The Bezzle

In his classic text on the origins of the great depression, The Great Crash, John Kenneth Galbraith came up with an ingenious concept he called 'the bezzle.' Basically, he argued that at any one point a certain number of people are filtering money out of the system through illicit means of embezzlement and fraud. In a time of easy money supply, rapid economic growth and widespread prosperity, people are much less likely to watch where every one of their pennies is going, and much more willing to lend money to people who may be less than scrupulous, meaning there's more scope for fraudulent activities. In Galbraith's terms, the size of the bezzle - the total amount of capital available to be defrauded from the system - grows. By contrast, in a time of economic contraction society seeks to account for itself, understand its finances, repay debts, and watch those pennies. The size of bezzle thus shrinks massively, and people who are busy committing frauds suddenly find themselves high and dry.

It's just a fancy way of saying that it's easier to play the system when the money's being spread around than when everybody's looking over their shoulder. But at a macroeconomic level, it's an interesting idea as it explains why you tend to get a wave of discoveries of corporate malfeasance at exactly the same time that economies start going downhill. Thus when the Great Hanshin Earthquake of 1995 knocked share prices in the already shaky Japanese market, the fallout exposed the corrupt dealings of rogue trader Nick Leeson, which subsequently brought down Barings Bank, an institution originally founded in London in 1762. Equally, the Keating Scandal so closely associated with Mr. McCain came at the end of the Reagan boom and beginning of the recession of the early 1990s. Similarly, it's not an entirely straight line, but it's hard not to associate the collapse of Enron in 2001 with the fallout from the rapidly collapsing dot-com boom.

Presumably, by drawing attention to the worst sins committed in the glory days, such efforts further undermine confidence in a particular financial system. So once the bezzle starts shrinking and dodgy dealing is exposed, a vicious circle dries up the bezzle even more.

So what fun is in store for us this time round? Presumably the scale of the crisis means that the bezzle will shrink extraordinarily rapidly, and that should mean a host of crimes are left exposed. We've already seen the uncovering of French rogue trader, Jerome Kerviel, caught in the midst of massive unscrupulous trades at Societe General, which have resulted in a loss of 4.9 billion Euros for his company - reportedly the largest single fraud in history. But reports are widespread that the FBI is investigating dozens of trading, banking and investment organizations, including Fannie Mae and Freddie Mac. Surely we must expect some more dirty secrets to be brought out of the closet as, over the next six months, banks are forced to come clean about their financial positions and admit the scale of their write-downs?

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Log cabin logic

There's nothing new about adopting the mythology of outsider status to get political power. American politicians have been doing it for hundreds of years, and it's been working at least since the rise of democracy in the Jacksonian era. Perhaps it's something that taps into the Jeffersonian core of American politics, the resistance to centralising power. But whatever the reason, you don't have to go far to find a log cabin or a haberdasher lurking in American politicians' election narratives.

Alaska has become just the latest in a series of locations sufficiently far from the Beltway that they're seen as free from the supposedly corrupting influence of high politics. And even using Alaska isn't that new. A raging anticommunist in the 1920s, Fred Marvin, ironically styled himself the "Senator from Alaska" to emphasise his distance from Washington politics, before going on to accuse the communist movement of originating in the Order of the Illuminati and operating through big government in Washington.

So no one should be surprised to discover that all is not what it seems with Sarah Palin, and no-one should believe her political strategy is in any way novel. It's, frankly, far too fishy a contradiction in terms to be  opposed to everything associated with Washington and yet at the same time so eager to get there. Investigative journalists have only had a month with this candidate so far, and yet already a more complex picture of her rise is emerging. The contours of a cohort of influential insiders underpinning her efforts have come into focus.

This piece in the New Yorker illustrates the degree to which Palin's rise has been orchestrated by Washington insiders looking for a new great white hope. It also suggests that Palin is a natural politician, highly attuned to the sinews of power in the Republican party. (One might even argue that she resembles Obama in the speed of her ascent and the degree to which her rapid rise has allowed her to be used as a cipher for all sorts of hopes and dreams.)

Meanwhile, mutterings from Bill Kristol, raising the idea that Palin's silence has not been a product of her lack of knowledge but a strategy forced upon her by a sexist McCain camp is clearly an attempt to extract her from the road crash that this campaign is turning out to be. This, Kristol seems to hope, might be enough to keep her career alive for 2012. It seems some powerful people have high hopes for Mrs. Palin.

We shall see about that. Much of her future depends on whether Palin actually merits any of the faith Kristol seems to have in her. On that, the jury must still be out, since we've only had a couple of months to see what kind of a politician she is. The essence of a successul politician is getting out of scrapes, and Palin has one hell of a mess to disentangle herself from here. Much also depends on which camp manages to win the battle for the soul of the Republican party in the next four years, for she only succeeds if the party continues to track to the right. A perfectly forseeable alternative is that the GOP pushes to the centre after this election, much as the Democrats did from the mid-1980s. If that happens, then it's sayonara Sarah Barracuda...

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USA: A nation divided by wonkery

The Obama campaign has set up a pretty little site listing all the defamatory mailings, robocalls and push-polls the Republicans have been running against them this year. Take a look at it here.

At risk of reading this backwards, let's just ignore the robocalls themselves for a minute (plenty of time to get angry about that later). What's really interesting about this site? First, the financial resources the Obama campaign have at their disposal are once again allowing them to paint a picture of a disreputable rival who stoops to nothing to win power. This is despite the fact that McCain has occasionally disagreed with some of his more ridiculous supporters when they stood up at meetings and called Obama a terrorist. When Kerry took government funding, he was left with no equivalent resources to highlight the smear campaigns of the Republicans - and so they were left to stand unchallenged. (Compare Gil Troy's recent post: "When Republicans Raise Big Bucks They are Being Plutocratic, When Democrats Do It They Are Being Democratic.")

Second, we can see exactly what states McCain is worried about. The smear campaigns are precisely targeted at Nevada, Colorado and New Mexico in the West; Florida, North Carolina and Virginia in the South; New Hampshire in the Northeast; and Missouri, Ohio, Pennsylvania, and Wisconsin in the Midwest. (God knows there's probably some people in Oklahoma who probably haven't even realised there's a campaign going on yet!)

Of course, nothing new here. Only fight the battles you need to win. But this kind of careful targeting - engaged in by both campaigns for fairly obvious reasons, to maximise the bang for your buck - is worrying. It's what produced the debacle of 2000: when the two campaigns campaigned so carefully to balance against each others' advantages that they unintentionally produced a dead heat and a constitutional crisis. And it helps explain why Red state voters identify with McCain's claims that Obama is the one running the most negative campaign in history, and reject the Democrats' claims that McCain is the sewer politician. After all, they don't get to see or hear any of these robocalls and defamatory mailings.

In short, the 'all politics is local' mentality, which leads to politicians not bothering to fight huge regions of the country, is a prime contributor to the political polarisation of American society. Politicos segment the voters up, and society ends up segmented as well. The best thing either candidate could do for political unity, then, would be to spend a little time in 'no-hoper' states they can win - and try and persuade those who disagree with them of the merits (or at least the seriousness and sincerity) of their ideas.

... And after that they can fly back home to New York and Texas on their pigs.

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Big banks, small banks

Robert Reich argues that if a bank is too big to fail, then it's too big. Corporations should not rule our lives. The antitrust traditions of the United States should be put into practice once again to break up these colossal institutions of 'supercapitalism'.

This all sounds fairly reasonable. (Anyone who's had Microsoft's stupid Office "ribbon" foisted upon them in the past year or two knows that monopolistic organizations can push you to the point of fury - and there's little you can do about it, and little, it seems, they care.) So let's break up the banks...

Except, when you look at US history, it becomes pretty clear that there's been as many problems produced by small banks as by big ones. The US has a strong tradition of hostility to federal banking, dating back to the earliest debates over the nation, in which antifederalists were hostile to Hamilton's desire to create a federal banking system and assume debts held by the states from the war of independence. Enemies of Hamilton believed federal financial power would inevitably lead to a nation of the United States rather than a collective of relatively autonomous republics with clear states' rights. (And it did.) In the Jacksonian era, hating the bank became a national pastime; the Second Bank of the United States was depicted - much as Lehman, Goldman's and others are now, really - as a many-headed hydra, a tool for the protection of privilege, and a mechanism for the exploitation of the people. The result was that, unlike almost every other rapidly developing nation in the nineteenth century, the United States kept hold of an eighteenth century banking system. As late as the early twentieth century, when almost all America's peers had developed strong central banks and a small number of very large commercial and investment banking institutions, the United States still had no federal reserve and most business was done by literally thousands of little 'mom-and-pop' outlets based in cities across the country.

You can see the appeal: a local bank seems like it offers personal banking, someone familiar and trustworthy in charge of your money who you can appeal to for understanding, rather than an anonymous and faceless institution that rides heartlessly over the needs of the poor. But the lack of a reserve damaged the government's ability to manage monetary policy during the first decade of the century. In the panic of 1907, which superficially resembles the current crisis in several ways (in particular, the massive loss of liquidity resulting from a precipitous decline in trust between financial institutions), the government was forced to rely upon the inordinate wealth of J. P. Morgan to underwrite the financial system, guarantee liquidity, and restore market confidence. A lack of centralised banking did not give power to the people, then: it gave it to the plutocrats.

