Monday, September 22, 2008
Personal Aside: Events, my dear boy, events!
I keep repeating it over and overand thats because its true but so widely unrecognized in the mass media: this campaign seems to be an unending roller-coaster of twists and turns each one an event in the description of Harold Macmillan who described politics uncertainty that way.
We left the campaign scenario last week with both candidates flailing over Iraq and terrorism which Barack Obama getting the worst of it basis his left-wing George McGovern orientation, leading many people to think that he would handle world crises as he would a Harvard or University of Chicago seminar taking the temperature of all concerned and arriving at no conclusion demanding action. (This is my view of Obama having interviewed him early in his career; I never met anyone who can pretend to agree with all sides of an argument but nevertheless leaving a radio studio with a solid left-wing orientation).
. Then came a seismographic eventthe eruption of the year-old credit problem into a full-blown crisis as the federal government took a major stake in the giant insurance firm AIG ($85 billion in exchange for running the joint), passed up with a no thanks the chance to save Lehman Brothers and by weeks end the prospect of national economic collapse as one market after another began to panic, investors fled money-market mutual funds and a freeze was clamped on short-term loans banks must have to fund their day-to-day businesses.
So Treasury Secretary Henry Paulson (an Illinois boy worth an easy billion himself as former CEO of Goldman Sachs, with a huge estate in suburban Barrington Hills) pulled what all hope is a solution out of his hip pocketa concept known as a Balanced Sheet Relief Act like the old Resolution Trust Corporation used during the `80s for the S&L crisis, in the hope that the federal government buying distressed assets such as residential and commercial mortgages and mortgage-backed securities from ill financial companies would provide relief. Paulson described off-the-record that the symptom of the failing economy was like a human being losing blood pressure rapidly.
All the while Washington and Wall Street could merely hope it could work and that the prospective costsomething around $700 billioncould be trimmed down as the markets stabilized. How did the presidential candidates behave?
McCain Awful, Obama Better.
Neither John McCain nor Barack Obama were nominated for their expertise on the economy but concerning their divergent positions on the Iraq War which was touted as the hottest issue going. Now the war has subsided due to the surge success, an effort McCain supported and Obama doubted would succeed. Then the general review of the electoral map showed McCain picking up on his young rival. But this latest Macmillan-like eventthe Wall Street meltdown--changed the demographics entirely. Obama has picked up, albeit slightly, in the melee with Obama hitting 273 and McCain 265 (needed to elect: 270).
While the Bush administration due to Hank Paulson seemingly kept its cool (although Wall Street and bankers were ready to throw up), McCain, the 72-year-old candidate didnt. He lost his cool for a stunning 4 days until he calmed down. First he rushed to the stage to announce that the fundamentals of the U.S. economy were strongwhich made him sound like Herbert Hoover who told businessmen in 1932 prosperity is just around the corner! Obama rightly jeered at that statement. Then McCain returned to pronounce that it was a really bad crisis. Next he called for the firing of SEC chairman Christopher Cox, a Catholic, born in St. Paul, MN and a graduate of St. Thomas Academy in Mendota Heights before proceeding on to collect a flurry of academic honors at UCLA and Harvard, serving Ronald Reagan in the White House as an assistant counsel and moving to California and running successfully through 10 terms before being named to the post by Bush.
McCain pounded the rostrum Teddy Roosevelt-style in Cedar Rapids, Iowa and shouted the chairman of the SEC has betrayed the public trust. If I were president today I would fire him! He cited three examples of so-called laxity naked short selling, short selling and the up-tick rule. So- called naked short selling, meaning you can sell a stock without owning it, has long been banned and is not in effect. Short selling is not fraud, the Wall Street Journal pointed out, but adds valuable information to the market about what the investors believe to be the price direction of the stock. The up-tick rule is an old New Deal rule that by now is meaningless, that an investor can only short a stock after a rise in the stocks price has been studied by three generations of economists and found harmless, said the newspaperbut all the same it should be gotten rid of, yet there is no basis to use this as a pretext to fire Cox. It was clear McCain was flailing around for reasons to sound Teddy Roosevelt-like on the podium. And Sarah Palin wasnt much better.
