A Question For Stirling and Numerian and Ian, If He's Around

After reading this article, and knowing a little bit about how markets work, I'm inclined to think we may see a devastating market slide in either September or October.

Note to Readers: Numerian, Stirling and Ian respond below in the text of this message

Here are some of the headwinds facing the economy from the article:

Many of the fundamental forces in the economy remain worrying. Home prices are still falling, though their rate of decline appears to have slowed in recent months. Defaults on all kinds of loans are rising. In the broader economy, the unemployment rate is rising and consumer spending has been faltering.

Coupled with the refining fiasco we're seeing develop in the Gulf of Mexico Region, the recent Fannie and Freddie nationalizations and an already weakening economy I'm inclined to think the time is ripe for a massive sell-off. Are you two inclined to agree, and if so, where do you put the odds? I put them at about a 50-60% probability something like 1987 but more long-lasting--and much more destructive--is quite possible right now. Stirling has written that we're not at the ultimate crisis yet, but the penultimate one. He's quite possibly correct. However, I just get a sense, call it that animalistic gut reaction to how markets work, that it might come sooner than anyone thinks, especially if Roubini's hypothesis of a generalized run on the shadow banking system does happen.

What's your take? Feel free to just add to this post in italics, as opposed to the comments.

Numerian here, Sean-Paul:

I tend to look at this question both fundamentally and technically. Fundamentally for the market to have a crash there needs to be an Awakening Moment. We are approaching such a moment, and your gut instinct is correct. For the reasons you have given regarding severe imbalances in the global economy, and including those that vonbahr has listed below, investors are facing a moment of truth when they realize not only that not all institutions can be saved, but a good many more are going to collapse. In fact, the entire credit generating mechanism of the U.S. is imploding, and nothing can save it or restore it quickly. Is this sufficient to create a crash? Quite probably, though it tells you a lot about how many ludicrous mortgage securities were created in recent years that we have institutions failing when mortgage delinquencies are nowhere near their peak, especially for Alt-A and prime borrowers. Perhaps the Awakening will come when people tie the banking system collapse to the inevitable depression that follows such an event, or perhaps when everyone realizes the US government is itself bankrupt, in that its good faith and credit is shot. This will be evident when it loses its Aaa rating.

Technically, we can look at it from a long term perspective of a 100 year history of the Dow, for which we have very good data. The Dow in this period has had a strong run up in three long waves, two of which have been corrected. The first wave peaked in 1929 and was corrected almost entirely to its starting point by the Great Depression and crash. The Dow then patiently rose to a new peak in the 1970s and then went through over ten years of sideways trading to correct that move, with about 60% of that move retraced. Then starting with the Reagan years in 1982 the Dow went from 1,000 to 12,000. This rally peaked only recently, and looking at things as one should long term on a logarithmic scale, no significant retracement has occurred, not even to the minimally expected 33%. A decent 50% correction of this rally, measured on a log normal scale, would bring the Dow to 4,000, though it could easily overshoot this target. This perspective says a major decline in the stock market is overdue, which is now coinciding with the fundamentals out there as well.

Will we get a 1987 crash, a one-day 22% collapse? The circuit breaker system probably prevents such an event, and also mitigating against this are the popular Ultrashort funds that allow you to short the indexes and sectors by 2x. So many hedge funds are using these recently that it is hard to get traction on the downside, because rallies tend to get magnified as the short covering is twice as violent as it used to be. What we are likely to see are lurches down with sharp recoveries, all the way to 4,000 in a few years time - a really vicious experience.

What Paulson is trying to do is forestall this crash before the November election. He may well succeed, because pretty soon the short term cycles, which govern market behavior every six weeks or so, will be in his favor. These cycles work until they don't, which means they could get overwhelmed by sentiment and the fundamentals. But clearly the administration is doing everything it can to save John McCain and the Republican Party before the economic reality hits the market.

Stirling Newberry

There already is a crash going on, in emerging markets. Consider the falls of China, Russia, and an assortment of other markets on the peripheries. While it is not beyond the realm of possibility, namely it's worth hedging against a massive market slide, there is a low probability of a market slide this year in financial markets. That's because the outgoing President is going to do everything to prevent one. He's got no reason not to leave everything on the field, just as with the Iraq, "surge." There's no next election for him.

Right now we are seeing a crash in all of the peripheral value. Example, hedge funds, MBS, including Freddie and Fannie. The thing to realize is that there is a vast amount of cash still parked on the sidelines in the "Sovereign Wealth Funds" and other forms of nationalized assets. While we've been spending, they've been saving, and they are going to want to acquire strategic assets in banking and so on. Any place which is "too big to fail."

The reason for this failure is the failure of Reagan/Thatcher's Red Queen's race. The idea was that we would create paper wealth faster than the oilarchies could buy it up. Until Bush came along, it was sort of working, with the ordinary caveats that nothing lasts forever, and the more specific caveats that it was gradually corrupting the institutions that made it work, such as Free Trade becoming development arbitrage and labor arbitrage and the financialization of the economy.

When those selling to the US could save faster than the US could create paper wealth, and Bush broke both parts of that equation by hobbling the stock market, and by profligate exporting of dollars to pay for, as Wes Clark called it "The Greatest Strategic Blunder of the Post-Cold War Era."

So crash? We should be so lucky to get it out of the way now. Instead what is likely to happen is that the Fed will take on bad debt,print money and assets will flee to the few remaining safe havens that are implicitly or explicitly assured by the federal government.

