The New Bailout - I Don't Get It...

Okay, I'm not an economist. Not even close. My calculus is so rusty, I probably couldn't struggle through the first exam in a Calculus 101 class. (Or is it 201? See, I can't even remember that much calculus.) So no, I'm no expert - don't pretend to be. So maybe this shouldn't be a surprise, but...

I just don't get it.

I appreciate that we've moved away from the "bad bank" model, something that seems primarily to be "bad for taxpayers". But I just don't see how providing capital for private investors to buy toxic assets is going to help clear up this mess. Let's say I'm an investor, and I'm not inclined to borrow money to invest in those assets at a present, near zero interest rate. That could be because I see them as too risky, as offering an inadequate rate of return, or because the seller doesn't want to admit their fair market price. Unless somebody gets subsidized how does federal money change that equation?

If I'm a bank that does not want to admit actual value for its assets because I'm bankrupt, having more potential buyers won't change that. Maybe that where Geithner's idea of auditing banks before giving them additional bailout funds comes in, assuming that plan has teeth. Their "97 cents on the dollar" entry is reduced to 38 cents, they qualify for federal aid (or a takeover), and the investor uses a federal loan to pick up the securities at their market value. But how is that superior to simply bailing out the bank and having it hold its own asset at its actual value?

Is the idea here that the money is only available to buy toxic securities, so that the private partners may decide, "Well, I wouldn't put my money on the line for a possible 0.1% rate of return, but I'll happily put free federal money on the line." What guarantees are we offering to the private partners? That we'll cover any losses if the securities drop in value - subsidizing the investors instead of the banks? How is that better than directly overpaying for junk securities through something like TARP - such a guarantee would seem to be yet another layer of lemon socialism, as with TARP the taxpayer would at least get the benefit of any increase in value. If we're not offering any guarantees, why should we expect investors to pick up the worst of the worst securities, the ones that are the biggest drags on the financial industry?

Granted, I'm working off of a public statement, pretty much devoid of details. I guess I'll wait to see what the experts have to say.... (Although the operative word so far seems to be BARF.)
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Update: What are Nobel Prize-winning economists for, if not to explain these things to us, and Paul Krugman has stepped in to help me understand the Geithner plan!

So what is the plan? I really don’t know, at least based on what we’ve seen today.

Wow.... I feel... so much better....

Stupid Tax Breaks

Oh, joy.... The Senate wants to reinflate the housing bubble.

The Senate on Wednesday voted to expand the economic stimulus package with a tax credit for homebuyers of up to $15,000, a provision championed by Republicans as addressing a root cause of the recession.

The downside is, it has to be used to buy your primary residence. The upside is, maybe I can sell "my" house to my wife - I purchased it before we married - and get $15,000 in free money. I'll have to read the fine print.

This one should be fun, as well:

On Tuesday, the Senate approved a tax incentive for car buyers, sponsored by Senator Barbara Mikulski, Democrat of Maryland, that would allow the deduction of sales tax and loan interest on purchases made this year.

Would this work: I sell you a car at 25% interest. At the end of the year if you've made all your payments on time, I give you 15% of your interest as a credit toward your remaining principal balance and adjust your future interest to market rates. I end up with a great rate of return on the loan, you end up with a 15% discount on your car, and the government picks up the entire tab!

What other genius ideas are coming down the pike?

Making the "Bad Bank" Not Quite As Bad

If we must have a 'bad bank'... Dean Baker proposes a provision that will keep taxpayers from being completely soaked when they buy up toxic securities from our nations bankrupt banks:

We can just attach a clawback provision, under which the bank will be forced to make up any money that the bad bank loses on their junk, plus a penalty. For example, if Citibank sells $100 billion in junk, and the bad bank ends up selling it for $70 billion, then Citibank has to cover this $30 billion loss, plus a 20 percent penalty ($6 billion). This structure will both ensure that Citibank doesn't run off with our money and also discourage banks from trying to mislead the bad bank about the true value of their junk. (Senator Dodd proposed a similar measure in the debate over the TARP.)

Under the Bush-Paulson plan, we gave away a ton of free cash, no strings attached, and we were rewarded with... Yeah. Enough of that.

Note, though, that an honest valuation won't make the banks solvent.

But It's Even Worse, Isn't It?

If you wait long enough, somebody's probably going to articulate what you are thinking, and probably say it better. Case in point: I haven't had much time to type out my thoughts on the nation's fear of "nationalization", but Robert Reich does a pretty good job of describing something that's been bothering me:

The federal government -- that is, you and I and every other taxpayer -- has taken ownership of giant home mortgagors Fannie and Freddie, which are by now basket cases. We've also put hundreds of millions into Wall Street banks, which are still flowing red ink and seem everyday to be in worse shape. We've bailed out the giant insurer AIG, which is failing. We've given GM and Chrysler the first installments of what are likely to turn into big bailouts. It's hard to find anyone who will place a big bet on the future of these two.

In terms of the companies lining up for bailouts,

If anyone has a good argument for why the shareholders of these losers should not be cleaned out first, and their creditors and executives and directors second -- before taxpayers get stuck with the astonishingly-large bill -- I would like to hear it.

I completely agree. But there's something Reich doesn't mention that concerns me: Our current bailouts aren't working. That is, it may cost us more to continue bailing out loser companies while declining to nationalize them than it would if we nationalized them, ate their bad debt and, as quickly as possible, restored them to private ownership. (Part of the reason, of course, is the appalling greed of incompetent managers.)

I can also tell you this, not far off from one of Reich's points - Chrysler is a black hole. If it weren't, Cerberus would be bailing it out itself. They shouldn't be invited back for more "loans" or bailout funds, save perhaps a bridge loan to help them seal a takeover deal with a viable company.
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Addendum: "Moral haz... whuttard?" David Ignatius flat-out calls for subsidy:

How will the managers of the Bad Bank coax the gremlins out of hiding? With money, of course -- buying up an estimated $1 trillion to $2 trillion in toxic paper. Will the government overpay? Of course it will, especially at first, as it discovers fair prices for securitized debt for which there isn't now a functioning market.

Anybody even casually conversant with this crisis knows that the government will overpay because to do otherwise won't help the banks. We can buy them for the pretend value the banks presently use, knowing we're paying probably two, three, four times their actual value, removing a huge liability from the banks' shoulders, then hope that with actual assets back in their coffers banks will return to "business as usual". Or we can try to come up with something approximating market value, force banks to report multi-billion dollar losses on those assets, and... then most of them have to admit insolvency.

At least people seem to be through arguing that if the taxpayer ends up owning these toxic assets, there's a chance of "turning a profit". Does Larry Kudlow blush when he reads crap like this, or does he shrug, smile at the corporate interests he serves and say, "It was worth a shot."