The next day McCain said we shouldnt bail out AIG, the giant insurance conglomerate. Then he changed his mind and said we should. Finally he called for bipartisanship which he co-mingled with a savage attack on Obama. All the while Obama (who has been slashing at McCain for being too old to understand sudden changes in the issues) said very little of substance, called all Democratic treasury secretaries and economic pooh-bahs (Robert Rubin, Warren Buffett and of all people Paul Volcker) together and placidly endorsed Bushs and Paulsons efforts. The week clearly went to Obama.
By the end of the week, McCain was sounding more coherent but certainly evidenced to the minds of some supporters of the market like he still doesnt know what hes talking about. But the interesting thing about all this is that with all the ruckus in the markets, rumbles of war and Bushs subterranean poll numbers, McCain is still now lower than 3 points some put it at 5 under Obama. With an unpopular war, unpopular president and a financial meltdown that can be blamed on the Republicans, one can ask: what does it take to really sell this guy Obama to the voters?
Both McCain and Obama are playing the game known as Political Econ-101, invented by agrarian Thomas Jefferson, polished to a veneer by Democrat William Jennings Bryan, implemented to a political fair-thee-well by Republican Teddy Roosevelt and perfected to an ingenious degree by Teddys cousin Democrat FDR. Like Bryan, TR, and FDR, McCain demonizes Wall Street, shouting that the malefactors of great wealth who lost tons of money should go to jail. But it is clear that this ferocious talk not only doesnt solve the problem but makes it worse, as none other than Amity Shlaes, originally of Chicago (and the daughter of a wild-eyed quasi socialist, Jared, whom I used to debate over lunch often at the Cliff Dwellers Club on Michigan avenue). Amity did not follow her passionately liberal father and after an excellent education at the University of Chicagos tony lab school for the liberal elite, became a journalist and voila!...one of the great young expositors of free market economics in the country, having been on the editorial board of the Wall Street Journal and now an author who has dissected what she has found were the spectacular failures of FDRs New Deal to solve the Depression which must make her father blanche and feel ill.
Last week the young woman who was known around Hyde Park as Amy Shlaes pointed out in several articles (one major piece in the Wall Street Journal) that it is all very understandable for the two parties to inveigh against Wall Street as a temple of greed. For Democrats this is old time liberal religion. For McCain and Sarah Palin trying to shake off any hint of closeness to Big Business and Big Banking, its necessary to show there is no favoritism toward the big business and banking sector. So on they go, saying that pure and simple greed percolating in the strange world of money and investments did in the poor simple folks like you and me. Rapacious Wall Street is excoriated. Lehman Brothers has a 158-year-old name but is really a 14-year-old company gobbled up by American Express in 1994. AmEx didnt digest it and spat it out leaving poor Lehman with a lofty reputation but not in good shape. Lehman then took spectacular risks to grow, borrowing huge sums disproportionate to its size, tottering under debt 35 times its capital which it tried to ease by plunging into real estate ventures that went pfffft.
Ever since Bryan targeted Wall Street in his Chicago speech in 1893 that my 23-year-old Irish Democratic grandfather a marble layer thrilled to, other people asked: well, if you dont like the feds taking over the banks, whats your solution? Let everybody drown in debt and lose their homes? And if so, what would happen to the jobs that accrued from such bare-chested speculation that enabled Tom Cleary (my grandfather) to make a living and own a two-flat in this city (which he promptly lost in the Depression of `29 but thats another story). Amy Shlaes says that for government to so stringently regulate the market as to take away the punchbowl would send us to the dull grey economic environment that once characterized the old USSR. She would face the crisis by avoiding New Deal economicsNew Deal economics that ironically had its beginnings in the administration of Herbert Hoover.
Hoover turned on short-tellers in the summer of 1929. And Roosevelt blasted Wall Street with hugely inflammatory rhetoric which got him kudos for being a traitor to his class. . Result: Chicagos Samuel Insull who created the format for the modern electrical grid, taught housewives about refrigerators, employed thousands and proved it was possible for the private sector to raise the prodigious amounts of cash necessary for utilities, the most capital-hungry of industries came under fire. Then a credit crunch squeezed Insulls companies, rendering portfolios worthless. Eastern bankers turned against himhe believing to the end that it was because of his British Jewish heritage whereas Wall Street was all WASP. He was extradited from Greece, hauled back to Chicago, was exonerated by a grand jury which had the smarts to understand something about the economy but federal prosecutors wanting revenge harassed him until he toppled dead on a London subway platform in 1938. The only relic of his tenure is the magnificent Civic Opera Building built in his heyday, built in a shape of a throne its back to the East, facing West, serving as a rebuff to New York (when it was built Insull had just begun to face the scorn of Wall Street bankers).
