Better than standing still, but the rot runs deep

As we head into the new year, there's a lot of anxiety over where the economy is headed. According to most economists, Canada is probably facing only a mild recession, with a recovery possibly beginning within six months. Historically, bull markets after recessions lead the actual economic recovery by roughly that length of time. Investors speculate on future economic performance, not what has already happened. And the markets have indeed been optimistic over the past week or so.

This article is most likely right that while 2009 will be a positive year, we shouldn't expect a boom right away. This, I think, is the key point:

But even a modest improvement in the economy, which has been in recession since last December, could help stocks extend their recent run.

"If you're standing still, walking is a pickup of speed," said Alan Levenson, chief economist at T. Rowe Price Associates Inc.

Also, this:

In addition, some analysts believe the market will improve because so many investors have pulled out, leaving little room for more selling.

"Given the nasty carnage how much further risk is there?" said David Darst, chief investment strategist for Morgan Stanley's global wealth management group.

It's going to take a little longer for the credit markets to recover, with the banks still in an extremely cautious state after being burned so badly in the crisis of 2008.

And it's important to remember that the US is not out of the woods yet. They still face some very serious problems, new administration or not. That $11 trillion in national debt isn't going away just because the new President has a (D) next to his name. Nor are GM and Ford going to suddenly become competitive simply because the government threw them a few billion dollars to keep them from drowning. Nor is an economy based on people borrowing money to buy shit from China while they struggle to pay for their health insurance and ever more expensive gasoline ever going to be viable in the long run. A lot of things need to change for America's economy to be healthy again, but one of the most immediate problems is a simple lack of revenues.

Bush's tax cuts and resultant deficits have left America's government starved of cash, forced to borrow record amounts of money in order to keep their economy afloat and avoid a longer term depression. The conservative mantra of tax cuts, tax cuts, and more tax cuts was sold on the idea that they were necessary for the health of the economy. Yet the government kept spending money and the economy crashed anyway. Now that it is necessary for the government to spend money, all they can do is borrow imaginary money that will be paid back through some combination of fairy dust, heavenly manna, and magic jelly beans.

The challenge for the new US administration is going to be stimulating the economy without bankrupting the country or resorting to devaluation of the currency. Obama will need to cut some expenditures (military pork spending, Iraq) while increasing others (public works, health care, alternative energy). It's a fine line to walk, and it isn't going to be easy.

The "Bush boom"

The National Bureau of Economic Research (NBER), today:

The National Bureau of Economic Research said Monday that the U.S. has been in a
recession since December 2007, making official what most Americans have already
believed about the state of the economy .

The NBER is a private group of
leading economists charged with dating the start and end of economic downturns.
It typically takes a long time after the start of a recession to declare its
start because of the need to look at final readings of various economic
measures.

Larry Kudlow, in December 2007 :

There is no recession. Despite all the doom and gloom from the economic
pessimistas, the resilient U.S economy continues moving ahead—quarter after
quarter, year after year—defying dire forecasts and delivering positive growth.
In fact, we are about to enter the seventh consecutive year of the Bush boom.

The pessimistas are a persistent bunch. In 2006, they were certain a
recession was just around the corner. They were wrong. Instead, the economy
posted two consecutive quarters of near or above four-percent growth.

Earlier today, a doom and gloom economic forecast from Macro Economic
Advisors was released predicting zero percent growth in the fourth quarter. This
report is off by at least two percentage points. These guys are going to wind up
with egg on their faces.

I've picked on Larry before, but why anyone pays this idiot to spread his idiocy is beyond me. The only thing he's good at is being consistently hilariously wrong. Kind of like Bill Kristol.

The need for stimulus

I may have been a bit premature in announcing the end of our political quagmire, as the Tory capitulation on public funding subsidies will not appease the opposition. Obviously, that cannot be seen as the fundamental issue here, otherwise Harper will use it as a bludgeon later on, and be the stronger for it. Instead, the Liberals and NDP will press forward with coalition talks and keep focusing on the economy, as this is probably their best chance yet to take Harper down.

And what about the economy? Is the government really guilty of negligence in the face of crisis?

Before the election, I defended Harper on the economy, pointing out that much of Canada's troubles are completely beyond our control. We cannot help but be affected by a total meltdown south of the border; Trudeau knew what he was talking about when he made his famous comment about sleeping with the elephant.

But this "economic update" from Jim Flaherty was downright bizarre.

At a time when countries around the world are working to fight a global recession by stimulating economic activity through increased government spending, Prime Minister Stephen Harper's Tory government actually plans to put the squeeze on Canada's economy.

In its all-out effort to avoid running a deficit, Flaherty has promised that federal spending will be slashed by $5 billion in the fiscal year that begins next April, when economic conditions probably will be at their worst. Another $1 billion in windfall income will be banked, not recycled into economic stimulus, for a total squeeze of $6 billion.

"That's precisely the thing not to do," said Carlos Leitao, chief economist at Laurentian Bank Securities. Rather than a balanced budget, he believes, what we need right now is new spending of $15 billion or more to do things like bail out provincial budgets and boost benefits to the unemployed. This would translate into a deficit of about the same size, but it would prevent economic damage worth far more.

As a (possibly severe) recession looms, the government's focus appears to be on cutting spending and keeping the budget balanced. I'm as big a deficit hawk as anyone, but even I recognize the need for stimulus. Now is not the time to worry about balanced budgets. Now is the time to boost aggregate demand by injecting money into the economy. Canada is lucky to be in a position to do this with very little negative fallout, due to our debt reduction policies of the last decade.

I'm frankly a little puzzled by Harper's strategy here. I understand the caution on economic stimulus packages, but I don't understand why Flaherty would choose to focus on balanced budgets at a time of uncertainty and near panic over the economy.

No good options for Detroit

I am of the opinion that while the executives at GM, Ford and Chrysler are total jackasses and short-sighted morons, it's quite necessary that some type of bailout take place.

