Economy vs. Policy vs. Politics: From Early Warnings to Near Collapse

8/14/2019 Economy vs. Policy vs. Politics: From Early Warnings to Near Collapse

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The Economy, Policy and Politics:

From Early Warnings to the Crisis

By Dave Livingston. Dave is a management consultant with almost 30 years of experience with analyzingcomplex business problems and developing solutions and new businesses. He blogs on public affairs athis blog Parts, Systems, Structures and Outcomes (http://llinlithgow.com/PtW/ ) where he attempts toapply that toolkit to current affairs and public policy.

Introduction

Understanding how the economy works is hard, and made harder because the practioners tend to be obscure,difficult and not much interested in explaining themselves so the rest of us can understand. At the same time thehealth of the Economy underpins everything else we do from personal choices and opportunities, what jobs we

get, how well we live and the possibilities for our children. It also determines the overall well-being of our societyand what we can do as a society. Whether that means creating jobs, dealing with Healthcare and Education oranything else. It is, in a phrase the Sine Qua Non, that without which there is no other.

When the economy heads into a crisis, and worse, heads into a crisis because of the poor behavior and self-interested actions of a small minority of our fellow citizens the natural reaction is anger. Yet anger does not serveus, despite the ground having been swept from beneath our feet by causes and consequences we understandpoorly, if at all.

What does serve us is improving our understanding of how the machinery works and, when it breaks, as it hasdone, what needs to be done to fix it and get it back in service. We are even better served by supportingrepresentatives who will act in our collective best interest instead of selling us magic beans of simple answersthat are easy to believe. But are in fact dangerous and lead, in the long-run, to a re-creation of other problems

and crisis.

Perhaps the single most challenging policy problem we face today is continuing to act wisely andcorrectly in addressing our economic challenges despite the political and popular challenges to do thewrong things in the name of wrong-headed ideologies.

Very early in 2008, January in fact, we warned that the economy was headed for serious difficulties. Later weeven identified it as the single most important issue in the 08 elections, and so it turned out. We then tracked it toand through the crisis, as the economy worsened and the markets collapse. Toward the end of the year we thenwent on to discuss the steps necessary to correct the problem. And the actions necessary to correct the long-standing and long-ignored deeper flaws that had accumulated over three decades and that metastasized undersevere pressure in a collection of major problems all acting at once.

This collection of essays puts together the story from beginning to an end, though not the final end. That is notonly still playing out but has a long way to go. Along the way we try to address the nature of the total economy insuch a way that its easier to understand the machinery and how economic cycles work. We also address thepolicy steps we think are required to repair that machinery in the short- and long-terms.

And since were going to be living in a policy-driven economy for a long time we also take a hard look at thepolitics of the situation, and the partisan posturings, that contributed to the crisis and have hampered us sincethen.


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Economy, Policy and Politics: Sailing Into the Storm

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We hope that after reading these essays youll have a better understanding of where were at, how we got hereand what needs to be done. As well as an understanding of the role and impacts of both policy and politics.Especially how dangerous mis-placed ideological posturings are to all our futures.

Each essay started life as a blog posting and the URL link is always provided because, in most cases, each hasan extensive collection of readings excerpts and linkings backing up our analysis.

Table of Contents

1. WRFest (Economics): Oops...Recession Ahead 3

2. Pump Priming, Rates Cuts and Crameritis: More on Economic Outlook 4

3. You, Economics and the Elections 4

4. The Coming Economic Crisis 6

5. Economic Crisis in a Nuts Shell: Jump Out of the Window? 7

6. Understanding Economics: Introduction to Macroeconomics & Business Cycles 9

7. Economic Tides, Naked Swimmers and Sharp Rocks 10

8. Facing Reality: Father Feldstein Explains It All 11

9. WRFest(Policy): More Economics - Realities vs. Rhetorics 12

10. A Little Off-Topic: the Credit Crisis, the Economy & You 13

11. Readings (Economy): It Really is the Economy, Stupid Frog 14

12. This is a Rescue, Not A Bailout: And It's Your Life 16

13. OOPS! Somebody Just Kicked the Wheels off the Wagon 19

14. Calm Down: the Fat Lady Ain't Sung, Yet. 20

15. Anatomy of a Crash: Welcome to the Political Sausage Factory 22

16. Wobble Wheels Wakeup: Crisis, Response, Policy, Execution 24

17. Populist Panderings, the Candidates and Real Solutions 26

18. First Things: Financial Crisis, Economy and Barry 28


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January 21, 2008

WRFest (Economics): Oops...Recession Aheadhttp://llinlithgow.com/PtW/2008/01/wrfest_20jan08economics_oopsre.html

Economics and economic policy is one of those things that most people ignore, take for granted and find makingtheir heads hurt. Unfortunately, for good or ill, it conditions most of the rest of what we can do. Just in case youwere living in another world, or paying attention to purely "practical" things last week not only did the major USmarkets continue tanking but the escalating chorus of cries for some sort of combined monetary and fiscalstimulus effort to short-circuit an increasingly likely US recession were capstoned by Ben Bernanke'sCongressional testimony and Pres. Bush's call for a $150B fiscal stimulus program.

Please understand that these efforts are necessary and vital but are unlikely to prevent a recession that's likelyalready underway. The real goal here is to a) mitigate the damage and b) prevent it from metastasizing intosomething much worse given the weaknesses in credit markets and the housing sector. And also c) to keepworldwide problems from feeding back to severely, as it increasingly turns out that the rest of the world is not infact decoupled from the US.

At this point you may be going, oh my god...he's off on economics. Please don't or why do I care ? Several of theexcerpts below will speak directly to that question of course. And it's an interesting one - for several years now itseems a conversation I"ve been having with several friends, all of whom would rather not think about it, by andlarge. Part of the problem is that everyone confuses economics with business or finance, which are significantparts but not the subject as a whole. Economics on a small scale is about finding the best use of availableresources to get the most done with those resources. On a large, or macro-, scale it's about the complexities ofmaking sure that the most people have the most jobs and overall welfare and well-being is moving ahead as wellas possible.

Put another way all the other things we think we need to do from protect our national interests to reform educationto changing healthcare to paying for pensions involve economics, on several levels. First off designing workableprograms and paying for them is often 90% a problem in micro-economics. But second off without a healthy

macro-economy we end up being unable to pursue any of these other initiatives.

There's a Latin tag phrase somebody explained to me once - sine qua non. That without which there is no other.Economics is the sine qua non of a healthy society.

When Antwerp fell to the besieging Spanish army in the 16thC and was sacked because the siege had been long& ugly and the bankrupt Spanish monarchy hadn't paid the troops in months it destroyed a major port and tradingcenter that had risen to prominence as the major economic and financial powerhouse of Europe. Its' destructionduring the Dutch-Spanish 80 Years War lead to the rise of Amsterdam as its' replacement and the eventualindependence of the Dutch and their leading role on the world-stage for two centuries as a major trading,economic and politico-military power. After months of successfully defending themselves do you know what oneof the primary triggers was ? The city fathers put price controls on smuggled food and smugglers would no longertake the risks to bring in the supplies that had been keeping the city alive. After a few months the starving city was

so weakened it fell to the Spanish troops.

Be careful what you wish, understand that often supposed unintended consequences are the results not ofignorance but of either not thinking things thru to the next step. Or of believing what we'd like to believe in the faceof all evidence to the contrary.

Speaking of which at least skim these readings and ask yourself a) how bad you think this problem might be, b)what you think of which candidates proposals and c) whether you're willing to let them "play politics" for partisanadvantage for what could be a major problem shortly ? And for the next several years. Several of the excerpts arewell worth at least skimming if not going to and reading but the three that are sort of the minimal set are one on


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the consequences for future generations (Change for our Children), the economic sense and sensibilities of thecandidates (What Are They Thinking) and an introduction to some sound thinking on fiscal policy (whichadmittedly is a little more rigorous but...)

January 25, 2008

Pump Priming, Rates Cuts and Crameritis: More on Economic Outlookhttp://llinlithgow.com/PtW/2008/01/pump_priming_rates_cuts_and_cr.html

Well the Economy has indeed moved into the #1 slot on the political agenda. Tu. the Fed announced a major ratecut while Th. the White House and Congress announced a major stimulus package. Both of which, on balance,should be helpful. At least it mitigating the damage that's likely though not avoiding it all together. And, much moreimportantly, reducing (at least hopefully), the enormous downside risks we're exposed to because of the fault linesin the economy that have been created and are under increasing pressure.We'd like to point you to a summary and analysis of the recent news as well as some relevent readings. Whichentails admitting that we lead a duel existence (and you thought the we was mere editorial posturing :) ). This blogis focused on Current Affairs while my other one is focused on Economics, Markets and Business. The most

recent post there goes over what's becoming an increasingly vital issue that WILL haunt us all for some time tocome. As we've argued before. So, without much further ado, here's an excerpt and link. Which has a niceselection of readings from a range of good resources. Hopefully you'll find it worthwhile.

