Eagle Watch

the Great Housing Bubble

2010-03-12T01:58:07Z

Since the post-Civil War era, the median cost of a new single family house has hovered around $100,000 in constant 1975 dollars, and with the exception of the Great Depression, housing bubbles and deflations have been asynchronously localized to metropolitan or area markets. Then in 1977, Congress passed The Community Reinvestment Act[1], a law designed to encourage commercial banks and savings associations to reduce discriminatory credit practices against low-income neighborhoods[2]. The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation (§802.). To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions (§804)[3].

Lending is how banks make their money. They are in constant arbitrage, pitting the interest they pay against the interest they charge so as to show a profit at the end of the day. Given this, it is reasonable to assume that they have sound fiscal reasons for not loaning money when the opportunity arises. With this Act, Congress is telling banks to play the part of brokerage houses in the 1920s – artificially cheapen the price of housing (through counter-fiscal interest rates or other loan terms) so as to include a class of buyer not qualified under traditional circumstances[4].

Even so, penetration into these neighborhoods was slow – most candidate properties were woefully sub-standard, or most candidate buyers were ineligible even under relaxed requirements – and regulators were nagging. “Subprimes”, as CRA-compliant loans were being called, were presenting problems, and banks were being squeezed on applications for branches, mergers and acquisitions. So banks began approving alternative mortgage products. Interest only mortgages provide an introductory period during which monthly payments cover only loan interest (“teaser rates”), after which payments are reset to a higher amount to also cover the loan’s principal. Negative amortizing mortgages (NegAms) allow borrowers to pay teaser rates less than current interest due and result in a higher loan balance and higher future payments. Adjustable rate mortgages (ARMs) reset the interest rate with changes in market interest rates and therefore can result in higher or lower monthly payments depending on market conditions[5]. Progress was still slow, so they went to low-doc and no-doc loans (so called “liar loans”) whereby applicants were required only abbreviated documentation (of income, existing debt, etc), or no documentation at all.

Although clearly in violation of §802’s “consistent with safe and sound operation” language, all was done in full view of regulators so as to demonstrate CRA compliance.

In an attempt to mitigate risk on these loans, banks began offering subprime qualifications into middle- and upper-middle-class neighborhoods (a sounder class of borrower), and packaging subprimes into mortgage backed securities (MBS) that could be traded in the derivatives market. Whereas subprime and other risky mortgages were still relatively rare before the mid-1990s, their use increased dramatically during the subsequent decade. In 2001, newly originated subprime and home equity lines (second mortgages) totaled $330 billion and amounted to 15% of all new residential mortgages. Just three years later these mortgages accounted for almost $1.1 trillion in new loans and 37% of residential mortgages. Their volume peaked in 2006 when they reached $1.4 trillion and 48% of new residential mortgages. Over a similar period, the volume of MBS’s collateralized by subprime mortgages increased from $18.5 billion in 1995 to $507.9 billion in 2005[7].

Two things were happening inside this sequence of events that exacerbated the inherent hazard. During the good times of the second half of the 1990s, house prices ran ahead of inflation and wages (as they are wont to do); and the dot-com bust in 1999 - 2000 saw interest rates drop to mitigate the resulting downturn. While standing still, in other words, a prospective borrower qualified for a costlier home than a year earlier. According to 2006 Census estimates, the homeownership rate increased from the pre-subprime rate of 64.7% in 1995 to 68.8% in 2006. Looser credit standards allowed an additional 4.6M American households and families to become homeowners than might otherwise have been the case without these mortgage market innovations. This period saw the rise of the McMansion. It was capping an era of ever-increasing home prices where, once again, it was conventional wisdom that home prices would always rise. This led to a mindset where everyone – sellers, buyers, banks, investors, regulators, legislators – assumed the current arrangement had spread risk to the point of elimination. Catastrophe was inevitable.

[1] PL 95-128, title VIII, 91 Stat 1147, 12 USC § 2901 et seq.

[2] Ben S Bernanke, Prepared Speech, The Community Reinvestment Act: Its Evolution and New Challenges, Chairman of the Federal Reserve System. before the Community Affairs Research Conference, March 30 2007, Federal Reserve System, available at:

http://www.federalreserve.gov/newsevents/speech/Bernanke20070330a.htm

also The Community Reinvestment Act: Thirty Years of Accomplishments, but Challenges Remain, February 13, 2008. This hearing before the full House Committee on Financial Services examined the impact of CRA on the provision of loans, investments and services to under-served communities. In addition to exploring CRA’s success, the hearing hoped to examine challenges that prevent the law from being more effective for the future.