John McCain feels he must blast Wall Street to get elected. But what should happen after election and the rhetoric cools? The astute prescription for the next president if he were to be McCain (who when his short-fused temper abates can be remarkably reasonable) is to eschew slapping even more heavy regulations on the Street, cut taxes, in fact slash corporation taxes and face it reduce taxes on capital gains to zero. Among the true reforms would be to repeal Sarbanes-Oxley, the act that resulted from the last wave of anti-Wall Street witch burning after Enron. Is it not enough for 15 executives of Enron to go to jail, the former CEO (Jeff Skilling, the brother of Chicagos most famous TV weatherman Tom) to be jailed for 20 years?
Overkill consumed Sarbanes-Oxley even as it gained Bushs signatureoverkill that punishes innovation. Example: Texas Instruments developed the silicon transistor, beginning at a modest $27 million in 1950 could never have amounted to the $9 billion company it is today. How did it do it? By taking the route Sarbanes-Oxley has made illegal today. Texas Instruments didnt launch an IPO. It didnt have the resources to be listed on the New York Stock Exchange. It instituted what it called a reverse merger. It found a rubber company which wasnt doing well, had survived tough times but still was listed on the NYSE. It bought it and muscled its way on the NYSE and the rest is history. It couldnt do this now due to Sarbanes Oxley. Now most of the mergers have to go over the counter and the law frowns even on that transaction. Sarbanes-Oxley has raised overall costs of operating as a public company by 130%, has added 30,700 man hours for each firm, adding $5 million to the costs of all Fortune 100 firms.
Another reform which will not garner huge headlines from the liberal mainstream would be to repeal the so-called mark-to-market rules for long-term assets. Killing mark-to-market is a mania of trendy liberal regulators akin to fighting a fire by dousing it with gasoline. It works like this. Suppose you buy a house for $350,000 and take out a $250,000 30-year fixed rate mortgage. Your income is more than required to easily handle the payments. But under the mark-to-market rules, your bank could call you up and say that if yuour house had to be sold immediately, it would fetch let us say $200,000 in a distressed sale. It could then inform you that you owe $250,000 on your house worth only $200,000 and please pay the $50,000 immediately or else lose the house. Thats whats happening today with the result that the crisis can feed on itself. The next president should insist the SEC to change these rules.
But commonsense proposals like these are verboten in todays political climate due to Political Econ: 101. And if McCain wants to be trounced as heavily as was Barry Goldwater in 1964 he will shut up about true reform. He can top Obama who is antithetical to the market overall by understanding that Alan Greenspan (whom McCain once thought so highly of he said if Greenspan were dead hed prop him up on the Fed Reserve chairmans chair anyhow) and Ben Bernanke created massive amounts of excess liquidity. He might just might announce that his major goal is to strengthen the dollar, declare that the Feds goal for gold is about $500 an ounce which would stabilize the buck. He should suggest the rewriting of our tax laws so there are no disadvantages to a U. S. company acquiring an overseas competitor and instead advocate creating an incentive for our firms to make acquisitions so this country can once again become the repository of executive talent around the world. He should espouse the flat taxthe most pro-growth simplification possible that would tax capital at a single flat rate.
Will he do this in the first presidential debate next week (from this writing?). I think not. Both will still be playing Political Econ: 101. And if you think this is the debasement of our once great political dialogue, remember that in 1800 Jeffersons team called John Adams a jackass and in 1860 Lincolns opponents termed him an outside gorilla.
Add this to the political equation. A poll conducted with Stanford University and reported by the Associated Press shows the percentage of voters who turn away from Obama because of his race could easily be larger than the final difference between candidates Bush and Kerry in 20042.5%. More than a third of all white Democrats and independentsvoters Obama cant win the White House withoutagreed with at least one negative adjective about blacks, according to the survey.
And all this time liberal Democrats have been excoriating Republicans for being backward on race.