Cramer's Comeuppance vs Pump Priming Realities Well some more interesting newshot off the press, so-to-speak. One both amusing and schadenfreudish but also informative. Andthe other a matter of both public policy and another reality check. The latter is the recentannouncement that House leadership and the White House have reached an agreement to passan economic stimulus package that's actually fairly sensible as well as astounding for its' speed.Though it still has to make it thru the Senate where further wrangling is all to likely. The former isJim Cramer being called out by Rick Santelli on CNBC for now trying to sound like a Bear when infact he was not only bullish for most of last year but stayed bullish weigh into the year. Somemore readings are below. In one of them Larry Summers lays out the primary criteria for a tax

stimulus: 1) quick, 2) targeted with the right instruments and 3) temporary. Another reading is aBrookings survey that takes a deeper dive but is nearly identical. So on that basis what do wethink. Well...

February 03, 2008

You, Economics and the Electionshttp://llinlithgow.com/PtW/2008/02/you_economics_and_the_election.html

Well if the polls are to be believed the state of the economy is not only first place but pulling way ahead. While theprimary purpose of this blog is to focus on current affairs in general that means being responsive to the issues at

hand as well as pursuing lines of inquiry that need some attention. So we've already put up a couple of otherposts with links, references and pointers. The week's interesting readings/links on economics and economicspolicy are below as well as some links to prior posts. But a blogging friend recently sent me a question and itmade so sense to post my response since it provides some context. And the readings beyond the break provide apretty good survey, IMHO, as to the issues, stakes and consequences. Notice btw that while the economy isstrengthening its' hold on the #1 position you're not hearing much from the candidates about. At least that makessense (no Canute telling the tide to stop won't keep it from coming in).


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Q: So far the best Ive been able to come up with is that the new stimulus plan is reparations for

the people that dont work as hard as other lol but quickly abandoned that line when the thoughtof offending anyone popped into my head lol.

A: EEEkkk - don't do that. Not least of which it's wrong. There's two kinds of economics - small-

scale (micro) and large-scale (macro). Both have a set of principles that have been painfullylearned and tested but it's not science in the sense that physics is. It's more like biology - things

move and change.

The big problem with the macro-economy is it moves in cycles - think of tides - to certain natural

rythms. Everytime everybody thinks they've repealed the laws they discover it's like ordering thetides to halt.

In the long-run there's a certain natural limit to the speed of the economy. It was generally taken

to be about 3.5%/yr but has likely dropped closer to 3% or less. If you push too far above thatlimit you get inflation. If you fall too far below it you get too much idle equipment and

unemployed. While we've learned that unemployment can't be completely eliminated, otherwiseyou trigger inflation, it can be "mitigated", that is keep the damage from getting to be too bad.

Every onece in a while (think Great Depression) the machinery really seizes up and all the gears

grind to a halt. For reasons we only partially understand. Japan got itself in trouble with a bubblein the 80s which burst but has now spent 15 years not recovering and damaged their society

badly. We could have had the same problem after the tech boom but sidestepped it but at a cost.

The cost was two seperate bubbles in housing and credit which are now in the process of leaking.

We're going to do thru a downturn but what the stimulus package is designed to do is keep itfrom tipping over into a major problem but won't prevent it. The problem is is this a 3-bucket fire

when the package is 1-bucket and the Fed rate cuts another. Which leaves us a bucket short.

If you'd like to get a little more background on business cycles and how the economy works try this

posts on another blog:

http://llinlithgow.com/bizzX/2007/12/weigh_the_world_works_understa.html

http://llinlithgow.com/bizzX/2007/12/wtw_part_deux_patterns_cycles.html

http://llinlithgow.com/bizzX/2007/11/slowmotion_slowdown_more_on_gd.html


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February 10, 2008

The Coming Economic Crisishttp://llinlithgow.com/PtW/2008/02/the_coming_economic_crisis.html

This week Paul Krugman's column drew attention to a recent paper by Reinhardt and Rogoff, both of whom are

distinguished economists with wide and deep practical experience in the real world of policy making. Once he'dposted the blogosphere (i.e. two of my favorite econ/finance blogs) proceeded to go to town on the topic. Here'swhat Prof. Krugman had to say, which needs no further embellishment from me.

The point YOU need to take from this is that the next President will be facing severe economic pressuresthat result from an accumulation of dodged problems that will HAVE to be dealt with . As you weighcandidates and issues we suggest, therefore, that you put the economic situation rather high on your priority list.In addition to Krugman's column we also point to some other concerns, e.g. another column by Ken Rogoff aboutthe fragilities in China which could have even more severe consequences.

A Long Story Its still not a certainty that were headed into recession, but the odds are growing

greater. The economic news has been fairly dire this week. The credit crunch is getting worse, and a

widely watched indicator of trends in the service sector which is most of the economy hasfallen off a cliff. Its still not a certainty that were headed into recession, but the odds are growing

greater. And if past experience is any guide, the troubles will persist for a long time say, into the

middle of 2010. The problems now facing the U.S. economy look a lot like the problems that caused

the last two recessions but this time in combination. On one side, the bursting of the housingbubble is playing the role that the bursting of the dot-com bubble played in 2001. On the other, the

subprime crisis is creating a credit crunch reminiscent of the crunch after the savings-and-loan crisis

of the late 1980s, which led to recession in 1990. Now, you may have heard that those recessionswere short. And its true that the last two recessions both officially ended after only eight months.

But the official end dates for those recessions are deeply misleading, at least as far as most peoples

experience is concerned. If the slump is still going on, which is likely, this will offer a chance to

consider other, more effective measures. In particular, now would be a good time to think about thepossibility of going beyond tax cuts and rebate checks, and stimulating the economy with some

much-needed public investment say, in repairing the countrys crumbling infrastructure. But we

wont get any innovative action to help the economy unless the next president has a couple of keyattributes. First, he or she has to be free of the ideological blinders that make the current

administration and its allies fiercely oppose the idea that the government can do anything positive

aside from cutting taxes. Second, he or she has to be knowledgeable about and interested ineconomic policy. Presidents dont have to be their own chief economists, but they do need to know

enough to take the right advice. Is the Current Financial Crisis So Different?

5 Historical Economic Crises and the U.S. Global Financial Crises, Part II: Norway 1987


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February 12, 2008

Economic Crisis in a Nuts Shell: Jump Out of the Window?http://llinlithgow.com/PtW/2008/02/economic_crisis_in_a_nuts_shel.html

One of my e-friends has suggested that, from time-to-time, that if I insist on babbling away about economics, the

Economy and the rapidly metastasizing crisis that it would be helpful to put it more clearly and simply. While it'snot entirely clear that such is within my circle of competencies fortunately there are alternative. Especiallyalternative sources.

He also mentioned not making my posts so long and detailed - which is another little thing to be worked on atsome future date. But in pursuit of both objectives we've found three excellent vid clips that put the currenteconomic problems simply, clearly and in some Nuts Shells.

We'll start with this little gem from Jon Stewart and CNN's financial editor who basically encapsulate the wholething: http://www.thedailyshow.com/video/index.jhtml?videoId=148477&title=gerri-willis

Now for an even simpler perspective we give you Elton John, indirectly anyway, with this rendition of Benny andthe Feds: http://www.youtube.com/watch?v=etfVMtCq9Oc


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And finally the piece de resistance' the best explantion of how the Investment Bankers got themselves and usinto this mess we've heard. This one you really...really have to watch - if nothing else for the wonderfully pointed,dry British humor. http://www.youtube.com/watch?v=SJ_qK4g6ntM


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And, oh yeah, underneath all the humor in this last one they actually get it exactly right. Only it's not just loaningmoney for houses to people who can't afford them. Other bankers did the same thing for companies that can't payback their loans either.

We hope this was helpful and a small step in the right direction. Enjoy!!