[3] The Community Reinvestment Act, Federal Reserve Bank of St Louis, available at:

http://www.stlouisfed.org/community/about_cra.html

[4] According to standard risk/reward formulae for balancing prudent interest for risky loans, these banks would be up against usury laws to charge what logic dictates to issue mortgages into many of these areas and to many of these buyers.

[5] Edward Vincent Murphy, Subprime Mortgages: Primer on Current Lending and Foreclosure Practices, Congressional Research Service Report for Congress, March 19 2007, p. 3.

Inside Mortgage Finance, website, available at:

www.imfpubs.com

[7] [E:-Drive/Economics] Darryl E Getter, Mark Jickling, Marc Labonte, and Edward Vincent Murphy, Financial Crisis? The Liquidity Crunch of August 2007, Congressional Research Service Report for Congress, September 21 2007, p. 3, available at:

http://assets.opencrs.com/rpts/RL34182_20070921.pdf

US Census Bureau, 2006 American Community Survey, Table S1101, available at:

http://factfinder.census.gov/servlet/STTable?_bm=y&-qr_name=ACS_2006_EST_G00_S1101&-geo_id=01000US&-ds_name=ACS_2006_EST_

Monetary Policy

2010-03-10T14:19:45Z

A stable currency was so important to the Founders that they included “To coin money, [and] regulate the value thereof[1]” as one of the specific powers granted to Congress. They have delegated that power to the Federal Reserve, America’s central bank, and it regulates the value of the dollar by regulating the money supply. The primary gauge of monetary stability is price stability – if prices are in a general rise, money is losing value (inflation); if prices are in general decline, money is gaining value (deflation). Both are worse than price stability, if for different reasons. The Federal Reserve accomplishes this regulation by using interest rates, reserve requirements, and bond transactions. The money supply consists of cash, demand deposits (checking accounts), time deposits (savings accounts), and savings instruments (CDs, T-Bonds, etc).

The Fed manages the “prime interest rate”, which is what it charges banks for overnight loans. All other interest rates are set voluntarily by the banks themselves. The effect is well known, whereby higher interest tends to inhibit lending and lower rates encourages it. This affects the money supply because money lent out, largely, is deposited in other banks, where a portion is lent out again, and so on. Controlling the velocity of lending has a real effect on money in the system. A tightly bound collateral effect is that the prevailing interest rate impacts business activity, as borrowing is the method by which most businesses expand, improve capital equipment, conduct mergers and acquisitions, weather disruptions in cash flow, and so on.

Banks are required to hold a percentage of their deposits at the Fed in what is called a reserve requirement[2]. This to cover unforeseen circumstances that would require the bank in question to produce cash. Obviously, by manipulating this rate, the Fed can affect the amount of money available for lending. Since there are serious penalties for falling below the reserve requirements, most banks hold funds in excess of the actual requirement at the Fed, so manipulating this rate has more immediate and profound effect on the money supply than interest rate adjustments.

The Fed can also pump money into the economy by selling Treasury Bonds, or conversely, remove money from circulation by buying bonds back (or redeeming them). This method is the least aggressive approach in that it has the least impact on collateral economic issues.

The earliest attempts to stabilize economies were to simply fix prices, thinking this would take care of the problem. That always fails however because you can’t fix prices if you can’t fix costs, and you can’t fix costs because the world is a spot market. Realizing that prices are set by markets, distorting those markets is counterproductive, as noted earlier, because changing the rules doesn’t change the physics – markets will perform until they disintegrate because of alien requirements. The most benign way to guide markets without distorting them is to control the exchange medium.

The metric used by Fed economists to judge their work is the consumer price index (CPI), which is a basket of goods and services common to most American families – food, clothing, transportation, housing, etc. By pricing these goods and services as a control (setting the CPI at 100.0 for a given year), future performance may be judged by comparing it to the control. If a current CPI is, say, 103.4, we have experienced an inflation rate of 3.4% since the control year. Over time, the basket has been adjusted to fit contemporary usage, but overall, this has been a widely accepted method of judging the performance of currency.