In more normal times, the answer may be different. Chapter 11 bankruptcy would be a credible option. Unfortunately, these are not normal times. Chapter 11 is simply not a realistic option right now. GM is literally on its last legs. Who would run the company while things were being settled in court, and how would they keep it running with no cash, no credit, and absolutely no one willing to lend them the billions of dollars necessary to keep making and selling cars? Here's Jonathan Cohn , making this precise point:

One reason for the casual support for letting GM fail is the assumption that bankruptcy would be no big deal: As USA Today editorialized recently, "Bankruptcy need not mean that the company disappears." But, while it's worked out that way for the airlines, among others, it's unlikely a GM business failure would play out in the same fashion. In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

And for that matter, who would buy a car from a bankrupt manufacturer? What about warranty/service coverage? It's not like buying an airline ticket, which is a one-time thing; you use it to get from one place to another, and that's it. But a car is a long term investment. You don't want the maker of your new Cadillac to go out of business next week.

What would happen to the Big 3 instead is Chapter 7: total liquidation, and millions of people suddenly without jobs, health insurance, or pensions. Millions of people newly dependent on social assistance from the government, which would itself cost billions and billions of dollars. The repercussions for an already sinking economy would be devastating. Stock markets went into another tailspin today, partly because of uncertainty on this very issue. If these companies actually went under, it just might be what turns this nasty recession into a longer-term depression.

As unpalatable as it is, I think a bailout is the only option, provided that it has serious strings attached, as President-elect Obama seems to be in favor of. If American taxpayers are going to bail out these failing companies, Detroit must be given some real shock treatment, forcing them to start making cars for the 21st century. Take it or leave it.

So what's going on with that bailout?

Turns out that Paulson is essentially making it up as he goes:

The Treasury Department on Wednesday officially abandoned the original strategy behind its $700 billion effort to rescue the financial system, as administration officials acknowledged that banks and financial institutions were as unwilling as ever to lend to consumers.

But with a little more than two months left before President Bush leaves office, Treasury Secretary Henry M. Paulson Jr. is hoping to put in place a major new lending program that would be run by the Federal Reserve and aimed at unlocking the frozen consumer credit market.

The program, still in the planning stages, would for the first time use bailout funds specifically to help consumers instead of banks, savings and loans and Wall Street firms.

Treasury officials said they hoped to invest about $50 billion from the bailout fund into the new loan facility, with the aim of helping companies that issue credit cards, make student loans and finance car purchases. [...]

“Illiquid assets looked like the way to go,” Mr. Paulson told reporters at a news conference on Wednesday. But as economic and financial conditions declined so rapidly, he said, that he had to change gears. “I will never apologize for changing the approach and the strategy when the facts change,” he said.

The change in strategy has had only limited impact on the frozen credit markets. The biggest improvement has been in the willingness of banks to lend to each other, a change that largely caused by the willingness of both the United States and European governments to guarantee bank deposits and interbank loans.

But the market for commercial debt backed by consumer and business loans has remained at a near standstill since Lehman Brothers, one of Wall Street’s leading investment banks, collapsed in September.

So far, the banks are using the bailout money to basically cover their own losses, not make new loans. Which is good for the banks, but not so good for keeping the economy going. There's really not much anyone can do about it, since there are fewer creditworthy borrowers in November than there were in August, and most of those that can borrow are already deep in the hole, and shouldn't be taking on more debt. Here's Tim Luy:

With consumers already overextended, the room for rapid credit growth is simply limited. Moreover, with economic activity deteriorating and unemployment rising, the number of creditworthy borrowers is falling. This comes on top of the deleveraging already underway in the financial sector. The Fed and Treasury are able to do little but prevent the banking system from outright collapse.

Simply put, policies focused on housing and consumer spending are a black hole for spending – this summer’s short-lived stimulus package is a case in point. Policymakers need to come clean with the American public: Future patterns of growth will simply be less dependent on consumer spending. We are entering a period of structural adjustment, and it will be painful. We spent decades pretending that the relentless focus on producing nontradable goods and relying on a ballooning current account deficit to hide our lack of productive capacity was an appropriate policy approach. But ultimately, those policies have failed us, with stagnant income growth for median income families and the deepest recession since the 1980’s (or even worse).

As far as the changes to the Paulson plan go, it's something of a vindication to those who argued against the bailout in the first place, preferring instead that the money go to consumers instead, or have the Treasury buy up equity and inject capital directly into the system rather than buying up these toxic securities and assets backed by bad mortgages and hoping for the best.

After the stock market crash of 1929, the Hoover administration tried a variety of different responses as well, most of which just made the situation worse, ranging from inaction early on to a misguided attempt to boost domestic production by raising tarrifs on imported goods (other countries retaliated by imposing tariffs as well, drastically depressing international trade).

One would hope that the people in charge have learned a few things since then, but it's hard to say whether that's true at this point.

Wednesday night rambling

This clip is interesting for two reasons.



First, the part 1:15 in, where Lauer is talking to one of Palin's daughters, and she says that yes, she missed a lot of school, and that "it's really hard". Gotta feel bad for the little ones, even if their mother is a power-hungry narcissist who doesn't realize that her 15 minutes are up.

Second, Bush's awkward silence starting around 1:39 where he jokes about looking forward to the lame duck session.

Bush sounded like a defeated man, not just yesterday, but today as well, with him actually admitting to various mistakes he has made during his presidency, something he was previously loathe to do.

Fox news' Shep Smith definitely has his moments. As does Chris Matthews.

And it looks like Alaskan GOP Senator convicted felon Ted Stevens is in trouble. The latest count, including thousands of absentee ballots, has him down by precisely three votes. Still more votes to count, but Alaska might not have let everyone down after all.

Finally, as the stock markets keep crashing on the heels of more bad economic news, and modifications to the Bailout plan, the fact that anyone even needs to ask why rich Americans voted Democratic this year is pretty depressing.

