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

Stop Acting Surprised

by Mike Kimel

Stop Acting Surprised

It seems a lot of Democrats seem surprised that Obama is willing to give up on what they view as core principles. On the Republican side, there seems to be an implicit understanding that pretending the economic mess and spending began under Obama’s watch, and thus the policies that they favor (most of which Obama has continued, whether they admit it or not) bear no responsibility for where we are today. As a reminder that reality is what it is, even if memory is weak and feeble, I’d like to repost something I wrote a few days after Obama was elected in its entirety below:

Is Obama Starting Poorly?

One of the things that worried me about Obama was that he (like McCain) supported the ridiculous bail-out bill. As I noted when it passed, it wasn’t going to work, and the net effect would be this:

…shady, undeserving characters will be enriched, young versions of the idiots who got us into the mess will launch successful careers (can you say “Kashkari”?), and the promised benefits to the American public, the schmucks footing the bill, will never materialize.

We now know the banks are not loaning out money which was the thing this whole bail-out was supposed to accomplish, but Goldman, Welfare, Queen, & Sachs (to borrow a term from Lambert Strether left at the previous post) has made out like the proverbial bandit, Kashkari’s career is made, and the American public would be better off being beaten with a stick than having to pay for this garbage.

Sure, the idea for this was rammed down everyone’s throat by the administration and Bernanke, but the Dem leadership guided it through, and Obama voted for the bail-out. To me, it was the financial equivalent of invading Iraq because Osama hit us on 9/11. I can understand that at the time, many people thought something absolutely positively had to be done. Even many smart people who aren’t crooks – just folks who are too decent to be cynical enough to anticipate what this administration will do when you let them, felt the gubmint had to act, and act fast. So I can understand Obama voting for this piece of $%^&.

But, now that we know the thing not working, and Paulson isn’t even pretending it was intended to work as advertised, isn’t it time to pull the plug? Shouldn’t the President-elect be out there, demanding an end to this waste of money? Shouldn’t he be calling on Congress to pull back the money that hasn’t already been thrown away? Shouldn’t he be proposing some other alternative? (If the problem, as we were told a while back, is that banks aren’t loaning money, and they’re still not loaning money, why is it worse for gubmint to loan money directly to people and corporations that need it than it is for the gubmint to find all sorts of ways to help Paulson’s former employer?) Instead, there’s all this talk about spending even more money on even more undeserving people and companies in a wider variety of industries, and Obama is not saying anything to discourage any of this.

I understand that the man hasn’t even been inaugurated yet, and I stand by what I wrote not long ago – I’m willing to give him a chance. (Heck, I voted for him.) But this bodes ill.

Now, its been a few years, and we still have a problem. There’s no demand. Consumers are sitting on their hands. Companies are sitting on their hands. Banks are sitting on their hands. Which leads to a second post I wrote a few days later, which I’m also reproducing in its entirety:

How To Bail Out the Economy – A Less Wrong Way

Regular readers know I’ve had post after post explaining why a bail-out would be a bad idea and would not work, dating to long before the bail-out began. I predicted that the end result would be the further enrichment of some of the very folks who brought us this mess and junior versions of the same folks who were too young to get in on the original crime spree, but otherwise, we’d have nothing to show for the trillions that would get spent.

The supposed “rationale” for this bail-out is to make sure that companies that are willing and able to produce goods and services that consumers wish to purchase are able to do so, and that in turn consumers are willing and able to purchase goods and services that companies want to bring to market. The story line is that this can be accomplished by giving money to the financial sector, that sector of the economy that for the past few years has specialized in selling squirrel meat as fillet mignon. Give those talented folks some money to make up the massive losses pulled off in the past years and they will happily loan money to producers and consumers, we are told.

Its becoming obvious even to the likes of Henry Paulson that no matter how much money gets paid to Goldman, Welfare, Queen & Sachs and Citi and Countrywide and the rest of ’em, the “financial system” of old is gone forever. Compensating buyers of squirrel meat is more than enough burden on the taxpayer, but it seems we’re expected to make Goldman, Welfare, Queen & Sachs whole for paying the exorbitant salaries of folks like Henry Paulson in the past, and the current and future generations of Henry Paulson to boot. Clearly this is not only a very, very, indirect way to keep companies producing and consumers buying, its also adding a bunch of layers of unnecessary expenses.

So… if the goal is to stimulate production and/or consumption, why not cut out the unnecessary layers of exorbitant expense? I’m not sure I see the reason for bailing out car companies, but say that was the goal for some reason. In that case, the government could simply buy a $20K car for every single American, every single one, and spend less than the $7 trillion that’s been committed so far. That’s well over 30 times as many cars as GM made last year. Worldwide. You could bet the car companies would tool up for this, and it would employ a lot of people, and it would stimulate the economy. Additionally, we’d all have another car thrown in. Sure, it might be a GM vehicle, but its still something, which is more than the nothing we’re gonna get from pumping it into the Goldman, Welfare, Queen & Sachs black hole. Heck, it doesn’t have to be cars – the gubmint could simply commit to spending $20,000 on something, anything each of us picks. You could take your 20 G and spend it on a menu of American made options.