Because That's What They Would Be Doing?

Thomas Friedman sings a tired old refrain,

To top it off, we’ve fallen into a trend of diverting and rewarding the best of our collective I.Q. to people doing financial engineering rather than real engineering. These rocket scientists and engineers were designing complex financial instruments to make money out of money - rather than designing cars, phones, computers, teaching tools, Internet programs and medical equipment that could improve the lives and productivity of millions.

Now, I'm not saying that people who become MBA's or lawyers couldn't have productive lives as engineers and computer programmers. But how many of them do you suppose wanted to enter those professions? Friedman also seems to believe that pretty much all of the "best and the brightest" want nothing more than to chase the almighty dollar. Not everybody chooses to work for Wall Street or BigLaw.

I suspected long before I reached that point, but my second semester of organic chemistry sent home the message that I wasn't going to be spending my career in a chemistry lab. Please, don't judge chemistry by organic chemistry alone - a tedious bore of a subject that is best "mastered" through rote memorization - but for goodness sake, not everybody who is good at crunching numbers on Wall Street would be particularly useful in scientific or engineering fields. Maybe they would be accountants or lawyers, or economists, or politicians.

For that matter, who says the people who crashed and burned the world financial system are "the best and brightest" at all? Friedman seems to be falling for a pretty typical American conceit that anybody who makes a lot of money is among the "best and brightest", even if they can't change a light bulb unassisted. What makes the people who crashed Bear Stearns, Lehman Brothers and WaMu any better than the people who crashed Chrysler and General Motors? If it's such a big deal that GM is gushing red ink to the tune of $74 billion over four years "yet you can count on one hand the number of executives who have been reassigned or lost their job", what's the body count over at Citigroup? It's the auto companies that are "giant wealth-destruction machines"?

When we look at the decline of the nation's newspapers, including the New York Times, can we turn a mirror on Friedman? Friedman likes to look down on GM, but what about his own employer? At what point do we declare that newspapers have "become giant wealth-destruction machines", and insist that it's ridiculous to pay people six figure salaries to write syndicated columns when they could be out inventing something?

I know, I know.... "That's different."

Cheap Oil - Forever!

Or at least for five years? Does anybody know what Paul Day was saying about the price of oil a year ago? Perhaps he wasn't among those who believed that we would never again see oil below $80-$100/bbl, but I suspect that most of the people presently projecting five years of low oil prices were then projecting indefinite high oil prices.

These low oil prices are a mixed blessing. It's nice to be able to fill up a gas tank for less than $50, and that fewer people will be fretting over whether they can afford to heat their homes this winter. But if prolonged, low gas prices will lead again to short-sighted manufacturing decisions by carmakers, and short-sighted purchases by consumers. It will make it harder to argue for, or justify the budget necessary for, preparing for the inevitable future in which energy prices again hit record levels. If low oil prices persist, they also reduce the amount of exploration for, and development of, hard-to-reach sources of oil, where the cost of production may be $70-$80/bbl.

I suspect that a big part of the drop in oil prices is less a question of world demand, and has more to do with wealthy investors and hedge funds having to sell off their oil futures to cover margin calls. We seem to be in an odd state of uncertainty, in which those large investors are afraid to buy up certain commodities in case their value continues to drop, but where that lack of investment perpetuates a cycle - the falling prices force additional sales, but again with no buyers, so prices continue to drop (or at best hold steady). That uncertainty extends into other markets where the wealthy once thought it was safe to hold their money - anybody looking to buy some contemporary art? (Maybe Hank Paulson should buy up a few billion dollars worth, to restore confidence to the markets....)

Argh, No!

Thomas Friedman again announces how the auto industry must design future products if it is to be rescued:

You want my tax dollars? Then I want to see the precise production plans and timetables for the hybridization of all your cars and trucks within 36 months. I want every bailed-out car company to move to hybrid electric drive trains, because nothing would both improve mileage and emissions more - and also stimulate a whole new 21st-century, job-creating industry: batteries.

Hybrids represent a tiny percentage of the domestic auto market, and represented a tiny percentage even when gas prices peaked. Hybrid technology is expensive. The cheaper, more efficient batteries Friedman wants? They're still vaporware - they don't exist. And there aren't factories lined up to manufacture millions of batteries for new hybrids - with the increased demand for the Prius this past year, Toyota had to disappoint prospective purchasers with long waits because the supply of batteries is limited.

If anything has been vindicated by the fall of the Big Three, it's Friedman's long-standing (and sometimes peculiar) call for higher gas taxes. What happened when gas prices hit $4/gallon? Friedman's dreams came true - the conspiracy between the Big 3 and Congress to carve enormous exceptions to CAFE standards collapsed, and the market for gas guzzling vehicles plummeted. That is to say, until Congress grows a backbone, the better approach to trying to change the vehicles that Americans buy is by hitting them in the pocketbook.

If Friedman's ideas are adopted, domestic autos may be modestly more fuel efficient than imports, but due to the cost of the hybrid technology it will cost about $2,000 more for a roughly equivalent car. People already have the choice of paying a premium for hybrid technology and, in overwhelming numbers, they're keeping that $2,000 in their pockets and buying more fuel efficient, conventionally powered vehicles.

Set an even floor. If it makes sense that every vehicle on the road be a hybrid (and, as the owner of a hybrid, in my opinion it does not make sense), then require that of every car manufacturer serving the U.S. market. Don't handicap the domestic manufacturers at a point in time when they're struggling to stay alive by pricing them into a segment of the market that, even as gas prices peaked, couldn't get more than 3% market penetration. Given Friedman's concern for emissions, it's worth noting that battery technology is pretty dirty - mining and smelting nickel is dirty enough, but Friedman's demand for instant hybrid gratification will probably lead to the wide use of lead-based batteries.

Meanwhile, perhaps Friedman should take a step back and ask, which car company is it that's trying to use breakthrough, cleaner battery technology in a future generation of hybrids. Not that I want to diminish the advances Toyota has made with its NiCad hybrids, but, could it be... GM with the LIon-powered Chevy Volt?

Friedman also presupposes that nothing better will come along. Forcing the domestic auto makers to spend tens of billions locking themselves into a 100% hybrid fleet, and to do it so quickly that they really have no other room for R&D (even assuming Friedman's proposed law permits them to explore other technologies), may make Friedman feel better, but it puts them at a disadvantage in developing other forms of clean, fuel efficient vehicles.