The prime example of broken monetary policy is the German hyperinflation of the 1930s. Berlin’s answer to the Great Depression was to just print money in an effort to spur the economy. The result was that before long, the one million mark note was in common service, and workers were paid in cash each day at noon so they could rush outside and pass it to their wives to shop before prices went up again. The German experience demonstrated how intractable inflation can be, as after a tipping-point, it becomes self-sustaining – prices rising so fast as to preclude centralized response, which tends to be sluggish under the best of circumstances.

With that brief refresher on how markets and money work, and a brush with fiscal mechanics, we can now look at our current predicament.

[1] Constitution: Art 1 §8(5)

[2] Currently, the reserve requirement is 10%, so if a bank has deposits of $100 million, it must deposit $10 million with the Federal Reserve.

Fiscal Policy

2010-03-08T17:45:57Z

John Maynard, Lord Keynes, (1883 - 1946) was a British economist whose ideas define modern fiscal policies, as they clearly elucidate the effects of government actions on the broader economy. Very generally, Keynesian economics advocates interventionist government policies to mitigate the adverse effects of economic recessions, depressions and booms. Spend (even unto deficits) to ameliorate the impact of recessions; repay deficits and retract discretionary spending during booms. The idea is to get us closer to the political economists’ holy grail of defeating the business cycle – nothing but good times. Lord Keynes’s body of work is the foundation of macroeconomics, a national economy taken as a single organism (microeconomics being the treatment of subsystems within the macroeconomy).

The most powerful tools a government has to influence the behavior of the broader economy are taxation and subsidization – if you want more of something, the adage goes, subsidize it; if you want less of something, tax it. Most famously, the Omnibus Budget Reconciliation Act of 1990 included – in the name of fairness, of course – a stern tax on “luxury items” (read: automobiles, aircraft, jewelry and furs over certain prices, and yachts costing more than $100,000). In 1990, the Joint Committee on Taxation projected that the 1991 revenue yield from luxury taxes would be $31 million. The actual effect was the loss of 330 jobs in jewelry manufacturing, 1,470 in the aircraft industry and 7,600 in boating, almost single-handedly dismantling the American boat-building industry. Thus, it became known as the “Yacht Tax”. The job losses cost the government a total of $24.2 million in unemployment benefits and lost income tax revenues. So the net effect of the taxes was a loss of $7.6 million in FY1991, which means the government projection was off by $38.6 million (or more than 124% in a single year!). This is such a shining example of governmental action having totally different results from those expected, that it serves as the poster child for unintended consequences.

What happened? Instead of people continuing their behavior of buying the same luxury items at the same rate, fewer people bought the taxed products. Demand went down when prices went up. In particular, people bought their yachts overseas. Government’s attempt to shift some of the revenue burden up the tax-brackets in fact hurt the highly-skilled, middle-class workers whose jobs were destroyed[1]. More than almost any other field of endeavor, applied economics is a living example of Frank Lloyd Wright’s admonition to his students – “A thing will do what its design permits it to do, regardless of what the designer had in mind.”

The MOAB (Mother Of All Blunders) of fiscal dysfunction, of course, was the utter collapse of capital markets that culminated in the stock market crash of 1929[2]. The situation was allowed to foment via incrementalism and a lack of regulatory vigilance. After the close of hostilities in the Great War, there was a general concern that a post-war pause would take some of the air out of our industrial base. As incentive to keep the money flowing, some brokerage houses allowed their best customers to buy stock on a 20% margin – giving them full discretionary rights (buy-sell-vote) on stock purchases by paying only 80% of the face value, the balance due upon sale or if the brokerage issued a “margin call” (calling in the balance). Over the next five years or so, nearly all houses were playing, margins had crept to 50% and eligibility had relaxed to include ordinary customers who had a favorable history with the brokerage.

It was somewhere around this point that the exchange and/or government should have warned about the moral hazard of letting more and more people buy things of greater and greater value contingent upon riskier and riskier credit. But no one did. Over the next five or so years, “conventional wisdom” had it that the NYSE would only go up, cab drivers were giving their customers stock tips, and anyone could buy stock on 90% margins. Catastrophe was inevitable.

Capitalism hadn’t failed, various players were allowed to distort price separately from the forces of supply and demand, and the market reacted accordingly. That’s the technical definition of a bubble, and government could have intervened if the affected sector didn’t. Neither did. An unobtrusive fix could have been executed, as noted, as margins approached 50% and eligibility was drifting away from those who could afford it toward those who couldn’t. The threat of banning the practice, or of draconian regulations could have reigned-in the practice and allowed the market to heal itself. Instead, risk was ignored until it dominated the market and a tipping-point was reached. The market disintegrated.