Instead of looking for the next "big one," it is more useful to think of us as living in the shadow of a "big one" - namely the NASDAQ/Dow crash of 2000-2002. The global economy has not really gotten traction since then, even though, on paper, this looked like a great decade. Instead what was being done was a rapid climb up the curve of diminishing returns on oil consumption and labor arbitrage. The upside is that hundreds of millions of people have entered the affluent economy. The downside is that almost all of that growth was bought at unsustainable prices.

What I am looking at is when do the fast growing sectors suffer their "mercantilist meltdown", that point where their internal bets of 20% growth in their hotspots are thwarted. If you are leveraged at 20%, then 10% looks like a depression. At this point capital flees, as it is fleeing, to the safe havens, such as oil states and a few areas of the US stock market. When these give out, and they will at some point, the rout can get to destroying core misallocated capital.

So short answer: unlikely to see a crash in core US equity values at the present time, very likely to continue to see minicrashes. I was telling people before to short Freddie and Fannie and MBSs as "free money."

As for what's wrong in a nutshell? It's an old story, the people in possession of the economy don't actually own it, so they pillage the owners to pay themselves. It happens over and over again, and each new cycle turns the running of polity and economy over to a few, and then wonders why they wake up in crate wearing a barrel.

BTW Barrel, reminds me. Why Barrels? Because barrel making was one of the long established trades, coopering it was called, that manufacturing was destroying with commercial cans and jars. Economists like to use "buggy whips" but that's a bad example. Barrels are better.

Ian responds:

I don't know. What I'm looking for is when the credit gets cut off and the Fed has to either raise rates through the roof or let inflation get completely out of control. These huge guarantees are making the ostensible economic plans of both presidential candidates complete fantasies unconnected to reality. Revenues are going to be way down, municipal state governments, pension funds and so on through the US are going to be bankrupt, and State governmetns are going to be hurting massively.

So what I wonder is what happens to the dollar and what happens to the financing rates? What happens to general demand? As for the stock market, as Numerian notes, Bernanke and Paulson don't want it to crash yet, but that isn't their first concern anymore. If it was, they would have paid someone to take over Lehman. They're beginning to worry about their own reputations. But the stock market has never been my strength. It'll crash at some point. Wouldn't be surprised if it was Sept/October. But wouldn't be surprised if it was later. How's that for a wimp out.

It's currency markets and bond markets that really concern me....

Sean Paul Kelley September 14, 2008 - 10:32pm

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( categories: The Markets )

Market Slide

The remarkable fact is that since last October's high of the Dow/S&P500, the declines (and upward pops) have not been more dramatic a la 1987's one day 22.6% drop. Charlie Rose had Bob Rubin and Larry Summers on his program last week. Rubin was as straight as he could be in noting that, 1) the worst was not yet over, and 2) he would not rule out a disaster. Rubin termed the current financial crises the proverbial perfect storm. No one has seen such a convergence of a plethora of simultaneous troubles all at once like this before, period. Roubini is correct and that raises the question: how many shoes can drop before the backbone of confidence is broken and institutions and individuals throw in the towel? After months of experiencing one near-calamity after another, there is not much left to even professional trader's nerves.
I was on a telephone with a friend who had a seat on the Pacific Stock (and Options) Exchange on October 19th. We kept the line open from around 11 a.m. until the closing @ 1 p.m. (Pacific Time), the day the Dow fell 508.32 points. If the market had not closed, most experts felt it could have kept going south and by 5 p.m. would have been completely gone. Zip. Is that even unimaginable; yes, but there was such an acceleration of selling in the last 45 minutes and it was actually picking up momentum near the bell. There was over 1/2 a trillion dollars lost just that day alone. What most people don't consider or recall is that in the 2 weeks prior to that day, the Dow was ALREADY down 394 points. So, cumulatively, it was a huge loss in a period of 11 days. Conditions today involve: an open window to investment banks, a rescue of Fannie and Freddie, oil in early July @ $147.00+, real (not gov't nonsense) unemployment at 10.6%, inflation on the street-level of over 8%, a budget deficit projected of 1/2 trillion dollars (counting off-balance sheet Iraq/Afghani military expenditures), increasing trade deficits @ a rate of over $60 billion a month, bank write-offs so far of over $600 billion (including insurance companies and related financial institutions)...and I have not yet mentioned delinquencies and foreclosures in the housing market. Yet, so far, the "bad" days dancing with Mr. Market have been 3 to 4 %, and seldom back-to-back. I would say risk levels are in the ionosphere. Hope is keeping professionals from "capitulating" because as we know since mid-March, Bernanke and Paulson have come over the hill with the cavalry each time the mood reached dire levels and the dumping of entire institutional portfolios was a keystroke away. Hope, however, is no way to invest.
When and if a magnitude "category 5" sell-off comes, it should be no surprise as there will come a point when Treasury/The Federal Reserve either won't or can't buy the markets any more time. There is a limit how many body blows a (real) fighter can absorb and so, too, a community of investors can take in before they fall and stay glued to the mat. It just depends on how much more that has not been discounted descends. No one can say; but clearly it "feels" like it could happen ANY time.

vonbahr September 14, 2008 - 2:40am

desperately needed

3 sentence summary of what went wrong, and how Repub policy contributed

The summary CANNOT be more than 3 sentences, or it will have no political usefulness.

The summary should imply the better policy that we need, of course.

A major problem (in terms of politics) is that there is no narrative. Bad things are happening. No one has a good idea why, or what to do.