Yes, the Big 3 need to change their ways. Yes, their past contempt for fuel efficiency is part of why they're in so deep a hole. Yes, their past contempt for environmental concerns is reproachable. (And is it ancient history to bring up how they helped destroy public transportation?) But for all of their faults, dictating the details of their future products has the potential to impair their future competitiveness, preventing them from developing fuel-efficient gasoline and flex fuel vehicles, while impeding the development of cleaner, more fuel-efficient non-hybrid vehicles.

At the end of the day, it's a bit like calling on Congress to legislate that the New York Times overcome its financial struggles and create a newspaper for a new century by publishing entirely through Twitter. It's one thing to know enough about something to be dangerous; Friedman's not even quite to the point of knowing that much about cars.

"If We Keep Throwing Cash On The Fire...."

"... Surely we'll eventually smother the flames."

Watching Paulson and friends scurry around pouring money on one fire after another, with no apparent concern for consistency other than protecting the jobs of their peers and the wealth of stockholders, is fascinating. It's a mad world.

Mad World....

Had Kerry been elected in 2004 and had he initiated a similar "bail-out", can you imagine how Republicans would be responding to the near random manner in which Bush and Paulson are running around, throwing bushels of money at the financial industry? Or that the auto industry's request for $25 billion in federal loans would seem miniscule as opposed to the Bush/Paulson blank check for the financial industry? A year, or even six months ago, could you have imagined a blasé reaction by Congressional Republicans to a Democratic President-Elect's proposed two-year $600 trillion economic stimulus package?

You can blame whomever you want for those aspects of this crisis that predate Bush's tenure. Certainly, financial deregulation that occurred under Clinton played a role in this mess. But it's difficult to get past the top-to-bottom, front-to-back incompetence of the Bush Administration. And despite their lies protestations, the leaders of financial giants like Citigroup knew that they had flushed lending standards down the toilet and were taking enormous risk in the hope of reaping huge profits - and paychecks. I don't want to seem vindictive, but if they've run their companies into the ditch to the point that they need these multi-billion dollar handouts, given that context their CEO's should be tendering their resignations.

As recently as March, we were given projections like this:

You can see this for yourself in Table VI.F8 in Social Security's 2007 trustees' report. Compare "income excluding interest" with "cost," and you get cash flow numbers. (I'm ignoring interest, because it's paid with Treasury IOUs, not with cash.) You see that the system's cash flow is projected at about positive $92 billion this year. Nice. But by 2020 it's negative $96 billion, rising to about negative $280 billion in 2025, half a trillion in 2030.

Oh my.... half a trillion dollars in twenty-two years? Strangely, back in March that seemed like a big number. So what's the cure?

It would be nice to have $2.3 trillion in useful assets in an equivalent of a sovereign wealth fund - but we can't turn back time.

We can still buy time by investing current cash surpluses in non-Treasury assets. But that would require a change in the law and a change in the Washington mindset, neither of which seems to be in the offing.

Darn shame, because if we had invested the Social Security trust fund in private securities that follow the Dow, we would have earned, no wait, lost $800 billion. You know, on paper. I think Social Security privatization is off the table for a while.

What I wonder is, has the scale of this bail-out blown any notion of fiscal responsibility straight out of the budget. What will it take to get us back into a world where a half-trillion dollars is a "big deal"?

Meanwhile in England

Because the domestic auto industry's situation is unique.

A Culture of Overcompensation

Within the executive suites and throughout the finance industry, a culture has developed that divorces compensation from performance. The rationale is pretty consistent, as described by William Cohan:

The gibberish about needing to pay that much just to keep superstars from fleeing to private-equity firms or hedge funds is just another Wall Street myth. The truth is most of them are lucky to have a job at all and they know it.

Within the finance industry, this has translated into compensation disproportionate not only to performance, but to the value of work performed - "compensation has historically consumed half or more of every dollar of revenue generated on Wall Street".

As for the executive suite, if CEO's truly believed they were worth their salaries, or that they were such hot properties that they could easily get the top job at another corporation, I doubt that they would invest so much energy into fashioning themselves glorious golden parachutes before agreeing to lead a company.
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Update: Let me guess... If they didn't get paid this much, they'd quit? And that would be so sad....

Is It "Unfair" To Let Detroit Collapse

Leave it to a conservative. In comments, CWD raises the question of whether it's fair to allow domestic auto makers to fail given the gargantuan financial industry bailout. Oh, I kid CWD. He actually argues, quite correctly, "I've pretty much always been opposed to the idea that we have to do something stupid and wasteful again just because it wouldn't be 'fair' not to do so".

Certain ideologues who favored the financial industry bail-out, while opposing an auto industry bailout, are engaged in some interesting contortions to avoid admitting their hypocrisy. Charles Krauthammer tells us that one's okay but not the other, because the financial industry is a "utility" - directly analogous to the electrical company. Except the government is not regulating the financial industry in the manner that it regulates utilities - is that something Krauthammer wants? Nor was it ever likely that the entire economy would shut down absent a bailout of the financial industry. It's not clear what would have happened, and fear has played a big role in the size of the bailout and the inadequacy of oversight. And I don't recall the federal government rushing in to save California from brownouts and rolling blackouts back in the glory days of Enron, or rushing in to update the electrical grid after the 2003 blackout.

David Brooks is more poetic in his explanation of the difference,

This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.

Well, no. In the same sense that Brooks contends that keeping the big three from collapsing would retard "creative destruction", so does the choice to prop up large financial institutions instead of letting them fail, or letting them be carved up and sold off in smaller pieces. There's no sense in arguing the glory of "creative destruction" if you're going to simultaneously exempt from its forces the institutions that supposedly drive it. Also, isn't "creative destruction" about more than destruction - what does Brooks propose will be created in the place of the destroyed automobile industry? (One wonders, also, why Brooks isn't spending any time describing how his employer might avoid "creative destruction", beyond suggesting that it should get a bailout if Detroit is rescued.)

In an interesting series of posts at the Atlantic, Megan McArdle takes on the question of fairness, asking in some earnestness if an auto industry bailout means that the government should also bail out companies like Kodak. But that's a slippery slope argument, already implicated by the financial industry bailout. If we can draw a line before bailing out the auto industry, we can draw a line afterward. McArdle correctly argues that the bailout is unlikely to change "business as usual" at a domestic auto company or the UAW. True, but that's not a distinction from the bailout of the financial industry, which is now preparing to shower its workers with generous bonuses and pay dividends to shareholders courtesy of the U.S. taxpayer.

There are also fundamental differences between allowing a company like Kodak to fail because it didn't sufficiently anticipate and respond to the rise of digital technologies and its effect on the sales of photo chemicals, and allowing the auto industry to fail. Sorry, Kodak, but you represent a much smaller, less vital part of our economy. And unlike a context where a dinosaur is allowed to dwindle or die because it didn't respond to the market calling for a different product, this is a failure in competition between companies offering similar products. Suggestions to the contrary aside, assuming for example that GM fails, a post-collapse consumer is going to buy a roughly equivalent car from one of the remaining auto makers.