It happened again, in a lesser version, in 1999 - 2000, when the dot-com bubble burst, taking about of fourth of the NYSE with it, but the tech-heavy NASDAQ lost three-fourth of its value. Once again, [stock] price had become divorced from supply-and-demand [profitability] as “conventional wisdom” assumed that internet start-ups could only go up. Catastrophe was inevitable.

In both cases, laws – other than those of common sense – weren’t broken. Both are examples of abysmally bad fiscal policy – in the everyday world, not from government. But the lessons are the same – intentions are transparent to outcomes. If you operate a system counter to how that system functions, you will break it.

[1] This is a lesson politicians apparently must relearn every twenty years or so.

[2] It was in reaction to the Great Depression that Lord Keynes issued his classic works.

Economics

2010-03-07T11:33:00Z

The most pressing obstacle to getting on with our lives today is the precarious nature of our national economy, not the manufactured “crises” of healthcare or global warming. We find ourselves on the brink of unsustainable national debt, and the unintended consequences a continuation of those policies would bring on. I would like to discuss these issues, but to take these conversations out of the political arena, I need to describe the landscape from which I come. I will be offering arguments that are rooted in economics, not politics.

I apologize up front if this opening bores anyone, but it is necessary to following sections on the particulars of our policies.

Value – wealth – is created by human activity upon raw materials of lesser intrinsic value. That value, intrinsic or added, is determined by markets consisting of buyers and sellers, each working in their own best interest. If you understand that, you understand economics. No one invented it, it’s merely the calculus of human interaction.

Our nomadic hunter-gatherer ancestors followed herds of game in largely familial bands, gathering fruit, nuts, berries and greens along the way. They lived at the whim of injury, disease and weather, and their GDP consisted of what they could carry. Division of labor wasn’t so much skill-driven as by gender – the men and older boys hunted, stood guard (if necessary), learned to make tools and weapons and built and maintained structures; the women, girls and children maintained the encampment, managed the food supply, did most of the skinning and butchering of kills, tended the fire, and filled-in providing security for the encampment when hunting parties were out.

Thus it went for the better part of 3½ million years.

The development of agriculture (~9500BC), somewhere in the fertile crescent from the Levant around to Mesopotamia, was a paradigm shift. Fixed-site living eliminated the nomadic imperative, permitting the accumulation of wealth and tribal sustenance of the old, the sick and the lame. Encampments became settlements became villages became towns became cities. Campfires became council fires became ovens became heaths, and we learned everything from baking to metallurgy. Wikiups and Yurts morphed into buildings and cathedrals. Specialization exploded as social complexity blossomed.

GDP exploded.

Specialization yields a rich variety of products in the marketplace, and that pretty much put an end to barter (“could I get change for a cow” not having much practicality), bringing about an abstract exchange medium (money) that facilitated the purchase of many things from many merchants, and in undefined quantities. At this point, a society’s treasury contained artifacts of value (jewelry, sculpture and flat art, religious icons, etc), raw jewels and precious metals, and the currencies of various societies, including its own. Coastal societies often used shells or pearls as currency, some Roman provinces used nails and iron bars. Mostly however, they used jewels and precious metals. “Money” had intrinsic value – gold or silver in known weights.

Most classical banking practices were introduced in 1129 by the Pauperes commilitones Christi Templique Solomonici (The Poor Fellow-Soldiers of Christ and of the Temple of Solomon), more commonly known as the Knights Templar. They would accept money from Crusaders or travelers going to the Middle East, and issue them a receipt, which could be drawn upon (in whole or in part) at any Templar outpost along the way. For this service, the Knights took a mild fee. Private banks sprang up in Europe, issuing denominated “receipts” in the form of paper currency, backed by gold or silver. The more people who trusted the issuing bank, the more places one could use the “scrip” as an exchange medium.

For the most part, this was the state of money until well into the industrial revolution.

“Fiat currency” – paper and ordinary coins issued without intrinsic backing – had been around for quite awhile, but usually in small states, and wasn’t much used outside their borders. Manufacturing was creating prosperity faster than governments could acquire silver and gold enough to issue enough currency to keep up with the demand for it. Most nations ceased backing their currency, allowing the printing of money as needed. And that raised problems.