And Numerian, please, do not start in with the moral failing of the public who do not save enough.

First, I do not buy it. The public is not super sophistocated, and it responds to blunt cues. What the public heard for 20 years was that housing prices rise inexorably, and if you do not buy now, you will be left in the dust while everyone else accumulates wealth. So housing prices rose. So people took home equity loans, spending what seemed to be solid gains.

Second, even if you are correct and I am wrong, no one will ever listen to that message. We need action, so we will need allies. Deal with it.

Three sentences: that is the challenge.

jwp September 14, 2008 - 10:46am

3 Sentences that Explain How Republicans Have Bankrupted US

1. Ronald Reagan busted the Air Traffic Controllers' union, demoralizing working people and energizing the aristocrats.

2. The Republican Party, from that rallying event forward, has systematically deconstructed the US government and weakened what they could not destroy, all the while chanting the mantra that working people have no right to expect anything more than subsistence from life.

3. The Republican Party has destroyed political language, changed citizenship into consumerism, and made it impossible to discuss -- let alone address -- the fact that, in the name of privatization, they have allowed the aristocrats to swarm like locusts over all centers of public wealth.

LindaR September 14, 2008 - 12:09pm

3 long sentences

3 sentence summary of what went wrong, and how Repub policy contributed

Beginning with Ronald Reagan, the GOP adopted supply side economics or Reaganomics, which G. W. H. Bush called "voodoo economics" and David Stockton, Reagan's budget director, later admitted was a trojan horse for reducing the top rung tax rates. The Chigago School of Economics socio-economic doctrines of Milton Friedman and Friedrich Hayek, for example, were coupled with supply side ideology in order to justify deregulating the economy, thereby removing the safeguards that had been put in place in consequence of the Great Depression, as well as giving the Federal Reserve a mandate to increase and support both nominal GDP and asset values through monetary intervention and Tayor's interest rate rule. Accompanying this, legislation undercut workers' bargaining power and economic policy based on GDP growth without concern for national prosperity encouraged the flight of capital and jobs to developing markets, which resulted in a consumer debt boom when workers sought to maintain their lifestyle through borrowing to make up for their dwindling share of national income, and government piled on the debt train as well by putting two wars on the tab — result: meltdown.

Of course, this includes only the economic side of the debacle we are facing, since that is what we are discussing here. Actually, the as yet unaddressed constitutional crisis provoked by the GOP is much more serious with respect to the survival of the US a beacon of liberal democracy and bastion of Enlightenment political philosophy. Only one phrase is needed to describe this phenomenon: "rightist coup d'etat"

Admittedly, this is not a narrative. The Dems have no narrative because they haven't created a frame for it. As a result, they are reacting to the frame that the right has been creating over the past several decades.

Creation of a new frame requires a new vision. So far, the Dems have not advanced a new vision for America. Therefore, they are reduced to explaining how the GOP went astray in implementing their vision and how the Dems will do it better, while maintaining key pieces of the New Deal like SS and Medicare that the middle class still likes. Sorry, no deal.

tjfxh September 14, 2008 - 1:47pm

Okay

A house divided cannot stand. For 25 years Republicans have told you to fear other Americans as if they were your enemies. We have real enemies abroad, and real economic troubles at home, but we will never solve our problems as long as we let the Republicans continue to divide us as a nation.

Numerian September 14, 2008 - 11:08am

Well said Numerian! eom

^{“Is not our first thought to go on the road? The road is our source, our vault of treasures, our wealth. Only on the road does the ‘traveller’ feel like himself, at home.”

Ryszard Kapuscinski}

Sean Paul Kelley September 14, 2008 - 9:19pm

The real enemies have

been Wall Street. And they're getting taken out.

http://mauberly.blogspot.com/

mauberly September 14, 2008 - 10:03pm

Sounds ominous to me

creativelcro September 14, 2008 - 11:13am

my mistake

we need 3 sentences to explain the financial problem

my pet theory is that tax policy, skewed to rich, has created hot money creating one bubble after another. Also, regulation has failed to step in/ or has been evaded by new rules.

But I don't really know.

We need a short story for Dem pols to tell in stump speeches that wiil stand the test of subsequent investigation by nitwit journalists and "experts". Something that can be elaborated on over time, but we need the nut. The key explanation.

Very important. Otherwise, there is no difference between Dems and Repubs in public mind. And there is no seed from which to grow public support for more sensible policy.

3 sentences to explain the financial crisis, and to imply what to do about it.

jwp September 14, 2008 - 11:21am

Let me try

1. Nixon abandoned the idea of buying no more than the equivalent of what you produce (abandoned Breton-Woods but I mean this at the national and personal level).
2. Reagan rolled back the much of "The New Deal" through a tax bubble on the middle class and banking "deregulation".
3. Bush created an expensive war that overwhelmed the financial infrastructure created by Nixon and Reagan.

"You have no respect for excessive authority or obsolete traditions. You're dangerous and depraved, and you ought to be taken outside and shot!" - Joseph Heller

Joaquin September 14, 2008 - 12:58pm

Ummm, jwp, there really is no difference between

the Dems and the Republicans. That's the problem. The Republicans are a radical/revisionist party. The Democrats are the conservatives, in that they seek to preserve and conserve what was achieved during the New Deal and the Republicans seek to overthrow it.

But in the end, until the Democrats seek to move us ahead, and not just preserve the status quo, there will be no change.

Sean Paul Kelley September 14, 2008 - 9:18pm

I'll take a crack at it.