February 15, 2008

Understanding Economics: Introduction to Macroeconomics & Business Cycles

Back in the saddle again - here we go once more in harm's way (alt. version). On my other blog just posted a plugfor a friends blog and it turned into a long riff on macroecon, business cycles and why it matters (can you spellsocial collapse). Given that all our choices are conditioned by the state of the economy, that most of the issuesfacing us in this election have their roots in policy failures reaching back to the '60s and our prosperity in the '90swas the other side of the coin you might be interested. The excerpt and link are below the line.

Giving ourselves a break today and taking care of chores and errands we had lunch at our favorite little local

family restaurant where business wasn't as good as it might be. Partly because of the weather, partly because ofthe snowbirds who're south right now but largely because of the impacts of energy, et.al. on people's spendingmoney. In two hours we had the same conversation at the tobacconist, the video store, the barber AND the wineshop!

If you don't think the next President is going to be faced with a major economics challenge which is, now,inescapably painful for all of us then you are sadly mistaken.

And there's, on the one hand, an enormous amount of terminal unsinn running around and placebo marketing togo with it. Otherwise known among wannabe Hawaiians as kuki moi, or bat guano to the rest of us. For exampleRobert Reich has a recent NYT editorial that correctly diagnoses the severity of the problem but is mis-leadinglydisingenuous in it's recommendations. Partly because he recommends short-term fixes for structural problemsthat have been accumulating for decades (as he does correctly point out). Mostly because his income re-

distribution placebos are feel good policy entrapaneur nonsense and don't address the structural problems hestarts with.

If you want to read a set of policy recommendations by somebody who is actually an economist and a darn goodone at that try Larry Summer's short, pithy and to-the-point Fortune/CNN interview. Now that's dead on target.

Given that Obama(Obama unveils $210B econ plan) and Clinton(Clinton Cites Her Economic Credentials,Attacks Obama, both came up with major policy initiatives we'd suggest taking a look there and below. And thenthinking it thru.

Let me put that another way - this really....really...really matters to you and yours.( Obama, Clinton Seek to GainEdge on Economic Issues)

The good news, while I'm ranting away here, is that things are enormously better than they were in the '60s,'70s

and '80s for sound advisors and advice (we're talking moving from a 1 to a 5 on a 1-10 scale here, maybecounting what Volcker, Greenspan and Bernanke have done a 7/8). Considering historical examples it doesn'ttake much to go the other way.

Economics is the world's largest experimental science because it gets to play with whole societies. If you don'tbelieve me look at the collapse of Zimbabwe for stupidities we know better than. Or what Chavez is doing inVenezeula. Better yet look at what China has done for it's people and eventually India. All by moving big...bigsteps in the right direction.


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Believe that water runs uphill all you want or that the tides can be turned back but don't be too surprised or upsetwhen the backwash turns out to be worse than avoiding the original problem. Of course your kids and grandkidsinherit most of that so...

Social Notes: Be Your Own Economist and Related ReadingsPresumably if you're visiting this site you've got some concern with the direction of the world, particularly thedirection of the economy, markets and business ? Mike's book is as good an introduction to the data sources(which are largely on-line now) and how they're reported in the WSJ as anything ever written IMHO. His old website (I understand a new one is under construction is BeYourOwnEconomist.com ) as well as his blog carrypointers and guidelines to the data sources. More important is it'll provide you a guide to understanding thebusiness cycle and how the data fits each part. And beneath that how it should look - or conversely what itmeans. His blog does a nice job of taking a macro-issue and working thru clearly, cleanly and directly using somenice, relatively simple charts.

February 18, 2008

Economic Tides, Naked Swimmers and Sharp Rocks

http://llinlithgow.com/PtW/2008/02/economic_tides_naked_swimmers.html

Warren Buffett has a famous saying that when the tide goes out you found out who was swimming naked. Well,it's true. Worse you also find out who's about to land on sharp coral and get cut up, or those who already have.And, speaking as somebody who's done a little diving, you also find out how many sharks are around who'll smellthe blood. Unfortunately we may be about to find out how many naked swimmers, sharp rocks and sharks therereally are after a couple of decades of dodging all that. AP has an interesting story that throws all this into a sharphighlight. And below the line you'll find a pointer to another post on the breakdowns in the economic cycle that arepart and parcel of this problem.

Economic Woes Reveal a Long-Felt Unease Even when experts were declaring theeconomy healthy, many Americans voiced a vague, but persistent dissatisfaction. True, jobs wererelatively plentiful over the last few years. It was easy to borrow and very cheap. The sharp rise in

the value of homes and plentiful credit cards encouraged a nation of consumers to get out andbuy. But to many people, something didn't feel right, even if they couldn't quite explain why. Nowthe economic tide is receding, and the undertow that was there all along is getting stronger. Takeaway the easy credit and consumers are left with paychecks that, for most, haven't nearly keptpace with their need and propensity to spend. Americans' declining confidence in their economyis triggered by a storm of very recent pressures, including plunging home prices, tightening credit,and heavy debt. But it is compounded by anxiety that was there all along, the result of a long,slow drip of worries and vulnerabilities. Much of that anxiety is the uncomfortable, but expectedjolt of the economic roller coaster. During a downturn, people become less confident aboutkeeping their jobs or being able to find new ones, meeting household expenses and about theprospects for the future. But there may be more to it than just cyclical ups and downs.

Debating the Business Cycle: Alternatives, Risks &

Catastrophes Over the weekend a friend asked mewhat the result of the stimulus package was likely tobe and how important it was. While we've asked andanswered that question before we ginned up a littlegraphic to make things a little clearer. And also tomake clear what the alternatives are likely to be,how it relates to history and why the "over-sanguinity", coining a word, of most market andeconomic commentators is likely to be severely mis-placed. Below the line you'll find an earlier chart that


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looks back to the investment bust and the consequences for the cycle. And, as it happens, three respected andrespectable commentators just popped up this morning with dead on observations. All of which we suggest youskim. But let's start with this chart which lays out things the way we see them.

February 20, 2008

Facing Reality: Father Feldstein ExplainsIt All

Sometimes life is just full of those funny little coincidences,convergences and serendipities. After a friend asked about thestimulus package and caused us to generate a graphic onwhere we're at in the business cycle "Father" Martin Feldsteinnot only appeared on the Charlie Rose show but had a greatWSJ column "explaining it all to us". Seriously - not if you canfind the time but if you're at all concerned with the economicsituation, taxes, Social Security reform and the long-term future

of retirement or the long-term prospects for this country don'tfind, make the 30 min. you'll need to watch this.Meanwhile here's the excerpt from the WSJ column - which

we've pulled at some length (key points highlighted):http://www.charlierose.com/shows/2008/02/15/1/a-conversation-with-economist-martin-feldstein

Our Economic Dilemma Although it is too soon to tell whether the United States has entereda recession, there is mounting evidence that a recession has in fact begun. Key measures ofeconomic activity stopped growing in December and January or actually began to decline. Thecollapse of house prices and the crisis in the credit markets continue to depress the realeconomy. The sharp reduction in the federal funds interest rate and the new fiscal stimuluspackage may, of course, be enough to avert a downturn. Many forecasters still predict that theeconomy will just slow in the first part of this year and then rebound after the summer. But the

hope that monetary and fiscal policies would prevent continued weakness by boosting consumerconfidence was derailed by the recent report that consumer confidence in January collapsed to

the lowest level since 1992. If a recession does occur, it could last longer and bemore painful than the past several downturns because of differences in its originand character.

The recessions that began in 1991 and 2001 lasted only eight months from the start of thedownturn until the beginning of the recovery. Even the deeper recession of 1981 lasted only 16months. But these past recessions were caused by deliberate Federal Reserve policy aimed atreversing a rise in inflation. In those cases, the Fed increased real interest rates until it saw theeconomic slowdown that it thought would move us back toward price stability. It then reversedcourse, reducing interest rates and bringing the recession to an end. In contrast, the real interestrate in 2006 and 2007 stayed at a relatively low level of less than 3%.

A key cause of the present slowdown and potential recession was not a tightening of monetarypolicy but the bursting of the house-price bubble after six years of exceptionally rapid house-priceincreases. The Fed therefore will not be able to end the recession as it did previous ones byturning off a tight monetary policy. The unprecedented national fall in house prices is reducinghousehold wealth and therefore consumer spending. House prices are down 10% from the 2006high and are likely to fall at least another 10%. Each 10% decline cuts household wealth by about$2 trillion, and this eventually reduces annual consumer spending by about $100 billion. No onecan predict the extent to which the coming fall in house prices will lead to defaults and


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foreclosures, driving house prices and wealth down even further. Falling house prices alsodiscourage home building, with housing starts down 38% over the past 12 months.