Despite Wilson's decision to create the Federal Reserve in 1913, the private institutions in the United States remained predominantly small local and state banks: institutions that, in the Reich model, are less likely to exploit us all by being 'too big to fail'. Unfortunately, because they were small enough to fail - fairly unsurprisingly - they failed.

When the 1929 crisis produced a loss of faith in the banking system and individuals sought to withdraw their assets, thousands and thousands of institutions were unable to cover their liabilities and collapsed, and we saw queues of desperate people on main streets across the country (images we have noticeably failed to see in the current banking crisis). If I remember correctly, something like a third of all the banks in the United States failed between 1929 and 1935. With many of those who failed before the Roosevelt reforms, depositors lost their money entirely.

Banking is a sector of the economy that is unlike most others. Because it relies upon trust, leveraging of assets and managing risks, the advantages for society of large institutions are manifold. We don't have runs on banks today because people are more confident their money is safe; they're more confident because the banks have much deeper pools of assets to draw upon to cover themselves and because large government banking structures insure our money. We have lower costs of capital and credit, because banks can plan for the risk of defaulting creditors. And people are able to transfer their assets easily and manage their own money effectively because the banking sector is globalised, competitive and efficient. We risk losing sight of all these advantages by focusing only on the way in which these massive institutions have placed us over a barrel in the current crisis.

There is a fundamental distinction to be made, then, between large banking institutions, that provide us valuable economies of scope and scale, and the responsible management of those institutions by people who are (a) not incentivised to take crazy risks and are (b) effectively overseen by regulatory mechanisms that work. The solution to the current problems is not to go back to a fragmented banking sector in which we have thousands of small local institutions that the government will have to underwrite more heavily than large banks. It's to make sure that we're in charge of the banks. Jefferson's warnings against elite financial power, and Jackson's campaigns to bring the national bank to democratic heel are not lessons from history that we should break today's institutions up and return to a system of local, decentralised banking. They just mean that the government should make sure that it is in charge of how they work.

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Can we trust the polls?

Logically, there's only two likely ways that McCain could win the election now: (1) an October surprise to end all October surprises (Amazing! It turns out Bin Laden was drawing welfare benefits for his six illegitimate children whilst living in Osama's Hyde Park residence, which had been bought for him by Tony Rezko using money raised by exploiting illegal immigrant workers); or (2) the polls are wrong.

So, in their increasingly desperate effort to keep this race neck and neck, much talk has been made in the news media of the so-called Bradley Effect, the mythical tendency of white voters to say they'll vote for a black candidate then just not be able to bring themselves to do it on polling day.

As such, it's worth reading Blair Levin's recent piece in the New York Times arguing that Tom Bradley, the African American mayoral candidate for Los Angeles in 1982 for whom the 'effect' was named, was defeated not over race but "an unpopular gun control initiative and an aggressive Republican absentee ballot program". The broader lesson is that, sure, there are plenty of people out there who will vote on race, or who will factor race into their decisions - but the vast majority of those who are significantly influenced by questions of race wouldn't vote for Obama anyway, since he is pretty antithetical to their values and politics.

The issue is not whether or not people are racist - after all, the term is pretty hard to pin down when you get into the complexities of racial code-words and symbolism, anyway - the issue is how many people would vote for Obama and everything he stands for if he was white but won't solely because he is black and, at the same time, are liberal enough to be ashamed of this attitude such that they'll mislead a pollster.

An individual that likes to 'pall around with terrorists', who opposed the war in Iraq, who 'has the most liberal voting record in the Senate' and - thanks Michelle Bachmann - is now officially 'anti-American'? I don't think he'd be getting much redneck vote anyway. And most rednecks I've met are quite happy to express their views, since they don't see what's wrong with them. So it all comes down to that much-maligned white working class, especially in the Midwest, who critics have considered the epitomy of American dumb ever since they fell into line for Reagan. Well, maybe we should give them a little more credit. They've had a pretty tough deal for decades now; the impression I get is that most of them are simply mistrustful of anyone who comes into politics seeming to promise the world.

There's plenty of valid reasons not to support Obama if you're so inclined. Blaming opposition on race not only stinks of sour grapes, but it makes it harder to think about the policy questions that go alongside it. It certainly seems that Obama is convinced that the best way to challenge racism is just to show he can do the job.

That's not to say that racism isn't still a problem; of course it is, and it won't ever completely go away. The shocking news turns out to be that humans aren't built perfect. Its not even to say that racial politics can't make a difference in some tightly balanced states. I just don't think that this election will be won or lost because of the colour of Barack Obama's skin. And that, in the end, is the way it should be.

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Spreading the wealth

In a country as sensitive to such phrases as the United States, Obama's off-hand remark about 'spreading the wealth' around was a snafu ... an error of phrasing that he should have anticipated would have opened up a can of worms. But it wasn't anything more than that. And the remark itself is certainly no less shameful than the context, in which a frank and reasonable discussion about taxation seems to be just about impossible.

Fact One: Socialism is defined by the state ownership of the means of production, not by marginally redistributive tax policies. The few socialists left on the planet would laugh in your face if anything as limp as this was passed off as equivalent to their views. And as far as I can tell, Obama has never advocated the state ownership of anything. As many jokes have shown, the nearest measure to socialism that we've seen in recent months is the Bush administration taking hold of the banking sector - and most people agree that that was impossible to avoid.

Fact Two: All tax policies redistribute wealth. That's the point of taxing; if they didn't you might as well not bother taxing at all. The only difference between different tax plans is whether they're progressive or regressive. The last eight years of Bush policies took money from the pockets of the middle and working classes and not from the wealthiest in society in order to pay for things we generally consider to be public goods - policing, fire rescue services, prisons, schools, and so on. Obama is arguing that now it's time for the rich people to pay a little more, and even here it probably won't compare to the amount they've saved from tax cuts in the previous three decades.

Presciently, the OECD has released a report today on income and wealth inequality across the developed nations of the world. Most of it makes for depressing reading. The gap between rich and poor and the number of people in poverty has risen pretty much everywhere since the 1970s. This latest phase of history, which has produced so much innovation and wealth, has also produced growing inquality in pretty much all developed nations, and dampened social mobility in comparison to the past. This is not actually quite as bad as it sounds: inequality has risen primarily because the rich have got much richer, and poverty is determined in this calculation in relation to average wages, so again is affected by rising national wealth as a whole. Someone who's defined as 'poor' in 2000 might not be quite as poor as someone with the same designation in 1980.

But massive distinctions in wealth in a society do come with a cost, even if the whole society is richer as a result. It produces social fragmentation, creating different classes of citizens, some living in ways utterly beyond the comprehension of the rest of us, and others working all day just to service our needs. It produces groups of people who have no stake in society or interest in seeing it work, and are willing to steal, rob and hurt other people to get by. And it produces expensive societies, in which many goods and services are beyond the means of normal people but are constantly thrust in their faces by advertising and ostentatious conspicuous consumption, generating envy and distrust.

The astonishing success of the free market in wealth generation in the past twenty years has convinced the public that (a) social inequality doesn't matter; and (b) acting responsibly to manage inequality somehow  leads to the kind of massive state ownership, regulatory structures and price controls that damaged growth in the past. The degree to which this way of thinking has come to dominate debate can be seen from the way that McCain can just repeat "spread the wealth" over and over and get a reaction from it, without ever stopping to actually discuss what the term might mean.

Amongst other things, the OECD report shows that income inequality began to decline in Britain in the 2000s, after several decades of extremely rapid growth. (It is still above the OECD average, but by the mid-2000s, for the first time since the 1980s, income poverty was below the average.) By contrast, in the United States income inequality rose even faster in the 2000s than it had in the past, and the proportion of citizens in the 'income poverty' bracket is way, way over the OECD average. Both countries experienced the same boom, the same growth, so this isn't really a product of the overall wealth distortions mentioned above. In short, whilst both continuing to be unequal societies, Britain had a little more success than the United States in redirecting some of its newly generated wealth into insurance, education, job creation and other programmes, and got the very rich to pay slightly more of their share towards common public goods (though presumably tax advisors, accountants and off-shore funds will mean that they'll never quite pay as much as we ask them to).

Ironically, Britain suffers from much the same problem as the United States. It's very hard to present this as a responsible policy - whether you agree or disagree with it - when other people are calling it some sort of creeping socialism. The Blair and Brown governments have had to replace 'redistribution of wealth' with 'redistribution by stealth': introducing subtle changes in policy without fanfare, which have a cumulative effect on national inequality by tinkering on the margins, but don't elicit the same attacks from the right. This strategy has its own cost: it undermines trust in the government, and convinces the electorate that the people in charge are not being honest with what they're doing with your money. And, ironically, it makes it harder for the government to take credit for things that go right.

