Monday Morning

Did you have a good weekend?

1. Welcome to the Republic of SubPrime

Say you want to invest in the largest, deepest, most public, most journalistically-scrutinized debt market in the world.  Will you be swayed by what a round-table of analysts churn up?  After all, they are looking at the same information as everyone else.  Ok, so what if our round table of analysts made a $2 trillion dollar mistake?  What if this same round-table only two years ago proved blind to the greatest bond risk mis-pricing in history (MBS and their backing CDOs)?

A huge mass of people want to bet real money on this market, and they’re willing to take a 10-year risk at 2.75% return.  A huge mass of institutions – all run and staffed by people far-better compensated than an S&P analyst – wants to make a bet on this market for a 2.75% return. It is nonsense to think a small clique of analysts possess some Olympian insight outstripping the price signal of the biggest market in the world.  S&P has ZERO credibility in their mush-mouth explanations of debt-to-GDP ratio baseline-assumptions, etc.

No one can divine default probabilities from debt ratios and such, at least not more accurately than the market, which is in effect all the money in the world.

These agencies are undeniably a net negative to the economy.  They encourage  laziness by selling firms not just research but also judgement.  They  promote herd behaviour.  They collect fees from the people who concoct the things they rate.  It’s a joke, both at the level of impartiality and the bizarre idea that some company can gather more information than the entire market.  For example, Warren Buffett owns Moody’s.  If Moody’s ratings were better than the markets, Warren Buffett would simpy turn the personnel of Moody’s into a hedge fund.

That said, say I run an agency that rates default risk.  First, every day I thank God I am being well paid for running something that has no right to exist.  But that leaves the whole rest of the day to do something.  Say it is August 3rd.  One of my ratee countries has just missed default by 12 hours, with a fair percentage of its population and political class expressing the belief that a default would be no big deal…

Yeah.  It’s a no brainer.

2. And yet several hours later, they’re starving again

Hey, China: You’re aware that you don’t have to buy US bonds right?  You’re aware that the US bonds you now hold earn higher coupon than our low-interest on-the-run bonds, making them quite saleable at a good price, right?

So hey, China: shut the f•ck up.

3. What Would Jesus Did?

Thanks for the national prayers, Rick.  Dark times, man, I’m with you.  Let’s ask Jesus.  I mean, after all, Jesus lived through probably the most resonant event in world political history, the transformation of Rome from Republic to Empire.  He was raised in an uneasily occupied country with competing religious and secular authorities.  He was born in a manger because of taxes!

That’s why whenever JC sat down with his disciples, he liked to talk politics.   He was obsessed with debt, for example. “Rome has a spending problem, not a taxing problem,” he’d say around the fire on the shore .  “Render unto Caesar what is Caeser’s,” he is reported to have said, but less reported is the follow up: “but that tax better be flat and low.”   He threw the moneylenders out of the market, for heaven’s sake.  (Literally.)

Of course, when intones Pastor Rick, “we see fear in the marketplace,” Jesus could also be blamed for that.  He seemed to promote a lax work ethic (“drop thy nets” etc.), but who knows the effect of generous unemployment benefits for Galilean fisherman who want to go on a “spiritual quest”, let alone health cover for their various martyrships.  (Herod?  Communist.)  Yes, the core of the Republican party has a camel-needle problem. No getting around (or through) that.  And while both Jesus and Rick have experience with capital punishment, Perry once bragged of executing an innocent man while Jesus was executed as an innocent man…

Sarcasm is the only way to respond to this nonsense.  While lip service was paid to the idea that Jesus wasn’t very political, after holding a stadium size prayer rally in the weeks before you announce your presidential candidacy.  Jesus may not have a political party but as between “Greater economic liberty and lower taxes will lead to higher growth,” instead of, say, “feed the poor and comfort the sick”, I think his preference would be clear.  Then again, if Jerusalem c. 33 CE had a mega-stadium funded by an oil company, ringed by luxurious suites issuing forth with mammon, conceived in the promotion of wildly violent entertainment held on the Sabbath, maybe Jesus would have Sermonized there instead of the Mount.