But the principle cause for concern today is the paralysis of the credit markets. Credit is alwayskey to the expansion of the economy. The collapse of confidence in credit markets is nowpreventing that necessary extension of credit. The decline of credit creation includes not only the

banks but also the bond markets, hedge funds, insurance companies and mutual funds.Securitization, leveraged buyouts and credit insurance have also atrophied. The dysfunctionalcharacter of the credit markets means that a Fed policy of reducing interest rates cannot be aseffective in stimulating the economy as it has been in the past. Monetary policy may simply lacktraction in the current credit environment.

March 07, 2008

WRFest(Policy): More Economics - Realities vs. Rhetorics

http://llinlithgow.com/PtW/2008/03/wrfest_2mar08policy_more_econo.html

Back in the day I had been a Bill Bradley supporter even going so far as to make a contribution but more

importantly suggesting that he, if he were serious, needed to differentiate himself by staking out a unique position.The position - a pragmatic and centrist one where in my book centrist was tackling serious issues with workableapproaches. With his background and track record he struck me as just the mean to speak truth to power, i.e. thevoters. After all why not? As a traditional candidate he didn't stand a chance but by introducing a new note intothe national debates he could strike off on a whole new pathway. Well unfortunately Bill turned out to be a terriblespeaker and not able to translate his practical experiences in the Senate into either a vision, policy or pragmatics.After we squandered the golden opportunities of the '90s on a binge while the Brits kept moving forward under theThatcher-Major-Blair sequence it was, IMHO, more than time for a change.

Worse as Bradley's results deteriorate his willingness to pander to special interests accelerated accordingly. Nowthat the state of the economy has moved back to center stage we're seeing the same with both Billary andBarrack competing to attack trade, globalization and the fat cats. Despite having good economic policy teams noless. Now a lot of this is necessary tactical maneuvering, especially in the primaries. And when you listen carefully

you can hear a lot of caveats and realisms.

Let's set the stage, define the context if you will with the following excerpt:

The ultimate sell signal The resignation of America's unheeded and under-funded chief accountantand watchdog, along with the billion-dollar bullhorn he's been given, are the ultimate sell signals forAmerica's stock investors. He has criticized supporting Iraq's dysfunctional government, pork barrelspending by Congress, unrealistic "universal health care plans" we can ill-afford or support, the escalatingrisks of huge deficits, fiscal vulnerability to hostile foreign governments, and a lack of will to reform ourgovernment. Facing indifference on the Hill and unrealistic spending promises, Walker is resigning withfive years still remaining in his term to head the newly formed Peter G. Peterson Foundation. Peterson,senior chairman of The Blackstone Group and Commerce secretary in the Nixon administration, haspledged an astounding startup budget for the foundation of $1 billion. That money will attack what the

foundation considers "the most substantial economic, fiscal and other sustainability challenges of ourcurrent age" -- including federal entitlement programs, health care, unprecedented trade and budgetdeficits, low savings rates, mounting foreign debt, soaring energy consumption, an uncompetitiveeducational system, and the proliferation of nuclear warfare materials. Maybe Congress will listen thistime. "I have been around a very long time, and I have never seen so many simultaneous challenges thatI would describe as undeniable, unsustainable and virtually untouchable politically," Peterson said in aprepared statement.


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March 17, 2008

A Little Off-Topic: the Credit Crisis, the Economy & You

http://llinlithgow.com/PtW/2008/03/a_little_offtopic_the_credit_c.html

Let's go a tad off-center from the normal run of posts here and point to a deeper dive in the economic and creditmarket news. While we've posted several times on the economic outlook, both for its' own sake and because it'smoved front and center as a political issue, we strongly suggest that on an individual basis this is worth yourattention. Why?

Because, first, the economy underpins all the other issues we normally address.

If you can't afford it you don't get it and lots of things are going to be unaffordable in the next few years. In fact thepolitical agenda for the next President is being determined as we speak by events on Wall St. and in theEconomy. Central to the accelerating economic malaise is the increased likelihood of a longer and deeperrecession brought about by the unraveling of the credit markets. Now if you're like most folks you pay attention tothe news that interests you, bears on your concerns and/or comes to your attention. Economics continues to be

arcane and ignored. In fact my college roommates one summer, on finding out I was majoring in economics,came up with the classic summary: "as long as my paycheck shows up and clears I could care less".

Stop and think about that for a minute. If you don't see the humor, black as it is in general and specifically now,and the self-indictment the rest of what we have to say may not be meaningful. But if you'd like to at least beslightly aware of where your paycheck comes from then the health of you payor, it's "industry" and the economyas a whole matters a great deal to you. And right now the big problem is that the credit markets, which are thelubricant of the economy, and are as essential to its' healthy functioning as oil is to an engine. And fills a similarrole. With all that preamble let us point you to a business affairs blog post on Bear-Sterns and the metastasizingcredit market problems of which it is simply a symptom: Run Away, Run Away: the Seriousness of the CreditCrisis

Earlier this week we put up two carefully considered posts on the cascading credit crisis and early Thur. called

the attention our network to them with a special e-mail. The title of the e-mail was "Brushed by the Wings of theAngel of Death" which wasn't entirely hyperbole. The core of the e-mail is reproduced below, idiosyncrasies andall. Fri. morning the non-hyperbolic nature of that description was illustrated by the emergency rescue of Bear-Sterns by a combination of J.P. Morgan and the Fed, who were acting to prevent the disorderly collapse of thecredit markets, not bailing out some miscreant investment bank.

The key words here are collapse and credit markets , the sine qua non of making the economy turnover. If they grind to a halt as they threaten to do so does the economy. Fri's headlines was and will be scary, nor

do the emergency fixes resolve the underlying problems. But the scariest headline would have beenBear NOT Rescued because it would have triggered the collapse.

What we're seeing here is a giant run on the bank, except this time it's a run on the system and the normal policymechanisms, as we've repeatedly said, are NOT working. The Fed is inventing policy and mechanisms on the fly

and hopefully it'll be sufficient to allow an orderly working out of these problems. But it won't prevent a downturn inthe credit markets and a much more severe and long-running downturn in the economy than most think. As amatter of personal decision-making it's important, vitally so, for you to come to grips with how serious this is, whatit means for your own personal plans and those of your investments and place of employment.

This is being managed by competent, dedicated and hard-working people who know what they're doing as well asanyone. Which won't prevent a downturn but should mitigate it. But the risks are to the downside of thedownside and you should be planning and positioning yourself accordingly.


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April 25, 2008

Readings (Economy): It Really is the Economy, Stupid Froghttp://llinlithgow.com/PtW/2008/04/readings_economy_it_really_is.html

We've paraphrased Jim Carville's famous

observation by adding on the notion that we'reall boiled frogs. In other words economicissues have moved front and center stage, incase you haven't noticed. In fact if you lookback at the last two posts which frame theoverall set of challenges we face and sketchedsome strategic policy directions, admittedlysimply at a high level, we id'd Economic Policyas one of the Big Three. If you'll skim over thereadings below you'll get a pretty good take onthe deep-seated structural challenges we allface. The problem is that most of them aren'tnew to this downturn but are the gradual

accumulation of things that have been building up for quite a while - time to que the Crazy Frog ? Wonder whathe'd look like boiled.

Just to put this in some long-term perspective the chart shows shares of national income going to Wages, Profitsand Capital since the end of WW2. What you see is a relatively healthy high-wage, high-profit economy in the '50sand '60s followed by a deterioration in Profits and Wages in the '70s as more equipment was required to shift thestructure of the economy under oil prices, regulations, etc. Capex reached a plateau but other than a brief blipduring the Tech Boom Wages have been in a long-term secular downtrend ever since. Profits have shot thru theroof relatively speaking because companies aren't either hiring or buying equipment. Why - setting evil capitalistconspiracies because they don't see rising demand justifying the return. We forget that our post war Golden Agehad four major new industries (Pharma, Plastics, Electronics, Transportation) that drove the creation of new jobs,we had a major shift upward in human capital with the GI Bill and we inherited a lot of manufacturing equipmentinvestment from the war. If we'd like a new Golden Age we need to come up with new industries that create new

jobs and make sure that the right kind of folks are available to work in those jobs. A lot of the symptoms of ourfailure to do that are listed and discussed in the readings.