But when advocacy for even a marginal change in tax policy gets shouted down as rampant revolutionism, its hardly surprising that politicians end up responding in such a back-door way. So the great irony of attacks on Obama's ill-thought "spread the wealth" comment is that, rather than revealing some underlying truth about the socialism hidden within the Democratic platform, they actually force American progressives to be less straightforward in explaining what they actually believe in...

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Keep cool

With an election as significant as this, it's not surprising the tension has been ratcheting up for several months now. It's hard to believe we're still weeks away from the big day. A financial tsunami wreaking havoc on the economy and two wars persisting for longer than the US was in World War Two have played their part in raising the stakes. And the media is helping the desperate amongst the Republican right increase the hysteria and lower the tone. Without their habit of repeating verbatim any absurd smear passed on to them under the table by either campaign, the election could hardly be as vitriolic, or as tense, as it has been to date.

As a result, it's hard to keep calm and collected and just look at the facts on the ground. But Senator Obama has set the example, focusing on evidence and organization rather than gut-feelings and ostentatious hurtling from crisis to crisis. His campaign has been built on three key elements: (i) not making any dumb mistakes for short term gain, something that McCain has been forced into by trailing in the polls; (ii) building up a massive donor base, so that - with more than $600 million so far, and more than $150 million this month alone - he has raised more finance to conduct this battle than any candidate in history; and (iii) building a massive nationwide machine capable of drawing out the vote and activating individuals right down to the street and house on election day. It's what won the election for Bush in 2004. And these are also the factors that will win him the election, despite the fact that there has been a natural Republican majority for more than three decades.

The events of the past two days reveal once again that Obama's biggest asset has been his ability to plan the party in November to perfection. This carefully-choreographed endorsement from Powell - something that Powell needed, to redeem his image after his affiliation with the first Bush administration and war in Iraq, as much as Obama - is a textbook example, and throws into relief the desperate efforts of the McCain campaign, who have switched absurdly from accusing Obama of being a terrorist to accusing him of being a socialist in a matter of days. Who knows how long this endorsement has been in the works, but it's good timing, and certainly a real advantage to a candidate whose biggest challenge to date has been a perceived lack of foreign policy experience.

So what are we to make of the news that Obama is planning on minimising his personal attention in states that went Kerry in 2004 and focusing on Missouri, Colorado, New Mexico, Ohio and other former Bush states that are still in the mix? Well, one way of looking at it is that he's overreaching himself. If there would ever be a kick in the teeth, it would be that he lost any of the Kerry states on November 4. But another view is that he's trying to maximise his gains and force McCain to spend his resources in these states rather than looking to New Hampshire or Michigan, or other places that he would need to get a proper electoral majority. In President Bush's language, he's taking the fight to the enemy. Even if the smears work and he doesn't win Missouri or Indiana, he still gets to keep Michigan and perhaps Florida. And that'd be enough to win him the election.

Of course, it isn't over till the proverbial fat lady has blasted out some chords. And as Hillary pointed out today, there's always a danger that people don't bother coming out if they think the whole thing is a done deal. Over-optimism is a dangerous thing. This happened in Britain in the early 1990s. John Major was the limp leader the Tories found to lead them in the early 1990s; the party was suffering a long hangover from the Thatcher era. Everyone expected Neil Kinnock's reinvigorated Labour Party to crush them in the 1992 election, and yet on the day Major managed to slink home with a tiny, twenty-one seat majority in Parliament, and governed for another five years.

Is this going to happen in the US in 2008? No. The reason the Tories sneaked the election in '92 was the same reason why McCain's going to lose ... they had a tighter operation, they focused on their core messages, and they got out the vote. Obama's been cool all campaign; so we can be sure he'll continue his relentless focus on the details right up to that vital day in November.

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Powell endorses Obama

Further evidence of the fracturing of the moderate wing of the Republican party. And, as a friend pointed out to me a moment ago, the first time I've heard any major figure this election stand up and say that not only Obama is not a Muslim, but who cares if he was...

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Karl Rove: the world is flat

Wall Street Journal: 'Obama Hasn't Closed the Sale'.

... And lipsticked pigs might fly. Rove the strategist is not the same as Rove the publicist (the statements we see at the moment, like his comments about Hillary during the primaries, are towing the party line, not revealing his real calculations). Latest polling from Pollster.com suggests that McCain has narrowed the Obama lead a little bit at a national level over the past week or so. The lines on Ayers and ACORN seem to have had a little traction amongst hard core Republicans, but as I argued previously, they are probably turning off as many as are attracted to it - and the only shift in the college is North Dakota moving from McCain to toss-up.

Unlike 1992, 2000, or 2004, this election is not about turning out the base for Republicans. It's about reclaiming the centre ground. I just don't see how McCain can transfer his smear tactics into success in the key marginals, even if they do continue to resonate amongst some. People who are scared still want to hear about pensions, employment, and Medicare. Ok, so let's assume he starts fighting the campaign that has been missing for the past couple of months and all goes well for him. He could potentially take back West Virginia, Ohio, North Dakota, Nevada, Missouri and North Carolina, where Obama has only a marginal lead. That's 59 college votes to add to the 166 he's probably got in the bag already. Last time I heard, 225 votes was about 44 short of the margin of victory. So McCain would not only have to reverse the trend in these six marginal states where Obama can massively outspend his rival, he'd also have to come out well in Virginia (6%, 13 votes), Florida (4%, 14 votes), New Mexico (7%, 5 votes), Colorado (5%, 9 votes), and New Hampshire (5%, 4 votes).

Five to seven percent swings are not beyond the realm of possibility. But an across the board recovery like that? With no money left for advertising? That 'my friends', is: a new bunch of Swift Boat revelations put through 527 groups, relentless push-polling, a sudden and unexpected improvement in the stock market and discovery that all is actually well in the global economy, Obama turning out to be a cross-dresser, and photos of Joe Biden smoking crack on a impromptu visit to Scranton.

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Did someone feed him a pretzel?

 

Poor McCain. This is fate's way of saying you ain't gonna win. Like when it put that three-pointer in for Obama a few months back...

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No Brave New World

Whilst they might have served a purpose shoring up the base, in the bigger scheme of things it seems that Obama might be benefiting from Republican smear tactics this year. As moderate Republicans have come to mistrust the motives of their old anti-Washington allies outside the Beltway, and have turned to reliable establishment figures in both parties to help reconstruct the banking system, the centre and left of the party has fallen silent, or even in some cases (Christopher Buckley, for instance) come out for Obama. This has left McCain and Palin with the rump, including some of its most extreme members baying for blood, and this makes it easy for the Democrats to discredit the Republicans entirely as either hysterical or cynical opportunists seeking to exploiting others' ignorance. This image in turn favours Obama as the moderate’s choice: the presidential candidate.

This same dynamic happened in 1964 with Johnson-Goldwater, where the rising influence of the new right alienated older Rockefeller Republicans, allowed the Democrats to link the Goldwaterites to the John Birch society, and convinced most Americans that the new breed of Republicans had to be kept away from the big red button.

So that’s why McCain has been criticising his own audiences in recent days, and now seems to be trying to rein in his VP pitbull. If McCain brings Bill Ayers or Jeremiah Wright up in the debate, then, he’s running a big risk – the third of the campaign, after Palin and the bailout suspension. He’d no doubt win plaudits amongst the conservatives who had been so hostile to him in the past, but he’ll drift further and further away from the centre of American politics and give more fuel to the Democrats who want to depict the Republican party in the worst terms possible.

But this political dynamic should not be confused with any kind of fundamental change in people’s attitudes. The economic crisis has not altered people’s beliefs, even if it has given people a new sense of urgency. In fact, in most cases it's probably only confirmed them. When Obama walks home with the presidency, I predict we’ll see pundits, press, and periodicals talking about a new post-racial America, a world of perpetual sunshine, and how Obama’s election means everything has changed in American politics. And it will, of course, be a dramatic milestone. But those who predict such things would do well to remember what happened just four short years after Goldwater’s disastrous defeat against LBJ ... the Democratic incumbent chose not to stand for re-election, and a certain Richard Milhous Nixon entered the Oval Office.

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How this bear market compares with the past

Great (though scary) comparative graphic from the New York Times.

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Visions of crisis

Interesting piece from Desde el Principio, arguing that whilst the dominant discussion in the media in Europe, Asia and the US focuses on the impact of the banking crisis on shares, pensions, GDP, employment and the relative effectiveness of various bailout schemes, the dominant claim of much of the Latin American media is that this crisis marks the final collapse of the system of international finance capitalism.

A few weeks ago, it appeared that continental Europeans were making similar arguments (not without a degree of schadenfreude) about the collapse of the so-called 'Anglo-Saxon' model ... until they realised the degree and nature of their exposure to the crisis was little different to Britain or the United States. By contrast, after three decades of variable results from the Washington consensus-implemented structural adjustment programmes; with a much smaller middle class and much larger class of extremely poor people; and with a long history of overweening US interference, many in Latin America are bound conceive of the crisis quite differently.