Preposterous, you say? Inflationary, you say? Jingoistic, you say? Sure, I say. Its a stupid idea and I don’t like it all. But I think its a much better idea than the current bail-out approach, which I think is worse than taking (for now) $7 trillion and setting it on fire. Giving the money to the likes of Henry Paulson’s former employer is simply rewarding bad behavior and sending the wrong message, not to mention preposterous, inflationary, and jingoistic.

So… to summarize a few things that seemed obvious to me a few years ago and yet which I’m finding today aren’t part of the narrative any more:

1. The government response to the problem began long before Obama took office.
2. The government response to the problem wasn’t going to have any positive effect since it addressed a non-existent problem (i.e., poor decision making on on Wall Street) and didn’t address the actual problem (i.e., weak aggregate demand on Main Street).
3. The government response to the problem was going to have a negative effect since it was extremely costly.
4. By the time of the 2008 election, the sitting administration had abandoned the rationale for the government response, but maintained that response regardless.
5. By the time of the 2008 election, Republican and Democratic leaders, including Barack Obama, knew the sitting administration had abandoned the rationale for the government response and yet were continuing that response regardless, and nobody complained.

In a sane world, the folks who let things get where they are, including pretty much all our esteemed members of Congress and our esteemed President, would not be allowed to be involved in “solving the problem” now. Most economists who had some input into the previous “solutions” or who cheerleaded for them would also be shown the door. But that’s not where we are.

The solution to our current mess is obvious, and was obvious a few years ago. Equally obvious is that we won’t be going anywhere near that solution. But if you’re wondering what the world would look like if we did follow the obvious solution, just remember… the last time the economy took a tumble like this, and was further exacerbated by bad policy response was 1929-1932. In 1933, four years after the proverbial doo doo first hit the fan, the correct policy response was finally implemented. Real economic growth rates for ten of the next 11 years exceeded 5% a year. Real economic growth rates for nine of the next 11 years exceeded 8% a year. Real economic growth rates for five of the next 11 years exceeded 10% a year. (Data here.)

It has now been almost four years since the doo doo hit the fan this time around. Does anyone expect we’re going to see that kind of performance this time around?

Reasons to be Cheerful

Ken Houghton

Christopher Buckley leads the Republican Party to water, and speculates on watching them sink:

…GOP pin-up girl Sarah Palin.

I’ll stipulate that that’s condescending, if my former confreres on the Right will stipulate that had Gov. Palin’s first name been “Bob” or “Chuck,” her surname would still be unrecognizable to 90 percent of the American electorate.

The other pull quote was pulling and sits in the center of the article. While I encourage you to Read the Whole Thing, it really is too delicious not to requote as well. Rendered by Buckley as a parenthetic:

Nexis and Google have so far failed to unearth evidence of any previous candidate for the U.S. vice presidency being called—by their own campaign, no less—a “whack job.”*

Read the Whole Thing, including some of the comments.

*One guesses that memories of Admiral Stockdale, besides whose accomplishments John McCain looks like the inept cadet he was, have escaped Google and Nexus, since he was surely called the equivalent or worse.

The WSJ Editorial Page Talks, the Market Listens

Thursday morning editorial:

The voters may be full of hope about the looming Obama Presidency, but so far investors aren’t. No President-elect in the postwar era has been greeted with a more audible hiss from Wall Street. The Dow has lost 1,342 points, or about 14%, since the election, with the S&P 500 and Nasdaq hitting similar skids. The Dow fell another 4.7% yesterday.

Much of this is due to hedge fund deleveraging,* as well as dreadful corporate earnings reports and pessimism that the recession will be deeper than many had hoped.** We also don’t want to read too much into short-term market moves.*** But there’s little doubt that uncertainty, and some fear, over Barack Obama’s economic agenda is also contributing to the downdraft.****

What WSJ readers did on seeing that (via Google Finance):

And, lest you think I’m cherry-picking to avoid the broader markets, from the same source:

*This is from the paper that argued continually until October that the hedge funds were running perfectly.

**There might be a link there.

***Really?? So how do they explain the next sentence?

****This is on a par with deleveraging, lack of investment, lack of profits, lack of markets that clear, fading real estate values for the mall-stores, and the multiple recent retail bankruptcies (Circuit City, Ponderosa, Applebee’s, etc.)? Looking at the six-month graphic, it appears that the market hit a bottom on October 27th [Oct27 close: 8,175.77, more than 100 points below the level when the editorial was written], bought into the Obama rumor, and has been selling some gains on the Obama fact and the Fed easing and Hank Paulson’s admitting he has never known what he was doing.

The Real Difference with 2004

While there was a lot of blather about “values voters” swinging the 2004 Presidential election to the man who had none, the real story has always been that the HENRYs went for W’s policies.

That changed in 2008:

Guess who won Joe the Plumber’s vote…real people who make about $42,000 a year, the median income for plumbers and pipefitters. Barack Obama carried hard-working Americans of that income stripe by 10 points, according to exit polls.

And the only voters who were told directly that their taxes would go up under a new Democratic president? Obama took the rich as well, winning by six points that small sliver of the electorate that makes more than $200,000 [per] year.

The HENRYs can do basic probability calculations, it seems. “Saving” 5% on your taxes while losing 15% on your non-deductible investments is not a great long-term strategy, no matter what Greg Mankiw may have decided to hear from his self-selected group.