Here's a newsflash, Daniel Gross, taxes aren't everything. Sure, they are for the perennial tax-whiners. But smart rich people know better. A marginal tax rate of 36% is marginally better than a marginal tax rate of 39%. But what good is that if your stock portfolio has lost 50% of its value? For all the gnashing of teeth over Bush's tax cuts for the rich, the stock markets are lower now than they were eight years ago.

And this isn't just some historical aberration. Over the last few decades, rates of return on the stock market have been consistently higher during Democratic presidencies. If you invested $10,000 dollars in the S&P index in 1929, this is the difference:



(image from here)

Rather than obsessing over marginal differences in marginal tax rates, pundits and journalists need only to look at the above picture to understand why the rich voted for Obama despite his desire to raise their taxes.

Give us some more money please

The Big 3 automakers are at it again, asking for more money from the US government. They've already been promised $25 billion (Obama proposes doubling it to $50 billion), earmarked to help them restructure and retool for the future. But insiders say that a quicker injection of funds is necessary just to help them meet current expenses and payroll.

It's difficult to understate just how dire the automakers' situation is. At a time of prohibitively expensive gasoline, their products are hopelessly obsolete compared to the competition. While Japanese and European manufacturers focused on capturing the compact and sedan markets, Ford, GM, and Chrysler preferred to focus on the gas-guzzling SUV and pickup truck market. And with the Bush administration opposed to any meaningful increase in CAFE fuel mileage standards, they were free to do so, thinking only for the short term, utterly ignorant of the coming crisis (last year the Bush administration finally signed a bill into law that increased standards, but too late to save the automakers from themselves).

If there was ever a business that deserved to fail, this is it. Here's John Cole:

This is not a damned surprise. They had years to re-tool and build vehicles that got better gas mileage, were more efficient, and used new technology, and instead they spent all their time building behemoths and paying lobbyists to fight higher CAFE standards. It was inevitable that once there was a gas crunch, they would get hammered. Why are we bailing out people who engaged in what was obviously bad business practices for years. Their focus on SUV’s was the business equivalent of malpractice, yet they did it anyway because that was where the quick bucks were.

The problem is that if they go under, they'll take millions of jobs with them. And that is certainly not what the US (or Canadian) economy needs right now.

Obama has smartly proposed tying federal aid to increased fuel efficiency standards. Tougher regulation seems to me to be the only way to go, as common sense has apparently been insufficient.

How Republicans exploit the middle class

Ed from ginandtacos has an excellent post up about Joe the Plumber:

Joe lives near Toledo, Ohio. The most charitable way I can describe that city is “post-industrial shithole.” The city’s unemployment rate is 9% as measured with the Bureau of Labor Statistics’ woefully understated methodology. There are many thousands of foreclosed homes within the city limits at this moment; Toledo is in the top ten large cities nationwide for foreclosures. Its population has fallen from 384,000 in 1970 to 285,000 today. Its violent crime rate is fully double the national average and rising. Based on nine common economic indicators, Lucas County (home of Toledo) ranks 87th out of 88 counties in Ohio for economic performance between 2001-2008. Annual bankruptcy filings have increased 23% in the same time period, while the percentage of residents in poverty has increased from 12% to a third-world-like 17%. Nearly 8000 manufacturing jobs have been eliminated in just six years (2001-2007). Toledo proper gained national attention for its unprecedented 7.5% drop in median home price in just 12 months. Real incomes are falling. In short, Toledo is in what its hometown newspaper calls a “downward spiral.” Every vital sign is flatlining and the city is entering what is likely a terminal economic torpor.

None of this matters to Joe the Plumber, of course. He lies awake at night worrying about taxes. That he lives in a picture-perfect example of the kinds of cities that right-wing economic policies have rendered moribund is irrelevant. What keeps Joe on edge and bubbling with entitled white male rage is Barack Hussein Tax-&-Spend Obama’s dastardly, amoral plan to raise taxes.

Click the link for the whole thing.

I think this is an exquisite illustration of the way Republicans get people like Joe to vote for them. While the town he lives in has been absolutely leveled by Bush's economic policies, what really pisses him off? Higher taxes for the rich. He's not rich, of course, but like many Republican voters, he's convinced that he will be someday.

Add in a healthy dose of white middle-class resentment, and a dollop of simple ignorance, and voila! Joe the Plumber, Republican figurehead, is born.

On the question of becoming rich, it is a cherished myth in the United States that such things "only happen in America". "Only in America" can a poor man succeed and become rich. All it takes is hard work and a little entrepreneurial spirit. The Republicans live and die on this sacred concept; and small business owners who dream of making it big consistently vote for the GOP by large margins.

Unfortunately, the data do not support this official propaganda.

In economics, there is a concept called intergenerational income mobility. Essentially, it is a measure of how likely the children of poor families are to end up with an improved economic status relative to their parents, and conversely, how likely the children of rich families are to end up with a worse economic status relative to their parents.

In other words, if the America that politicians talk about actually exists, we should find that intergenerational income mobility is high; that people succeed on their own merits, without much regard to whether they started off rich or poor.

This is not the case. Studies show that mobility is actually higher in several other industrialized countries, including Canada, Sweden, and Norway, while the US is roughly in the middle of the pack. Why is this? Gross income inequality is one reason. Those at the top control such a insanely large portion of the nation's wealth that they are unlikely to lose it absent redistributive tax policies.

In fact, recent government policies and tax cuts have only strengthened the position of wealthy Americans relative to everyone else. Meanwhile, the poor have little access to health care, little access to education, and they will now be hardest hit by the worsening economy. But in a country like Sweden, the rich are heavily taxed, while the poor have access to generous social transfers, free health care, and free post-secondary education. Is it any wonder that a poor Swede has a better chance of improving his or her economic status than a poor American?

