History Forum / General / British History / January 2008

I shouldn't be rooting for one or the other since I'm not American.
But there is nothing to hold me back from quoting articles that
reflect my take on the issues. Note: Obama's victory is no surprise.
It is the margin of his victory that is the surprise.

Obama bin lottery
By Spengler
January 29, 2008
http://www.atimes.com/atimes/Global_Economy/JA29Dj06.html

What do you do with your last dollar when you are flat broke? You
might as well buy a lottery ticket. Putting your last silver dollar
into the slot machine with a million-dollar payout is a rational
decision after you've gambled away your whole stake. Absent a miracle,
you're going to walk home anyway.

Two great upheavals took place in the past week. One occurred in
American politics, when the voters of South Carolina crushed the
predictions of the political professionals. The other occurred on the
world's stock exchanges, where the value of the world economy swung in
a 20% range.

Senator Barak Obama's surprise landslide victory in the South Carolina
primary demarcates a turning point in modern American politics. Can it
be a coincidence that it occurred in the same week that financial
markets showed their wildest gyrations in post-war history? Days ago,
every poll indicated that economic weakness gave the edge to Senator
Hillary Clinton, whom voters regarded as a superior manager. But the
Democrats of South Carolina chose a miracle over a manager, for the
same rational reasons that a down-and-outer spends his last dollar on
the lottery.

Obama's South Carolina victory speech was the economic equivalent of a
carnival snake-oil pitch. He promised to "stop giving tax breaks to
rich companies and instead put the money in the pockets of struggling
homeowners who can't pay their mortgages", and at the same time stop
the export of American jobs overseas, while raising everyone's wages.

The crowd chanted, "Yes we can! Yes we can!" Excuse me: No, you can't.
You can't keep inefficient American factories open without massive tax
breaks to corporations, in the form of tariffs or otherwise. In 1992,
voters rejected the same message from Ross Perot, who warned that free
trade with Mexico would create a "giant sucking sound" as American
jobs disappeared, and chose the free-trader Bill Clinton. But that was
then: this is now.

Polls projected a close race, but Obama crushed Clinton by a
two-to-one margin. The inability of the pollsters to gauge the
opinions of voters is one of the most important observations, for
uncertainty itself has become a decisive variable. Can it be
coincidence that investors also suffer from the same degree of
uncertainty in valuing economic outcomes? During 2008 to date, the
Nasdaq 100 Index of American stocks swung in a 26% range. Citicorp ,
America's largest bank, gyrated in a 30% range - and therein lies a
tale to which I will return momentarily.

If markets cannot make sense of economic outcomes, all the less can
individuals at the bottom of the economic pyramid make sense of their
own prospects. Americans face a degree of economic uncertainty not
seen since the Clinton years, and in some ways much worse, for more
Americans than ever will retire during the next decade with slimmer
means than they ever expected to have.

People of modest means do not understand the stock market, but they
are sly: they can read the panic in the eyes of their leaders. After
assuring them for months that all was well, Washington last week
offered an emergency interest rate cut for the first time since
September 11, 2001, and an emergency economic package which will send
a small check to every American family earning less than a certain
threshold. Both President George W Bush and Clinton proposed
essentially the same program. If that is "managerial ability", thought
the voters of South Carolina , we might as well buy the lottery
ticket.

America faces not a dip in the business cycle, but the end of a
25-year run of wealth creation. Rising home prices were supposed to
provide America's retirement nest egg, the substitute for the savings
that Americans never amassed. Home prices have fallen by a third in
markets like California, Arizona, Nevada and Florida where the bubble
rose fastest. During 2007, the price of American homes fell overall
for the first time since the Great Depression. Yet Americans still
expect home price appreciation of 5% a year over the long term,
according to polls conducted by economist Robert Shiller.

Americans, as I wrote on January 8 (Putin for President ... of the
United States) mistook the one-time windfall from the Ronald Reagan
boom of the 1980s for the enduring right to get something for nothing.
Despite massive evidence to the contrary, they still cling to the
delusion that twenty years from now, everyone will retire by selling
his home to his neighbor at double the price. It is like the
passengers on the Titanic selling each other annuities.

Writing about the impending retirement of the Baby Boomers in the
January Atlantic Monthly, Megan McArdle observes that prospective
retirees evince a preternatural optimism about their prospects. But
this confidence "seems to rely on some mystical alchemy of strong
stock gains, housing value increases, and government largesse. The
first, as we've seen, may disappoint. The second seems outright
fantastic".

