Dead Cat Bounce?

After two days soaring, stocks turned lower again today, with the Dow down 372.75 or 3.25 percent at the close. They say that the third day after a bounce is the key to a sustained rally, so it looks like there is more to come on the bad news front.

When things turn south, we read in the books, the key is to find a scapegoat and sacrifice it. That's how primitive humans did it back in the day according to Rene Girard in Violence and the Sacred.  Since all this bad stuff happened on Bush’s watch it goes without saying that he is to blame.

But since Bush will soon be out of office, it seems hardly satisfying to give him the entire blame for the mortgage meltdown and the Fannie/Freddie meltdown and the Wall Street investment bank meltdom and doubtless more meltdowns to come.

I know, let’s blame the Democrats! Kevin Hassett from the American Enterprise Institute has the goods on them.

Back in 2005 responsible Republicans introduced S.190 in the United States Senate. It would have curbed Fannie and Freddie and maybe averted the meltdown. But Democrats were united in opposition.

Of course it had nothing to do with the money that Democrats were getting from Fannie/Freddie. Oh no. Even though Hassett writes that Sen. Barack Obama (D-IL) was one of the prime beneficiaries of Fannie/Freddie money.

Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.

That’s right. Chairman Dodd. He was a mere ranking Democrat in 2005, but the Senate changed hands in 2006. Don’t expect much from Chairman Dodd on the Fannie/Freddie reform front, not unless Secretary Paulson puts a gun to his head. Especially since Dodd was a “Friend of Angelo” at Countrywide Financial.

But the larger issue is to think back over the years of Fannie/Freddie excess. Was it really doing their low-income homeowner constituents a favor for Democrats to sluice money at housing? Wouldn’t they be better off if there had been no subsidies and no big runup in home prices? Wouldn’t they be better off if house prices weren’t in free fall right now?

The tragedy is that Democrats still don’t seem to have learned their lesson. At least not Barney Frank, the counterpart to Dodd in the House, according to the Wall Street Journal.

Fan and Fred’s patrons on Capitol Hill didn’t care about the risks inherent in their combined trillion-dollar-plus mortgage portfolios, so long as they helped meet political goals on housing. Even after taxpayers have had to pick up a bailout tab that may grow as large as $200 billion, House Financial Services Chairman Barney Frank still won’t back a reduction in their mortgage portfolios.

It’s the trouble with the whole welfare state model. You think you are helping the poor by sluicing out subsidies. But you only end up wrecking their families, failing to educate their children, and enticing them into buying more house than they can afford.

But at least you get their votes.

It's the Debt Stupid

So here we are, we hope, at the selling climax of this bear market, with the big Wall Street investment firms going cap in hand to the Feds and to the banks for a handout. Last night there was talk that Morgan Stanley and Goldman Sachs might be the next to go.

As Robert Samuelson says, this is the end of Wall Street as we know it. It is the end of the Masters of the Universe and their leverage fueled “principal transactions.” In the old days, investment firms worked for their clients. But now they work for themselves.:

Now, most financial firms also invest for themselves. They use partners’ or shareholders’ money to place bets on stocks, bonds and other securities — so-called "principal transactions."

And most of this investing has been financed with a high level of borrowed money. Nothing wrong with that, of course, until things go south and the asset that is collateralizing the loan can no longer liquidate the loan.

The trouble with high-leverage investing is that it is taking money that is not really supposed to be risk capital—i.e., fixed-income debt—and then using it in high-risk transactions. The banks or individuals supplying the money for this activity are not hands-off investors. They are risk partners in the venture. Because if asset values go south, then they are out of the chips.

For too long, for far too long, government has allowed this high-octane, highly flammable business model to operate, when everyone should know the risks. People investing money in these high-risk ventures and people lending money to these high-risk ventures are, whether they like it or not, risk partners in the venture. They should be treated as such and rewarded as such.

When you are a partner in the risk, then you should be getting an equity stake in the venture, not you should not be lending money backed by collateral.

How hard is this? Well, I’ll tell you. If we enforced this rule, that risk=equity and should be capitalized as such, then the Masters of the Universe wouldn’t be making so much money in the good times. They would have to share the wealth with their equity partners.

But on the downside they wouldn’t be forcing fixed-income investors and taxpayers to pay for their stupid mistakes.

An Eight-point Economic Plan

With the distractions of Palin Power and the earthquake on Wall Street, some of us are losing the narrative. But the editors at National Review are not. They have an eight-point plan to remind us whose side they are on. Let’s review it.

1. No more bailouts. Actually, let’s make that a bit broader. No more subsidies. The trouble with subsidies, aside from the universal truth that subsidies are a waste of resources, always and everywhere, is that it teaches economic interests to look to the government for cheap answers to their problems—cheap for them anyway. Not good training for anyone.
   