Hype green technologies all you want, but the consumer's choice is more likely to be driven by gas prices than by the availability of hybrid or flex fuel technologies, and the Japanese auto companies sell trucks and SUV's with gas engines in order to meet that demand. If the big three fail, cars will continue to be made, but the profits from those sales will flow to foreign companies and the instinct of those companies, faced with economies like the one we're in, will likely be to shutter U.S. plants ahead of those situated in the countries where they are based. High tech jobs in the auto fields will filter out of the U.S., so we need to ask ourselves whether those are the jobs we want to lose? (And that's before considering the jobs and businesses that would collapse across the country in the event of an auto industry collapse. No matter how much you hate unions, it's insane to be hoping for the death of the Big Three.)

I'm less concerned about an unlikely future where this leads to our bailing out Kodak, than I am of GM coming back in thee years, or maybe three months, begging for more cash - can we offer this bail-out without doing exactly what Henry Paulson and GW are doing with the metastatic financial industry bailout?

McArdle is correct in suggesting that any bailout should return a net gain to society, and that it is not clear that the current proposal would do so. Would bankruptcy? The fallout from bankruptcy for GM itself may be worse, but what if you instead used that bailout money to soften those consequences, or held it in reserve to potentially help a stripped-down, post-bankruptcy GM? I'm not big on the Thomas Friedman model of trying to force the Big Three to reinvent their vehicle line-up in his preferred image. The priority needs to be on creating viable companies, not on forcing them to incorporate technologies into their fleets that will either require massive government subsidies or price their vehicles far above competing models.

The WSJ proposal that if we're bailing out the auto industry to the tune of $25 billion or more, existing shareholders should be wiped out, seems to be on the mark. If we prefer a bail-out to bankruptcy, make it "bankruptcy lite" - a more efficient, industry focused version of bankruptcy, but with pretty much the same goals in mind. Not long-term stewardship, micromanagement, or redesigning vehicle fleets by committee. If you want to impose green reforms, do them legislatively and impose them on all new vehicles, so that the "new GM" can compete on equal ground. Perhaps more importantly, it isn't clear that an auto manufacture could survive bankruptcy - that they could maintain the cash flow necessary to stay in operation if they're unable to obtain and maintain enormous lines of credit. A specially legislated "bankruptcy lite" might bring about the benefits of bankruptcy without killing the company or impairing its ability to sell cars.

Something that seems to get lost in the noise, particularly the anti-union, "those workers get paid too much" noise, is that it's not only the labor cost differential that makes it hard for the Big Three to profitably sell smaller, cheaper cars. Take a look at vehicle sales in recent years. If domestic auto makers could avoid the discounting they have to offer to make their "comparable" cars competitive with cars from companies like Toyota or Honda, this would be much less of an issue. Instead, the labor cost differential is magnified by the need to offer discounts and incentives to people who are prepared to pay close to MSRP for a "comparable" quality vehicle.

Some painful truths. It isn't clear at this point that a financial industry-style bailout (no strings attached, here are billions to spend on whatever you think is best) would do more for the auto industry than forestall their collapse by a period of months or maybe years. It does not appear that, left to their own devices, the domestic auto manufacturers will get it together to manufacture vehicles that compete in terms of quality, design, or economy (in what I personally regard as an inevitable return to high gas prices) before they again hit a financial wall. But it isn't clear that any bailout, bankruptcy, or "bankruptcy lite" will turn them into viable companies - the context is created for that possibility, but these are sick giants with a corporate culture that has largely fought, tooth and nail, against the type of evolution that is required. Their progress over the past few years gives some hope, but it's only a modest beginning.

But doing nothing, if it leads to the collapse of one or more of these companies, will almost certainly deepen and prolong our recession while effectively ceding a big money, high tech manufacturing industry to foreign companies. So all said, at this point I would argue for "bankruptcy lite", for any of the Big Three that feels it cannot otherwise survive, and otherwise let market forces prevail.

Meanwhile, In Japan

Because the domestic auto industry's situation is unique, and car manufacturers wouldn't be in this situation if they only built more cars like the Prius, right?

Plans to make the Toyota Prius at the carmaker's new U.S. plant in Mississippi are being reviewed by a new emergency task force charged with propping up the company's profits.

U.S. production of the Prius, originally scheduled to begin in 2010, could now be pushed back to 2011 or later, Japan's Nikkei newspaper reported November 14, without citing sources.

Okay, but if had the domestic auto manufacturers focused on quality, smaller, more fuel efficient vehicles, or didn't have so many UAW plants, they would still be rolling in dough, right?

The task force, chaired by President Katsuaki Watanabe, was formed after Toyota booked an operating loss in North America for the first half and slashed its full-year earnings forecast.

What this illustrates is not that the Big Three have been unduly criticized for their bad management and poor strategies. It highlights how, in an economic downturn, even the best run companies can lose money. And how nothing the critics of an auto industry bailout are advocating is likely to quickly, and perhaps not even slowly, turn around the plight of domestic auto makers. Not even if Toyota handed them its hybrid technology and the keys to its Mississippi manufacturing plant.

Meanwhile, let's keep in mind that the Big Three have a point, in that a lot of domestic auto buyers really do want a huge, overpriced, gas guzzling SUV sitting in their driveway. Gas prices are down this month? Do I even need to tell you what that means, or have you guessed - SUV sales are up. If not for the economic downturn, burst housing bubble and credit crunch, the Big Three would probably be seeing SUV sales figures as high as last year's, as if the summer's record gas prices never happened.

Although the Big Three have improved their quality over the past few decades, they still lag behind major foreign auto manufacturers. I don't want to understate the importance of their ceding short- and (moreso) long-term quality to companies like Honda and Toyota. But there's something else to keep in mind: One of the reasons that auto manufacturers coming out of Europe or Japan build compact, fuel efficient vehicles is that's what their domestic consumers want. It's what we want when gas hits $4/gallon - prices comparable to those long seen in Europe or Japan? Is that supposed to surprise us - we truly believed Europeans and Japanese to be alien creatures who love packing themselves into tiny cars? Are we supposed to be surprised that gas prices hit the $4 mark and, despite the current drop, are going to hit and exceed that mark in the future?

The myopia here is not just out of Detroit - far from it. Congress worked hand-in-hand with domestic auto makers to create the context for this crisis. You know what might have forced the Big Three to develop a business model that is more realistic in a world of $4/gallon gas? Not carving out dishonest exceptions from CAFE standards to avoid classifying SUV's as passenger vehicles.

