Relevant and even prescient commentary on news, politics and the economy.

SF-Politics Tie-In of the Day

Greg Mitchell’s twitter feed reminds us of Upton Sinclair’s 1934 campaign for Governor of California.

Working on Sinclair’s campaign, as noted in an article we ran several years ago in NYRSF, was a former Naval Officer in his mid-20s whose career was cut short by tuberculosis: Robert A. Heinlein.

As Mitchell notes:

The champion of all dirty races in this century, in fact, was that 1934 contest. Like Barack Obama, Sinclair led a “change” campaign with masses of new or re-energized voters leading him to an upset victory for the nomination from the Democrats in dire economic times. Like Obama, he was pictured as mysterious interloper. And like Obama, he was labeled a “Socialist.”

Well, actually, that was mostly true in his case.

It’s always interesting to note that to all the people who say they became “libertarian” because of Heinlein.

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Nobody Could Have Predicted, Volume CCCXL

McGill University Macroeconomics Comprehension Exam, May 2003, Question 10 (Essay):

The stock market bubble burst in the spring of 2000. The popular pres now talks about a housing bubble, referring to ever rising prices of houses in North America (and elsewhere). They say that if the housing bubble bursts it will have a much more severe effect on the economy. Do you agree? Sketch a model that would capture your argument.

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Bestest Day of the Year: SSRR Day

by Bruce Webb

What special holiday falls on March 31st? Yep is is Social Security Report Release Day. Now as I type it turns out that the Social Security Bunny (aka Commissioner Michael Astrue) has not actually delivered his special SS Egg, and gosh who knows, given that we are still in transition from the old Administration and that three of six Trustees’ spots are vacant SSRR Day may come late this year.

But just in case it comes today you can get your own copy from the Reports of the Trustees website in either PDF or in paper via paid first class mail. Plus there is an HTML version to which (if file name conventions stay the same) I have linked from my blog 2009 Report: Due March 31st

Update 2: A commenter reports that the release is probably going to come in mid-May. Which seems reasonable and hopefully will allow some adjustments for the bruising data that came in Q4 of last year and Q1 of this one and so get us a better data set. So I have moved the rest of this post below the fold.

The Report has been released as late as May 1st (that was mostly a matter of the Bush Administration trying to pressure the Senate into reconfirming the two Public Trustees for an unusual (maybe unprecedented) 2nd five year term in an apparent effort to keep privatization alive through the next President’s first term), but generally it is released without fanfare some time during the course of the day on March 31st.

The contents of the SSRR Day Basket may not be as yummy as those of the typical Easter Basket, if fact they are kind of dry. But I find them pretty tasty. Try it, you might like it.

If it comes before noon PST I’ll update this with numbers.

Update: there seems to be some advanced push back. Today the WaPo published this from Lori Montgomery Recession Puts a Major Strain On Social Security Trust Fund: As Payroll Tax Revenue Falls, So Does Surplus which is just a rehash of a piece by Kevin Hassett of AEI for Bloomberg yesterday Recession Bites Into Social Security’s Surplus. What they are doing is using a special definition of ‘surplus’. When Social Security surpluses are reported for Unified Budget purposes they include both any cash surplus from taxation plus interest earned on the Trust Fund. That is why people say Social Security was running $200 billion a year surpluses over the last few years. Hassett here is just using cash surpluses and moreover ignoring the fact that almost all the damage is a temporary hit on the DI Trust Fund. And the WaPo as always is just picking up the talking points and pushing them to the broader audience.

Dean Baker will not be pleased. He hasn’t posted at Beat the Press yet today, but I suspect Ms. Montgomery is in for a drubbing when he does.

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Why Wagoner?

Tom Bozzo

1. Well, duh.

2. In the NYT, William J. Holstein’s case for Wagoner should be read as damnation by faint praise. Promoting efficiency and quality improvements is laudable enough, but hardly the sort of vision thing that merits a U.S. CEO salary. Bob Lutz’s product-development record is mixed in part due to Lutz’s contempt for greenery and faulty assumptions that SUV demands were not price-sensitive, and in more significant part because GM’s management was full of pound-foolishness as important product developments (e.g. marketable compact cars) were underfunded when the company more-or-less had money. The company can easily go bankrupt building bulletproof Buick Lucernes. And, troublingly, GM has persisted in futuremortgaging despite the availability of government aid.