Now the Economy has many moving parts but two large components. The business cycle and the long-termsecular growth trend. L.T. growth is entirely dependent on the sum of population (labor force) growth andproductivity. If we want to get wealthier in the long-run the only sure path is to get more productivity. Just to keepgrowing to pay Social Security we need to grow the population (btw - that's one reason Immigrants are so vital.Without Hispanic population increases are growth would drop ~ 1% and we'd look like the aging Europe!).

In the short-run the economy goes thru cycles where the goal is to get as close to the long-run speed limit ofabout 3.3%, though it may be dropping for the reasons discussed. On the outside you want to keep inflation fromturning into hyper-inflation and destroying the society (think Weimar Republic) or from dropping into a majordepression - which we could have in '01 in the aftermath of the bust bubble (think Great Depression or Japansince 1990). Within those bounds we need to ride out the cycles but mitigate the effects as best as possible.

Cycles can't be cured but can be managed. In other words we can't avoid the downturn that's coming but we cankeep it from metastasizing. We have basically two options - monetary policy (lower interest rates) or fiscal policy(cut taxes or spend money). That's it. So you put it all together we need to deal with the Housing and CreditMarket crisis before they spin out of control (btw - you may not have been paying attention but the credit marketsdid their drunken Irishman thing and almost completely collapsed in mid-March. Collapse is analyst-speak for ohmy god the world is ending). Then we need to stimulate the economy to mitigate the downside. Finally we haveseveral major things like infrastructure and energy that are drains on the economy.


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Let's put it all together.

1. "Quick Fixes" -a) the Fed may have saved the free world with it's new tools that prevented the collapse of the credit markets andit's foreclosure of Bear-Stearns (nobody got rescued btw). Now we need serious regulatory reform

b) Houses got inflated way over sensible values thru widespread greed and stupidity. If we don't figure out a fixthis will drag on for years and threaten the viability of the economy. Two parts - re-write the loan terms, with gov'tguarantees and workout management and then combine it with writedowns in house and home value.Straightforward, simple and hard - the biggest problem is finding the people to do it. But it'll get done the hard wayor this way.

Stimulus - that still leaves us with a weak economy, just not one on the brink of implosion. So we need to spendsome money. And $150B ain't gonna cut it. But any fiscal stimulus needs to be targeted, temporary and bigenough. McCain's gas tax holiday is actually a pretty good idea. What should be added is some major hits (on theorder of the '00s of $Bs that people pulled from home equity) in such things as extended unemploymentinsurance, targeted tax cuts and training programs.

2. Big Fixes - the US has let it's electrical, waterway and transportation infrastructures deteriorate to the pointof...well never mind. A massive decade long infrastructure rebuilding project would see us get new electrical grids,

new highways and transportation systems and possibly new power plants and alternative energy supplies. Thiswould have the benefit of providing enormous fiscal stimulus, i.e. creating jobs and making a major long-terminvestment for things we know how to do. BtW - major sidebar. The long boom of the '80s and '90s was primarilybuilt around two things. Supply side is utter nonsense. Reagan got it going the old-fashioned way with deficitspending and Clinton got lucky and also cut the defense budget. Bingo, that's it.

3. Long-term Fixes - we need new industries and we need to get off of our oil dependencies. There are thingswe can do in each and both. For example by increasing conservation as well as mandating enormously highermileage thru better materials and engineering we could get a huge jump for the next ten years. Then we need tobuild new power plants, particularly nuclear, we need to open up our own offshore deepwater to oil explorationand we need more refineries. That, taken all together, takes us into the next decade. Beyond that we need somemajor alternatives - and don't believe 'em. We don't have the knowledge or technology do magic yet.

For example we should really be heavily emphasizing coal but need major new technology not the Rube Goldbergfixes running around. So a concerted national effort (does the word Manhattan Project ring any bells) to createmajor new energy sources and technologies would stimulate the economy, create new industries and provide usseveral paths to the future.

Combine that with major parallel investments in new life sciences and materials, both because they offer the besthopes for the Next Big Things and because they are synergistic with energy investments. For example if we pie-in-the-sky about Fusion we need the new materials for the reactor vessels. Or new lightweight composites forhigh-temperature turbines. Similarly new bio-sciences offer up their own benefits not least of which is designedalternative energy crops as well as way to control and manage environmental problems. The real beauty of this isthat it doesn't take a lot now because it's all at early stages.

So there you have it in a nutshell :) A complete now to futures strategic economic policy recommendation. Believe

it or not it's at least a decent strawman based on reality, the ways things actually work instead of fantasies andoffers some real benefits. Test it against the candidates if you like. The results might be interesting !


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September 26, 2008

This is a Rescue, Not A Bailout: And It's Your Lifehttp://llinlithgow.com/PtW/2008/09/this_is_a_rescue_not_a_bailout.html

For several years I've been arguing that economic healthis critically important to all other policy agendii we want topursue; and, for several months, that it was the singlemost critical issue in this campaign. Hopefully, at thispoint, the number of naysayers is approaching zero onthis argument. At the same time the number of scared,angry and obtuse commenters and pundits who havebeen energized by the crisis of the last two weeks hasmetastasized.

Sadly, but understandably, because of a lack of grasp ofthe seriousness of the situation, it's sources and possiblecures. Instead we're being inundated with populist rhetoric

and political posturing. Often by the same people whohelped us all get in this mess in the first place. Calmingthem down is now the first order of business since withoutsome popular support the proposed rescue package willbe stillborn and we'll all be in deep kimchi.

Fortunately there are some calmer heads who do have the necessary knowledge, and more fortunately, some ofthem occupy positions of power on the Hill. To try and contribute to some small smidgeon of understanding we'dlike to disabuse you of some of the errors and make you aware of the stakes.

Quick and Dirty Summary

That lack of grasp is our most dangerous problem and it has two roots. First off almost no one understands howthis is all working - and hasn't bothered to learn or investigate - and popular anger is out of control. Second, ratherlike a fish swimming in the ocean, we take the complex system we depend on for survival without grasping it'slinkages, fragilities and susceptibility to disruption. We're going to do our best to move along with more, hopefully,to follow. Too much ground for one post if we try and explain the background.

1. Bailout = Rescue. This is called a bailout and postured as charity for the fat cats. It is nothing of the sort. Itis a purchase of assets that yield a flow in income and are likely to be worth more in the future if they weren't soldduring the sack of the city but held until things return to more normalcy and less turbulence. $700B is not $700B -by buying at less than book valuation but above distress the goal is to unfreeze the banks and get them lendingagain. Some of the table stakes are laid out in the first section of readings, including a fact that everybody has lostsight of. All the econ news was really bad, including this morning's major downward revision of GDP growth from3.3% to 2.8%.

2. Main Street, Not Wall Street: Everybody is reacting as if this were their problem and not ours when justthe opposite is true. The few who got and kept the $M bonuses won't go hungry. Right now companies thruout thecountry are having trouble meeting daily cash needs for purchases, payroll and other bills because the creditmarkets have frozen up. They've frozen because banks are afraid to loan money to anybody, especiallythemselves, for any reason. You care because you're car loan, credit card payments, etc. are at risk. If thisworsens you really care because you job, your retirement, your kid's college and your healthcare is too. There'sactually plenty of money to loan if the banks weren't afraid they'd lose it. Call this the paradox of caution - whenone bank is careful and nobody else changes their behavior o.k. But when the next two banks react by alsogetting cautious that quickly turns into four, then forty, then four thousand. It's like a benign and life-giving fluid we


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need to live where some cells suddenly turn cancerous. If caught and treated in time it won't spread. That's whatthe Fed and the Treasury were trying to do until last week when three major danger spots metastasized intocontagion at alarming speed. Not it's systemic and it needs a massive dose of chemotherapy and radiationtreatment. That comparison is deliberate btw. No one enjoys such treatment, wishes they had to undergo it but it'sthe best we have available. Unlike cancer the really sad part is that this is all self-inflicted by widespreadirresponsible behaviors.

3. Economic Collapse is the Risk: even if the total rescue investment were doubled and a deadweightloss we'd still get a positive return. All therescue does is keep the wheels on thewagon by un-freezing the credit markets. Itdoesn't make the Housing crisis go awayand it still has two years to run to get backto more reasonable values and work offexcess inventories. Nor does it stop therecession that's underway from happening.What it does do is stop it from turning intosomething far...far worse and ending up ina 15-year malaise like the Japanesecreated for themselves by trying to avoidrealities and wave the tide out when itwanted in. Learn to surf the waves, don'tgo surfing or drown. Those are the choiceson offer...period, end-of-story. This beingthe ocean we swim in it's hard not to play.Drowning is not much fun. Let's see if wecan learn to swim - and it doesn't matterhow well. Only that you keep your headabove water for long enough to reach theshore. Let me give you two cases thatconcern the bald twins, King Henry and Uncle Ben, as well as the President and apparently darn few others.