Under the Republican's, the rich got richer. They were supposed to let that money trickle down to you, but all they did was loan it to you at 10% (if you were lucky). And now that we can't pay them back individually, they are demanding we pay them back collectively.

Markets might be efficient, but they aren't fair. The role of government is to create incentives for fairness and a certain measure of equality while preserving as much of that efficiency as possible.

That is why we need a change, and that is why we need a democrat in the White House.

(Okay, I wrote that from the perspective of a democrat, so forgive me if you don't think Obama will deliver anything I mentioned. Separate issue, unfortunately.)

BuddhaSixFour September 14, 2008 - 1:11pm

One sentence answer

"Bush's greed killed the golden goose of the paper for oil economy."

Stirling Newberry September 14, 2008 - 1:16pm

Bingo

although I wouldn't attribute all the greed to W. He had/has a lot of help here.

tjfxh September 14, 2008 - 1:58pm

True...

But if the idea is to come up with a stump speech narrative, that's the end of the story. It has two problems: 1) HOW did Bush do that? and 2) You can't shove people in political messaging. You can only nudge them along. You can't take someone from zero to justified Bush-hater in one leap. It has to be an incremental process.

I think that's where a lot of progressive messaging falls short. We're all a little stunned when people hold the opposite view point, but we don't walk them over. We just respond with some variation of "Really? You actually like Bush? Moron." That just doesn't do anything. The problem then becomes that if someone does start this nudging process, we're quick to say "AHAH! They aren't progressive at all!"

My point is that for any political movement to be successful, you can't have both. You have to slowly walk the middle in your direction, whether that be the electorate as a whole or your Bushie co-worker who loves to spew Fox News quotes at you. Baby steps.

BuddhaSixFour September 14, 2008 - 2:30pm

New Reaganism or New Vision?

Fist let me reiterate what I wrote above:

The Dems have no narrative because they haven't created a frame for it. As a result, they are reacting to the frame that the right has been creating over the past several decades.

Obama's economic team is Chicago School. They are putting forth the "standard" solutions with some tinsel around the edge. Obama is trying to out-macho McCain, just shifting the focus to Afghanistan instead of Iraq. Obama is more like Bush here than McCain because it subscribes to the Bush doctrine of ignoring sovereignty, while McCain favors respecting it.

You have to have more than a narrative. Obama's narrative is that he's GOP (Reaganite) lite. First, it's difficult to beat the GOP at its own game by one-uping them. Secondly, it boxes you in if you are elected. Thirdly, it alienates your base.

As long as the Dems play this game they will be ineffective because there will be enough blue dogs in congress to ally with the GOP to undercut any progressive measures.

Without a new vision for American the Dems are the flip side of Reaganism. Whichever way the coin turns up that's what you get. In fact, the present day Democratic Party is actually closer to Reagan than the present day GOP, which has moved much further to the right ideologically and the way it governs. BTW, Reaganism can also be called American suburbanism (with a hidden bias toward oligarchic plutocracy and rightist nationalism).

See also from a somewhat different angle: Joseph Romm: Can Obama Win With Half a Messaging Strategy and Half a Ticket?

tjfxh September 14, 2008 - 2:51pm

Amen.

hvd September 14, 2008 - 4:50pm

It's not 3 sentences

It's a song: The Party's Over

The party's over
It's time to call it a day
They've burst your pretty balloon
And taken the moon away
It's time to wind up the masquerade
Just make your mind up
The piper must be paid

The party's over
The candles flicker and dim
You danced and dreamed through the night
It seemed to be right
Just being with him
Now you must wake up
All dreams must end
Take off your makeup

The party's over
It's all over, my friend
Now you must wake up
All dreams must end
Take off your makeup
The party's over
It's all over, my friend

“The Playboy reader invites a female acquaintance in for a quiet discussion of Picasso, Nietzsche, jazz, sex.” - Hugh Hefner

Tonsure Wimple September 15, 2008 - 2:32am

One other note

We have not finished pricing in the coming second dip of this double dip recession, so there is another downside run. Right now the theory on Wall Street is that after the election there will be one more hit of liquidity, for the Freddie and Fannie bail outs, and for whatever is done about Lehman Brothers.

Right now the money cannot be released because another hit of inflation would just kill McCain.

Stirling Newberry September 14, 2008 - 1:39pm

Well, it looks like Ike may be taking care of that

Inflation for US consumers = gas prices

tjfxh September 14, 2008 - 1:54pm

Because gasoline is a commodity

That we have trouble engaging in non-price adjusting for.

Unless you want lead back in your gasoline.

Stirling Newberry September 14, 2008 - 2:08pm

Market sell-off?

SPK: I'm inclined to think the time is ripe for a massive sell-off. Are you two inclined to agree, and if so, where do you put the odds? I put them at about a 50-60% probability something like 1987 but more long-lasting--and much more destructive--is quite possible right now.

Questions to ask:

1. What is the likelihood of a significant down-move in relation to a significant up-move in the near, intermediate and long term? (Where is the funding for a rise other than the huge sums held by the global financial elite? Is this enough to spark more than a short-term rise in asset prices without corresponding increases in both real profits and consumer real income? How likely is the financial elite to commit huge sums when a downward trend promises better values developing over time?)

2. How great is the risk of systemic financial collapse? (When Nouriel Roubini is talking seriously about it, among many others, I'd say it's a significant risk. Behind the façade, these people are freaking.)