The diplomatic term used is that a nation’s currency is backed by “the full faith and credit” of issuing government, meaning that they won’t suddenly change currencies, or drastically revalue its money. This is necessary to assure those who hold your money (or instruments denominated in your money) that it will retain its value, else they will move their savings and investments into something else. This development meant that national economics now had two faces – fiscal policy (how government manages its money), and monetary policy (how government regulates the value of its money), and they are of equal importance to the overall economy.

Does it Matter if the President is a Socialist?

2010-02-23T16:24:00Z

The short answer is yes because he would replace history’s most successful economic theory (as measured by generalized prosperity and systemic economic growth), with its least successful (as measured by the same metrics).

Now to the important question – what is a socialist?

In strict theoretical terms, socialism is the abolition of private property, everything being owned by the government. Functionally, socialism consists of the government owning “the tools of production”, that is, all business units. Politically, socialism encompasses government control of the economy. In real-world terms, it is the degree to which decision-making is centralized versus individualized.

Socialism is, by any definition, un-American. In the very first document penned by the Founders, they made unambiguously clear their views on the supremacy of the people over government by stating as unalienable rights Life (defense), Liberty (political freedom) and the Pursuit of Happiness (economic freedom). The Articles of Confederation, the second document penned by the Founders as a group, clearly demonstrates their view as the “Pursuit of Happiness” meaning a meritocracy when they stated that residents of the several states would enjoy the full range of rights and privileges granted residents of the United States, save “vagabonds, paupers and fugitives from justice.” This primacy of the people over the government is reaffirmed in their third document, the Constitution of the United States of America, where the Tenth Amendment (penned by the authors) states that powers not enumerated in the Constitution do not belong to the government. All of this is further discussed at length in the Federalist Papers, authored by James Madison, Alexander Hamilton and John Jay, which discussed the Constitution with the residents of New York prior to its ratification.

Does this endorse unfettered laissez faire markets? No, it does not. The Constitution specifically gives the federal government jurisdiction over interstate commerce, for example, and yields to the states the authority to regulate business within their boundaries. Their vision was one of placing jurisdiction to the closest practicable level of government to the problem: federal jurisdiction over only those issues not adjudicable by the states; state jurisdiction over only those issues not adjudicable by the counties; county jurisdiction over only those issues not adjudicable by towns and cities. It is a minimalist view of government, the only way to maximize individual liberty – the point of the Enlightenment and the purpose of the Revolution.

The philosophical differences between “government knows best” and the American vision couldn’t be clearer. What about practical differences?

The Founders were imminently practical people. They were farmers, merchants and shopkeepers. They understood that local solutions to local problems were always more efficient, fairer and swifter than those made at a distance. They wanted to solve their own problems, decide their own fate. They were tired of constantly having their successes punished by central government – the Stamp Act, the Molasses Act, the Stationary Tax, and all the other Intolerable Acts. They saw this as not just an attribute of an indifferent British Crown, but a natural devolution of centralized governance over free peoples. The best way to keep governance responsive to the governed (as opposed to its own desires) is to keep it as close to the people as possible. That a person’s grievance in Cleveland can be addressed from Washington, like gardening from the second floor balcony with tools tied to sticks, doesn’t mean it should be. The more remote, the bigger government gets, the more self-interested, the less efficient, the less responsive it gets.

In addition to, again, handing ones destiny to absentee rulers, erecting a highly centralized government ensures a bloated, unresponsive, inefficient and self-interested bureaucracy that is closer to the Crown than the Constitution. “From each according to his ability to each according to his need” is a subsistence outlook, devoid of hope or achievement. It also assumes an altruism of human nature that just isn’t there, hence the Ten Commandments, Hammurabi’s Code, and all that has followed.

Is the president a socialist? I don’t think so, but his programs are definitely aimed at taking day-to-day decisions out of the hands of individuals and moving them to Washington. His vision of America is vastly less generous toward the governed than it is toward the government. His view of government ensures decreasing political and economic freedom to the governed. I don’t view his philosophy of governance to be wrong because it's evil, rather to be insidious because it doesn’t work.