4. Give ’em Hell, erm, Barack

The Sunday New York Times gifts us (us= the internet; rebuttal here) several thousand words of impressionistic analysis on Obama’s lack of “overarching message”, his vagueness and indecision, his reflex for conciliation.  The author of the piece uses “psychological insight” to conclude that the problems of Obama would have been fixed by a better speech.  If he’d only told a compelling story. The American people – the poor, the set upon, and the predisposed to liberalism – would hear that story, rise up, and sweep the plutocrats and nihilists to the…

Look, I’m obviously suffering from Obama disappointment, too.  Is anyone not?   But imagining power interests will be defeated by a good speech that rouses a torpid populace is magical thinking.

The other prong of the essay, though, is that American voters prefer “centrists who help them solve their problems”, not centrists who are mere conciliators.  The first half of this is semi-tautological, but it interests me in connection with another piece I read this weekend, the account of the bin Laden raid in the New Yorker.  (It is an absolute must read.)

Obama comes off well in the piece, calmly working through his options, commanding and making decisions.  He even got off 9 holes of golf before the raid.  I was struck by the similarities between him and that other great lacker of the “vision thing”, George HW Bush.  His decisions, like Obama’s, seemed marked by careful consideration, a disdain for sudden moves, but also a steely willingness to commit when required, especially in foreign policy.  GHW Bush executed the Gulf War and conducted a tough symphony as Communism collapsed.  Obama “defeated” our greatest post-Cold War enemy, and extricated us – pending – from two wars.

These parallels do not cheer.  If Obama loses in 2012, we will have two one term Presidents sandwiching two two-termers.  And similarities between the two-term Baby Boomers, GW Bush and Clinton, run equally deep.  GW Bush and Clinton are both appetitive, emotional, and visceral.  They lusted as the boomers lust.  They, as the culture that raised them, adored their internal versions of reality as valid and meaningful in their own right.  GHW Bush and Obama, on the other hand, are reserved, cautious, and see themselves as conduits of larger forces: GHW Bush believed himself the link to an establishment of WASP decency that created the American century; Obama sees himself as a prototype of an ascendant rationality, a devastating technocratic argument that would win over partisanship with logic, fact and calm argument.

That’s my “psychological insight”, anyway.

Why no cheer?  I think the “centrists want” someone like them.  That’s their squishy secret.  And when they elect someone that isn’t like them, which they periodically do, they turn on them and turn them out.   When you consider Obama’s chances for reelection, ask yourself which of the two character types above looks more like the typical American voter?

The Week Ahead:

Market reax to the downgrade dominates.  Increasing discussion of the dread “double dip”.  Europeans leaders consider whether the collapse of the Euro is worth leaving the beach.  Austerity England riots.  The US pivots to jobs (sigh).  Republicans gather in Iowa to get their story straight on how Obama caused everything.

European football leagues open, so you’ll be listening to this again.  Golden Gate Park pays her bills on well-meaning hippies, fans of Zach Braff, and people who’ve never been on the west side of SF in August before.  Plums are ripe eating.  Shark Week is over on TV, but not live.  (I’ve seen the Ocean Beach one.)  On that note, the surf stinks.

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In Berlin of 1846, 1 in 17 Women was a Prostitute

Via Andrew Sullivan, a Huffpo story on student loan debt and “arrangements”:

Debt-strapped college graduates weren’t included in his original business plan. But once the recession hit and more and more students were among the growing list of new site users, Wade began to target them. The company, which is headquartered in Las Vegas, now places strategic pop-up ads that appear whenever someone types “tuition help” or “financial aid” into a search engine. And over the past five years, Wade says he’s seen a 350 percent increase in college sugar baby membership — from 38,303 college sugar babies in 2007 to 179,906 college sugar babies by July of this year.

Salacious as one expects from that outlet, but illustrative of an occluded point.  Capital is debt, and Capitalism is Debtism.  The most bloodless-seeming proxies eventually reduce to this one, and we are always one or the other party.

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Man, I Woke Up on the Bright Side

But in accord here’s Chait agreeing also with Nate Silver.

Next up: if I’m one of the Democratic Six, I open with taxes on banks, financial services, and carried interest.   I go from there, taxing everything I hate.  After the Super Committee Super-collapses, I’ll have a long list, mounted on poster-board and and standing next to me for the entirety of October 2012, of taxes rejected by the Rs.