3. How can I best protect my accumulated wealth and future prospects in light of these probabilities. (What's happening now is deleveraging. Lots of money is being parked in the short term treasury market. Other markets are not rising because of repriced risk in light of current instability.)

4. What's supporting the equity markets at the moment? (Government intervention, pure and simple. What happens next? The government doesn't have infinite pockets and at some point has to start printing. What effect will this have on the dollar? What happens when paper for oil breaks down?)

5. What's the prognosis based on the political situation? (Very bad. Neither Republicans or Dems are willing to admit how badly the system is broken, or what needs to be done to fix it, both immediately to minimize meltdown and long-term by reallocating capital to opportunity through incentivization and emphasizing national prosperity instead of pursuing "growth" as increase in nominal GDP.)

What we are engaged in now is a classic struggle among social groups. However, this struggle is peculiarly American. This struggle is primarily to maintain a sustainable suburban and ex-urban lifestyle that is in fact unsustainable and therefore doomed to fail, while keeping in power a ruling elite that has an open license to capture as much national wealth/income/rent as it can. This struggle is hurtling toward a bad end because there is no way that less than 5% of the world's population can indefinitely continue to use 25% of energy resources at the cheap prices it can afford without increasing productivity relative to the rest of the world to the necessary degree — a virtual impossibility as other nations develop.

tjfxh September 14, 2008 - 2:30pm

it cannot be organic

in my view, one problem Dems have on all issues is that they have been cowardly on all issues, and so took no strong correct stands to put them in a position to say "I told you so"

ok, well, water under the bridge

what should Dems have been saying? What did Repubs do wrong?

We need a simple story

Otherwise, when finacial collapse comes, Repubs will offer some big lie to prove it was all the Dems fault

they will anyway. But we are better off if we can figure out a narrative in advance

remember, most Dems are "honestly" clueless

what should the story be? Nothing too cosmic

jwp September 14, 2008 - 3:20pm

Too late

Otherwise, when financial collapse comes, Repubs will offer some big lie to prove it was all the Dems fault

While is fortunate that the breakdown is actually beginning on the GOP watch, the Dems have done almost nothing to call them out on this or prepare the nation for what is coming. As a result they are going to bear a lot of the blame and if in office, probabaly the brunt of it.

This is because the Dems subscribe to the same Chicago School discredited policies that have guided the GOP over the past decades.

There is a reason they have no narrative to counter this. They either didn't see it coming or were chicken to call BS.

tjfxh September 14, 2008 - 3:45pm

"cowardly on all issues"

That's not easy either. They deserve extra credit for that effort.

Three sentences is beyond me but here's a thought

The Money Party

"It is not about Republicans versus Democrats. Right now, the Republicans do a better job taking money than the Democrats. But The Money Party is an equal opportunity employer. They have no permanent friends or enemies, just permanent interests. Democrats are as welcome as Republicans to this party. It’s all good when you’re on the take and the take is legal

"In every campaign for major office, the party passes out money and buys candidates from both parties. Thanks to the candidates who get elected, this pay to play system remains perfectly legal. Those elected get luxury trips, sweet jobs for family members, and more campaign contributions for the next round of elections. What they do is perfectly legal even though it looks like bribery.

"In return for contributions, the election winners come through by fixing the laws so that The Money Party cleans up. Lower taxes, highly favorable business regulations, laws that shield their businesses from real competition all start with the nonstop flow of Money Party funds. Cost is no object, because in the end it’s all paid for with our tax dollars.

"The Money Party gets no-bid contracts as well as the ability to lay off their employees and dump their pension plans just about any time they want. It doesn’t get much better than that. It's welfare for big money and survival of the fittest for the rest of us."

"We are nothing to them."
http://www.scoop.co.nz/stories/HL0709/S00549.htm

Michael Collins September 14, 2008 - 3:49pm

Plutocratic oligarchy vs Liberal Democracy

The terms in political philosophy are "plutocracy" or rule of the wealthy, and "oligarchy" or rule of the few. The US, as you point out, is now a plutocratic oligarchy rather than a liberal democracy.

The question is how to get out from under the thumb of the Money Party.

What is needed is effective campaign finance reform that keeps money out of politics, which probably requires taxpayer financing of elections with no private money permitted. It also requires strict regulation of lobbying to eliminate what is in effect legalized bribery. It also requires media decentralization, although the internet has been a giant step forward and as the world goes digital, dominance by printed and television interests will likely diminish. The trick will be to maintain net neutrality and decentralization.

Overall, the trend toward consolidation and centralization has been a trend toward the concentration of wealth and power in the hands of a few. The republic began with a debate among the framers over just such issues, Hamilton (the first Republican, figuratively speaking) arguing for centralization and Jefferson (the first Democrat, figuratively speaking) arguing for decentralization.

Are you listening, Dems? There's a new vision in this, which is an old vision called Jeffersonian democracy. Can the Reaganism-lite. When will you learn that you can't fool people by putting lipstick on a pig. Without a real choice, they will continue to vote Republican instead of Republican-lite. And even if you win, they will hound you for not doing it right (pun intended).

tjfxh September 14, 2008 - 4:06pm

If I remember my history FDR didn't come in with a vision

He offered hope and a hands-on, practical set of solutions to help people in need. I don't think Keynes' General Theory was anything more than a possible economic justification for large-scale government intervention in the economy. It came in support of something like the New Deal after the fact. Roosevelt didn't come into office brandishing Keynesianism as a solution to everyone's problems. The theory met the man, not vice versa.