3. Nevertheless, my question is, why not the more obvious choice of Chrysler’s Robert Nardelli? If GM management has been years late and billions short, Chrysler’s Cerberus-hired management has shown no public signs of elementary competence. Where GM’s product plans are questionable (Cadillac station wagon?), Chrysler’s are an intergalactic void unless you’re very optimistic about its ability to bring its electric showcars into production or eagerly anticipating Americanized Fiats. As a major net beneficiary of the housing bubble and poster-child for CEO excesses, Nardelli is perfectly cast for the scapegoat role, not least because he’s substantively more deserving of sh*t-canning as Wagoner.

The concern of course is that someone(s) on the Obama team think Nardelli is more deserving of forbearance than Wagoner because of his private equity bosses. I’m not saying that’s true, but if it were, then I’d want to play poker against whomever can’t see that Cerberus Capital Management has been exploding myths of the power of patient private capital and by most indications wants out.

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Simon Johnson suggests a narrative

rdan (re-post)

Perhaps Simon Johnson is correct in his estimation of a captured financial/government combination than is discussed in detail to date. Here is his Atlantic Monthly piece a la IMF perspective…two paragraphs stand out for me on the first page, but explanation goes on for several pages.

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

Dani Rodrik responds and states bankers were not as powerful as Johnson suggests, and the IMF does not have a stellar reputation in some areas regarding policy for emerging economies. He questions whether economists should rule the world as well. (h/t Mark Thoma)

Update: Then again, Pension Pulse has a quote suggesting the word banker is outmoded and limits are changed. (He has two graphs worth reading on pension mix of assets in public pension funds as well. The Mass Teacher Assoc. declared a drop of 29% value, about right for equities. Many teachers were not following the numbers.)

One senior pension industry insider wrote me tonight, telling me the following:
“Just read an interesting statistic that 37% of all private equity capital raised over the last 30 years was raised in the last three years. A giant experiment whose results won’t be known for another 5 to 10 years.”
A scary thought indeed, and he is absolutely right, we simply do not know how all these billions of dollars into hedge funds, private equity and real estate funds will pan out over the next decade.

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I didn’t think of that

Robert Waldmann

JimLuke argues that GM will almost certainly go bankrupt because …

there may be thousands (perhaps even millions) of seperate bondholders, the vast majority have no voice in the negotiations. Instead, there is a “bondholders’ committee”. Who is on the committee? The “experts” and the large bondholders: primarily banks and bond funds. These banks and bond funds presume to speak for all bondholders. But their interests are not in line with all bondholders. We know that there are very large number of outstanding Credit Default Swaps (CDS) contracts on GM. So who likely holds the CDSs? The very same large banks and bond funds that are negotiating. So, in effect, if GM goes BK, then the bondfunds/big banks are hedged and get full payment via the CDS. If they agree to a restructuring, they get less than full payout. So there’s no chance they’ll agree.

I fear he’s right about CDS contracts, that the writer doesn’t have to pay the CDS holder if there is a “voluntary” restructuring. The CDS writers aren’t on the committee.

update: From comments

JPKK says:
Today, 3:21:07 PM
“Most CDS have a modified restructuring clause in the US, which allows for the delivery/cash settle based on bonds within a window of the same maturity as those that were restructured (principle reduced, payment reduce, maturity extended). The reason for modified restructuring revolves around a case where Household restructured some short debt, but it in no way had an affect on long bonds, but under vanilla restructuring CDS holders were able to delivery long bonds which were discounted due to rate changes.

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Bananas republic?

rdan

NYT shouts out about Wagoner and GM.

Chrysler must merge with Fiat? Wagoner needed to go in my opinion, but so do some of the bankers. When is that to happen?

Perhaps Simon Johnson is more correct in his estimation of a captured financial/government combination than is discussed in detail to date. Here is his Atlantic Monthly piece a la IMF perspective…two paragraphs stand out on the first page, but explanation goes on for several pages.

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

Comments (0) | |