This is a global crisis. The irony is that whilst fundamental economic forces are hitting economies around the world with an unprecedented unity, their impact, and the reactions of different societies to this impact, will likely be hugely different.

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They don't make demagogues like they used to

Some characteristic footage of the 1930s Louisiana rabble-rouser, Huey Long. Courtesy of More or Less Bunk:

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The verge of history

Ho ho ho. Amiable dunce writes:

"If Barack Obama becomes the candidate and wins the election he will be the first president since Kennedy with more than two syllables in his name. He will also be the first president to begin with an 'O'.

"American lingers on the verge of history."

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Of Moose and Men

The report released yesterday - the result of an ethics investigation into Sarah Palin's activities as Governor of Alaska - does not make for edifying reading. If the evidence is taken at face value, it seems that the Alaska governor's office was used to pursue a personal vendetta against Trooper Michael Wooton over an extended period of time, and that when this campaign failed to produce Wooton's dismissal, Anchorage Police Chief Walt Monegan - who refused to act against Wooton, since the complaints had already been dealt with by a predecessor - was dismissed. As Monegan said after an early meeting about Wooton, "I had this kind of ominous feeling that I may not be long for this job if I – if I didn’t somehow respond accordingly” (p.22).

Looking at the detail of the investigation may not reveal anything that excuses the actions taken by the governor and in her name, but it does provide some shades of grey. First, the whole affair originated in what was clearly a nasty breakup between Trooper Wooton and his ex-wife Molly (Palin's sister), which had produced a great deal of bad feeling and a running child custody dispute. As the Palin family rallied round, this tightly-knit unit naturally came to conclude that Wooton was a man of low moral fibre. Indeed, the accusation repeated on several occasions by Todd Palin and others was that the man was "not fit" to be a trooper and he gave the authorities a bad name, implying a belief that public employment should not just be a question of technical compliance with laws but also of good character. Those of us who don't know the individuals personally are unlikely ever to find out if any of this is true, though if any of the allegations against Wooton - that he was a DUI, that he liked shooting moose, that he threatened violence against Molly's dad, that he tasered a teenage kid - are substantiable he certainly seems colourful, to put it mildly.

So the vendetta against Wooton was understandable, if still unethical (and perhaps unjustified). The Palins seem to have believed that they were both protecting their family and the good name of their police force, even whilst they were trying to undermine its independence.

Looking at the way the case was pursued - that is, extremely incompetently - also supports the idea that this was basically a rationalisation of misplaced protective feelings toward a suffering family member rather than anything more malevolent. If they had been more calculating about it or more aware that they were misbehaving, they undoubtedly would have taken proper steps to cover their tracks. Ironically, Police Chief Monegan - who seems to have had a much better idea of the potential repercussions than most of those involved - warned Palin's associates several times that they should not be talking about the issue in the terms that they were, as all discussions would be legally discoverable in the event of a complaint being filed by Wooton. At one point, Monegan asked "would you tell the boss [Palin] – it’s only going to spill out. The more people involved in this, the more people are going to – the more the chance this is going to come on out in the public” (p.33). The Palins weren't to know that they would be catapulted into the national spotlight shortly afterward, but with hindsight they would have done well to have heeded Monegan's advice, rather than taking his failure to act as a likely contributing factor (p. 69) in their decision to dismiss him!

It also seems likely from the testimony that this was at least as much about Todd as Sarah Palin (though it's possible this is because the governor was covering herself). Todd was the one who repeatedly raised the issue with Monegan, and the one who seemed most animated about it. The calls involving the governor directly were comparatively few, though several members of her staff were also detailed to act on the matter. Undoubtedly, husband and wife work as a unit, with Todd reportedly spending about fifty percent of his time in the governor's office (p.45). So one of the more valuable lessons to be drawn from this grimy debacle is that we need to know more about his role in Palin's political activities. He certainly doesn't come across as a particularly retiring First Gentleman of Alaska.

Of course, it's tempting to conclude that a vendetta is a vendetta and the Palins are deeply unethical individuals. But the degree to which this was a family issue writ large could equally suggest that it was a one off. Depending on where your sympathies are, then, either the Palins are the sort of people whose sense of injustice occasionally pushes them into foolhardiness, or they are the sort of people who exist in government only to further their personal agendas. With the facts unresolved and such a limited example to work on, deciding between these interpretations is really just a matter of personal prejudice.

It's also tempting just to say that this is the Republican camp reaping the whirlwind. This isn't the first Troopergate affair, after all, and it was the Republicans as much as the Democrats who started making minor ethics questions fair game for investigative reporters in the 1990s. Certainly, there'll be few tears shed for the Palin camp: especially as none of it is likely to have a lasting impact on her career, anyway.

But perhaps we should not read too much into this affair. Comparisons between it and Obama's involvement with convicted dodgy-dealer Tony Rezko hold up in at least one respect. Obama's decision to allow Rezko to buy an adjacent plot of land to his house and sell it to him at a future date reveal a capacity for ill-considered bad judgement (Obama has admitted as much himself), when the temptations of power override good sense. Those people who use Troopergate to indict the entire Republican party and its small-town values should therefore not be surprised when Republicans use Rezko to suggest the Democrats are hopelessly embroiled in municipal corruption.

In the end, both the Wooton and Rezko affairs shine a light on the murky underbelly of local politics wherever it operates. Whether in the big cities or the small towns, close networks of friends and associates working together seem inevitably to produce conflicts of interest. Meanwhile, the all-consuming nature of modern politics makes it almost impossible to keep family life (protecting a sister, buying a house) away from public life. Dealing with this endemic problem, which has characterised local politics since the first settlers landed in the New World, requires much more than laying a few complaints at the door of a candidate for office, and then moving on to the next scandal in waiting.

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Reaganism in the ash-heap of history

... And speaking of pundits who make their money predicting the future, Francis Fukayama, he of 'The End of History', is denouncing the Bush administration once again in Newsweek. After abandoning neoconservatism following the Iraq war, he now seems to have given up on old-fashioned free market economics. The strange thing is that this neocon sounds more and more like a European Social Democrat every time he revises his ideas! (Just as long as people aren't allowed long holidays; no, Dr. Fukuyama is not happy about that one.)

Still, he's right to point out that Reagan/Thatcher policies worked quite well in a lot of ways, but were disastrous when applied in rigid, ideological ways to the wrong areas. In particular, the belief that you could consistently cut taxes without worrying about deficits, and that financial deregulation produced innovation without risk have been proven false in the most graphic way imaginable: turning out to be a self-serving ideology that suited the needs of businessmen making millions by creaming their earnings off the top of the world's investments.

But he underestimates the degree to which this ideological rigidity was built into the Reaganite philosophy from the outset. He ignores the fact that Reagan's electoral appeal was based on its illusory promises as much as its specific philosophy (that is, his claims that the United States was unstoppable and invincible, that it would be always morning in America, and that the hangover never comes). And he makes no mention of the third fundamental error which should condemn Reaganism to the ash-heap of history as rapidly as any other: the belief that as long as you have growth, inequality doesn't matter.

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Down in the dumps

Another pessimistic article, this time from Steve Fraser in the LA Times (courtesy HNN). The main point seems to be not that we are necessarily in for another Great Depression, but that we really don't know what could be round the corner. Certainly, we should be extremely skeptical of predictions. Politicians are almost required to lie, since presenting the bald facts runs the risk of making a serious problem worse; whilst pundits, academics and economists are paid to present opinions and predictions with authority, even when no such authority is possible.

Fraser makes a revealing reference to "that interstitial zone of our public life where psychology meets economic policy." The dangerous deregulation and risk-taking that has permitted the multiple bubbles of the tech sector, housing sector, not to mention the global trade imbalance, of recent years, were themselves built upon foundations of irrational exuberance, justified in public minds by evidence of unparalleled growth and prosperity throughout the world.

Whilst it seems easy to criticise such ideas with hindsight (just as we can laugh at those who argued the same thing politically, that after the Cold War liberalism and democracy had 'won'), it's important to realise that optimism was not just an illusion. It also contributed to growth, creating its own reality, convincing people to open their markets, integrate their economies with each other, develop new ideas and investment in the future confident of a secure and stable global environment. In this sense, mass psychology is intimately tied into the way markets work, in a way that no amount of regulation can fully control (at least as long as humans are involved in the decision-making), and the solution to this crisis requires faith in leadership and political systems as much as regulatory reform.

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The Perfect Financial Storm

It’s worth taking a moment to reflect on the scale of the losses on the market this week, the week when the Paulson rescue plan was supposed to have reassured bankers and allowed them to begin lending again.

For the eighth straight day in a row, the Dow Jones has dropped. A record. It lost more than four percent by the end of trading, after being some 600 points down mid-afternoon, falling below 8,000 for the first time in years. The expiration of the badly-conceived ban on short selling yesterday also brought about additional negative effects. But even before today’s selling, four years’ worth of market growth had been effectively written off. 