Remember too that the collapse of the banking system occurred in 1933, and this really set the Depression into a grinding force of wealth destruction more than the 1929 crash. Roosevelt had to respond to this calamity, but he didn't take any blame for it at the time.

Our current crisis has blind-sided most professional economists, certainly the ones surrounding McCain, Obama, and just about every member of Congress. The Roubinis are rare and even now aren't getting that wide an audience (how often do you see Robert Prechter invited on TV?) In many respects the financial markets, the commentariat, the politicians, and the regulators are sleep-walking through this crisis. That they now realize that maybe Lehman, Merrill, WaMu and perhaps others could fail, when it is too late to stop them from failing, tells us everything we need to know about whether society is in a reactionary or anticipatory mode.

Oddly, it is the people who are anticipating the future with dread. I hear it all the time now, especially from wealthy people. How do I protect my money? Could the unimaginable happen? The ones still working in the banking system or government don't truly believe the unimaginable will happen, because their whole life experience tells them the world works in a certain way and problems get solved in a certain way. That's why the regulators and bankers are flailing around for the usual solutions like bail-outs, because that is what worked the past 50 or so years. They cannot see that the United States itself is bankrupt and the self-interested machinations of the power elite in the US have corrupted this country beyond redemption.

What if Obama had Roubini counseling him, or believed that a financial meltdown was highly likely? Would this help him on the campaign trail? Or would he be painted as a Cassandra, doing as much to cause the problem as anyone else? Is this election cycle ready for a candidate who calls for a radical overhaul of the economic and power structure of American society? I wonder. I'm not sure we're at that point socially yet; the pain threshold for the average American isn't high enough.

The reason I choose Obama over McCain is because Obama at least is curious and willing to experiment as well as change with the times. His party may be knee-deep in the corrupt practices that allow corporations to dictate public policy, and he himself is no stranger to the benefits of those practices, but if a true economic calamity strikes the US, at least he may have a shot at adopting radically different approaches. Have hope, as his campaign says, even if at this stage it looks like a faint hope indeed.

Numerian September 14, 2008 - 4:29pm

Agreed

The Dem have been cowed by the GOP framing and have been unable to oppose it effectively without seeming radical or out of touch. Now they have to live with that.

However, if there is a systemic breakdown, as it seems more and more plausible daily, then all bets are off, and a strong leader can propose and successfully deploy a new vision for America to meet changing conditions.

Will Obama turn out to have "the right stuff" in extremis. We may get to see sooner rather than later, but if he is elected, I very much doubt that the US can make it through his first term in office by just jiggling with the status quo at the margins. My feeling is that Obama can rise to the occasion, while McCain would be an utter disaster — a clueless tool of the status quo — while Palin would be in the wings ready to pick up the pieces for the ruling elite and throw red meat to Redneck Nation.

Whoever the next president is and whatever the character of the new administration may be, they will be sorely challenged in the next four years, domestically and abroad. What transpires over this time will shape the future of the US significantly, for good or ill, against the backdrop of which court fights over Roe v. Wade will pale by comparison, should the appointment and confirmation of new justices arise.

tjfxh September 14, 2008 - 5:13pm

There we go - agreed also

FDR even proposed a balanced budget in the race. In an odd way, that answers the question about Roubini and campaign pitches. Hopefully, he's reading Roubini and the others with good sense and data and plans to use him.

I suspect Obama is quite curious. I read a comment from one of his faculty colleagues at Chicago lamenting that Obama didn't seem to want to share ideas with 'them'(meaning the Friedman crew). But Obama spent a great deal of time there sharing with his students. I'd say that's a sign of good judgment and time management. 'Stupid' never works in times like these. Obama negotiated and escaped the Daly machine unmarked. He also surpassed Hillary and Bill Clinton, which requires considerable intellect and poise.

There's only one choice for president, even with the institutional baggage, just like there' only one for Congress, in most cases (not all).

I'm thinking though, that Obama will need FDR's charm and skills with the public but also Lincoln's ability to stare into the abyss and make some sense out of it.

Michael Collins September 14, 2008 - 6:41pm

The Right Stuff

While I've criticized his position, his choice of advisers, and the running of his campaign, I think that circumstances have forced him into that mold and that when push comes to shove, he has the right stuff and will surprise a lot of people.

ON the other hand, I believe that McCain will sorely disappoint under the same circumstances. I just don't think he can comprehend systemic change, and his advisers will be about preserving the status quo at all costs, even at risk of putting the ship on the shoals.

tjfxh September 14, 2008 - 6:46pm

Why are oil prices going down?

I cannot believe there aren't organizations out there who can analyze the data and figure out causes and effects in the market.

creativelcro September 14, 2008 - 5:05pm

I believe it's political manipulation

If not, then we've already started into a terminal deflationary cylce that has bled enough money from people that they's stopped buying gasoline (but I don't think that's really the case--yet).

How is it that we have wholesale gasoline futures for next month listed at $2.70/gallon and spot prices today for actual gasoline $2/gallon higher, especially when the forecast calls for fuel shortages extending at least a month or more?

Our total gasoline inventory is something like 189 million barrels and it takes 170 million barrels to keep the pipelines used to supply the country full (meaning this reserve cannot be extracted without putting more into the system).

Our product cushion has become so narrow that it's best measured in hours rather than days.

I am good and damn tired of being lied to and of having our markets manipulated for political reasons.

This kind of stupid behavior can lead not only to fuel shortages but to actual outages.

I did inhale.

