green) designs take market share from the Big 3. (Look at this little Aptera, made by a company here in San Diego County, that gets 300 mpg, for instance.)

For autos and finance the future is uncertain. What kind of models will work best? What kind of financial products are innovative and which are merely reckless? What kind of cars will work to alleviate congestion and pollution? And even we could define these products, what kind of company could best provide the whole package (from employees to prices to support infrastructure) to best deliver those products?

Given so much is uncertain, it is best to have lots of experiments running right now. The Big 3 and the big banks could, in theory, run those experiments, letting various divisions and groups take their shot at creating a new future. But one of the many problems with CEOs making so much money is that they seemingly feel obligated to earn it. They review and judge the various plans from within the company, effectively running everything through the same filter - making the company one really big test of one theory rather than lots of small tests of many theories.

Given the financial crisis, Obama has been compared to FDR. What if, instead, the better model is the brash Teddy Roosevelt who broke up big companies, forcing competition into industries that made a few rich but did little for the rest of the country? He could do worse than accept this argument from Spitzer:

But even more important, from a structural perspective, our dependence on [financial institutions] of this size ensured that we would fall prey to a "too big to fail" argument in favor of bailouts.

Two responses are possible: One is to accept the need for gigantic financial institutions and the impossibility of failure—and hence the reality of explicit government guarantees, such as Fannie and Freddie now have—but then to regulate the entities so heavily that they essentially become extensions of the government. To do so could risk the nimbleness we want from economic actors.

The better policy is to return to an era of vibrant competition among multiple, smaller entities—none so essential to the entire structure that it is indispensable.

The concentration of power—political as well as economic—that resided in these few institutions has made it impossible so far for this crisis to be used as an evolutionary step in confronting the true economic issues before us. But imagine if instead of merging more and more banks together, we had broken them apart and forced them to compete in a genuine manner. Or, alternatively, imagine if we had never placed ourselves in a position in which so many institutions were too big to fail. The bailouts might have been unnecessary.

$25 Billion for These Guys?

"Leadership is not the same as reaction. Even a cat will jump off of a hot stove. Leadership involves prediction."
[loosely quoting] W. Edwards Deming

The big three auto companies are clarifying their request for $25 billion to bail them out.

GM"s CEO will drive to DC in a hybrid car.
Ford's CEO will work for $1 if the auto industry gets $25 billion. (Which, oddly enough, suggests that if his company has less money he'll ask for more pay.)

These two were sharply criticized for flying to DC on private jets, asking the American taxpayer for money. And Ford's CEO, Mulally, said that he thought his $21.7 million compensation package was okay, even when the company he was leading needed to be bailed out.

I guess this shows that these CEOs can be shamed into changing their behavior. But it also seems to affirm that they are merely lurching from one reactionary move to another. And in an industry where developing a new model car can take 3 to 8 years, leadership by reaction is far more of a liabilty than high gas prices or tight credit markets.

It seems doubtful that these CEOs have a bold vision of the future or have any real connection to the average consumer. Given that, it is not obvious how they'd be able to put $25 billion to good use. I say invest the money into mass transit instead.

Bush Bails Out on Bailout

In a stunning turnabout, the Bush administration Wednesday abandoned the original centerpiece of its $700 billion effort to rescue the financial system and said it will not use the money to purchase troubled bank assets.

“Our assessment at this time is that this (the purchase of toxic assets) is not the most effective way to use funds,” Treasury Secretary Henry Paulson told a news conference.

[Full story can be found on click through - read on here if you want to dive into plausible fiction.]

The Bush administration has realized that it can purchase whole countries instead - "places where we can run experiments to test various economic models and bailout options before we commit to any one plan," Paulson explained.

"As it turns out," Treasury Secretary Paulson said, "$700 billion is a LOT of money. Once we realized how much we could do with it, buying bad assets didn't seem that appealing." (Reporters commented later that Paulson seemed to drag out the term bad assets is ways that he might have hoped would make an old white man in a suit sound like a bad ass.)

George Bush, who is looking for retirement property, was said to have protested any move that would prop up home prices before he moved out in January. Aids say that Bush was shocked to realize that although the resale value of the White House was still high, he would not actually get to sell it when he moved out. "If we aren't selling the place," he said to Laura, "tell me again what the deal was with showing the place to that young black couple with the two pretty little girls?" They deny, though, that this is the only reason Bush has decided to embrace a policy that would let home prices fall further.

Paulson explained that there is something magical about having $700 billion to spend at any time. "You should see the way people look at me, hang on my every word, hoping that I might throw a little of it their way. Even when I was the CEO at Goldman Sachs, it was never this good," he said. "I don't want to rush this process of deciding where to spend the money."

The Bush administration said that it has no plans to revive credit markets or the economy and might not have one until sometime after the holidays - "perhaps late January," Dick Cheney said with a chuckle.

It Must Be Monday Miscellany

I've never admitted this before, but I am oddly encouraged by fortune cookies. I think that news outlets should include fake news each day on the front page that leaves readers feeling similarly warm and encouraged, so we would not have to eat so much Chinese food simply to be reassured of our hidden potential.

George Bush continues to show the magic touch. He signs the bailout bill and investors promptly do just that - bailout of the market in record numbers. My projected retirement date seems to move out another 6 months every two days of late. There is, apparently, no truth to the rumor that John McCain said, "We'll leave workers in cubicles as long as we need to. I don't care if it is 100 years."

I went to high school in the 70s. You know what we called classic rock and roll music? Rock and roll.

A friend of ours recently had a baby. She said that lots of family was in the delivery room, and confessed "I was past shame." "Yes," I told her. "People are far too squeamish about such things. These are just facts of life. We actually invited family and friends in to witness the conception."

I got a booklet from my darling wife's 2nd grade class Friday - a tardy delivery of their happy birthday cards for me. My favorite snippets?

"... how odd are you?" (I'm pretty sure she was asking about my age.)
"I like your jock because at the end you said look theres a batman that was so funny."

And really, how odd is it to wear a jock in public and say, "hey, look! there's batman!" After just a couple of visits, these kids seem to have my number.

Captain Credit Crunch to the Rescue

This nation faces a credit crunch. Car sales are down from last year. Home sales are down. We're teetering on the brink of - or more probably have already fallen into - a recession because liquidity has dried up, the money has run out.

Last night, the Senate voted 3 to 1 to change this state of affairs by passing a bill that would not only purchase about $700 billion in bad mortgages, but added another $150 billion in personal and corporate tax cuts. Senate leaders hope that these tax cuts will persuade the House to pass the bill.

Apparently, the $500 billion the federal government was already going to borrow from credit markets was not enough. We're borrowing even more to help an economy that faces a credit shortage.

Sadly, the average person does not understand and support this plan.

Video: Keynesian Economics & the Great Bailout of 2008

Again, I try the video experiment.

As I videoed this, the negotiations for some kind of intervention seemed to be stalled or even breaking down. I completely support the notion of debating and challenging the Paulson plan. I cringe at the thought of the free market advocates just derailing any kind of plan, as if there is not some financial system that we need to protect. The neoconservatives convinced that this problem can be left to markets are the same ones who saw nothing wrong with the invasion and occupation of Iraq.