Genetic Bottleneck

2010-02-19T15:15:15Z

I came across an interesting study by Penn State’s Stephan Schuster, to be published in Nature this month, finding that any two African bushmen who spoke different languages were more different genetically than a European and an Asian. That was true even if the bushmen lived within walking distance of each other.

This lends credence to the theory that non-Africans are descended from a single breeding female – our Mitochondrial Eve – who migrated from what is now Kenya to what is now Yemen ~150,000 years ago (and whose descendents apparently went on to populate all of non-Africa). Others may have crossed with her, and their maternal ancestry eliminated through some as of yet not understood mechanism. For example, the Toba supervolcanic eruption in Indonesia ~70,000 years ago caused an Ice Age that lasted for 1,800 years, reducing the non-African human population from about that of Boston to about that of Fenway Park. Mitochondrial Eve’s descendents, possibly further afield from Toba than others (the Levant, Europe, the Steppes, whatever), could have been the sole survivors. The rest of Africa, particularly the southern home of the bushmen, was free to intermingle and diversify their DNA-base.

The study also found 1.3 million tiny variations that hadn’t been observed before in any human DNA, suggesting that mitochondrial DNA may be more important to genetic diversification than previously thought, only 7,000 or so generations having passed since “Eve” migrated.

The engineering mastery and elegance of nature never ceases to amaze me.

Indiana Update 1.0

2010-02-15T19:35:24Z

Two-term Senator Evan Bayh, a moderate Democrat who would probably be on the short list of early 2012 front-runners if a Republican was in the White House, could suffer from the anti-incumbent fever raging in the country these days. In somewhat of an early surprise, four-term Representative Mike Pence from Indiana’s 6^th District was polling 3 points ahead of Bayh in late January[1]. Two other Republicans had announced (ex-US Representative John Hostettler and ex-Indiana state Congressman Marlin Stutzman), but Bayh is leading both (by 16 and 22, respectively).

Then February 10^th, former Senator Dan Coats (R) announced that he was entering the race for Bayh’s seat, and thus sets up what may be a preview of things to come. It seems that the announcement was made by Indiana Republican National Committeeman James Bopp in an eMail to state Party officials. To say that this was not warmly received is a bit of an understatement. The next day a Huntington [IN] Tea Party group circulated an eMail with the subject line, “NO to RNC/Coats for force feeding us this crap sandwich,” while Emery McClendon, a Tea Party organizer, distributed an eMail to activists declaring that the [RNC] push for a Coats candidacy “is the Republican Party’s way of slapping we the people in the face ... ”

This has shades of New York’s 23^rd, where the state party anointed Dede Scozzafava (R) for re-election. Local conservatives, claiming she was more liberal than Bill Owens, the Democrat running against her, wanted the Party to endorse Doug Hoffman, the Conservative Party candidate. The squabble drew national attention and several national figures also backed Mr Hoffman. A few days before the election, Ms Scozzafava dropped out, claiming a lack of support, and endorsed Mr Owens, who went on to win the seat (73,137 to 69,353, with 8, 582 voting for Scozzafava, whose name was still on the ballot).

This is illustrative of the inherent conundrum of populist movements.

In what may be a bright spot for Democrats, Tea Party-inspired candidates are going to run into resistance from state and national GOP organizations as well as Democrats. The extant powerbrokers won’t give up their vested positions easily, and some races – particularly in the hundreds of House races – could be lost if infighting can’t be resolved in enough time to clarify the ballot for voters.

At this point, I’m moving Indiana’s senate seat from a probable Democrat save into the toss-up column, though it could move back. Mr Bayh was a popular governor, is a well-liked senator, and it’s too early to see if Coat’s entry will split Pence’s support. But for right now, the national mood has changed this race.

[1] Rasmussen polled 800 likely voters on a Bayh-Pence head-to-head contest, between January 21 and 24, and found Bayh (D) 44%, Pence (R) 47%, with 9% undecided.

Trouble in River City

2010-02-11T21:22:01Z

Cracks are beginning to show in Chief of Staff Rahm Emanuel’s once impregnable political armor. Last week he had to apologize after it surfaced that he called liberal groups “f****** retarded” in a private meeting. People are ripping chief political strategist David Axelrod. A spate of recent losses in races that Democrats should have won have some clamoring that the chairmanship of the Democratic National Committee is the wrong job for Tim Kaine. Some say the President Obama shouldn’t have pushed healthcare before stabilizing the economy, others say he let it idle in the Senate for too long. Comments like this have been around for months, but what makes these different is that they are coming from tenured Democrats[1].