(NB: Last post, barring a twist in the tail, on the debt ceiling.)

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If Unclear from the Tone of My Post Today

The deal is better than I thought it would be on Friday afternoon.

As I suggested below, and as this fleshes out: the upcoming negotiation of the Super Committee (and subsequent congressional vote just in time for your holidays) equalizes the hostage leverage.  Ds will open: no $1.5 trillion in cuts without new revenue.  R’s will say: no new revenue.  So there’s no deal.

But unlike this go-round, Obama doesn’t take the blame for failure – a possibility which undeniably motivated him this time.  Furthermore, the consequences aren’t as dire, at least politically.   They’re cuts.  To many they’ll be invisible.   More so that many of them are to defense and state departments, who do much of their work overseas.

The only way this deal works for Rs is, as they believe, “no new taxes” overpowers everything else in the political system.  Seems a stretch, though…

Addendum on defense costs: Does anything think defense cuts will stick on a 10-year window?  When’s the last time the US went 10 years without a conflict?  1980 – 1990?  If we don’t count Libya bombing, Grenada, and Panama?   After 10 years of “emergency authorizations” blowing the defense budget, why wouldn’t it continue?

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Lashing Oneself to the Odyssey Metaphor

I’m not the only one, it seems:

“It’s between our consciences and the president,” said Rep. Steve Cohen, D-Tenn. “This is a Trojan Horse with Scylla and Charabis inside of it.”

The Dems meet to grumble over the legislative marching orders issued by the executive.  The Republican victory gets blessed with how many Democratic votes?  And how many Rs consider themselves safe enough to push it over the top?

Or can the House Dems simply not show and make the Rs vote a majority of presumably 110 members (one-half + one of the 218 quorum)?  Better yet, have a single Dem show and demand a tabulated vote?

Immature!  Irresponsible!

In the words of Otter: “I think that this situation requires a really futile and stupid gesture be done on somebody’s part.”

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What Can You Say?

The deal’s about done, if not passed, and the internet evinces a surplus of opinions.  My bullets, followed by some analysis.  The deal:

1) Does nothing to help the current economy.  May harm it, if only slightly, as the cuts are heavily back-loaded into later years.

2) Does little to change the long term debt concern; the areas of escalating costs (health and retirement) are neither reined in, nor provided for with next taxes.

3) Ate a summer of political life, during which time: the weather sent weekly reminders that the vast scientific consensus on human-influence over the weather is “probably right”; the economy limped into year 3 and then stopped walking altogether, and the US opened another war without any sense of how it ends.

***

Unedifying stuff.  A month’s ado about a deal whose shape was set the moment Rs credibly threatened to damn economy over big cuts and “no new taxes”.  If the consequences don’t bother you then negotiating is easy, and the Rs got what they wanted.  Psychological and strategic analyses abound on many blogs, doing better than I could.  The disillusioned left decries Obama’s sell-out.  Monday morning quarterbacks compete to write about how tough they’d have been.

I am with them.  Who doesn’t feel let down?  If this reaction does not seem to me illuminating, it is at least heartfelt, and it does the work of commiseration.  For something entirely different, here’s Mitt Romney:

As president, my plan would have produced a budget that was cut, capped and balanced – not one that opens the door to higher taxes and puts defense cuts on the table. President Obama’s leadership failure has pushed the economy to the brink at the eleventh hour and 59th minute. While I appreciate the extraordinarily difficult situation President Obama’s lack of leadership has placed Republican Members of Congress in, I personally cannot support this deal.

In other words, Mitt Romney – whose “leadership” arrives usefully at the 13th hour – can tell you one thing: his plan would have balanced the budget with no pain for anyone.  Speak up man!  We should’ve done that!  Um, what again?

It is men like Romney who make it possible Obama will be re-elected despite the historically crap economy and his inability to fix it.

Bottom line to us kvetchers and potential kvetchers:  the Rs held the process hostage – and got what they wanted – by using the most democratic branch of government.  Rightly or wrongly, that majority in the House was returned a year ago.  This was no filibuster, no Bush v. Gore.  This is plausibly what “America” wanted.