Don September 14, 2008 - 10:01pm

The storm took the refineries offline

So basically, the folks who buy the oil and refine it are not able to buy oil for now. You need to look at prices for distillates.

"You have no respect for excessive authority or obsolete traditions. You're dangerous and depraved, and you ought to be taken outside and shot!" - Joseph Heller

Joaquin September 15, 2008 - 2:11am

This is true

especially with the LOOP being out of commission for a time (I hear it is now back on). But you must also consider that several million barrels a day of crude production has been stopped temporarily (since Gustav) and it will take at least ten days to get back on line.

Our crude stocks are also low. It went almost undetected, but bush tapped the strategic reserve last week (before Ike). This sent a signal to financial types that big brother had their back. This oil must be replaced.

It doesn't take much more than a little hurricane every now and again to prove big brother doesn't have as much power as they think they do.

I did inhale.

Don September 15, 2008 - 9:18am

Numerian, for goodness sake, focus

to mobilize people (probably after the collapse -- people being how we are -- we need a plan, of course

but we need a simple story of how it happened

to convince people what should be addressed and how

what is simple story of the most significant policy decisions -- or failures to act -- that led to the unwise and unstable financial situation

I love the details. Most people don't. How do we strip it down?

We need a simple outline, and a few telling examples

jwp September 14, 2008 - 9:20pm

Perhaps, jwp, what you are asking Numerian for is something

better suited to someone else. I'm not speaking for Numerian, but perhaps his strengths towards analyzing and dissecting and writing about the markets and other issues are his strengths, and political sloganeering aren't. I'm not dissing political sloganeering either. It is important. Just saying, is all. Dig?

Sean Paul Kelley September 14, 2008 - 9:40pm

The time is here to present a new vision for America

*Bear gone.
*Fannie and Freddie in government "conservatorship."
*Lehman bankrupt.
*Merrill Lynch bought out.
*Many more shoes to drop — AIG, WaMu, Wachovia, numerous regional banks....

Now is not the time to point fingers but instead to present a new vision. Just about anyone should get it tomorrow that this country is in trouble and so is the world. They know who to blame. They will be looking for a leader to guide them through this mess that greed and hubris created.

IN addition, the war in Afghanistan has just escalated into Pakistan, further destabilizing the region.

tjfxh September 14, 2008 - 9:55pm

What if people panic....

Everybody wants their money back NOW, and the FDIC cannot cover all the banks that fail (it seems that would not take much, given how little money they have)?...

creativelcro September 15, 2008 - 11:40am

Let's say that there is a

Let's say that there is a panic, and people are going to try to pull their money out of the bank. What are they going to do with it? It's not backed by any real asset, so it might as well be monopoly money if the banks fail The only possible issue is if the money is taken off-shore, which is not going to practical for most people.

Who's going to make a run on these banks anyway? The population is, in general, in debt with mortages and credit cards - they typically owe the banks money.

NateTG September 15, 2008 - 12:14pm

You know what I've been thinking about?

A children's primer, only for adults. Basic pictures showing the connections between key sectors of the economy, how they evolved over the past 25 years, where the excesses arose, and why. How it all came unraveled. How it has to be rebuilt. Perhaps 50 pages or so, selling for around $15. I've been sketching this out for six months or so, ever since you mentioned the need, jwp, for something simple. I don't think slogans will do it, but basic pictures (not necessarily graphs or charts) might work for most people, who have trouble enough with economic and financial concepts.

Now if there were enough time to actually put this together....

Numerian September 14, 2008 - 11:27pm

It would be a guaranteed best-seller, Numerian. Do it!

Sean Paul Kelley September 14, 2008 - 11:33pm

Democracy, Economics & Policy

Democracy cannot survive and prosper without an informed citizenry and a free press that rises to the responsibilities that this guarantee of freedom entails.

Economics is the infrastructure on which society is built. Almost no one knows the basics of economics AND how this applies to the health of a society and the making of political choices. This also applies to a lot of economists, sad to say.

Most people don't have a clue about how the local, region, national and international economies work, and so they often vote against their own interests or call for solutions that make problems worse. In addition, due to popular ignorance, sophisticated players can easily mislead them in the economic shell games they play.

Moreover, too many economists see economics as a field separately from life, in that many of their presumptions, such as that of rational agents, do not hold up against historical experience, as present events are now showing.

Arguing against market intervention, especially in the form of regulation and oversight, Alan Greenspan was convinced that rational players would never undermine their own positions, but present events are proving how wrong he was. In addition, many economists are blindsided by ideology, failing to recognize that their theories are based on bad philosophies.

So, by all means, go for it, Numerian. I promise I'll buy a copy for myself and recommend it to friends and acquaintances.

tjfxh September 14, 2008 - 11:56pm

excellent idea

footnotes on sources at the bottom of the page

I loath footnotes in chapters at the end of the book

jwp September 15, 2008 - 12:55am

Brilliant idea!

Need any help with that?

creativelcro September 15, 2008 - 11:41am

I don't know any good illustrators

Not to mention interested publishers

Numerian September 15, 2008 - 11:49am

Publishers? This is the

Publishers? This is the inter-web.

(I don't have any good ideas for illustration.)

NateTG September 15, 2008 - 12:16pm

WOW, Numerian!

This is what I've been waiting for. Before you publish it you should run it by me because if I understand it, everyone will :)

If I may, I would like to give you a few tips regarding the layout and design of your book. Although I'm not a professional designer I do know a thing or two about making documents visually calm and appealing. If you familiarize yourself with a few techniques for creating visual appeal as well as color theory, chances are that your book will find an eager audience and that the content will be better understood.