2. Hard money. Yep. We got away that important conservative principle, and it’s hurt us. We got off it in the middle 1980s with the Plaza Accord and it ended in the ten year recession in Japan. Now we are battling through a similar meltdown in the global economy because Alan Greenspan got off the hard-money standard in the early 2000s.
   
3. Energy production. The Democrats are wrong on their policy to make energy more expensive to rush conversion to a post-carbon energy economy. Republicans want cheap energy, but as clean as sensible. This is a can’t lose position for Republicans.
   
4. Cheaper health care. John McCain is trying to help us move from the administrative first-dollar approach to health care. The new model is the Wal-Mart plan. Inexpensive clinics in Wal-Mart stores and you pay with your own money.
   
5. An end to ethanol subsidies. Why hasn’t Congress passed this yesterday? Everyone now understands that ethanol subsidies add up to a cruel trick on the poor. See item #1 above.
   
6. Encourage growth. That means cutting marginal tax rates, not handing out money in complicated rebates like Obama.
   
7. Free trade. People should be allowed to buy in the cheapest market. Period. Anything else is economic imperialism.
   
8. Middle-class tax relief. Same as growth, above. Simplify the tax system and keep marginal rates low for everyone.
   

Come on chaps. This isn’t rocket science.

Market Failure: Government is the Problem

The candidates rushed out statements on the Wall Street meltdown yesterday. According to an Obama-friendly piece in the New York Times McCain blamed greed on Wall Street and Obama blamed lax regulation during the Bush years.

It’s a pity that both candidates seem to be clueless.

This meltdown has government failure all over it. Let us count the ways.

1. The first cause is the reckless expansion of credit during the early 2000s as the Federal Reserve worked to head off the threat of deflation. The Fed kept the spigots on too long, as usual, taking two years to raise interest rates from the low of 1 percent up to the middle fives.
   
2. Then there’s the sluicing of money into the housing market with Fannie and Freddie. Sensible people have been warning about Fannie and Freddie for years, but Congress, and mostly Democrats in Congress, have resisted reform.
   
3. There’s the specific distortion that the Clinton administration wrenched into the housing finance market. An Investors Business Daily editorial fingers the guilty parties. The Clintonoids used the Community Reinvestment Act to force banks to lend more money to low-income borrowers. That set up the sub-prime market, and set up the current meltdown.
   
4. Greed on Wall Street. Yes, there’s plenty of that. And unfortunately the easiest way to make money is to game government subsidies and market distortions for a quick buck.
   
5. Lax regulation. Well, the regulators always seem to be a day late and a dollar short. How about we reform the system to force more equity into it. It’s the highly leveraged setups that lead to trouble (think 90 percent mortgages on homes as well) because when you are highly leveraged you can find yourself underwater as soon as the market turns south.
   

The current mess is mostly the creation of government power and the natural instinct of politicians to sluice taxpayers and bondholders money to their favorite special interests.

The beautiful part about this system is that when the whole mess hits the fan, the authors of the mess are usually long gone, and the blame attached to the poor saps who inherited the mess.

The Arc of Celebrity

If you burst onto the scene, they say, your celebrity will last about 15 months unless you amount to more than a flash in the pan.

Let’s see. It’s about 15 months since Sen. Barack Obama (D-IL) burst onto the national scene as a breakout presidential candidate.

The trouble with celebrity, Charles Krauthammer warns, is that its currency is novelty. You can trump yesterday’s celebrity with today’s new phenomenon. It is becominig clear, with the Palin phenomenon, that the Obama phenomenon is becoming old and, well, yesterday.

It is clear, in retrospect, that the natural arc of Obama’s celebrity had started to decline by his Berlin speech earlier this summer. So his handlers decided to make his convention acceptance speech a more sober affair, full of facts and figures. Yet he had already committed to make this sober speech in a football stadium complete with faux-Greek temple.

The incongruity between text and context was apparent. Obama was trying to make himself ordinary — and serious — but could hardly remember how.



One star fades, another is born. The very next morning McCain picks Sarah Palin and a new celebrity is launched. And in the celebrity game, novelty is trump. With her narrative, her persona, her charisma carrying the McCain campaign to places it has never been and by all logic has no right to be, she’s pulling an Obama.

What we conservatives hope is that when Palin’s celebrity novelty cools off her real self will emerge and it will turn out to be the reality a gifted and serious politician.

Earlier this week she gave her first media interview, to Charlie Gibson of ABC News. “Mixed Reviews,” said the London Daily Telegraph. “[U]nfamiliar with the Bush Doctrine,” said the Wall Street Journal. On the other hand, the conservative blogosphere was full of comments about Charlie Gibson’s missteps.