The very same members of Congress who are presently blocking a bail-out are the ones who happily went along with that deceit, concurred with Dick Cheney's notion that doing otherwise would somehow destroy an American way of life in which consumption is king and conservation is for wusses is a "personal virtue", and gleefully chanted "drill, baby, drill" during the presidential race. They're they types who giggled along with caricatures of "Prius-driving liberals". They were backed up by pundits like George Will, who would happily regurgitate any anti-hybrid propaganda, no matter how absurd, such as the fabrication that a Prius costs $3.25 per mile over its lifetime, while a Hummer costs only $1.95. And now they're lecturing the auto industry that they should have been leading the hybrid race? Or that the Big Three exemplify a failure of leadership? Or that they know more about these issues than, say, heads of cabbage? (Not that those who favor the bailout are necessarily any better.)

I know, I know. Building an economy propped up by debt-driven consumer spending and low energy prices was "the free market at work", and preparing for an inevitable future of higher energy costs or reduced credit would have... somehow... been wrong, even if it might have diminished or prevented the present collapse of the economy.

The Infuriating U.S. Auto Industry

Living in a state that seems to be in a permanent recession, and where it sometimes appears that the state government's leading solution to decades of economic decline is, "Wait until the auto industry rebounds," it's frustrating to see how short-sighted the domestic auto industry is. The auto industry's decline has been actively abetted by Congress which, rather than pressing for fuel economy standards that make sense in the context of the world's oil supply and demand, has time and time again favored consumption over conservation.

Right now the auto industry is hoping to get its hands on $25 billion in loans, already approved by the Bush Administration, to build more fuel efficient vehicles. How fuel efficient? So that they can meet a 35 mpg CAFE standard by 2020. You know, like the Civic Hybrid's 42 mpg combined average, or the 46 mpg achieved by the Toyota Prius. Oh, let's give the domestic auto industry its due - Ford's compact hybrid SUV's combined average is 34 mpg - they're almost there. Too bad it will take another twelve years and $25 billion to get that extra 1 mpg.

If you approach gas mileage honestly, you already know you don't need hybrid technology to achieve 35 mpg. In 1989, 20 years ago, Honda introduced its CRX HF, which achieved a 45 mpg combined average. The Geo Metro achieved similar fuel efficiency. In fairness, the method for calculating fuel efficiency has changed, and these cars would probably get about 38 mpg combined averages by today's standards, probably a bit less for the Metro, although by the same token we could presently build even more fuel efficient versions of those same cars. What those cars do is demonstrate that if you put a small, fuel efficient motor in a small, light car, you can achieve high fuel efficiency - something that, surprisingly, still needs to be said. This is a context where I'll be the first to admit, the CRX and Metro weren't and aren't the cars for everyone. But let's not pretend it's about technology, as opposed to wanting a large set of features and amenities that increase vehicle weight and decrease fuel efficiency. A huge part of the investment in fuel efficiency is about how to squeeze V8 power out of a V6 engine, or how to reduce vehicle weight without reducing size, performance, or amenities.

Criticisms of the auto industry almost always include a potshot at organized labor, if not an outright call to bust the unions. The history of generous union contracts plays a role in the current plight of the automakers, but not in the way that is typically depicted on the Wall Street Journal's editorial page. The Big Three have actually done a respectable job of paring down their labor costs and raising plant efficiency, to the point where the cost of labor provides only a marginal advantage to foreign auto manufacturers. They are weighed down by their huge obligations to retirees - health and pension benefits. A big part of GM's present cash flow problem comes from its obligation to pay billions of dollars to the UAW, to as part of a deal to transfer pension and retiree health care obligations from its books and onto the union.

But unions do remain a part of the problem, in that their lobbying efforts have largely followed those of the Big Three. When the Big Three were making a lot of money selling inefficient, high margin vehicles, the UAW had their back. Big profits mean profit sharing checks, and a possibility to negotiate higher wages during the next round of contract negotiations. I don't find that insidious, so much as short-sighted. It's their job to try to get more money for their members. But while the auto manufacturers themselves bear responsibility for lobbying (and obtaining) fuel efficiency standards and exceptions that let them "build the cars people want" (when gas is less than $4/gallon), and let them avoid investing in the technologies that might allow them to build comparable cars with much greater efficiency, I think that a union has an obligation to look at the long-term as well. Unions are often very willing to ignore the long-term financial picture for an employer or industry, and to sell out new members in favor of obtaining preferential treatment or benefits for their existing members. A union has an obligation to negotiate for the benefit of its members, but UAW-type negotiations seem to focus on existing membership (often at the literal expense of future members, and sometimes also of retirees) over the short term, without regard for the long-term effects on the employer or even themselves.

Is it needless to say? The UAW has joined GM in its quest for a federal bailout. Getting billions in federal money lets everybody avoid making tough decisions, while avoiding the consequences of decades of selfishness, short-sightedness and incompetence. Many opponents of the bailout suggest that it will simply enable "business as usual", and there's little reason to doubt that's what GM and the UAW most desire.

Fred Wilson, a venture capitalist focusing on technology companies, suggests that we should break up the Big Three instead of bailing them out. Unfortunately, it's not that easy. There's no clean way to divide any of the auto makers by product line, let alone to maintain supply contracts and product distribution by product line. I think that forcing the auto manufacturers to become smaller, more nimble, and able to quickly develop and manufacture new products is a good goal; I just don't see that it can be done by breaking them into smaller manufacturers. (If it were feasible to divide a major auto manufacturer and there were buyers willing to purchase individual car brands, I suspect Cerberus would already be taking bids for the various Chrysler brands.)

Thomas Friedman endorses a WSJ-style solution - and I mean that quite literally. He endorses a proposal by Paul Ingrassia, former Detroit bureau chief for the WSJ, as published in the WSJ (and as linked above).

In return for any direct government aid, the board and the management should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver - someone hard-nosed and nonpolitical - should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.

That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits. The same basic rules should apply to Ford and Chrysler.

To me, that proposal seems silly. I am not aware of the magic wand you can wave over a major corporation to replace its upper management with "better people" and instantly transform the company into something lean and competitive. If Ingrassia were honest about it, he would be admitting that's what the Cerberus acquisition of Chrysler was supposed to be about - brilliant financial wizards take the company private, install new management, streamline operations, and transform it into a dazzling success. Yet Cerberus has failed in that effort, and Chrysler stands alongside GM and Ford in seeking a multi-billion dollar handout. It also seems absurd to me that a supposedly conservative, pro-business paper would be suggesting yet another socialization of major American companies, with government-appointed management being the cure-all for the failures of the market. The contempt for contracts is also a curious phenomenon - why are WSJ-brand conservatives so quick to call for the shredding of contracts, when the entire business world revolves around reliance on contractual relationships?