The trick is to ask yourself what the economy looks like over the future with and without a rescue. Now if thingsreally seize up the numbers will be much worse. These two cases are not major downturns (trying to avoid the Dword here) but are worse than the downturn we will have to live thru if the credit markets aren't repaired. The Badcase is a moderate recession followed by slower than potential growth while the Malaise case is a more severedownturn finished up with the Japanese disease. In the first case the total losses are $18T while in the secondthey are $25T. Plus of course the destruction and blighting of all our hopes for the next two decades but that'shard to analyze.

4. Deeper Problems Remain - the Rescue is a quick-fix proposal to keep the wheels rolling and doesn'taddress nor is it intended to address, the need for regulatory reform, a short-term stimulus package needed to getthe economy cranking again. Or the necessary investments in infrastructure, energy, education and newtechnologies that are required for a prosperous future. All it does is reduce the risks of Malaise, which areotherwise pretty high.

5. Congress Not Acting Well - if you've been listening to any of the hearings you're hearing a lot of yokellike posturing and just plain ignorance on display. How much of that is political kabuki and how much of it is deadserious isn't known. If we're lucky it was 1/3 play-acting and 2/3 posturing for the folks back home so theCongress critters could return and sell the package. If we're unlucky it was 2/3 dead serious and 1/3demagoguery by politicians without a clue. Given that the leadership managed to craft the details of a legislativeproposal that addressed the core of the original proposal, added on the fixes that made it salable and palatable,had the public and full support of the President and were blindsided in a surprise attack with no warning by HouseRepublicans at the last minute in a political maneuver triggered if not directly supported by John McCain and his


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grand-standing inclines me to the latter for some. On the other hand they climbed back into the pits to fight again.Bravo ! This is important - welcome to the Sausage Factory. This is how politics gets played. All those grandhopes we have for the right economic agenda are going to get wrung thru it.

6.Popular Pressures - by and large the politicians, even the good ones have no choice but to dance theKabuki dances because the outpouring of popular anger was and is over-whelming. This coming from an

electorate that was perfectly happy to ride the gravy train up when it met rising housing prices, a growingeconomy, easy boat loans, credit for vacations and all the goodies everybody consumed. When this is all said anddone we're all going to have to change our behaviors. The real downside risks here are that a major downturnturns us all into a witch-hunting mob and locks us into another decade of angst and general despair like the '70s.Except this is more avoidable and almost entirely self-inflicted.

7. Twins and Bush - Paulson and Bernanke having been performing well under incredible pressures foralmost two years. We couldn't ask for a better pair. The distinguished macro-economist who's spent a lifetimestudying this exact problem but also nearly a decade making policy along with a tough, no-nonsense financialexecutives who understands markets as well as anyone. Almost every other past pairings would not be doing aswell. We got lucky. On the other hand they aren't selling it.

8. Barry and Johnboy - up until four o'clock last night I though the candidates were playing it well asking usall to pull together and standing up for a non-partisan approach which is so critical. Unfortunately John McCainviolated every principle he purports to stand for when he attended to critical kiss and sign meeting and withheldhis approval from an all but done deal that met every requirement he'd laid out for a proposal he was entirelyignorant of and hadn't been involved in crafting. Leadership in this case calls for standing up and supporting thisas the best available solution crafted by the best available minds. Not posturing for your base.

9. WE WILL GET THRU THIS- perhaps the most important point. Despite long hours, much strain, theseverity and urgency of the task and being bushwhacked at the last minute by the House Republicans the Dems,all the Senate (so far), the Twins and Bush are keeping their heads and staying conciliatory. Last week when thisblew up in hours the markets and the credit markets almost crashed. So far today they're being a lot moresanguine than anybody should expect. Let's hope they're right.

10. IT'S UP TO YOU- at the end of the day this may still remain a great mystery but the slivers of silver liningin all this is we're getting to pre-test our candidates, the machinery and the process. As well as undergo a forcededucation in economics that was long overdue for everybody. You may not be able to judge the technical meritsbut you can judge the behavior and cut the Gordian knots of complexity.

Who's acting in a public spirited manner ?

Who's supporting collective action in the best interest ?

Who's stepping up and providing leadership by speaking in support ?

And who's attacking the other parties at an inappropriate time ?

Make your own judgments. We've got a lot more ahead of us of this sort of thing and the world you pick

will be the world we all live in. As Robert Heinlein was fond of pointing out, "not knowing how a buzz

saw works is no excuse if you're working in a lumber yard" .


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September 29, 2008

OOPS! Somebody Just Kicked the Wheels off the Wagon

http://llinlithgow.com/PtW/2008/09/oops_somebody_just_kicked_the.html

The original plan was to put up a post over the weekend looking beyond the rescue package but as the newsebbed and flowed we got distracted more than a bit. And still headed into today with a relatively benign outlookwhich turned out to be mis-placed. There's been a change of plan since instead of containing the breakout fromStalingrad we've had an ideologically motivated sit-down strike on the part of the troops who're now sulking intheir tents. So rather than our normal longish analytical post along with excerpts, charts, etc. we're going to focuson Steve Perslstein's latest column from the Washington Post which is as short, pithy, direct, accurate and honesta description, in ordinary English, as we've read. We've got a lot more to say but we're simply going to start hereand pick up more tomorrow, depending on how tonight's drinking goes. BtW - how's your food, water, ammo, fueland liquor stocks doing ? After you read Mr. Pearlstein's elegantly direct assessment we also suggest you consultJohn Mauldin's latest newsletter for a more detailed explanation: Who's Afraid of a Big, Bad Bailout?

They Just Don't Get It

OY VEY.

That is the technical economic term that best sums up a day in which the House of Representativesrefuses to pass a $700 billion rescue plan pushed by the White House and congressional leaders fromboth parties, Wachovia is taken over in a deal that will have the government potentially owning 10percent ofCitigroup, a few European banks fail, theFederal Reserve and other central banks areforced to inject an additional $300 billion into the global banking system, the Dow Jones industrialaverage plunges 777 points, and investors everywhere rush to the safety of gold and short-termTreasury bills. The basic problem here is that too many people don't understand the seriousness ofthe situation.

Americans fail to understand that they are facing the real prospect of a decade of little or noeconomic growth because of the bursting of a credit bubble that they helped create and that nowthreatens to bring down the global financial system. Politicians worry less about preventing afinancial meltdown than about ideology, partisan posturing and teaching people a lesson. Financiershave yet to own up publicly to their own greed, arrogance and incompetence. And leaders of foreigngovernments still think that this is an American problem and that they have no need to mount similarrescue efforts in their own countries.

In the coming weeks and months, all of these people will come to understand how deep the hole reallyis and how we're all in it together. They'll come to understand that the giant sucking sound they hear

is of a massive deleveraging of the global economy and the global financial system as households andgovernments, businesses and investment funds adjust to living in a world with less debt and moreinflation.


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September 30, 2008

Calm Down: the Fat Lady Ain't Sung, Yet.http://llinlithgow.com/PtW/2008/09/calm_down_the_fat_lady_aint_su.html

Well now that we've all had a decent night's

sleep, being defined as not sleeping like a babytoo..o much hopefully we can step back and getsome perspective on this. A couple of analogiesoccur to me. The underlying cause of all thiswas the massive voter negative reactions whichprompted and supported a palace revolt by theHouse Republican back-benchers.

The best comparison is that the Peasants setout to burn down the castle and destroy themonsters but instead set the forest on fire andare about to see the village go up in flames.Now the question is can we contain the fire, put

it out and then we'll deal with the monsters. Thepolitical cartoon collage almost captures thingsperfectly IMHO.

The "interesting" thing here, at least for me isthe extent to which the most primitive parts ofour brains have dominated those reactions (thelizard-brain) and how ill-informed almost all thepundits, legislators and others have been.Including many who should know better. One doesn't expect deep financial expertise out of the general populacebut the lack of grasp of people in decision-influencing positions should be a permanent blight on their records. Ona par with Winston Churchill's triggering of the British Depression of 1922.

How Bad Was It ?

Yesterday the US equity markets lostabout $1.3T in value. Now one canhonestly argue that we're due for a majordownturn in the markets, which haven'tproperly priced in the rapidly metastasizingdownturn, but the question is how far andhow fast? This certainly hasn't helped.