There is not much to be gained from giving up the illusion that rising
home prices will fund the retirement of Americans, for the alternative
is to reduce consumption drastically in order to save. It is hard to
imagine how Americans can avoid such a shift away from the spending
habits of grasshoppers to the thrift of ants during the next several
years. But even a very large increase in the savings rate will not
match the decline in household wealth due to falling home and stock
prices.

It is an ominous sign for the American economy that banks already have
taken US$120 billion in charges due to the collapse in the value of
securities backed by mortgages of poor ("subprime") credit quality,
before the onset of an actual recession. A number of banks, including
Citicorp, America's largest, are short of capital and have gone hat in
hand to sovereign wealth funds in the Middle East and Asia to raise
more. To date banks have suffered almost no defaults from corporate
borrowers, after the most aggressive round of lending to
speculative-grade companies in American history. As defaults pile up
during 2008 and 2009, pressure on banks' capital will become extreme.

Bank capital is the Achilles' heel of the world economy. Last Monday,
stock markets crashed in Asia around one pm local time, when an e-mail
from Hong Kong and Shanghai Bank told investors that two of the
sovereign wealth funds had pulled out of agreements to investment in
Citicorp and other major financial institutions. Whether that is true
or not remains unconfirmed, but the rumor alone was sufficient to send
world stock markets into a tailspin. Compounding the crisis was
concern that insurance companies who have guaranteed $1.6 trillion of
securities would not meet their obligations. Investors had assumed
that the banks would bail out the bond insurers, but if the banks
themselves could not raise capital from the sovereign funds, they
themselves would need a bailout before they could bail out anyone
else.

No, Obama, you can't. You can't blame America's trading partners for
the loss of manufacturing jobs, and at the same time persuade them to
replace the misspent capital of the American banking system. You can't
persuade the world to fund hundreds of billions of dollars a year of
American home mortgages, and protect the employment of a few hundred
workers at Maytag.

Obama well may win the presidency notwithstanding. Some of the
decisive electoral battles of 2000 and 2004 were won in the so-called
exurbs, the newer and more distant suburbs that mushroomed during the
home-building boom of the past decade. Republicans no longer dominate
the upwardly-mobile middle class of the exurbs, where the most
devastating home-price declines are registered. Earlier this month a
large home-builder, Lennar, sold tracts of unoccupied homes in exurban
Florida to speculators at 40 cents on the dollar. That does not bode
well for the shoddily-wrought McMansions in recently built exurban
tracts.

Obama is the "Democratic Reagan", observes one of my favorite
bloggers, Beliefnet's Rod Dreher. In terms of political punch, the
comparison is apt; it is now conceivable that Obama will sweep the
November election and bring a Democratic Congress on his coattails. In
content, though Obama is the anti-Reagan, promising that the
government will come to everyone's rescue. In his South Carolina
victory speech, he proclaimed, "We cannot afford another year without
decent wages because our leaders could not come together and get it
done."

What precisely does that mean? "The teacher who works another shift at
Dunkin' Donuts needs us to reform the educational system to raise her
pay." Is the Federal government planning to subsidize teachers'
salaries, which in America are paid by local school boards with city
and state taxes? Is he really planning to raise corporate taxes and
subsidize mortgage payments?

If Reagan offered "voodoo economics", as his opponents charged, Obama
is selling Cargo Cult economics. After World War II, New Guinea
aborigines build model airfields to entice the gods to bring them
"cargo". They watched American soldiers build airstrips and land cargo
planes, and sought to accomplish the same through sympathetic magic.
Given the culture of the aborigines and their observations,
anthropologists aver, making radios and observation towers out of
straw and coconuts was a rational response. Something similar might be
said of the position of the American middle class.

Waves of uncertainty are whipsawing through both the financial markets
and the primary elections. The danger in coming days is that a kind of
harmonic resonance will amplify both of them. The Bush administration
will cower before Obama's growing shadow as it struggles to prevent
the unraveling of the financial system. Every action to buttress the
banks and insurers the administration might take will be vulnerable to
the charge that the Republicans are bailing out out Wall Street rather
than distressed homeowners or insecure workers. The danger is that
election-year politics will paralyze crisis management.

It has been a very long week, and it is going to be a very, very long
year.