Anyway, good luck with it. I would like a 'signed' copy, please.

(edit - the first site I referenced also offers good tips on what kind of language to use. My favorite exercise in English class was how to capture the meaning of an entire paragraph in one sentence)

_{"While not a Playboy reader, she invites a male acquaintance in for a quiet discussion of Chagall, Nietzsche, jazz, sex." - not a Hugh Hefner quote}

adrena September 15, 2008 - 7:10pm

3 sentences

1. Reagan and the Republicans started a 'borrow and squander' economy. Bush took it over the top. This is no way to run an economy. The Democrats never had nerve enough to 'tax and spend' the way Republicans 'borrow and squander'.
2. Tax cuts for the rich just create a 'hurricane of hot money chasing hot money' above the everyday economy. It does not trickle down, it crashes down and destroys things, especially your job and savings. It never creates a better job for the average American...just a lot of business for Wall Street.
3. Basic Republican and conservative Democrat economic policy gets the average person to act against their economic self interest. It has used lies, racism, sexism and Madison Avenue media propaganda continually since the New Deal to accomplish this.

Place a sales tax on all financial trading. We pay sales taxes on everything we buy. Why not Wall Street?

JT September 14, 2008 - 10:03pm

Coming

Place a sales tax on all financial trading. We pay sales taxes on everything we buy. Why not Wall Street?

tjfxh September 14, 2008 - 10:12pm

Just before that...

...we need to go back to taxing capital gains as normal income.

Petronius September 14, 2008 - 11:46pm

"a new financial world order that will be born of this"?

`Tectonic' Shift on Wall Street as Lehman Fails, Merrill Sold - Bloomberg

quiet Bill September 15, 2008 - 3:00am

George Bush Said: "Technology Will Save Us"

I've pondered that statement by Bush for many years now and, the more I ponder it, the more I believe that Bush was repeating a core belief of the ruling class.

More specifically, when those with wealth retire, their valuable skills are lost as they decomission themselves to the beach or a card table at a casino.

This creates a stress on the system since the retired boomers will demand health care but they're retired so "who delivers it?" since only "those without money and skill" remain in the workforce.

So it seems like our technology has to save us becase technology is the only way of storing our youthful energy until it's needed in our old age.

IMO, globalization was a gamble that a technological renaissance would result and allow folks to retire but, as Stirling implies, that revolution became fat and lazy since profit could be made without having to produce new wealth.

So perhaps the stuttering stockmarket will send a shot over the bow of our distressed ship and let folks know that reagan's privatization effort is now having less impact as it becomes as anemic and cancerous as the stereo-typical government bureaucracy that it was supposed to challenge.

mrmx September 15, 2008 - 9:40am

There's a degree of truth to this

George Bush Said: "Technology Will Save Us"

But not if we shoot ourselves in the head through greed and stupidity.

The good news: financialization is over. Now maybe we can get back to production.

tjfxh September 15, 2008 - 11:01am

RE: Now maybe we can get back to production

I'll second that toast and, indeed, the Bush administration's legacy might be ending financialization. moreover, hopefully our society's influenza becomes cured and the unsurmountable wealth disparities become manageable.

Unfortunately, after the housing crash in Japan, many elderly-- for the first time, were forced into poverty.

Thus, reenginerring our sweet tooths will be "job #1" for the next administration.

mrmx September 15, 2008 - 1:29pm

Easier said than done

We're like the horse left in the starting gate with many lengths to make up just to get into the race.

Then there's the energy problem.

Productivity in the real world is often more a matter of cheap abundant energy than it is how hard a person works.

One back hoe beats a whole lot of workers on the end of a shovel. Matter of fact, it beats as many workers as you can assemble (because only so many workers fit at the spot of ground you need dug).

We import some 70% of our oil.

Rather than acknowlege this weakness, we chose to fight for dwindling oil reserves left in the world and then waste the oil we have on extravagant unproductive lifestyles with the energy sources we do have.

I know people will disagree, but the notion that we can maintain constant movement in automobiles and planes as a part of our daily existence has to come to an end.

I did inhale.

Don September 16, 2008 - 8:56am

I look forward to the day

when the world is a fairer place. I dream that slavery is finally abolished worldwide. Chinese, Mexican, African, South American, etc., economies shouldn't be subservient to North American or European. Shortly electric vehicles will come on the market reducing the need for oil, but inceasing electricity needs. There are lots of ways to product electricity including nano-sized windmill generators on roofs, along with solar panels that if home made are very affordable. All sources of power need including to get off dwindling sources of oil.

Companies like Monsanto need disbanding. No commercial company should be able to destroy seeds needed around the world. Dominance of one country over another must end as must slavery. All life is precious including human, plants and animals. Human beings have to stop thinking of themselves as being at the top--they're just part of the mix.

Numerian...let me know if there's anything I can help you with regarding your book. I do quite a bit of desktop publishing and continue to make up very professional-looking newsletters on a frequent basis. I do own Adobe InDesign Creative Suite 3, but still use Adobe PageMaker because the learning curve of CS3 is steep. Sadly, I've never found any of Adobe's products user friendly. :-( PDF format condenses pictures, graphs and text. It's very convenient for books--pdf incorporates linking url's or links to parts of the pdf book within it. Tables of Contents are very easy to do.

canuck September 16, 2008 - 2:06pm

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