Ingrassia should also be aware that the problem with the Big Three's contracts with suppliers is not that they're overpaying. It's that they've always focused on price, and the squeezing of price concessions out of their suppliers, as a first line approach to cost savings. While a company like Toyota works closely with its parts suppliers to increase efficiency and quality - to save money while maintaining or improving quality - the Big Three have had little regard for anything but the bottom line. Even assuming that the suppliers are able to stay in business after a WSJ-style shredding of their contracts, where's the evidence that turning contracts into confetti will translate into even a penny in cost savings? Similarly, given that the largest burden imposed by union contracts has already been incurred and the cost of labor is no longer much higher for the Big Three than for their non-unionized (or largely non-unionized) competitors, how much will the shredding union contracts actually help? And, as with shredding contracts with suppliers, what of the risk that it will disrupt their ability to make cars? Finally, if the shredding of their contracts is of such import, why not refer them to a bankruptcy court where they can do that through a Chapter 11 filing?

Friedman also has some demands of his own:

Any car company that gets taxpayer money must demonstrate a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability, so its entire fleet can also run on next generation cellulosic ethanol.

I'm not sure what that means. Is Friedman proposing that all new vehicles incorporate those technologies? That they have the capacity to be "upgraded" to hybrid/flex-fuel vehicles? If he wants those technologies built into every new car, does he believe that the path to prosperity involves increasing the cost of every vehicle by a couple of thousand dollars, while we operate on the assumption that ethanol production will become more green (and be less subsidized) in the future? Seriously, I applaud efforts to increase fuel efficiency, achieve energy independence, make cars cleaner and greener, etc., but I don't see much point in creating a context where the government has to grant a multi-thousand dollar subsidy for pretty much every domestically manufactured vehicle in order for it to be price competitive with imports.

Lastly, somebody ought to call Steve Jobs, who doesn’t need to be bribed to do innovation, and ask him if he’d like to do national service and run a car company for a year. I’d bet it wouldn’t take him much longer than that to come up with the G.M. iCar.

This is cute, but it's a bit like a simplified version of Ingrassia's receiver who will magically replace the upper management of the Big Three with people who know how to run car companies. (People from other industries?) Friedman believes that a culture of innovation (let alone a culture of quality) can be instilled in a company simply by switching it's CEO, but how often does that actually happen? History suggests that the opposite is more likely - an ill-suited CEO will damage or crush a culture of innovation (see, e.g., Hewlett-Packard, Yahoo!, Apple during the non-Jobs years, etc.) Also, sometimes those creative, brilliant leaders bring quirks to their companies that can be as problematic as having boring, conservative, rule-by-committee CEO's. (Remember the period when Apple wouldn't build a desktop PC that required an internal fan?).

Although something of an aside, whatever criticism may be fairly directed at GM's leadership, or to idiotic statements on global warming, this assertion by Friedman seems like a cheap shot:

Nothing typified this more than statements like those of Bob Lutz, G.M.’s vice chairman. He has been quoted as saying that hybrids like the Toyota Prius “make no economic sense.”

Lutz is more fully quoted as saying that Prius-style hybrids make no economic sense because their price will never come down. As I interpret his comments, he was simultaneously talking up GM's plug-in hybrid technology (i.e., the Chevy Volt), talking down a competing product (the Prius) and noting what is pretty obvious: current hybrid technology comes at a premium price and, if you can't eliminate that premium, you're unlikely to get the type of market penetration that people like Friedman supposedly want. Further, he made the comments several years ago, and related them specifically to the price of gas at that time.

It just doesn't make environmental or economic sense to try to put an expensive dual-powertrain system into less expensive cars which already get good mileage, Lutz said at the North American International Auto Show.

* * *

"Hybrids are an interesting curiosity and we will do some," he said. "But do they make sense at $1.50 a gallon? No, they do not."

It seems unlikely that Lutz was arguing that there's no place for current hybrid technology in the GM line-up, as it's offered in a number of models and he was suggesting at the time that it would be added to GM trucks. It may turn out that Lutz is incorrect, and the current hybrid technologies come down in price, but it's also possible that he's correct and the best and cheapest way to bring hybrid technology to the mass market is through plug-in hybrids. But it is clear that in the four years (actually, almost five years) since he made the statement, current hybrid technologies have not come down in price and you continue to pay a significant premium for hybrid cars. That's why, even with record gas prices driving record sales, hybrids make up only about 3% of the U.S. car market.

What do I want to see for the domestic auto industry? I want to see private capital deliver on its promises, rather than "yet another display" of the supposedly brilliant financiers behind companies like Cerberus getting a public handout when they screw up an investment or prove that they're even less capable than the former managers of the companies they're supposedly rescuing. I would like to see GM find a way to get private money to finance its way through this crisis, even if that means making some unpleasant concessions. I would like the auto manufacturers and their workers to internalize the lesson that you can't make up for deficits in quality by creating a context where new car buyers reliably trade in their cars every two years, passing along the defects to the next guy, while your competitors make cars that are remarkably reliable for people who prefer long-term ownership. Yeah, right.

Finally, the one thing I don't want to hear is anybody who supported the financial industry bailout oppose an auto industry bailout on the basis that the domestic auto industry has collapsed due to incompetent management, greed, poor planning, badly designed products, or overpaid employees - that's a distinction without a difference.

It Was Only Eight Years Ago....

That, as G.W. Bush became President Elect of the United States, I commented that he was inheriting a gloomy financial picture and that I didn't envy anybody who was taking over as President, and wondered if either candidate could have looked forward to more than a single term presidency. And from day one until the day history took over, G.W. seemed intent to prove me right.

Looking back, it's amazing how good things were - exceptionally good - as contrasted with the gaping chasm left for Obama by the Bush Administration. Is there anything Bush touched that didn't turn to, um, lead?

Put the audacity on hold - it is time to hope, but perhaps more modestly, that we've reached a point where there's nowhere to go but up. I don't actually believe that - things could get much worse - so I guess that's where the hope comes in.

Don't Diminish the Value of Education

Roger Cohen shares a "rags to riches" story:

Fazal Fazlin has an American story. Raised in Karachi, Pakistan, he came to the United States in 1969 with an engineering degree and little else. Now he lives on a five-acre estate in the waterfront mansion that once belonged to Nelson Poynter, luminary of the newspaper business.

This reminds me of when I was in law school, and a classmate from a well-off family shared that the carpet in his dorm room was from his parent's first apartment in the U.S., the one-room apartment where he had also spent his earliest years. I didn't know anything about his background, save for it being pretty obvious that his parents were now quite wealthy, and I asked, "You mean your parents started out here with nothing? He laughed, "Yeah, if you count their Ph.D.'s in the hard sciences as 'nothing'".