Meanwhile, Japanese stocks lost 10 percent today alone, repeating the decimation of Wednesday. The London FTSE is down 20 percent for the week, and is approaching half the value it was at just over a year ago. Another record. In mid-September stocks simply fell off a cliff. The fairly consistent decline in stock prices over the last twelve months had already seen the FTSE drop to the level it was at in December 2005 by the start of October. Since then, we’ve been effectively moved back to the bottom of the post dot-com trough in January 2003. Three years. In a little more than a week.

In total, more than $6.2 trillion has been wiped off the value of stocks worldwide in the past seven days. Another record, and one that makes the $700 billion of the Paulson plan pale into insignificance. The only marginal crack in the otherwise ominous bank of clouds comes from the fact that interbank lending rates seem to have fallen a little, which suggests that credit may ease somewhat in the following days. But this is unlikely to make much headway into the hundred mile an hour winds racing in the opposite direction. The panic in world markets is shown by the way military language is now being thrown about by desperate financiers. It was all about “regime change” in the major institutions a few days ago. Now bankers are calling for a “shock and awe” engagement from world leaders: massive, overwhelmingly ambitious intervention in order to break the relentless cycle of fear brought about by deleveraging and contagious mistrust.

The problem remains that it’s not clear what the governments can do. The markets are moving so swiftly that rescue plans are outdated before they’re even signed. A week ago, bankers and politicians were still talking as if addressing the issue of mortgage-backed securities by effectively cutting them out of the banks would be a simple piece of surgery, leaving an otherwise healthy patient ready to begin recovery. But while they’ve been debating the best anaesthetic, the patient's had a cardiac arrest.

Meanwhile, the US has already cut interest rates to a level way below RPI (effectively paying people to take their money), making clear what was already blindingly obvious: that in current conditions interest rate policy has completed ceased to function as a tool for controlling the economy. Governments are simply dwarfed by the scale of the private sector. An unprecedented world-wide, coordinated half a percent cut two days ago seems to have achieved little beyond a very brief fillip. Anecdotal evidence suggests markets would respond favourably to governments taking equity stakes in them and underwriting all interbank lending, but even then the question remains over what to do about the myriad other institutions exposed heavily to the crisis – investors, governments, pension fund managers, and so on. To illustrate: a mini crisis within a crisis began in the UK yesterday when local governments revealed that hundreds of millions of their pounds were currently invested in Icelandic banks, which had now been frozen by their government; and the UK government responded by freezing Icelandic assets in Britain.

Indeed, in the case of Iceland, the country is effectively bankrupt. So we know it’s possible that the problem is simply too big for government to solve. In fact, we know for certain that it's too big for any single government to solve.

If ever there was a sign that the world needs effective multilateral institutions for economic policy, then this is it. The British government is calling for co-ordinated provisions of expanded liquidity through massive recapitalisation schemes, and this model may be followed by Germany and the US: we shall have to wait and see as announcements at the moment are vague. (The drafting and decisions goes on as we sit here.)

Nothing will become clear until after this crisis meeting in Washington tomorrow. If individual governments can’t work in harmony, the risk grows that the kinds of massive, unstable runs on currencies we’ve seen in the past week will intensify, that particularly exposed national economies will start going under, that we might see more Lehman Brothers style collapses, and that individual countries will be forced to disengage from the world economy to preserve a modicum of stability.

This is quite astonishing; certainly beyond anything I could have imagined happening in our globalised world. Panic is a bad idea; it's panic that's got us this far. But we really need some decisive leadership from our politicians right now. As Paul Krugman says, “You may think that things can’t get any worse — but they can, and if nothing is done in the next few days, they will.”

Ironically, there’s only one person who’s winning big from this mess, and that’s Barack Obama. New Pollster rankings suggest that whilst Obama’s rating (around 50-51) have remained stable all week, McCain’s are continuing to slide. Who would have thought that at this stage that Ohio, Wisconsin, Michigan, and Minnesota would be safely on the Democrat side, that Florida polls would be suggesting a six point margin to Obama (all those dodgy savings and pensions held by retirees are making themselves felt), and that not only Virginia, but West Virginia and North Carolina would still be in play? If the election were held today, rather than 330 Obama could walk away with 350 or 360 seats. That's right: a black man would walk away with a couple of states in the South!

Smearing Obama by linking him to Bill Ayers might have seemed like a good idea to strategists raised by Lee Atwater and Karl Rove. First, Ayers can be called a terrorist with only a marginally ridiculous attempt to obscure the difference between the Weathermen and Al Qaeda. He’s belligerently unrepentant, by the sounds of things, and a pointy-headed academic as well. By proxy, this provides a narrow but potentially squeezable link between Obama and “terrorism” that can be reinforced by subtle efforts at racial coding (For “Who is this Obama?” read: “Who is this strange black man in your yard?”) and repeating his full name, Barack HUSSEIN Obama. I think it still the smear has some traction in it, but only amongst people who’d be voting John Birch if they could. And the danger with appealing only to the crazies is that moderate Republicans stay home (as happened with Goldwater-Johnson in 1964).

After all, who’s really voting on foreign policy or race right now? And the only attacks the Republicans can launch on the economy are (1) that he’s going to raise taxes on you (only true for the very wealthy, who don't seem very popular right now); (2) he doesn’t care about balancing the budget (nor does McCain); and (3) he has some dodgy donors (McCain’s own financiers are hardly whiter than white). Who cares about any of these when we're faced with the potential collapse of the entire banking system?

So things look dark for us all, whilst Obama finds he’s got money to burn. His campaign is reportedly buying up half hour blocks of time from major networks in the last few days before the election. Indeed, one of the many unprecedented stories of this campaign has been the incredible discrepancy of spending levels operating between the two campaigns, the amazing success Obama has had in building a mass financial base, and how this has forced McCain to dilute his resources in states that he didn’t think he’d be competing in and reduce his profile in places he'd originally wanted to take from the Democrats.

So it looks like at least one person doesn't have any problems with liquidity.

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Spend spend spend!

Robert Reich says in the New York Times that it's wrong to criticise the candidates for not talking about scrapping their spending plans in the light of the financial crisis. The situation is not like 1993, he says, when Clinton was forced to cut back his plans drastically to address the painful deficit left to him by Presidents Reagan and Bush. In 1993, the US was emerging from recession and therefore under inflationary pressures, whilst today the world is entering a recession, if not depression. Also, he says, the fact that the bailout bill will push the annual deficit to more than six percent of GDP is not a problem as these are investments whose value will be recouped over time.

Some good thoughts worth thinking about. But it's also worth noting that - if memory serves me - Reich, as Clinton's Secretary of Labor, was one of the cabinet most deeply opposed to Clinton's decision to cut spending back in 1993. Once again, it turns out that in times of crisis people tend to recommend the government does exactly what they've been calling for all along.

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More reflections on Debate 2.0

Most of the reactions to the debate since my post yesterday seem broadly in line with it. Apart from committed Republicans, most people also seem to think that Obama won, but on style, and that he is the one that seems to represent the best chance for getting America out of its economic mess. What seems particularly clear from the blog world, though, is how bored most people seemed to have been by debate 2.0.

One of the interesting things about having a series of debates rather than just one is that you quickly start to realise quite how intensely repetitive the process of political campaigning must be. Without an insatiable desire for power, it's hard to see how anybody could keep up these gruelling schedules for more than a few weeks, let alone the year and a half that Obama's been on the trail (or eight years for McCain, on and off!). For the rest of us, with lives to lead, we tend not to follow the day to day activities, and so miss the fact that each candidate is trotting out the same lines, same jokes, same smears, subtly modified for regional bias, in place after place after place.

So come the second debate, when the core audience realises that they've heard most of it before, a dose of reality sinks in. The unfortunate truth is that a sensible candidate will try to make as few concrete commitments during the election process as they can and yet still win, and the best way to do that is to perfect high-sounding but largely empty lines that will get repeated across the nation. This delivers them the Oval Office but with the fewest constraints on their actions when they get there. Instead of detailed policy commitments, we get bland rhetoric, fitful allegations about character and associations, and microscopic pundit discussions about handshakes.

As a result, when we look back on this election season, only a couple of events will emerge as historically significant. First, Obama's decision to exclude Hillary from the ticket. This both frees his administration from potentially the greatest internal constraint it could have had, and opens up the Democratic party to future political divisions which could be exploited by a Republican candidate capable of running for the centre. The second was Palin's nomination. Whilst she's been a bit of a disaster for this campaign, she must still have a future once she gets some real seasoning in Washington. With the Republican party so apparently empty of new talent, I'd be very surprised not to see her emerge as an influential player in the Christian right wing of the party during the Obama presidency. Third and of course most important, the backstory of the financial crisis and Bush's descent into oblivion. The rest of the noise will probably be muffled almost as soon as the election is done with.