Sooner or later, either before the election or after it, the American people are going to tumble to the fact that the Demcrats are not offering Change this year, but more of the same leavened with a new celebrity. How could they be offering change? Ninety percent of the government programs on the books today are their legacy, the legacy of a century of the welfare state.

Democrats are not yet ready to consider that there might be ways other than the model of the centralized government program to deliver social services. Givern that the government program has served them so well—in political power, in fame, and in comfortable sinecures—why would they offer Change?

Why Palin Really Matters

Never mind the fun-and-games of the Palin candidacy. What started with the pure joy of watching a politician that likes to speak from the podium and who drives our liberal friends nuts has now gone nuclear.

With the pigs-and-lipstick incident we now have young women at rallies with gigantic lipsticked lips, “Read My Lipstick” signs, and Palin Is Great.

But enough of fun and frolic. Let’s get to a serious discussion of the issues from Jay Cost.

Republican Margin of Victory/Defeat: Selected Demographic Groups 1996-2004 1996 2000 2004 White Men +9 +24 +25 White Women -5 +1 +11 African Americans -72 -81 -77 Hispanics -51 -27 -9 Overall -8.5 -0.5 +2.4

You can see what it means. If McCain loses the comfortable majorities in white men and white women, he will lose to the overwhelming pro-Obama vote among African Americans. If won’t be -77% this time. How about -95%?

Then, of course, there is the interesting question of the Hispanic vote. We are hearing all the time that Hispanics and blacks don’t like each other. So what does that do to the Hispanic vote this time out? Because the fact is that, even when he won by overwhelming majorities in white men and white women, George W. Bush only just pulled out a win in 2004 by a thin 2.4%.

You can see that the key to a Republican win in 2008 is to keep, and even expand the majority of white women.

Larry Kudlow has an interesting take on the Palin “hockey mom” ad-lib at the convention.

Palin’s really saying: Don’t tread on me. Don’t try to intimidate me. I am a strong, tough mom who is determined to succeed in politics.

And it seems that Sen. Barack Obama, with his clumsy “lipstick on a pig” remark, has played right along with the Palin challenge.

And in the process, he is boosting Palin, getting more and more people to pay attention to her, and motivating more and more white women to come out and vote for her.

Is Abortion the 21st Century Equivalent of Slavery?

In the ancient world, we know, slavery was ubiquitous. In They Year 1000: What Life Was Like at the Turn of the First Millennium Robert Lacey and Danny Danziger write about people in England going to their lord and placing themselves in slavery when starvation threatened. And they write about the Vikings sailing up the rivers in the autumn, plundering the harvest, killing the men, and selling the women and children into slavery at the main slave market in northwest Europe: Dublin. That was in the year 1000 AD, or CE if that’s your preference.

The remarkable thing is not that slavery existed in 1800. The remarkable thing is that it seems to have died out in NW Europe. The remarkable thing is that there were people like William Wilberforce who had organized to stamp it out in the rest of the world.

And stamp it out they did, by ending the trans-Atlantic slave trade and ultimately provoking the great Civil War in the United States that ended slavery on these fruited plains.

The fierce opposition to VP candidate Sarah Palin raises the question as to whether abortion is the new slavery.

Because it is clear that the fact of Sarah Palin’s life, with its unrestained fecundity and its celebration of “special-needs” children, is an offense to our pro-choice liberal friends.

Sarah Palin’s life raises again the issue of abortion. And the fact is that the question of abortion must be decided by the people. It is not the job of the elite Supreme Court to issue a ukase, as it did in 1973. It is up to the people to determine, by political action in its largest sense, when the fetus carried by a woman becomes a life protected by the law.

When women emerged, in the 20th century, from lives completely circumscribed by child-rearing and domestic management, to lives lived more in the public square, a new era began.

This new era opened the question of What Women Want. What does a woman liberated from constant child-bearing want? Feminists like Simone de Beauvoir said that they wanted careers and creative originality and liberation from the domestic sphere. It was natural for upper-class women like her to think that way.

But Beauvoir’s feminism only appealed to an upper-class elite.

Women do want to work, usually with people, outside the home. But few women want male-type careers. And most women want lives fully integrated with children, marriage, family, and the community of women.

Modern western society has just begun to address this question.

If children are important then the issue of abortion is important as well. And it is not exhuasted by the notion that a woman should have absolute control of her body. Nobody in society has absolute control of their body, just as nobody in society has absolute control of their children.

Somehow, some way, in the coming decades, we will come to a resolution of the abortion question. But it won’t be pretty.