The next crisis

(graph from here, via Obsidian Wings)

Americans are increasingly unable to cover their credit card debt. What does this mean for the economy? Well, several things:

First, with their customers increasingly defaulting on their loans and credit card debt, banks will be much more stingy in their lending. People who depend on loans to get by will have a harder go of things.

Second, consumers will inevitably scale back their spending, reducing aggregate demand and business profits, which in turn has a negative effect on employment. Unemployed people don't spend much money either, which just reinforces this downward spiral.

This is what happens when a central bank tries to avoid a recession at all costs.

Economy not doing so well? Here, have some easy credit! Borrow money and spend it on shit from China. Oh, and buy a house, and use it as leverage for even more borrowing. And in the meantime, the fat cats on Wall Street will get rich by repackaging and reselling all your debt. Everyone's happy!

...until the bill comes due. We've seen the effects; a housing bubble popped, financial institutions crumbling under the weight of bad assets, credit markets in a deep freeze, and now the impending death of the omnipotent American Consumer.

Even a broken neo-con is right sometimes

This is NYT columnist Tom Friedman on Real Time the other night:

Now, Friedman is an asshole. He was a huge cheerleader of the Iraq war, and became infamous for his Friedman Units (FUs) of roughly three to six months, after which the situation in that country would either get better or the war would be lost. This image illustrates the concept. Or more succinctly:



So anyway, he's a total douchebag.

But even douchebags are capable of being right from time to time, whatever their motivations or pretensions toward greater understanding.

This "Drill baby, drill!" nonsense is the saddest excuse for an energy policy that I've ever seen. Even Stephen Harper sees the logic in carbon markets (though he tries to avoid admitting it in public), but the American Right is intent on sticking their heads in the sand and desperately hanging on to an obsolete economy and an unsustainable lifestyle.

Offshore drilling is not going to save them from $4/gallon gas. Nor will it save the middle class. Ironically, the opposite course of action can.

Red Tory, also responding to Friedman, wonders why liberals have such a difficult time selling this simple message:

It drove me completely mental that during the last election, and leading up to it, Stéphane Dion was hopelessly incapable of creating a broader framework and context for his “Green Shift” and it therefore simply became, as described by the Conservatives, a “tax on everything.” Once again, liberals demonstrate how, in recent years at least, they consistently get outfoxed by conservatives when it comes to “framing” issues. When will they ever learn these simple lessons? Oy.

In some of the Liberal commercials they mentioned “green jobs” or something like that, but there was no substance to it other than being a pleasing expression. For the life of me, I couldn’t understand why he didn’t discuss some of the exciting new technology that’s emerging that the government could have helped to facilitate with various incentives. Most people would probably agree that Stephen Harper isn’t exactly a man of vision — except to the extent of imaging Canada as being an “energy superpower” with oil extraction programs of “Brobignagian “ proportions (yes, he actually said that). And yet, we see our manufacturing sector and industrial infrastructure gradually falling apart — whether because demand for the products being made is diminishing (much of the automotive sector… wrong vehicles at the wrong time) or because it’s simply no longer “competitive” in a low-wage global race to the bottom. What’s needed is investment to revitalize that sector of the economy focusing on technologies of the future, not trying to prop up the remains of soon-to-be legacy industries.

This is going to be a tough perception to crack. The public, by and large, associates environmentalist policies with more government spending and thus higher taxes, and also stricter regulation that may hamper economic growth. The great challenge for environmentalists over the next few years is to demonstrate that this shift toward a greener economy is not only necessary, but possibly very beneficial for our economic prospects.

"New industries and new jobs" is the message that people should take away from this. Higher taxes on gasoline are beside the point, because the ultimate goal is to make gasoline itself obsolete.

Catching up

Sorry about the lack of updates, just too much real life business to take care of.

1. I missed the first 20 minutes or so of the debate, but from what I saw, it was same old, same old. Obama gave generally better answers and was calm and collected throughout the entire thing, while McCain lied and blustered his way through with ideology, not substance, all while struggling to control his temper and hide his contempt for his rival.

The talking heads on CNN seem to think McCain did very well through the first half hour or so, but started losing his way when they got into the Ayers/ACORN stuff.

Things that made me want to yell at the TV screen:

- McCain dishonestly blaming the financial crisis on Freddie Mac and Fannie Mae (see Matt Taibbi's epic IM takedown of Byron York).

- McCain lying about ACORN and voter fraud.

- McCain lying about Obama voting to let babies die.

- McCain repeatedly stressing how important it was to make health care more affordable, even after Obama eviscerated his sham of a plan.

2. Ah, the Canadian election. I don't have much to say about it, really. It went down about how I expected. Harper made some gains, but it's still a minority government, so either he gets the support of one or more opposition parties to pass legislation, or he just makes everything a confidence vote, daring the opposition to take him down.

Clearly Harper's attacks on the cultural industry and his support of tougher measures on youth crime hurt him badly in Quebec. If it hadn't been for those two things, he might have gotten his majority, bad economic news or no.

3. The stock market took another dive today (the Dow suffered its worst percentage loss since 1987; remember, 700 points means a lot more when your starting point is 9200).

What did I say last week? I said I'm buying this week...but I might actually have to extend that to next week.

Some economists think the bottom is around a thousand points lower than the current level (that goes for both Canada and the US). They're the pessimistic economists of course, but perhaps a little pessimism is the right attitude after the massive clusterfuck that has been perpetrated on an unsuspecting populace.

One thing is for sure, smart investors (and I humbly claim to be a reasonably smart one) will be able to get a lot of value at rock-bottom prices. Even after the Great Depression, the stock market did go back up, and money invested back then has since doubled, tripled, quadrupled, or quintupled several times over. This might not be another Great Depression, but it is, at minimum, a severe market correction. And stocks are a terrific bargain right now.....just wait a few more days and see what happens.