Though it's hard to see how it could be otherwise, it's no wonder then that the public is disillusioned with electioneering. One of the biggest differences with the US system from most others, of course, is that the nation is effectively in a perpetual election, so there's no chance for people to forget about how repetitive and self-serving most politicians are. There's a lot to be said for the primary process, but it doesn't half draw out the whole thing. I suppose the really interesting stuff of the past year has been the day-to-day grassroots activity, where committed workers on both sides have been setting up field offices, registering real and imagined voters, push-polling, securing contributions and doing backroom deals with influential state and municipal politicians and powerful individuals and groups. Little of this gets reported during the campaign itself, but in the longer term it has far more significance for the outcome of the election and the path of the next administration. It's the difference between the discussions amongst the generals in their campaign tent, and the blood and guts of the front line.

Meanwhile, McCain's precipitous decline over the past month seems to have bottomed out. With hindsight, this may turn out to show that some of the recent negative advertising is shoring up his political base. (Some people seem to have criticised McCain for not following through and talking about Jeremiah Wright, Tony Rezko and Bill Ayers during the debate, but the essence of smearing has always been deniability. Why dirty your hands when you can let others do it for you?) But it would still be remarkable, an achievement worthy of Lee Atwater, if these smears could eliminate Obama's lead now.

So with the election effectively over, barring an astonishing political development, it seems a shame that we still have to put up with three more weeks of campaigning, another debate likely to repeat the same old stuff, another few months of lame duck presidency, and nothing but speculation over potential cabinet picks to keep political obsessives interested. Maybe I've become a victim of this generation's chronic attention span problems, but can't we just get on with it...?

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The first meaningful debate this season?

It'll be interesting to see over the rest of today what the pundits and reporters and bloggers and public at large make of last night's debate, but for my two cents I consider it to have been more significant than either Palin-Biden (which was important only because both candidates managed not to slip up) or the first Obama-McCain debate (neutered by being more or less fought to a draw).

Last night, in McCain's supposedly strongest format, the town hall debate, we saw a convincing victory for Obama. Although I think the majority of people favoured Obama in the first debate, I scored it to McCain. This time, I think the Democrat won: significantly on the economy and fought to a tie on foreign politics.

Of course, none of this was on the basis of policy. As much as they try to hide it, there are now virtually no real differences on foreign affairs between the two candidates. Both want a managed drawdown of troops in Iraq and renewed emphasis on Afghanistan. Both will conduct low-level diplomacy with Iran. Both want to renew America's standing in the world, but don't suggest any way that the country can pay for it. There are clearer differences in terms of domestic economic issues, but neither side has a platform which will hold up to the straightened economic climate they'll be governing in. McCain's proposed tax breaks on entitlement programmes and attempts to rebalance the housing market and deal with foreclosures are no more or less impressive (and no more or less concrete) than Obama's reasonable-sounding but still empty statements on benefit reform.

Naturally, both are playing heavily to American nationalism, though it stands out more when Obama calls Russia's actions in Georgia 'evil', proposes to apply the Bush Doctrine in Pakistan, and supports offshore drilling and clean coal technology. Obama has provided no breathing space between the two candidates that will allow the Republicans to deploy what was supposed to be their central campaign message: country first (i.e. the opponent is un-American). Not for the first time, the campaign has come to resemble the Kennedy-Nixon debates in 1960, when the Democrats took a more belligerent line on foreign policy, undermining Nixon's perceived core strength. (That campaign is widely said to have hemmed Kennedy into following through with Eisenhower's plan at the Bay of Pigs. Obama-mad foreigners would therefore do well not to assume that an Obama presidency guarantees a fundamental change in the way American power is applied in the world.)

Not policies, then. The reason Obama won so clearly was entirely down to demeanour. From the outset, the image of a crabby McCain, angry at his upstart opponent and resentful that he has been pushed into negative politics, was reinforced. His attempts to emphasise his bipartisan record rang false when couched within cheap barbs at his opponent's expense, whilst Obama's partisanship was delivered in pleasant, passive and presidential tones. McCain stomped around the stage like an angry dwarf, trying to get reactions from an audience with handshakes and terrible jokes when the audience was specifically instructed not to respond. Meanwhile, Obama acted like a Roman Senator, addressing the questioner and the crowd, speaking loftily yet directly, and getting away with massively overrunning each of his allotted two minutes (despite Brokaw's blustering). He caught the public sense of concern - talking specifics about gas prices and insurance premiums - and presented a sense that he would do 1, 2, 3 things to rectify the problems in the economy. This mode of address exuded empathy, yet also showed a firm hand on the tiller. McCain was bitter whilst Obama was calm. In Middle Earth terms, Obama was Legolas, McCain Gimli.

The moment that immediately summed up the difference in body language and demeanour and seems to have been picked up equally quickly by the few pundits I've read so far, was the "that one" comment. It was a low form of expression that McCain tried to deliver in jest, but in a silent room came across as disrespectful, condescending and bitter. It was the first moment in any of the three debates that will stay in people's mind, because it resonated with the larger narrative being constructed in the media about these two individuals: that McCain has lost his cool and Obama is the statesman.

Ironically, this time it was Obama who didn't shake hands when McCain came over and delivered a pally pat on the back to his rival at the end of the debate. In fact, it's interesting to note that Obama's two major battles, with Hillary and McCain, seem quickly to have descended into personal antipathy. Of course, in part that's down to his opponents, but it's also because Obama's sense of moral certitude and faith in his own high-mindedness. This could be a problem for Obama in government; where the essence of success is working with people that, deep down, you don't much like. But for now, no mud is sticking, Obama was focused much more on working the crowd while McCain's energy had run out and he slunk off home. The Obama campaign is feeling the wind on its back and rolls on to the next debate with a sense of gathering momentum.

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Do you think they're trying to tell us something?

An (admittedly not very scientific) Economist poll, courtesy of FP Passport. Turns out if the whole world could vote, apparently Obama would have 8,471 electoral college votes to McCain's 16. Obama win's the world; McCain gets Macedonia and Georgia.

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Bubbles and super-bubbles

Interesting article by John Cassidy in the New York Review of Books, writing about George Soros' new book, The New Paradigm for Financial Markets.

The central idea of Soros' book is what he calls 'reflexivity'. Markets are vulnerable to systemic, irrational expectations (periods of irrational ebullience or pessimism). And these irrational expectations can create their own reality. For instance, faith in the earnings potential of a company produces an accompanying climb in share prices. This allows it to leverage debt on capital markets to acquire rival companies. Those acquisitions then allow it to make more money. The faith in the company, that is, ends up becoming a reality. Until, of course, the peak of one's ability to leverage is reached and people begin to look at the fundamental earnings potential of the company in the cold light of day.

In the past years, faith in the earnings potential of mortgage-backed securities has drastically increased their value. This in turn has increased returns, and so the willingness of creditors to supply mortgages. The growth in supply naturally raises the number of potential buyers in the market. Increasing demand then pushed up house prices. 'Reflexivity', that is, has seen an optimistic belief create its own reality, pushing prices and the supply of credit far beyond reasonable levels.

So far, so familiar. But the seven hundred billion dollar question is whether the bailout stands any chance of working to deal with this crisis. The second important point in Soros' book is that this broad phenomenon of irrational ebullience in the US housing market has been paralleled by a broader, global process underway since 1989. Call it globalisation if you like, the main feature has been the incredible ability of the United States to access credit on international markets to buy goods from developing countries, especially China. Credit has fuelled rising living standards and rising consumption, which has in turn buoyed the economy. And sovereign wealth funds in foreign nations have been happy to lend the money, because they know it will be spent on commodities and goods in their own countries, producing economic growth for them. Reflexivity here formed what Soros calls a "super-bubble", far more threatening in scale than just the US housing market. As Soros points out, in the past few years the US current account deficit has been running at "more than 6 percent of GDP—a level usually associated with a developing country about to suffer a foreign exchange crisis."

This suggests that the outcome of the current financial crisis will produce some sort of major adjustment in international capital flows and therefore relative national power, not just an adjustment in US housing prices and standards of living. It stands to reason that buying everything from abroad, wasting your money on destructive warfare and producing less and less at home will lead to weakening economic influence: after all, this was the mechanic that saw the collapse of the old European empires and the rise of the United States to a world power in the first half of the twentieth century, at that time the world's biggest creditor nation. If true, this also suggest that the bailout - designed only to address the 'toxic debts' in the housing market - will not have the scale to address the economic changes catalysed by this crisis.

What seems particularly worrying is that there is little evidence from the past that such dramatic shifts come peacefully, or that the United States has a political movement capable of adapting itself to this new environment. For more than twenty years, the US has been the world's biggest debtor nation. But the basic framework of all political debate in the US has been and remains based on unchallenged assumptions that it is a unipolar hegemon, that its workers can outproduce all others, and that it will remain on the top of the heap. Instead of fighting over the reality of a United States with unchallenged military power but heavily challenged economic power, voters have fought each other over flag-burning, weekend prisoner furloughs, which church you attend, and gay marriage.

Meanwhile, arguing that the unipolar moment was squandered and that we risk entering an unstable, risky multipolar world is a sure-fire guaranteed way to achieve electoral defeat. Witness, for instance, the backlash that followed Carter's remarks about the decline of American power in the late 1970s.