***

Let’s instead be interested in the future.  The compromise specifies $1 trillion in cuts now (effective over 10 years). It impanels a SuperCommittee (6 Ds, 6 Rs) to report out, by Thanksgiving,  a mix of cuts/new revenues to reduce the 10-year debt project $1.5 trillion.  This report, if its made, gets an expedited, presumably un-amended vote in congress.  If the Committee can’t find $1.5, or if Congress votes it down, or if the President vetoes it, an automatic spending cut “trigger” lops a new $1.2 trillion of the 10 year debt.

The immediate cuts are roughly half to security / defense; manageable because we are meant to be winding down a war or two.  The other half comes from things like health, education, energy, etc.  In other words, the basic squeeze.

The “trigger” is the interesting element.   $1.2 trillion on top of $1 trillion is deep.  It’s main cuts are defense (again) and medicare.  This is designed to promote a deal because, supposedly, Rs will never allow defense cuts and Ds will never allow Medicare cuts.  Note that all Medicare cuts are “provider” side, meaning reimbursement.  Thus the political idea is that R’s can’t piss off “hawks” and D’s can’t anger “Docs”.

R’s have stated already they will not agree to any tax rise.  However, as is well known the “Bush Tax Cuts” sunset at the end of the year.  Thus its plausible a deal is struck with the cuts rolled in, in one way or another, such that their sunset counts as a revenue rise.  Equally likely, from here, is we get nowhere near a deal, the trigger cuts, the tax cuts lapse.  Inelegant, but now we’re talking real deficit reduction!

The Rs willingness to sacrifice military spending, or being at least willing to risk sacrificing it, is salient.  Being “tough” was a key to their success from 1952-1992.  They’ve now made the calculation, it seems, that toughness is not as important as tax rhetoric, an interesting shift from the patriotic to the rich and/or graspy.  A scan of the Republican presidential field doesn’t turn up a military figure, which must be a first for that party.  Indeed, a less “military” bunch would be hard to find outside a country club: Romney?  Gingrich?  Pawlenty? Bachmann?  Our coterie from the Useless Generation act their non-miliary part, debating only the totality of the non-necessity of sacrifice.  Absolutely no sacrifice?  Maybe completely no sacrifice?   OK, maybe a sacrifice by some unseen other who is hoovering up the federal budget, probably in a ghetto, but that’s it!

This is the opposite of the usual military candidate’s rhetoric, and an apparent abdication of being the “Daddy Party”.  As behind the times as Rs are on certain marriage and sexuality issues, they’ve tuned the emergent American ethos of “let me keep my money and you sacrifice” will-mongering sourness.

***

Political compromise is hard.  Pre-emptive action of big problems is almost never achieved.  Weber’s description of politics as “the slow boring of hard boards” is bedrock truth.  But even as we lurch from crisis to crisis, very few choices get made.  R’s might have got $4 trillion in cuts with the grand bargain, but they couldn’t accept it, and so got less.  Super Committees and triggers are abdications.  Lashing oneself to a mast is not leadership.  This December debate will likely be a competition to posture the other side for eventual failure.  If it happens, the next election might well be fought on the horrible issue of “national decline” as embodied by the threat of Sharia (!!), the gutting of the US military, and the specter of Socialism.

Meanwhile, the earth warms, health care costs…you know the litany.

Countries don’t falter because they go broke; the falter long before, when conditions are still manageable but they lose the ability to manage them.  This decision-less compromise, I fear, lights that path.

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Predictions Are Hard

even about the present.

On the afternoon of July 28, I made a prediction about the 2012 elections.   I also made a prediction about the evening of July 28.  Does being wrong about the next few hours lessen my apparent authority on the next 15 months?

Maybe.  Regardless, an unacceptable bill will now be replaced with a bill even more unacceptable, but a day closer to endgame.  It appears Boehner gets sign-off by promising to recreate the hostage situation in a few months, with the only possible debt raiser at that time the passage of a constitutional amendment.  Requiring a 2/3 majority!  17 of them passed in 200+ years of US history!

Perhaps tomorrow House R’s pass one requiring, as a debt ceiling condition, that the Democratic Party dissolve?  That Obama abdicate on confession of long time membership in Communist Party?

The bottom line: House Dems bail out a piece of eventual Senate compromise legislation with a few R votes.  That’s the only endgame if we want a negotiated solution.  I’m not sure we do anymore.

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