4. Kos has a good post up about some inexplicable McCain campaign decisions. For instance, why is he still spending millions of dollars on advertisements in Iowa and Pennsylvania? Obama is ahead by double digits in both states. If McCain wants any chance of winning at all, he needs to concentrate ALL his efforts on Florida and Ohio, and pray for some game-changer that shifts the fundamentals in his favor so that states like Virginia and Colorado stay red. Iowa and Pennsylvania are the last swing states that would shift in his favor, if they can even be considered swing states at this point.

5. And just because my day would not be complete without exposing yet another lie from Sarah Palin, this here is probably her worst yet. Steve Benen explains:

I can understand Sarah Palin feeling humiliated by her Troopergate scandal. An independent investigation concluded that she violated state ethics, abused the powers of her office, and lied about it. This isn't exactly easy to spin away this kind of violation of the public trust.

It was odd, then, to hear Palin tell reporters on Saturday that she's "very very pleased to be cleared of any legal wrongdoing, any hint of any kind of unethical activity there." This was, of course, the exact opposite of reality. The Anchorage Daily News called Palin's response "an embarrassment to Alaskans and the nation." The editorial added, "Her response is either astoundingly ignorant or downright Orwellian.... Palin's response is the kind of political 'big lie' that George Orwell warned against. War is peace. Black is white. Up is down."

Naturally, then, Palin repeated the lie yesterday.

"The report that came out also was very clear in that there was no unethical or unlawful behavior on my part," Palin told a local CBS affiliate in Pittsburgh, adding, "No abuse of power there at all."

This is just madness. The report was unambiguous -- Palin "abused her power." She "violated" the "Alaska Executive Branch Ethics Act." Even Sarah Palin can read this and understand the plain meaning of basic words.

This makes Palin's breathtaking lies all the more remarkable. She said the report was "very clear" that she hadn't done anything "unethical" and there was "no abuse of power" at all. I don't think I've ever seen a politician lie so brazenly.

No? Where have you been the last two months, Steve?

....oh, I kid Steve Benen. He's been invaluable in cataloging all of this crap, and yes, this lie probably takes the cake.

That's all I got.

Loony loonie

Our dollar took a record dive today, briefly falling below 83 cents USD, but recovering to close the day at 84.69, losing about 2 and half cents, and more than 10% since last Friday.

It doesn't make much sense to me, but like everything else with our markets, the loonie is reacting to the whirlwind of bad economic news from the United States, pushing oil prices down (oil closed at $78/barrel today), and sending world currencies plummeting against the dollar as investors liquidate their shaky assets all across the globe, in favor of the relative safety of US Treasury bonds.

I say "relative" saftey because I don't have much long term confidence in the US dollar either. $10-13 trillion of debt is nothing to sneeze at. And while central bankers may currently be fretting about the possibility of deflation, currency devaluation is going to start to look awfully tempting once Social Security and Medicare become insolvent just a few years down the road.

Oh well, even if our currency is tanking, at least we're not in as bad shape as Iceland:

Iceland suspended trading on its stock exchange for two days and took control of the country's largest bank — the third to be placed under its protective umbrella — on Thursday as it grappled with a banking crisis that is threatening to engulf the entire country.

The Nordic nation's government also used sweeping new emergency powers to create a new bank that will take over the bulk of the domestic operations of another one of its collapsed banks.

The country is struggling to get a grip on the collapse of its top-heavy banking system, a situation that Prime Minister Geir H. Haarde has warned is putting Iceland at risk of "national bankruptcy."

The crisis is also causing ripples throughout Europe, where tens of thousands of people have accounts with subsidiaries of the Icelandic banks.

Holy shit.

Bottoming out

I would have more to say about the plummeting stock markets, but I'm sick, tired and grumpy, and have little energy or motivation for blogging right now. So I'll just leave you with a few informative links.

Here's something positive, Canadian banks ranked soundest in the world. (the US is ranked 40)

CIBC says that the world will avoid a global recession, and Jim Flaherty says that Canada is "well-positioned" to weather this crisis, but does anyone actually believe them?

Dean Baker says that low stock prices are actually good news for us young folks who can buy them really cheap and see them grow astronomically once the markets recover. I know I'm buying. But not until next week.

My initial reaction to McCain's latest idea to save the world was fair. It's a joke.

And poor Dion, just when he was gaining in the polls, he goes and fumbles an easy question on the economy during a CTV interview. Repeatedly. (I understand that he has a slight hearing problem, but it seems like he has trouble understanding the concept of the question, which is more than a little weird)

It's the economy, stupid

It doesn't look like Harper will get his majority:



The problem the Tories face is that they didn't anticipate the breadth of this crisis when they called the election. And so they went into it without a coherent response. Big no-no. Harper's initial reaction was to say the Canadian economy was doing fine and deny that anything needed to change, which the opposition parties leapt on.

The irony here is that Harper's policies have nothing to do with the crisis, at least as it pertains to the financial sector. Our financial sector is healthy insofar as it is shielded from the US. Which may not be too reassuring, but the problems we currently face are certainly not a result of Harper favoring US style deregulation.

That is not to say that our economy hasn't been stuttering in other ways (Ontario's economy was basically already in recession before all this hit), but I sometimes think we fail to realize just how dependent we are on the US. 90% of our trade is conducted with our southern neighbor, and that's why Ontario is suffering, not because Harper cut the GST or didn't give enough subsidies to artists.

Pre-debate roundup

1. Wow, in the past couple days, the McCain campaign has really devolved into some kind of perverse Rovian self-parody.

Yesterday, McCain gave a simply odious speech, full of lies and hypocrisy, that included thinly veiled winks at Barack Obama's "foreign" background, part of which elicited an embarassing response from the audience.

