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Tuesday, September 16, 2008

An Adjustment in Strong Fundamentals

broker reacts to numbers on his laptopYesterday was not a good day for the economy, the markets, the United States or, for that matter, the rest of the world. As the Dow dropped more than 500 points, we said goodbye to Lehman Brothers. In related news, Merrill Lynch was traded to the Bank of America for a bologna and cheese sandwich, a can of orange Faygo, and a fun-size Snickers bar. The state of the market was not good.

For his part, President Bush handled the crisis as well as he's handled other crises -- poorly, by trying to BS his way through it. Americans, Bush said, "are concerned about the adjustments that are taking place in our financial markets." See, it's an adjustment, a tiny bump in the road, a little minus-500-point tweak.

Associated Press:

...He said that his administration is focusing on the problem and "working to reduce disruptions and minimize the impact of these developments on the broader economy."

Bush also said he was pleased with work done so far by the Treasury Department, Federal Reserve and major financial institutions to "promote stability" in financial markets shaken by the bankruptcy declaration by Lehman Brothers Holdings Inc. and the sale of Merrill Lynch & Co. to Bank of America.

He acknowledged that such convulsive developments can be "painful for people" directly involved. But Bush also said, "In the long run, I am confident that our capital markets are flexible and resilient and can adjust to these developments."

Of course, as economist John Maynard Keynes so famously pointed out, "In the long run, we're all dead." While it's nice to keep an eye on the future, we live in the present and the present presently sucks. The concerns are immediate, not forecasted.

And no one has a better grasp of those immediate concerns than that great economic mind, Republican John Sidney McCain. Speaking at a campaign event in Jacksonville, Florida, McCain told the crowd, "Our economy, I think, still, the fundamentals of our economy are strong." That didn't go over real well, so McCain redefined what he meant by the "fundamentals."

Think Progress:

During a campaign stop today in Orlando, FL, Sen. John McCain (R-AZ) attempted to defend his repeated claims that the “fundamentals of our economy are strong” by redefining those fundamentals as “workers and small businesses.” “The American worker and their innovation and their entrepreneurship, the small business, those are the fundamentals of America and I think they’re strong,” he said...

As Atrios writes, McCain is now arguing that “if you suggest something is wrong with the economy, you’re insulting workers. This follows the Bush strategy of saying that criticizing his Iraq policies is insulting the troops.”

That'd be a huge shift in policy for supply-sider McCain. Throughout his career, he hasn't done a whole lot for workers, so I doubt he really thinks labor -- the demand-side -- is a "fundamental" of our economy. If you take a look at his tax cut scheme, you see it's Bushian in its top-heavy nature. For McCain, the fundament is at the top, not the bottom. The english language be damned. If you're at the top -- $2.87 million or more a year in income -- you get a %4.4 cut. That works out to more than a quarter million annually. If you're at the bottom, you get a 0.2% tax cut. That works out to be less than 20 bucks. Yay for you. Spend it wisely.

In fact, what we're seeing this week are the result of the kind of economic policies McCain proposes. You only have to look at his economic advisers to see that.

David Corn, MoJo Blog:

If McCain wants to hold someone accountable for the failure in transparency and accountability that led to the current calamity, he should turn to his good friend and adviser, Phil Gramm.

As Mother Jones reported in June, eight years ago, Gramm, then a Republican senator chairing the Senate banking committee, slipped a 262-page bill into a gargantuan, must-pass spending measure. Gramm's legislation, written with the help of financial industry lobbyists, essentially removed newfangled financial products called swaps from any regulation. Credit default swaps are basically insurance policies that cover the losses on investments, and they have been at the heart of the subprime meltdown because they have enabled large financial institutions to turn risky loans into risky securities that could be packaged and sold to other institutions.

Corn then points us to Blooomberg News, who reports that "The immediate problem" with Lehman's collapse was "the derivative default swaps market." Phil Gramm's fingerprints are all over the smoking gun.

Of course, it was Gramm who McCain finally fired for saying the US was in a "mental recession" and that we were a "nation of whiners." Not because of his crazy economic ideas, mind you, but for putting them so bluntly. After firing Gramm, McCain continues to get the same quality of economic advice from new econ adviser David Luskin. That'd be the same David Luskin who wrote this:

Things today just aren't that bad. Sure, there are trouble spots in the economy, as the government takeover of mortgage giants Fannie Mae and Freddie Mac, and jitters about Wall Street firm Lehman Brothers, amply demonstrate. And unemployment figures are up a bit, too. None of this, however, is cause for depression -- or exaggerated Depression comparisons.


McCain campaign adviser and former U.S. senator Phil Gramm was right in July when he said that our current state "is a mental recession." Maybe he was out of line when he added that the United States has become "a nation of whiners." But when it comes to the economy, we have surely become a nation of exaggerators.

When was this written? Sometime long in the past, when all of the events of yesterday were totally unforeseeable, right?

Wrong. It was written Sunday -- the day before the floor fell out -- and published in the Washington Post, under the title "A NATION OF EXAGGERATORS: Quit Doling Out That Bad-Economy Line." In his op-ed, Luskin also insists that the housing "crisis" (his quotes) is over. Assumedly, everything was supposed to be back to normal. You've also got to assume that, if he actually believes any of this crap, David Luskin took a bath in the market yesterday.

The Obama campaign is right -- McCain is more of the same. As their economic ideology fails spectacularly before their very eyes, Team McCain insists that the ship isn't sinking and there's no reason to deploy the lifeboats. They are supply-siders and banking deregulation moonies in denial. When it all fails, they don't accept their mistakes and adjust to reality, because cultists never accept the shortcomings of their faith. No, they try to convince you that reality isn't what you're seeing right in front of you. Everything is fine. It's just an "adjustment." Reality must adjust to be in accordance with them.

The question Americans need to ask themselves is whether this is the best they can do. If trying the same thing over and over and over, while failing every time, is really the wisest way to go. If slashing regulations and oversight really worked out all that well. Deregulation moonies like to talk about "the genius of the market," a benevolent force that will lift everyone up if you just snap the regulatory chains. But the genius looks more like a moron today. Cut loose from its chains, it ran straight out into traffic.

Don't ask yourself whether you'd vote for John McCain's economic policies. Ask yourself if you'd vote for this market and this economy.

Because this is what McCain's economic policies are.