Judging from the reactions prior to the voteof several of my network the conspiracytheories are widespread among more than

the peasants as well. So these resultsshouldn't be surprising. For the record boththe Rep. and Dem. leadership and, so far,membership in the Senate stepped up tothe plate as did the House Dem.leadership.

The Rep. leadership in the House threwmajor monkey wrench in the works last


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Thur. when they disrupted a deal that met all the requirements and the principles of both candidates. JohnMcCain's statement that there was no deal and his principles weren't satisfied is, IMHO of course, somewhatdisingenuous. Somewhat in the sense that there was a backbenchers revolt. His subsequent statements haven'thelped much and show a lack of grasp of the importance and intricacies. Obama, while still speaking as they bothmust, to the populist anger has done a much better job of attempting to calm people down, explaining thenecessity to act and supporting the process. Particularly by concentrating on the forward/backward sausage-making of the legislative process that we're all now getting over-educated in.

If you'll permit the wry observation some of my own early religious training was in economics though I becameapostate and went into business while retaining a lot of affection and conviction about the discipline. And learningthat the book theories must be balanced and integrated with a lot of real world practicalities. But for those whoargue that it's all theory let me tell you your flat wrong. In the long-run economics works as well as the Newtonianphysics that describes the orbits of the planets. As we're all going to be learning here shortly. So for all the folkswho think economics has no laboratory verification let me warn you we're all about to be lab rats in yet anothergiant field experiment.

Leadership to Date

Last week began with an awesome and somewhat skilled display of political kabuki as the Senate hearings were

kicked off with posturing displays designed to placate the angry, fearful and vengeful electorate. By the end of theweek enough progress had been made that a workable bi-partisan package was ready for approval. It was ofcourse blown up but put back together over the weekend. What is slightly amusing is that the heart of theproposal is entirely intact and it was merely wrapped with clauses designed to make it more palatable andsaleable. Both the Kabuki and the wrapping were vital to moving it forward because, in the face of profoundignorance, it was necessary to force it thru the approval process. For the record the final vote (Y/N/Pass) was:Dems(140/95/~), Reps(64/133/1),Ind(~/~/~) for a Total of 225/208/1.

Now a lot of blame is being placed on a floor speech by Nancy Pelosi for attacking Rep mis-management. Notsure that her timing wasn't bad but then she hasn't had any sleep in a week either. If you listen to the speechthough it struck me more as attempt to save a failing bill but telling her colleagues that they'd address and fix alltheir long-term substantive concerns when they came back but vote for this bill now. Clearly there wereopponents in both parties but this was a Rep. bill, put together by the leadership of both Houses, strongly

supported by the Pres., initiated by two of the best public servents we've had and the perfact men for the job(Paulson with his exemplary real-world experience and pragmatism and Benanke with his distinguishedbackground as one of the world's leading macro-economists and a specialist in the Depression). At the end of theday this bill failed because the House R's decided to oppose it and they were given air-cover and leadership byMcCain.

If you want to see some real straight-talk by a man who know's what he's talking about listen to Sen. Gregg's

press conference (R of NH btw). Here's the URL: rtsp://video1.c-span.org/project/economy/econ092808_gregg.rm

And back that up with Mark Zandi's interview on his recent book. Finally walk, don't run, to read John Mauldin'slatest newsletter.(Who's Afraid of a Big, Bad Bailout?). Save your energy, you'll need it later in the bathroom.

Judging the process we apply the criteria we've already set out. Who's acting to lead? Acting in the public interest? Spending less time pointing fingers and more acting, constructively and proactively, to support this critical bill ?So you can judge for yourself we've included various press conferences and speeches in the readings. IronicallyPelosi said nothing on the floor that McCain hadn't said in his press conference the week before, during thedebate, on Sixty Minutes and in his press conference after the failure. With a major difference.

Her speech spent a 1/3 of its' energy on polemics, a 1/3 on futures and another 1/3 on pass it now. His was allabout partisanship (or at least 80%). This is not the country first, straight-talk that was supposed to be hishallmark. Either this was a display of massive ignorance of the consequences and how things worked, a brillianttactical political manuver for which both parties leadership tried to give him credit or both.


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My suspicion is that as Obama continues to play the public spirit card, with the necessary popular wrappings tosell it given voter angers, and as more and more of the sausage making becomes visible that he may have justcost himself the election.

On the other hand the ex-post statements of Paulson, the President and Dodd and Gregg continued to sustain aspirit of not laying blame, of understanding the job-threatening difficulties for the House representatives, to appealto bi-partisanship and to emphasize the criticality. Now if any of this is working for you is the time to speak up. Tothis point people still weren't and aren't taking this as seriously as it deserves to be taken. Maybe that'll changeand we'll get this rescue package passed in a workable form. The punditry is certainly not helping and the dearthof constructive suggestions and total lack of insight is stunning. With the occasional exception like our last postfocused on Perlstein's column. Let's hope we end up doing the right thing. The downside risks are moreenormous than anyone is admitting.

October 11, 2008

Anatomy of a Crash: Welcome to the Political Sausage Factoryhttp://llinlithgow.com/PtW/2008/10/anatomy_of_a_crash_welcome_to.html

Now that we've just had the worst single week in thefinancial markets in post-war America, that people are(literally) shivering in their beds and nobody knows whichend is up now what? The answer to that is technical,economic and political. But remember back in distanthistory when Wall St. was going to rip us all off with a"bailout" package and the consensus reaction was let 'emburn in hell. Well we did, they are and we've got the seatright next to 'em. Be careful what you wish for - God'slistening and he has a bleak sense of humor.

There's so much going on we can't compress all the

explanations, analysis and readings into one post. And it'sbeen moving so fast it's been hard to keep up. For a bitmore technical explanation of the market situation, and afew reasons for a gleam of hope try this: Whistling Pastthe Graveyard: Market Assessment and Outlook. And fora look behind the curtain at the economic realities whichare just beginning to come home try this one: Wheels Back on the Wagon ? Still Headed for Icy Curves along withthe prior post: Marketing Elephant Pills: Struggling to Explain the Rescue. So here we're going to concentrate onsome of the political and policy issues with more to follow. However the bottomline is that the composite politicalcartoon exactly captures what triggered a crisis into a near collapse.


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Inside the Sausage Factory

This started out bad, as we've discussed, andmetastasized into something really dangerous but,IOHO, what sent things over the edge was the failure of

the rescue package on the first attempt in the House.And make no mistake, it failed because it not onlydidn't get supported by the Rips there but wasactively opposed on ideological and partisangrounds.

In fact the House Dems more than stepped up to theirresponsibilities. Unfortunately by the time the billeventually passed it was necessary to scare peoplewhich woke up everyone to how fragile the situation isbefore we prepared to cope with it. Now that's not the only thing that went on. Rather like that H.S. lab experimentwhere you drop just one more grain of salt in the super-saturated solution which immediately crystallizes into anear-solid this was a pre-avalanche situation just waiting for that last big boulder to start the whole thing down the

mountain. BtW - that's not entirely a metaphor but how the mathematicians describe catastrophic cascadesleading to collapses. The picture is from the press conference just after the Rescue package was passed - youcan judge the level of strain AND the anticipated results from the near giddy grins on the faces of the most seniorand serious members of both House and Senate. Unfortunately little did they and we know we were all standingon the lips of the abyss.

Now What?

After the break you'll find some readings on the the anatomy of the political backstory and some on the financialbackstory. The former substantiate all the conclusions we're suggesting IOHO. Skim 'em and reach your ownconclusions if you like. In the latter section we especially want to draw your attention to the story and audioclipsfrom PBS on some of the details which are all couched in non-technical terms. We strongly suggest you listen tothose - it'll only take a few minutes and surely this crisis deserves that much attention ? Even more strongly we

suggest you listen to Charile Rose's interview of Warren Buffett who provides his usual insight, folksy wisdom andblunt, plan-speaking truths about where we're at and where we're going.

The bottom line here is that y'all just got a lesson in practical politics and what the majority of the electoratethought it wanted. The problem is that what you've seen is the triumph of the lizard-brain over good sense. Thelizard-brain being that primitive part we inherited from our remotest ancestors that makes decisions on emotionsand survival instincts and relies on the thinking mind to help rationalize things and get us out of trouble. We aren'tgoing to wax on having done so at some length, if rather abstractly, in major prior posts (Inside the SausageFactory: the 4P's of Political Reality ,911 Memorial: Fix the Problem Don't Repeat the Crash,RationalVoters, Public Choice, Economics and Futures).