Near the end of his vitriolic speech, after McCain asked "Who is the real Barack Obama?", some guy yelled out "Terrorist!". Here's the clip:



McCain may protest that this kind of outburst had nothing to do with his speech. That he was only asking legitimate questions about Obama's plan for America. But it would be an empty defense. Starting with Palin's claims of Obama "palling around with terrorists" (without naming Bill Ayers), and continuing with McCain's mention of illegal Palestinian donations to Obama's campaign, I believe there is a subtle but obvious strategy at work here to associate Obama not only with Bill Ayers but with more contemporary terrorists.

There is no need to be explicit. Just subtley plant the seeds of doubt in voters' minds that Obama cannot be trusted to lead the country. It's pretty disgusting, and we'll no doubt see a lot more of it in the coming days.

Glenn Greenwald has more:

In the last two months of this election -- as the Bush administration winds down as the most unpopular in modern American history and the Right is on the verge of a desperately-needed collective death -- we see a perfect microcosm of what our country has been over the last eight years. The financial crisis is spreading, accelerating, and morphing across the globe in unpredictable ways. The economic anxiety levels are as high as one can recall, teetering on panic, and even the Wall St. Journal Editorial Page is acknowledging that America's days of economic dominance are over. The national debt is over a staggering $10 trillion and has doubled in the last 8 years alone. And the symbols of our nation have become gulags, the waterboard, an endless stream of bombs and occupations, and people imprisoned forever with no charges of any kind.

And as these flames engulf America's foundations, what is the Right doing -- the movement that brought us all of this through their virtually absolute control of our Government for the last eight years? They're spending all their time chattering with each other about an aging 1960s radical and giddily cheering the increasingly repellent Sarah Palin as she skips around the country in front of rambunctiously booing right-wing crowds accusing Barack Obama of palling around with The Terrorists and pointing out that he doesn't see America the way all the Normal, Good Americans do. For the last eight years, the opponents of the Right have been America-hating Terrorists and they still are.

And just now, John McCain -- speaking in New Mexico -- delivered one of the ugliest, nastiest, most invective-filled personality attacks a major candidate has ever delivered, blatantly designed to stoke raw racial resentments and depict Obama as a Manchurian candidate funded by secret Arab Terrorist sources.

2. I voted yesterday, and I felt good doing it. I can't understand why so many young people fail to show up at the polls. It takes only five minutes, and you can walk away with the knowledge that you had some say in the future of your country. Men died so that you could have this privilege. Don't miss out on it.

3. Iron Man was pretty awesome, but when I stick the Blu-ray into my PS3 the other day, I'm greeted with this loading screen. After it's stuck on this for several minutes, I start pushing buttons, and after much trial and error and growing consternation, I am finally able to get the movie to play. Whose bright idea was this? What the hell good is this internet stuff anyway? I'm just trying to watch the fucking movie.

4. This is is a very good primer on CDS, or "credit default swaps". They are basically insurance contracts for firms that purchase risky mortgage securities, but since they called them swaps instead of insurance, they didn't have to be regulated. And since they weren't regulated, the insurers were not required to hold sufficient capital to cover the risk.


Watch CBS Videos Online

Nice, huh? What a bunch of geniuses.

(h/t Balloon Juice)

Light at the end of the tunnel?

The bailout bill finally passed in Congress, and its basic structure remains the same. It will still authorize up to $700 billion that the Treasury can use to purchase troubled assets from financial firms and banks to enable them to start lending and borrowing again, which will once again get the economy rolling, or so the theory goes.

There were some extra porky provisions put in (like $100 billion worth of tax breaks, including some for companies that manufacture wooden arrows), and a popular measure to temporarily increase federal deposit insurance from $100,000 to $250,000, which should reassure people for the time being.

There are also holdovers from the earlier bill, like the incremental nature of the purchases and some ways for the government to protect itself against losses.

But what will those losses be? It's important for people to understand that this $700 billion is not just going to disappear down the rabbit hole and be written off onto the national debt. Some of it may be. Perhaps even most of it. But there is no way this is going to cost the full $700 billion (since the assets will be resold at some price), and although few people really believe this, it's even possible it will be profitable in the end, if the real estate market recovers and these mortgages actually reflect some real value again.

It may still be a lousy bill, but it's better than it could have been, and with any luck, it will stem the bleeding, and inject some much needed confidence into the financial sector.

The problem is that despite the passage of the bailout, the markets fell again yesterday. Krugman is pessimistic. It goes without saying that Nouriel Roubini is pessimistic, but this is just terrifying:

It is now clear that the US financial system - and now even the system of financing of the corporate sector - is now in cardiac arrest and at a risk of a systemic financial meltdown. I don’t use these words lightly but at this point we have reached the final 12th step of my February paper on “The Risk of a Systemic Financial Meltdown: 12 Steps to a Financial Disaster” (Step 9 or the collapse of the major broker dealers has already widely occurred).

After running through the symptoms, he says this:

This is indeed a cardiac arrest for the shadow and non-shadow banking system and for the system of financing of the corporate sector. The shutdown of financing for the corporate system is particularly scary: solvent but illiquid corporations that cannot roll over their maturing debt may now face massive defaults due to this illiquidity. And if the financing of the corporate sectors shuts down and remains shut down the risk of an economic collapse similar to the Great Depression becomes highly likely.

Many have ridiculed Roubini during the past few years as nothing but a doomsayer, but to his credit, he accurately predicted this crisis as early as 2004. Remember, there are overly optimistic economists, like the ones who wrote Dow 36,000, and then there are those like Roubini. I think there are more profits in the former than the latter. Everyone wants to hear that they're going to make millions in the stock market. No one wants to hear about the collapse around the corner.

So I've got good news and bad news...

First, the good news.

McCain: Obama Is To Blame For Bailout Failure

Desperate bluster from a small, angry man. The same man who bragged about his central effort in securing a compromise just this morning.

McCain is really on his last legs here; his stunt was a disastrous failure. The bailout may not have passed in any case, but his pretence of going to Washington to fix the mess was a complete farce.