The descent of the Obama Presidency has eclipsed “fickle” Independents and “ignorant” Republicans, and now embraces well-known and long-serving Democrats. The far left is irritated that government takeovers of energy and healthcare seem to be stalled, and the mainstream left is irritated that the Party essentially failed to get anything post-stimulus through their legislative majorities. With their Senate supermajority gone and both simple majorities in existential danger, the infamous Democrat circular firing squad is beginning to form.

Doug Wilder, America’s first Black governor and no wild-eyed radical, is advising the president to jettison his current staff and find some credible people whose expertise is governing rather than campaigning. “Getting elected and getting things done for the people are two different jobs,” he says[2]. After three devastating losses in gubernatorial and special elections, the “don’t worry, be happy” message is beginning to wear a little thin among individual Democrats who see no leadership from the National Committee or the White House.

They’re running out of people to blame for the failure of their programs… maybe they should take a look at their programs.

Even as the “save us from 8% unemployment” stimulus bill was being passed, Cap-and-Trade was pronounced dead on arrival by the Senate, not because Republicans were being obstructionist, but because spiking the cost of energy is the last thing you need while trying to spur economic recovery. Any pretext that it is necessitated by global warming has lost all credibility. Essentially scrapping carbon-based energy without a bridge technology in place is a guarantee of weakening economic performance – renewed and deepened recession. Making energy rapidly and increasingly more expensive – the whole purpose of Cap-and-Trade – eats into profits (i.e., newly created wealth, or GDP-growth), precluding new hiring. What can be passed on to consumers obviously will diminish disposable income (i.e., consumer spending), further depressing recovery. Whenever it’s invoked, it will cost us a trillion dollars in productivity, which will cost the government taxes on a trillion dollars of GDP. Even if Cap-and-Trade was a good idea (and it’s not), this is possibly the worst time to threaten the economy with it.

Healthcare failed to get through Democrat legislative majorities in both Houses because the American people got a look at it. It is so hopelessly convoluted – and Members scoff at the idea of actually reading it – that to seriously consider passing it into law would be irresponsible. The only way they could keep the 10-year cost under a trillion is to start the taxes and fees immediately and hold off on the entitlements for three (Senate) or four (House) years, and take half a trillion out of Medicare. It doesn’t even work then. Part of the deal the White House cut with the AMA was that doctors and hospitals wouldn’t see any decrease for a while – they are reduced to trying to sneak the “Doctor Fix” through under separate legislation (because it can’t be included in the actual healthcare bill as it kicks costs back over a trillion). A complete restructuring of a sixth of the economy is too much for the people to blindly accept from a bunch of politicians. Once again, even if this was a good idea (and it’s not), this is possibly the worst time to shock the economy with it.

Attempting to put them both through during a severe recession is unbelievably detached from economic reality.

If I were on the Republican team going to the televised “bipartisanship” meeting on the 25^th, I would need only one question – “everyone in this room who will vote to cut Medicare by $50 billion in next year’s budget, please hold up your hand.”

[1] See Alexander Bolton, Congressional Democrats point finger of blame at Rahm Emanuel, in The Hill, February 9 2010 and L Douglas Wilder, Obama needs a staff shakeup, in Politico, February 9 2010.

[2] Wilder, ibid.

Opportunity Lost?

2010-02-07T19:13:59Z

I have yet to hear or read about a truly fundamental opportunity uncovered by the Town Hall meetings/Tea Party movement. Much of the rage expressed by those phenomena have centered around some basic, common sense travesties routinely carried out by our representatives in Washington: voting (either way) on 2,000-page bills that nobody’s read; backroom deals (effecting, but intentionally hidden from the American people); the bribing of public officials for votes. The “sausage making” that was exposed as the process by which the healthcare bill (a focus of the aforementioned meetings/movement) was brought about.

This isn’t an Obama administration foible, or even a Democrat prevalence. This is how your government works.

It’s the “business as usual” we were warned about. And this is the golden opportunity that is being squandered away – there should a raucous, honestly bipartisan, foot-stomping, red-in-the-face demand to STOP! “No wonder government can’t get anything right – nobody knows what it’s up to. One group of aides write the bills, other groups of aides reads them, then people from neither group vote on them. This is absurd and it’s insulting!”