None of this is to say that the United States' day is necessarily done. After all, people overestimated the risks to the Mexican peso crisis in the mid-1990s, and decisive leadership averted the problem before it grew out of control. In Soros' model, irrational expectations cut both ways - optimistic and pessimistic - and so the doomsayers can just as easily be wrong. Moreover, potential economic rivals - most importantly China - have a huge amount invested in the US recovering swiftly from this crisis, since falls in consumption directly hurt their economies.

But it does mean that the US is going to have to face up to a period of readjustment, bringing its imports and exports into some kind of balance that has been lacking for so long. To do that, prices must drop at home, which means - at root - a lower standard of living for average American citizens. And that will be very hard to bear.

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Stocks tumble worldwide

Geir Haarde, prime minister of Iceland, earlier today: "There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy."

In London today, the FTSE lost eight percent of its value, nine billion pounds, the biggest single loss for twenty years. The market in Germany fell seven percent. The Dow fell below 10,000 for the first time since 2004. In Japan, the Nikkei fell badly too.

The weekend was the eye of the storm, and now we are feeling the full force of the winds. The same false assumptions that we could avoid a fall-out from the sub-prime crisis a year ago are now damning the entire global banking system and eliminating credit from the market. Things will get much, much worse before they get better.

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Join or die

If there's any good thing that comes out of a crisis, it's that it brings the best out of people. So how bad do things have to get before our political class start getting serious?

The debate over the bailout was unedifying, but it's nothing compared to the shambles that has been the European response to date. Instead of devising a common approach to deal with the problems being faced by European banks as much as US ones, each county has been left to fend for themselves, playing games with their own citizens as well as their neighbours', and playing the blame game. Iceland is in a terrible situation due to its heavy exposure to stock investments in the US and UK. Meanwhile, Ireland and Greece have guaranteed all private savings in their national banks. Germany appears today to have done the same thing, although Angela Merkel's statement is not entirely clear. Britain has raised the threshold of its savings insurance to £50,000, and may be forced to respond to the unilateral German action. The result is that instead of generating confidence in the sector, these individual actions are accelerating the pace of panicky flows of money from one region to the next and forcing each country to up its personal guarantees in a 'reverse Dutch auction'. (Sometimes not even between countries, since transferring your money from a British to an Irish bank, for instance, means nothing more than walking down a street in London. Witness the astonishing flow of capital away from the British market in the past week.) In a crisis of confidence in the banking sector, this is hardly a good idea, and the number of wobbly banks appears only to be growing.

So the major European leaders met this weekend to work out a common solution. But did we get a 'Euro-Paulson plan' to assume toxic debts across the continent and manage them in a shared pool so as to minimise their impact on European trading? No, they performed worse than congress, and all we got we platitudinous statements. This crisis may turn out to be the most serious test of the viability of the European project to date.

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Return of the prince

Gordon Brown has had a lot of good fortune in recent weeks, as the economic crisis has forced him to take decisive action and at the same time provided real strategic problems for the conservatives. His latest coup is orchestrating the return of Peter Mandelson, the so-called Prince of Darkness and father of the notorious New Labour spin machine, to cabinet. A potentially profitable move on several levels: (i) it shows he's given up on the hope he can run government without senior figures; (ii) it ends the rumours of a potential Blairite coup against him (Blair approved Mandelson's decision to return); and (iii) Mandelson might actually get the job done (rumours are the DTI staff's delight at seeing him back might not even have been manufactured for the cameras).

Brown, of course, is a famous Americophile (far more so than Blair, ironically). So is the model for Mandelson's shocking return to be found in recent US history? The awful straits he found himself in at the start of the summer - especially the huge by-election defeat - certainly present a superficial resemblance to Clinton's disastrous performance in 1994. Like Gingrich's Contract With America, Cameron had reached the point where he was beginning to sound like he could lead policy from without (such as the New Labour adoption of the conservative proposal to raise Stamp Duty). So is Mandelson the UK's answer to Dick Morris? Certainly the howls of outrage from the left at his return sounded remarkably similar...

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The terrible tyranny of principles

Generally, it's best to avoid reading the press on Sundays, since the British weekend newspaper is a bloated, unpleasant beast. Dozens of unwanted sections (B6, ballet section; D4, turnips, and so on) mean that its major benefit comes from the workout you get carrying it home from the shop. The standard of journalism – in fact the standard in the British press generally these days – is pretty variable. A marketplace driven by the overweening business logic of News International Murdochism – that newspapers are essentially editorial machines, functioning solely to take copy from the Press Association and give it a saleable political slant – has seen thirty years of slow decline, even amongst the better papers. Investigative reporting has been shunted to the sidelines in favour of opinion pieces that are no better informed than your average blogger’s, often less perceptive or sensible, and often slower to report on the facts and discuss them in detail.

You have to wonder as well what kind of impact the histrionics of the media can have on a crisis such as this. Today’s edition of The Observer includes a twelve page section on the financial crisis, which includes a mixture of thoughtful criticism (such as a Will Hutton article arguing for a pan-European intervention analogous to the Paulson plan) and generic puff. Much of it, however, seems to be fuelled by a belief - widely spread - that this crisis marks the end of the particular phase of capitalism that began under Reagan and Thatcher, and the start of something new. Even national European leaders have been expressing the idea that this represents the supposed collapse of something called Anglo-Saxon capitalism.

Maybe so, but I’m impressed that these journalists, many of whom had no interest in economics a couple of months ago, have such access to the future that they can tell us how the world will be so different from now on. The same blanket assumptions that painted everything as rosy a few years back seem to now be fuelling a terminal apocalypticism.

The inanity of this black and white doom-mongering is perhaps best shown by another piece in same pull-out, entitled “How to Spot a Recession”. This informs us that a sharp rise in Viagra sales in the Square Mile of London shows how the crisis is emasculating city traders, that a growth in the sale of espresso machines shows how people are opting for a “DIY caffeine fix”, and that music website thefilter.com is reporting a rising interest in the music of “Arch miserabilist Morrissey”, a fitting soundtrack for all of us depressed by the credit crunch. Sorry: but can someone tell me when rising espresso machine sales and music downloads started to count as evidence of a nation plunging into misery and poverty? If the economy was booming and Viagra sales were still up, would this not have been used to show how the horrendous salaries of big city traders was being wasted in orgies of excess? This was the sort of tendentious misreading of facts that wrote into the history books the story that Wall Street bankers during the Great Depression embarked upon a vast wave of suicides, when no such thing happened.

Because the economy is going south, so the logic seems to go, every economic indicator must in some way reflect the crisis. Hair shirts for all. Underpinning this is some sort of deep human need to abstract events into fixed and immutable black and white principles when, as the wise Buddhists say, nothing is fixed or immutable. Because speculative trading has so spectacularly failed and the state needs to intervene, every former assumption we had about the world is wrong.

But this desire to talk about bland and largely meaningless abstractions rather than what is actually happening and what we can do about it, and to assess everything in binary terms, is exactly what got us into this mess in the first place. The foreign policy adventurism that generated the oil spike (and presumably helped collapse the housing bubble) was driven by the current President’s statements about the universal desire for “freedom”. The errors of deregulation in the financial sector, especially the Glass-Steagall repeal, were driven by equally fatuous statements that “the market” could solve any problem as long as its limitless energies were not constrained by government on our backs.

As this crisis grows more damaging, we run the risk of throwing the baby out with the bathwater by buying into principles that are at 180 degrees to the foolish excesses of the era of Gordon Gekko. We run the risk of seeing one utopian construct - faith in markets - being replaced by another: faith in the state.

As well as personal crimes which should be punished, we clearly face systemic problems which need to be addressed. At the centre of them is the precise way in which trading operates within our financial system and our dangerous exposure to the centralised decisions of a very small number of ultra-rich individuals. But I'm not sure it helps to talk about these problems in simplistic terms of “government” versus “market”, “regulation” versus “deregulation”, and so on, except to show that the old-fashioned market mantras were naive or cynical. The left has spent a generation attacking the right wing for this kind of deceptive abstraction, but it is certainly no less susceptible to it.

For instance, “deregulation” is not exactly the enemy. The problem was the crudely self-interested way in which a few key sectors were deregulated to the benefit of special interest groups – high finance being chief among them. Increasing the amount of regulation in the telecoms sector or airlines is not going to help the economy recover, and increasing the authority of the state across the board could lead to its unwanted involvement in areas of your life that have no bearing whatsoever on the economic context. Similarly, deficit spending is not necessarily the problem or the solution: it depends whether you spend the money on fruitful, constructive enterprises, or absurd, wasteful, destructive things, and it depends on the impact of that spending on inflation and other issues. And “the state” is not the solution any more than it was the problem during the last twenty years: sometimes state action works well, when the market does not operate effectively to preserve a perceived sense of public good; sometimes it doesn’t, often because it, too, is made up people who can err or be tempted like the rest of us. We live in a mixed economy, and that's where we should stay. The debate should be over specific policies, not fundamentals.