At best, he did nothing to facilitate negotiations, and at worst, actually sabotaged them. Of course, he mostly kept his mouth shut while the grownups debated, but what he did do was inject presidential politics into a delicate situation. Then, after doing nothing to achieve compromise, he nevertheless took credit for achieving the compromise, and then on the very same day, the bill is defeated in the House by members of HIS OWN PARTY. And he has the balls to blame Obama for its failure!

I honestly don't see how McCain recovers from this. Combine today's events with the inevitable trainwreck on Thursday, and I think we're looking at 300 electoral votes minimum for Obama in November.

Isn't it time for McCain to "suspend" his campaign again?

So that's the good news: McCain, already in a deep hole, just dug it a little deeper.

But the bad news is that this is some serious shit. Largest ever one-day drop on the Dow. Same for the TSX. World markets will no doubt follow suit.

For all the ignorant crowing by some on the Left, what happened today is bad for everyone, rich and poor alike. Look, no reasonable person wants the crooks on Wall Street to be bailed out. It's a tough pill to swallow, and that's precisely what is making this politically untenable for so many incumbent Congressmen (read Nate Silver). And maybe there are better ways to do this.

But what happened today just erased more than $1 trillion worth of wealth. And Wall Street fat cats aren't the only ones suffering (in fact, they'll suffer less than most). It's people's retirement funds. It's their jobs. If nothing is done to fix this, everyone is going to feel the effects, and don't fool yourselves into thinking otherwise.

UPDATE: Ezra Klein's take on the failure of the bailout:

With leadership -- and elites -- so aggressively behind the bill, the massive defections suggest that congressmen are sensing a towering populist outrage. Like on the immigration bill, the opposition did not fear their party but their voters. The implication here is that the politics of the bailout are much more intense than most currently recognize.

The question is what comes next. The Dow has plummeted. It's lost 700 points in a single day. It's the sort of freefall that suggests the markets may well begin to lock, that the continually available credit that oils the economy may dry up, with catastrophic consequences. The pressure from the market collapse could sober some congressmen into voting for the next iteration of the bill after having extracted some quick and cosmetic changes. Few want to be judged, either by their constituents or by history, for crushing the American economy beneath their own political cowardice. Alternatively, House Democrats could construct a new strategy: Rather than looking for bipartisan agreement on a muddled bill, they could take full ownership and seek partisan agreement on aggressive bill. They could move away from the bailout model and towards outright nationalization. Only Pelosi knows if she's got the votes for that.

Above all, though, this is a failure of politics. Like with global warming, with health care, with the national debt, with immigration. It is further proof that we have a calcified political system incapable of responding to either long-term threats or short-term crises. The electoral and partisan incentives have made actual action too dangerous and rendered obstruction everyone's easy second choice. And in politics, you just about never get your first choice. And so the Republicans killed this bill. Without their cover, the Democrats couldn't save it, because politically, they couldn't take ownership of it.

Sunday night wrapup

1. Looks like my post on NDP fiscal irresponsibility was timely:

NDP platform pledges billions for child care

And billions more for First Nations. Billions for affordable housing and energy retrofitting programs. Another billion in $1000 grants for all first year university students.

Look, all this is great. But how does the NDP plan to pay for it? Apparently, by reversing corporate tax cuts and pulling out of Afghanistan. Since the Conservatives have pledged to withdraw from Afghanistan within a couple years anyway, that leaves the corporate tax cuts.

The NDP loves to attack big business and side with unions and "working families", but the simple fact is that outside of Alberta, our economy is hurting. Anyone who thinks higher corporate taxes are the answer doesn't know what they're talking about. Sure, they may help pay for the billions of dollars in new government spending. This year. But what about next year, when those same corporations that the NDP loves to rail against ship jobs overseas where the corporate taxes are lower? What happens when Layton's "working families" are no longer working and tax revenues fall? How will he pay for his new social programs then?

To me, the NDP represents the unrealistic and naive Left. The Left where everything is possible, nothing is too expensive, corporations are the villains and workers are the heroes, and complete social justice is achievable. The Liberals represent a much more pragmatic Left; sympathetic to many of the same principles, but much more responsible managers of the economy. There's a reason why Canadians have never entrusted the federal government to the NDP, and it isn't because we don't like child care benefits or grants for students or affordable housing. It's because we aren't all Kool-aid drinkers.

2. Excellent editorial by Frank Rich, summing up the absurdity of the McCain campaign.

3. Looks like they've agreed to a compromise on the bailout. Still $700 billion to buy out toxic assets, but the added provisions look good:

- The $700 billion would be disbursed in stages, with $250 billion made available immediately for the Treasury's use.

- Curbs will be placed on the compensation of executives at companies that sell mortgage assets to Treasury. Among them, companies that participate will not be able to deduct the salary they pay to executives above $500,000.

- An oversight board will be created. The board will include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director and the Housing and Urban Development secretary.

- Treasury is allowed the option to take ownership stakes in participating companies under certain circumstances.

- Treasury may establish an insurance program - with risk-based premiums paid by the industry - to guarantee companies' troubled assets, including mortgage-backed securities, purchased before March 14, 2008.

-One provision requires the president to propose legislation to recoup losses from the financial industry if the rescue plan results in net losses to taxpayers five years after the plan is enacted.

The incremental nature of the bailout will allow for some evaluation of how well the plan is working before flushing more taxpayer dollars down the tubes.

Curbing the compensation packages of company executives is a very populist and, dare I say, appropriate step to take, given that the irresponsibility of these same people created this mess.

I'd like to see some more info on just how the "insurance program" being spoke of here is supposed to work, but it looks like they're leaving the door open for the government (and by extension, the taxpayer) to avoid losing vast sums of money, both by taking ownership stakes under "certain circumstances" and possibly legislation to "recoup losses". Though what those "certain circumstances" are and what the legislation would amount to is not immediately clear.