This is also why any politician who promises you “transparency in government” is lying to you. They can’t deliver on it, and they know it. “But,” Obama apologists implore, “he couldn’t dictate to Congress how to hold their legislative meetings.” That’s correct, but what about those White House meetings in which the AMA, the pharmaceutical industry and the unions were bought off? Do you really think he wanted those to be C-SPAN’ed negotiations “so all could see who was standing up for the drug [medical/union] companies and who was standing up for you”? Me neither.

This assault on process is so effective because it’s indefensible. You can’t spin it. What’s being overlooked is that this same reaction could have been generated by these same arguments during the Bush administration (or anyone else’s in recent history). As I say, this is how your government works.

No wonder we have drifted so far from the Founders’ ideals. Their revolution was against imperial government … a ruling class lording over subjects. This very sort of thing.

… and They’re Off!

2010-02-02T17:46:58Z

Usually these off-year elections don’t heat-up much before six months out, but this year it seems that the race is already on. The highly contentious nature of the year-long healthcare battle, and the disgusting way in which it was waged, produced public ire against specific congressmen and senators. In politics, perception is reality, and the perception began growing that the administration just didn’t get it. The August town halls were a public relations disaster for incumbents – in spite of the media’s constantly portraying citizens as clueless idiots, Members came off as out of touch, arrogant and dismissive. That started it.

The tea party movement took off, and instead of actually committing journalism, the press continued its “clueless idiots” interpretation of the largest grass roots movement since the ‘60s. Virtually everything Washington has done increased voter frustration – bailouts and takeovers, “man-caused disasters”, an obviously political “stimulus” package, cap-and-trade, moving the KSM trials to New York, healthcare, Mirandizing the crotch-bomber after just 50 minutes of questioning, on and on.

Part of the why behind an early season this cycle is that many Democrats suddenly realized that the “clueless idiots” vote. They’re falling away like over-ripe fruit. Almost daily we’re treated to another Democrat congressman or senator who has suddenly decided to “spend more time with the family”. All other things being equal, an open seat is easier for the opposition party to capture than it is to unseat an incumbent. This, added to the dissatisfaction factor, has helped generate an early start to campaign season.

Keeping in mind that the historical norm for off-year elections is for the White House party to lose 3 Senate seats and 20 House seats, it will take a net gain of 10 seats in the Senate and 40 in the House to change political leadership in those institutions. I’ll admit to watching the Senate more closely than the House, because the 60-seat supermajority was razor-thin, requiring absolute partisan lock-step to pass or block anything controversial. The Senate became a laboratory for watching the influence (or lack of it) of public opinion on elected officials.

Of the four open Senate seats formerly held by Democrats (Connecticut, Delaware, Illinois and North Dakota), two are likely going Republican (Vice President Biden’s old Delaware seat and North Dakota’s), Chris Dodd’s Connecticut seat is leaning Democrat, and President Obama’s old Illinois seat is a statistical toss up. The five open Republican seats (Florida, Kentucky, Missouri, New Hampshire and Ohio) are 1-0-4 as to Republican (Florida)-Democrat (none)-Toss Up (Kentucky, Missouri, New Hampshire and Ohio). I see the open seats, as of today, yielding a net Democrat loss of two seats, with five too close to call.

Of the six closely contested Democrats up for election this year, California’s Barbara Boxer and Indiana’s Evan Bayh will probably retain their seats, while Arkansas’ Blanche Lincoln and Nevada’s Harry Reid will likely lose theirs. Colorado’s Michael Bennet’s and Pennsylvania’s Arlen Specter’s races are still too close to call. I don’t see any Republican seats up for re-election likely to change polarity this year. Another Democrat loss of two seats with two more too close to call.

So as of now, Republicans stand to gain four Senate seats, but with seven races within the margin of error and large numbers of undecided, I can’t imagine that all of them will retain their seats – especially Arlen Specter, whose party-changing repulsed both parties in Pennsylvania. Real Clear Politics’ Generic Congressional Vote switched over to Republicans for the first time in early November[1], and holds at favoring the GOP by 3.2%.

But then, their just approaching the first pole.

[1] RCP averages the following polls for their Generic Congressional Vote: NPR/GQR, 800 likely voters; Rasmussen Reports, 3,500 likely voters; Democracy Corps, 836 likely voters; CNN/Opinion Research, 955 registered voters; and Pew Research, 1,214 registered voters.