All The World Loves a Bubble

As if you need to be told, I'm not an economist. But at the same time, I haven't had a great deal of difficulty identifying the two big "bubbles" of our time - the "dot com bubble" and the "real estate bubble". With the dot com bubble, I "knew" that the moment I tried to "cash in" would be the moment people figured out that it was largely a house of cards, so I didn't try to cash in - silly me, overestimating the intelligence of the financial community.

For the more recent bubble, I wasn't trying to get a loan to buy a house I couldn't afford, and don't want a McMansion, so I wasn't aware of how absurd the housing market had become, but it wasn't lost on me that housing inflation had reached absurd levels in parts of the country or that a lot of new construction was priced well above the reasonable means of a lot of people who seemed to be buying it. And for the last two years, a growing number of voices have been warning laypersons about the impending problems of the housing market and mortgage industry - those warnings could not have escaped the attention of industry professionals. If we are to assume that there is value to the field of economics, I find it difficult to believe that an economist who was truly studying the housing market wouldn't have seen this coming.

The other day on Marketplace, I heard an economist, Susan Lee, give a simplistic explanation for how the government is responsible for... well, everything that goes wrong with the economy:

Just take a look at monetary policy. Back in 1998, when the giant hedge fund Long Term Capital Management went under, the Fed rushed to the rescue. Tons of unnecessary dollars were pumped out. Those dollars generated the dot-com bubble. When that bubble burst in 2001, the Fed again threw dollars at the crisis, generating the housing bubble. And when that bubble burst last year, the Fed once again shoveled out more dollars which will, eventually, create another crisis somewhere else.

A similar argument is raised in the Washington Post today, by Peter Schiff: Don't Blame Capitalism.

Yes, many Wall Street leaders were irresponsible, and they should pay. But they were playing the distorted hand dealt them by government policies. Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.

Schiff tells us how government policy has stripped people of the fear of losing their investments,

But over the past generation, government has removed the necessary counterbalance of fear from the equation. Policies enacted by the Federal Reserve, the Federal Housing Administration, Fannie Mae and Freddie Mac (which were always government entities in disguise), and others created advantages for home-buying and selling and removed disincentives for lending and borrowing. The result was a credit and real estate bubble that could only grow - until it could grow no more.

That's nonsense. Nobody made a private lender participate in this scheme. Nobody said, "Hey - don't pay any attention to that ginormous bubble that's completely unsustainable and could wipe us out if it bursts." If we're supposed to believe that the financial industry "wizards" who get paid between tens and hundreds of millions of dollars per year couldn't see this coming, or did but chose to do nothing, they don't even deserve minimum wage.

With all due respect for the distorting effects of tax policy, subsidies, and government guarantees, it's not as if any of those distortions are a mystery. They're among the best known, most obvious, and most predictable aspects of the housing market. When people like Schiff tell us, "Market forces would have kept out unqualified buyers and prevented home-price appreciation from exceeding the growth in household income," they're both overstating the responsibility of those policies for the bubble and are grossly understating the responsibility of financial professionals. For goodness sake, Schiff argues,

Prominent among these wrongheaded advantages are the mortgage interest tax deduction and the exemption of real estate capital gains from taxable income. These policies create unnatural demand for home purchases and a (tax-free) incentive to speculate in real estate.

Those policies make it possible for people to afford "more house" than they could in their absence, but they are far from "prominent" in the current financial crisis. They have existed for many decades without causing a bubble. Nobody - nobody - is proposing that it's necessary to repeal them in order to prevent a future bubble. And I doubt any sensible person, economist or otherwise, would suggest that now is the time for a repeal resulting in downward pressure on home values and a further reduction in the amount prospective homeowners would be able to borrow. Removing those distortions may well be an appropriate long-term goal, but would be short-term stupidity.

Schiff provides a similar argument to that heard on Marketplace,

Artificially low interest rates invigorated the market for adjustable-rate mortgages and gave birth to the teaser rate, which made overpriced homes appear affordable. Alan Greenspan himself actively encouraged home buyers to avail themselves of these seeming benefits. As monetary policy caused houses to become more expensive, it also temporarily provided buyers with the means to overpay. Cheap money gave rise to subprime mortgages and the resulting securitization wave that made these loans appear safe for investors.

Who says the "loans" appeared safe for investors? They were combined, sliced, diced and securitized, and certified as high grade securities, all by financial industry professionals - with the apparent goal of making it impossible for investors to figure out what they were buying or make an accurate assessment of risk. The accounts from inside the mortgage industry suggest two primary lines of thought: First, the absurd notion that housing inflation could continue at 10-20% per year, indefinitely, and second that it was more important to buy up garbage mortgages, securitize them, and turn a profit than it was to let somebody else do so and grab the "profits".

Schiff notes, correctly in my opinion, that "Real credit can be supplied only by savings", and suggests that nonetheless "the government cannot abide solutions that ask for consumer sacrifice". But it's not just the government that can't stand the idea of consumer sacrifice - our economy is built on consumer largesse. What happens if you reign in consumer spending, some 2/3 of the economy, as part of your effort to shift the economy back to savings and "real credit"? In the long-term we're likely to be better off, but boy does that short-term picture get rocky.

I respect the consistency of Schiff's argument, which appears to be a form of free markets purism where the government shouldn't create tax or fiscal policies that affect the markets, and also should let markets self-correct in times of crisis.¹ And I respect the fact that government actions that distort the markets will have unintended consequences. But the markets have an atrocious record of self-regulation, and the unfettered capitalism of the industrial revolution has little appeal.

Schiff implies that "fear" will cause self-regulation in the absence of government regulation, but that's presented as an article of faith, and seems contradicted by the fortunes lost in these market corrections.² If Lehman Brothers truly saw no risk and had no fear of failure, again, its principals didn't deserve so much as minimum wage. Beyond that, how far does even Schiff truly wish to roll back worker rights, workplace safety requirements, environmental regulations, and other regulations of business and industry in the name of "free markets"?
________________

1. Schiff writes,

By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment and help workers transition from the service sector to the manufacturing sector, government is resisting the cure while exacerbating the disease.

Now, I've not seen any great evidence that the markets are interested in training or retraining workers, except as made necessary by labor shortages. But what transition from service to manufacturing is he talking about? Granted, I'm in Michigan, so my perspective may be skewed, but I see a continued bleed of middle class manufacturing jobs with retraining directed at moving people into office or service jobs.