Here's the key point - this is going to keep happening as long as we keep electingpeople to public office who tell us what we want to hear instead of telling uswhat's really going on.

You don't have to know the technical details of these major issues to make deeply informed decisions. What youdo have to do is pick people to represent you whom you trust, who tell the truth and who will act in the balance forlarger as well as narrower interests.

Let me that another, blunter way.


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There's nothing going on that we didn't encourage. Make up your minds whether or not the party's worth the pricethe Piper always charges. And then either party on or let's start cleaning up these messes.

October 12, 2008

Wobble Wheels Wakeup: Crisis,Response, Policy, Executionhttp://llinlithgow.com/PtW/2008/10/wobble_wheels_wakeup_crisis_re.html

That loud squeaking noise you hear and the side-to-sidemotion making you see-sick is "US" trying to get thewheels to stay on the economy wagon, keep 'em turningand get on down the mountain. After a pronounced lack ofpolitical leadership scared the bejesus out of the marketsthey shared the angst by scaring the bejesus out of us all.And in the last week or so, shall we say, the worldwide

schadenfreude with (for example) the German FinanceMinister dancing on the grave of the American economyhas metamorphosed into a worse crisis in Europe that'sspreading worldwide.

Oddly enough this apparently was the wakeup call that finally got everyone's attention despite literally years ofwarning. Call it re-discovering history. Not the history that says that market economies are subject to cycles orthat speculation leads to booms which lead to busts. We knew all that. No, we're re-discovering something morefundamental...people don't pay attention until the pain exceeds the gain. Which threshold was crossed this weekapparently !

The Silver Light in the Tunnel

Which is good news in and off itself but there'sactually better news. Not only has the rescuepackage passed but

a) it's being modified or extended within the existingauthorities to include other essential steps, includingbank re-capitalization, direct purchase of commercialpaper and some plans to buy down mortgages. And

b) similar programs are being rapidly adopted on aworldwide basis by all the developed economies andthey are coordinating their efforts, though more thansomewhat hampered by on-going parochialisms.

Nonetheless the toolkit to get out of this mess is beingput in place about as fast as possible, let alonereasonable, by some very competent people who are also demonstrating a superb capability to innovate understress (Adm. Jim Stockdale's primary and No. 1 criteria for real leadership! Thoughts of a Philosophical FighterPilot (Reprint ed.))

At this point we've still got some pain to go though the markets may be calming down, at least the equity marketsthough considerable rehabilitation needs to be done (as we've been discussing) on the credit markets.Nonetheless we have the tools - and if that sounds too much like the leadin to the $6 Trillion Man I strongly urge


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you to listen to Paul Volcker's Rose interview. (http://www.charlierose.com/shows/2008/10/09/1/a-discussion-about-the-economic-crisis-with-paul-volcker ) Which doesn't meant there's not some more pain to come but doesmean that all this talk of a "Great Depression" is beyond overdone - if it bleeds it leads and right now the economyis what's bleeding.

Some Perspective

After the break you'll find Volcker's WSJ oped pieceexcerpted along with Gordon Brown's, which outlines thenature of things, necessary corrective measures andshows some real grasp and leadership. While I'm not surehow he's received in Britain this is the kind of thing weneeded over here and got only from some. And thecomplete opposite from others (Anatomy of a Crash:Welcome to the Political Sausage Factory).

Neither of the candidates has particularly steppedforward, but the Senate leadership did on both sides ofthe aisle as did the House Democratic leadership. We

won't further comment on the reprehensible to despicableactions of the House Rips but you likely take our point.But the two guys who've stepped up and carried the load are Hank and Ben - who've been struggling with this forwell over a year, continue to meet Stockdale's criteria for leadership of performing well under incredible pressureand keeping a calm head and putting up with all the nattering from the critics who have almost uniformly focusedon knocking things down instead instead of helping to make them better. The cartoon is very funny, IOHO, butgreatly exaggerated so take it as black humorfrom somebody who's a superior critiquer but nota contributor.

The graphic at right is a much more realisticdepiction of the strategic alternatives we're facing,though being a very simple chart it likely has no

emotional impact. Let me try and wrap somewords around it to help out.

The bottom sub-chart shows GDP under fourscenarios: a "Mild" downturn though one stillmore severe than we've seen in thirty years. Myexpected case and two bad cases - one wherewe have a protacted and fairly severe downturnand the other where that bad case morphs into asustained malaise.

The equivalent of the GD is NOT shown but it'dhave GDP declining for 4-5 years for a total 25%drop followed by another five of sub-par growth.

What we're facing is nothing at all like that. Let'sget some perspective people - this is going to bepainful enough and take us all pulling together.Time for the negative heads to quit pumping upcirculation in their outlets and start pumping upcirculation in the country!

In other words even the worst case is better thanthe GD by two or more orders of magnitude. What


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we're trying to do is get as close to the region between the green and blue lines as workable and stay as far aspossible from the orange and red lines. On the record to date I consider that both possible AND likely, thoughbeyond getting the wheels more secure and turning again there's a bunch of other things required that boil downto stimulate the hell out of the economy. But do it right and don't run us thru another trip in the political sausagefactory. But you'd better darn well vote for the candidate you think will do his best to avoid that repeat or take ourmedicine.

October 14, 2008

Populist Panderings, the Candidates and Real Solutionshttp://llinlithgow.com/PtW/2008/10/populist_panderings_the_candid.html

Well the last of the debates are tonight and THE focal issue, asit should be, is the state of the economy. In our last post(Wobble Wheels Wakeup: Crisis, Response, Policy, Execution)we discussed the situation beyond the various worldwiderescue and re-vitalization efforts. In particular a key point we'llre-iterate is that once we get the wheels bolted back on thewagon we need to keep careening down a rather icy mountain

sloped. A serious recession is pretty much in the cards andlocked-in. The only real debate is how deep and how long; andthis one is likely to be longer and deeper than anything manyfolks have seen for a long time.

One of the "interesting" anecdotes making the rounds in thefinancial community is that all the advisers aren't getting anyphone calls! It would seem that people are so shell-shockedthat they're still trapped in the 1,000-yard stare syndrome. Formy own part the contacts from family, friends and network more than reinforces that. We saw a more thangenerational collapse in the markets all collapsed into basically week. They come by their shock very....veryhonestly. We had to talk a bunch of folks out of selling their existing portfolios on Mon. open - which meant theywould have missed the run up that mostly recovered the worst day from last week.

We're far from out of the woods yet. In the readings the first one, finally, puts the emphasis where it needs to be -all these worldwide interventions are NOT quick fixes. Now we've been talking up the economy as THE centralissue in this election for months (WRFest 20Jan08(Economics): Oops...Recession Ahead, Crisis, Standing) and outlined oursketch of a multi-faceted program that moves beyond arresting the immediate problems to looking at what needsto be done next and then beyond that. Which we thought we'd review here a little more.

Comprehensive & Strategic Economic Program

Given all that what should we be doing - and therefore what should be looking for in tonight's debate. Well twothings. One as close to this outline as possible and two minimal populist pandering, bearing in mind "nobody canhandle the truth". That said in both his acceptance speech and the last debate Barry basically walked right downour reccy's while Johnboy appears to be improvising as he goes and throwing out one offs - not an integratedprogram. You might/ought/should invest the time to listen to this interview very carefully - from the guy who's

called it for three years now!

Nouriel Roubini, New York University, Economics Professor Nouriel Roubini, an economist whopredicted the depth and magnitude of the current financial situation before the decline of Bear Sterns,discusses the indicators he saw and his recommendations for stemming the financial downturn.

Step 1: Get Credit Flowing Again - we've been discussing this almost exclusively for the last severalposts. While it's still very early days yet we think that the basic elements are in place and being acted on asrapidly as possible.


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Step 2: "FIX" Housing - we're not going to get the economy back on it's feet while Housing continues todrag so much. At the same time too many people bought too many houses for unsupportable prices with funnymoney. Until prices come down significantly MORE it won't start self-correcting. In other words we need for thehomeowners and the lenders to take another 15% haircut, write it off and re-negotiate the loans to somethingmore sensible. And it'll need a serious institutional framework.

Step 3: Major Fiscal Stimulus- the last so-called recovery was put together on the Housing ATM and waspumping $500-700B/year into the economy at least. The economy will fall into a major serious recession unlesswe stimulate it and that stimulus needs to be of the same order of magnitude. This also needs to be quick,targeted and temporary - not another po

Economy vs. Policy vs. Politics: From Early Warnings to Near Collapse

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