I suppose the reason why the news media seem so particularly vulnerable to this is because of their attempt to segment the market and keep feeding their audiences information they think they want to hear. But now more than ever, we need intelligent, thoughtful, engaged, and perceptive reporters, who are willing to look at the details and how they work. Join the res publica, the world of civic minded people trying to better their society, and raise the standard of debate.

If, as I suspect may be the case, it turns out to be impossible to free yourself from all fixed and tyrannical principles, the best of our public servants would do well to temper their beliefs with the Rooseveltian method: pragmatism. Try and see what works in each situation and keep their minds open, question assumptions rather than trying to adduce generic principles about “the way the world is” that will only create more problems for us to fix in the future.

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All you can eat

It had become clear by the middle of the week that the bailout bill would be passed and on the basis of the 'All You Can Eat' approach to writing legislation that dominates contemporary congressional wrangling. Instead of modifying the bill substantially to improve its contents and particularly to include a reformist component, the bill was purchased, more or less state by state, to the tune of more than a hundred billion dollars.

Unlike the election, though, this story is far from over. The bill is clearly likely to have some positive consequences. First, it will produce an immediate bounce in the stock markets, and presumably reassure many investors and even small depositors who otherwise could have withdrawn their assets and precipitated a bank run. There are plenty of well-secured banks out there that are going concerns. The decision to increase coverage of savings will also provide much needed security. And it may be that buying up these toxic assets will allow banks to draw a line between the failed housing market and their other financial activities, allow them to begin using their reserves again, and lower the inter-bank lending rate.

But that's very much the upside. Pessimists point out that the purchase of these assets may not fully deal with the contagion, and instability and mistrust in the market could easily persist. At the same time, the bailout creates a question of terrible moral hazard, rewarding those banks who were most irresponsible in their business models and leaving the rest to deal with the market-wide crisis on their own. (Here in the UK, the two major banks that the government has intervened to save - Northern Rock and Bradford and Bingley - were precisely marked out because of their indulgence in highly risky lending practices, but at least we took them into national ownership as the price for their foolishness.) And in the worst-case scenario, a run on the banking sector might even happen anyway.

Whichever of these scenarios plays out, or whatever point in between the two, a recession seems inevitable as US purchasing power and the standard of living readjust to reflect the fundamental realities of the new world economy and Americans start to try to pay off the debt they have accrued, either through inflation, spending cuts or tax hikes (or all three). In all likelihood, the housing sector will remain in a terrible state for years to come. And this will have knock-on effects for consumer spending, and therefore manufacturing output, and therefore jobs. The need to address the problems of negative equity, housing defaults, devalued pension plans, unemployment, and bankruptcy will persist; if anything, in fact, they'll grow as the financial calamity feeds through to the real economy.

When Obama walks into the White House next year, he will find that the job of rebuilding the economy is only beginning. One hopes that he will approach it with the sensitivity that has dominated his approach to the campaign, but with greater intellectual boldness than has been shown during the bailout negotiations. If he doesn't, a more radical populist alternative could very easily emerge to challenge his leadership.

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"Ok, I'm calling it. Time of death: 2.45am."

It turns out that if your expectations are low enough, anything can be a good performance. After two weeks of attacking Sarah Palin as only marginally higher up the evolutionary scale than a wombat, certain conservatives (who shall remain unnamed) were delighted to discover in the debate last night that she is fairly likeable, can make a point about one in ten times, and can remember the names of several important people and countries (just about ... we'll overlook the whole McClellan / McKiernan thing as a slip of the tongue). And, gee, who cares if she's not especially familiar with the constitutional function of the job she's applying for. Surely that old document is just another one of those things that the Washington insiders worry about... and they're gonna have ta think again about that one when the mavericks ride inta town!

If this had not been the most maligned vice presidential candidate in history (even including Dan 'Potatoe' Quayle), if we are to hold the debate to any kind of standards above and beyond those established by a decade of reality TV, then this has to be put down as a rinsing by Biden. Not only did the format favour him - forcing him to curtail his comments to the briefest bullet points, in which his long experience came to the fore but his self-indulgence was restrained - but he turned on the toothy charm: his enormous, expensive denture work glinting brightly in the stage lighting whenever Palin tried to goad him into petulance. Biden was angry at times, but he wisely directed it at Bush-Cheney rather than his rival on the podium. And when he talked about his own family and his personal loss, he resonated a genuine humanity that the supposedly folksy and down-to-earth Palin's obviously pre-rehearsed remarks about her and Todd and her happy family failed to generate.

Palin, meanwhile, was the undergraduate who hoped that a late night of coffee and cramming for the end of term exam would cover her for not doing enough work for the whole of the previous year. BS detectors were overloaded within just a couple of questions. Like some kind of demented Google machine, she managed to come up with relevant keywords - Wasilla, maverick, energy independence, freedom - but rarely strung them together in an intelligible order. At only one point, her little jibe about lame jokes, did any sense of natural smarts come through. I feel sorry for her in a way, because she's just not up to the job. But I suppose it's her own fault for telling the public that she had talent to be an American Idol.

It's hard to believe that most people, even those favourably disposed towards her and desperate to see her rescue her struggling political career, could not have been befuddled and bemused by her performance. Rearrange the words and perhaps a meaningful sentence might have come out of it, but it was all far too much for me at 3am to decipher.

Ladies and gentlemen, the emperor has no clothes. McCain's campaign is not just finished in Michigan. The Republican tank is empty. The fun and games have concluded. This election is over.

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Pork and penury

Thanks to good old Wikipedia, I am now able to report the additional components of the Emergency Economic Stabilization Act which presumably helped its safe passage through the Senate following its far more troubled defeat in the House on Monday. These include credit and tax extensions for the following items (I quote):

• "Certain wooden arrows designed for use by children" (Sec 503)
• Wool Research (Sec. 325)
• Film and Television Productions (Sec. 502)
• Litigants in the 1989 Exxon-Valdez oil spill (Sec. 504)
• Virgin Island and Puerto Rican Rum (Section 308)
• American Samoa (Sec. 309)
• Mine Rescue Teams (Sec. 310)
• Mine Safety Equipment (Sec. 311)
• Domestic Production Activities in Puerto Rico (Sec. 312)
• Indian Tribes (Sec. 314, 315)
• Railroads (Sec. 316)
• Auto Racing Tracks (317)
• District of Columbia (Sec. 322)

Good to see that Senator McCain, who supported the bill, has already begun his ruthless fight against the earmarks!

Seriously, though, it appears that the bill will return to the House and will go through this time. So what has actually changed to make its passage so much more likely at the end of the week than it was at the start? The first bill promised $700 billion (an effective rise in the annual budget by a quarter), to be spent - at the Secretary of the Treasury’s complete and unverifiable discretion - buying mortgage-backed securities from major banks and investment houses. No equity is to be received in exchange for the money, and only marginal constraints will be imposed on executive pay (specifically banning golden parachutes and little else). The Senate bill was exactly the same, except it was merged with a stalled Democratic tax bill from last year, giving credits amounting to another hundred billion dollars for commendable and not-so-commendable initiatives ranging from housing assistance to the poorest and tax relief for alternative energy efforts, to the aforementioned wooden arrows.

Now may not be the time to talk about budget balancing, but who can honestly believe that the way to deal with the worst financial crisis in eighty years is to throw out all sense of proportion? Even the most committed Keynesian has to be concerned by the likely impact on the real economy of such a drastic growth in the national deficit, taking the national debt to more than $10 trillion for the first time in history. Either these senators aren’t serious when they talk about the scale of the danger the economy faces, or they’re playing dangerous games with a vital measure.

But more important than the pork, nothing in the bill seems to be concerned about making sure this doesn’t happen again. In fact, if we emerge with nothing other than this bill and at the same time a more consolidated financial marketplace, the risk is likely to be even greater in the future.

The difference between the passage in the Senate and the failure in the House is therefore based on two things, neither of which have anything to do with its actual contents: the fact that only a third of the Senate are being elected this November, and the fact that several stock exchanges witnessed their largest single fall in history on Monday.

Instead of demanding extra money for pet projects, senators could have insisted on reforms that made the bailout bill better: clauses that limited taxpayer liability; that provided opportunities for the government to take the cost of the bill back from banks at a future date if the value of the mortgage-backed securities turns out to be incorrectly calculated; that offer close, bipartisan oversight over the Treasury’s activities to prevent future corrupt practices; and most of all measures that limit financial institutions’ ability to engineer financial bubbles for personal profit in the future. I’m no expert, but surely at the root of this problem is the performance-related pay which encourages traders to take dumb risks with other peoples’ money?

It may be that some of these measures come in the version adopted in the House, as the price for getting the bill past disgruntled Representatives, but at the moment it looks like the stock market crash on Monday has been enough to quieten the American public, and in turn enough for a dozen or so congresspeople to change their vote. I want to see a bill passed as much as the next person. But we nevertheless run the risk of seeing a measure passed that pays the price of the crisis without learning its lessons.

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