2. I don't want to overstate this. I find truth in the quip that, had current government policies been in effect in the 18th century, we would still have (heavily subsidized) neighborhood blacksmith shops.
________________
Update: Recession-Plagued Nation Demands New Bubble To Invest In (via Paul Krugman).

If We Are To Judge By Appearances....

Then Henry Paulson's financial industry bail-out seems ill-conceived, unfocused and ineffective. The only consistent inference is that, top to bottom, start to finish, it appears designed to benefit financial industry insiders.

I can easily find Paulson's explanation that his current plan won't work. But where can I find him explaining how it will work.

Brooks Somehow Missed the Joke

David Brooks argues that the Republican Party engaged in class warfare, eroding its support among intellectuals:

[O]ver the past few decades, the Republican Party has driven away people who live in cities, in highly educated regions and on the coasts. This expulsion has had many causes. But the big one is this: Republican political tacticians decided to mobilize their coalition with a form of social class warfare. Democrats kept nominating coastal pointy-heads like Michael Dukakis so Republicans attacked coastal pointy-heads.

* * *

What had been a disdain for liberal intellectuals slipped into a disdain for the educated class as a whole. The liberals had coastal condescension, so the conservatives developed their own anti-elitism, with mirror-image categories and mirror-image resentments, but with the same corrosive effect.

The result, as Brooks sees it?

The Republicans have alienated whole professions. Lawyers now donate to the Democratic Party over the Republican Party at 4-to-1 rates. With doctors, it’s 2-to-1. With tech executives, it’s 5-to-1. With investment bankers, it’s 2-to-1. It took talent for Republicans to lose the banking community.

* * *

And so, politically, the G.O.P. is squeezed at both ends. The party is losing the working class by sins of omission — because it has not developed policies to address economic anxiety. It has lost the educated class by sins of commission — by telling members of that class to go away.

I think Brooks has it wrong. The Republican Party isn't declining because it has alienated intellectuals. It's declining due to a combination of bad policy decisions and its void of new ideas. That's why you have an array of Republicans suggesting that "You have to let the party die in order to save it", as if it will arise like a phoenix once it is reduced to ash.

That perhaps also reflects this nation's unfortunate tendency to start by supporting a party, embracing the party label as a matter of personal identity, and deciding from there that we support its agenda. If we even think about its agenda. It takes a great shock to wake people up to the idea that their political party doesn't actually have their best interests at heart, even though it seems obvious that the other party is full of corrupt, self-serving slaves to special interests.

As I see it, the set of elites that gained control of the Republican Party, and who foisted their policies upon the nation for the past eight years, have managed to convince a great many conservatives that the modern Republican party is largely not conservative, and has embraced one bad policy after another. Are you a fiscal conservative? How can you not choke on the manner in which the Bush Administration has blown the budget? A foreign policy conservative? How do you feel, then, about aggressive overseas military interventionism and the positioning of the U.S. as world policeman in a never-ending "war on terror"? Are you a social or religious conservative? What did the Bush Administration actually deliver on social issues, despite using them as wedge issues to "inspire the base" in every recent national election? Are you a "club for growth" type who cares about little beyond enriching yourself and eliminating taxes on inherited wealth? Somehow I don't think getting a capital gains tax cut's your hot button issue this week....

The conservative intelligentsia was always in on the joke. They voted for the Republican Party because they thought that Republican policies would best advance their interests, and they understood that the party had to string "the base" along in order to gain and hold power. The Republican party is losing their support because it has proved itself unfit to rule. (Which isn't necessarily to say that the alternative is better, but we're way past the point where "holding the course" seems like a credible response to the problems facing this nation.)

As for losing the base, the "working class" - a term elites use to describe blue collar "red state" voters - has faced a lot of adversity during the years of the so-called "Bush Boom". Then there was the housing bubble - okay, but that mostly affected other people, and most Americans were ready to ride that one out. Then there was the financial industry meltdown and a promise of even harder times, but not to worry - a bailout is on the way... for bankers. The weird thing about getting people to worry about social issues is that they have plenty of time and energy for it when times are good, but when the economy melts down attentions start to shift toward substantive political and economic issues. Right now, that's bad for the Republican Party.

I could have saved a lot of typing and coopted Clinton. Attention, David Brooks: It's the economy, stupid!

Everything's Coming Up Roses

What is it with Bush's economic advisors, anyway? First Phil Gramm, now 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.

No, they're not that bad... if you're wealthy. It's just not so great for everybody else. If you live in Michigan, where "recession" is a multi-year reality, it's hard to see any bright lights at the end of the tunnel.

It's a lot easier to wave around red herrings, such as, "It's a wild overstatement to compare our current situation to a depression", than it is to address the financial difficulties our nation faces. Difficulties compounded by the vast amounts borrowed and spent on the Iraq War. You can view that war as an absolute necessity or an utter frivolity, but there can be little mistake as to the effect of its trillion dollar price tag on our nation's budget. Further, not all comparisons to the Great Depression are overblown - they may not indicate that we have another depression on our horizon, but they highlight how serious our post-Bush financial predicament has become.

Luskin attempts to reassure us,

Moreover, MBA data show that today's foreclosures are concentrated in that small fraction of U.S. homes financed by subprime mortgages. Such homes make up only 12 percent of all mortgages, yet account for 52 percent of foreclosures. This suggests that today's mortgage difficulties are probably a side effect of the otherwise happy fact that, over the past several years, millions of Americans of modest means have come to own their own homes for the first time.

Well then, somebody had better clue my bank in, because they seem to think my neighborhood is at risk.

As for savings, Luskin tries to pull a fast one - take a quote from Obama that relates to recent financial data and pretend it's about the latest figures - figures for one quarter that post-date Obama's statement and are likely anomalous

Let's hope, despite the dearth of evidence, that the most recent figures do represent a turnaround. Luskin, unfortunately, presents no evidence of that, but otherwise the trend appears to be as Obama described - and it's ugly. But it does not appear that Luskin's trying to be honest here - he appears to be trying to distract us from the trends by comparing one of the best savings rates for a single quarter under Bush to one of the worst under Clinton.

And to be fair, [McCain] isn't immune to the Depression-exaggeration virus, either. At a campaign news conference in July, my fellow adviser Steve Forbes warned that Obama was seeking "the biggest tax increase since Herbert Hoover and the Great Depression." Factual? Almost certainly not.

Almost? Wouldn't "big fat lie" be more accurate?

But at least Forbes wasn't dissing the economy -- he was dissing Obama.

Ah. So it's okay to tell outright lies about a candidate, as long as you don't state what appears to be the truth about the economy in an unflattering light.

Luskin can't help himself from defending Phil Gramm:

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.

Does Luskin have a mirror handy? Because from where I'm sitting Luskin is either exaggerating himself, or is wearing rose-colored glasses.