And I know that it's not what this specific bill was all about, but some tightening of the regulatory framework is the obvious next step unless we want the same thing to happen 10-15 years down the road. Those who fail to learn from their mistakes are doomed to repeat them.

An NDP surge?

Just when it seemed that one left-wing party was gaining (the Greens), the other one says "hey, don't forget about us!" While the Conservatives hover somewhere between 38-40% support, it looks like the NDP is gaining at the Liberals' expense.

Only about 4 points separate the Liberals and NDP in that poll, which is unusual, to say the least. I think it really speaks to just how frustrated the Left is with Dion's leadership, or lack thereof. They'll even turn to a guy with a mustache.

Layton has a tendency to be opportunistic and promise everything under the sun if he thinks it will play with the public. Most of the NDP's stated policies are nothing but feel-good socialist bromides. They are on the wrong side of the health care debate. The wrong side of the immigration debate. Their positions on the environmental debate are self-serving and cynical. And frankly, they are on the wrong side of fiscal responsibility.

The NDP may include as part of their platform "balanced budgets", but listening to Layton over the years, he has given little indication that he sees value in budget surpluses themselves, only an opportunity for more government spending. $5 billion going to pay down the debt would be a waste in his view, when it could be spent on social programs or handed out to organized labour instead.

Canada has made great progress in cutting our national debt burden, something that we as a nation should be very proud of. We are actually the only G-7 country currently running surpluses, and our debt to GDP ratio is down somewhere in the 30% range from a high of over 60% back in the nineties:


(Source: Public Works Canada, via The Bolt)

Our friends to the south could learn a thing or two about fiscal conservatism from us pinko commie Canucks. But not from the NDP.

I don't trust Layton to keep a balanced budget any more than I trust him to keep our military healthy or our economy strong. Nor, for that matter, do I trust the federal Conservatives, who are too obsessed with gimmicky tax cuts and making sure that Alberta doesn't have to share its oil money.

Maneuverings...

Lots of interesting stuff happening today.

First, the bailout. It's really starting to look like the Paulson plan will not pass in its current form. No congressman facing re-election wants to go along with a massive $700 billion transfer of wealth from the taxpayers to Wall Street. Nor does John McCain. There is a bipartisan consensus forming that Paulson is largely full of shit, and that this is not the only option.

It isn't. There are a variety of other ways to go about fixing the financial sector, but they all involve Wall Street taking some losses. Imagine that! Free enterprises reaping the gains and incurring the losses that result from free market operations! What a radical concept.

Anyway, back to the fun stuff. John McCain decided to "suspend his campaign" today, and asked to postpone the first debate, so he could get to work on fixing the economic crisis. "Country first", right? Not that he has the slightest idea how to fix this mess (he probably thinks we just have to "defeat it" ), but I guess presidential candidates need to at least appear as though they have some idea of what they're talking about.

Personally, I think McCain, knowing that this is not his strongest issue, was hoping that the Dems would sign on to the $700 billion Paulson plan, including Obama, and then he could campaign on a platform of opposing it. But now that it looks like neither party will be on board, he won't be able to demagogue the bailout. So, he's throwing another Hail Mary, trying to appear Presidential while potraying Obama as putting politics above country.

To his credit, Obama has said no to any debate postponement, calling McCain's bluff. Whatever McCain's stated reasons for doing this, the real motive is transparently clear. He knows how badly things are going for him, and he desperately needs to establish some credibility on the economy. For that matter, what McCain plans to do back in the Senate is a rather puzzling question. He brings no extra expertise to the table, so it's not clear to me how his presence will do anything to achieve a speedy resolution.

If anything, it might be the opposite; McCain's reactions to this entire crisis have been laughably incoherent and often in opposition :

When the crisis on Wall Street began, and the markets began tanking nine days ago, the very first message from John McCain was, "The fundamentals of our economy are strong." That didn't work, and McCain dropped the line.

His second message was that he wanted to see a commission investigate how and why the crisis happened. That made McCain appear confused, so he dropped that line, too.

His third message was in opposition to the AIG bailout. That didn't last, and McCain took the opposite position 24 hours later.

His fourth message was to fire Christopher Cox from the Securities and Exchange Commission. That turned out to be ridiculous, and McCain dropped the line, too.

His fifth message was to blame lobbyists, influence peddlers, and the collapse of Fannie Mae and Freddie Mac. That became problematic given the lobbyists and former Fannie/Freddie officials on McCain's payroll.

McCain has simply gone from one ridiculous notion to another, flailing around, looking desperately for something coherent to say. Now McCain has come up with yet another stunt: suspend the campaign, delay the debate, and head back to his day job for the first time since April.

So to recap, McCain has no idea how to respond to this, and with this latest stunt, all he's going to do is inject more politics into the ultimate decision that Congress will make, one that is already being made under the worst possible conditions: fear and intimidation.

To summarize: the Paulson plan buys all the banks' sludge at inflated prices, allowing them to stay in business instead of filing for Chapter 11 bankruptcy. In short, Wall Street doesn't lose a thing, and, in fact, gets a lot more than they deserve, and the taxpayers are short $700 billion. This kind of perverse robbing from the poor to save the rich from well-deserved losses is pretty much unprecedented.

No one disputes that major action is necessary to preserve the financial sector, and by extension, the entire economy. But handing out $700 billion with no strings attached and giving the Treasury Secretary such wide-ranging power to do as he pleases with the money is certainly not the only option, and it's dishonest to suggest otherwise.

The Bush administration is trying to push this false dichotomy: "you have to go along with this specific plan or else the economy crashes", just as they did with Iraq("we have to invade Iraq or Saddam will give WMDs to terrorists and they'll kill us"), just as they did with terrorism and expanded government surveillance powers ("we need to spy without warrants, otherwise the terrorists will kill us"). But I don't think Congress will be bamboozled into doing what he wants quite so easily this time.