"It's the asset prices, stupid"

In a good post titled 'Why Obama is Winning' Harold James points out that political strategist James Carville's famous "it's the economy, stupid" quip from the 1992 U.S. presidential election campaign has gained a new twist:

...the lesson about the economy’s electoral salience is being subtly reformulated. It is no longer the real state of the economy, but rather the perception of asset markets, that is crucial. And the perception can be far removed from reality, which means that the more the prevailing political wisdom assigns decisive electoral importance to the economy, the greater the temptation to view monetary policy’s impact on asset prices, and not on long-term growth, as crucial.

What James is basically saying is that people feel wealthier when asset prices - stocks, bonds, real estate, etc. - go up in value. This phenomenon -- the so called 'wealth effect' -- can make those who don't read The PolyCapitalist and the other recommended sites listed on the right side of this blog feel like the real, fundamental economy is doing better than it actually is. Or so the theory goes. 

Further, positive feelings about how the economy is trending due to rising asset prices can in turn drive higher consumer consumption and business investment, which in turn can increase GDP. At least in the short (and possibly) medium run.

For how long can this wealth effect ponzi-esque scheme go on? In other words, are programs like QE3 nothing more than an macroeconomic cheap trick?

No one knows for sure because, like much of modern macroeconomic theory, we are conducting a live, empirical test of the theory. And this test has arguably been running since at least 1987 (the year Alan Greenspan became Chairman of the Fed), if not 1971 (the year Nixon severed the U.S. Dollar's anchor to the price of gold).

What this means longer-term, according to James, is further politicization of the Federal Reserve and other central banks around the world:

Republicans will blame their defeat in November on the Fed’s monetary stimulus (if not on the ineffectiveness of Mitt Romney’s blunder-filled campaign). 

Meanwhile, in Europe, many national leaders, looking at Obama and the Fed, may conclude that they would do better with more direct control over the central bank. Given the difficulty of establishing such control over the European Central Bank, the euro’s next great challenge may be growing sentiment in favor of a return to national currencies.

In other words, expect central banks to remain in the politial bullseye following the 2012 U.S. and 2013 German elections, regardless of the their outcomes.

Will major reform be applied to central banks? For example, there has been open discussion of terms limits for the Federal Reserve Chairman.

Perhaps changes like term limits, greater Fed transparency, etc. are in the cards longer-term. But I am personally skeptical that any significant reforms will be enacted at the Federal Reserve prior to the end of the U.S. dollar's global hegemony.

Video: Richard Duncan on The New Depression

All About 'The Blob'

Read it and weep.

Video: Review of 4-Part Frontline Financial Crisis Series 'Money, Power, and Wall St.'

The PolyCapitalist is kicking May off with a number of must watch videos, and this epic 4-part Frontline special follows the crisis from what is arguably its point of genesis: a 1994 JP Morgan retreat in Boca Raton, Florida which of led to the creation of the first credit default swaps.

Frontline has done an incredible job getting many of the key players and insiders, including a number of top Wall St. bankers, to go on record about what happend. Even if you've read all the books, seen the earlier Frontline financial crisis special, and think you know all you need to about the financial crisis, this is still must watch.

The big new item for me, and I'm a bit surprised this has not received more ink, was the March 2009 battle between Larry Summers and Tim Geithner over what to do with the megabanks. My prior understanding was that Summers and Geithner were two peas in a pod. Not always it turns out.

According to Frontline, in March 2009 Summers, along with fellow economist Chritina Romer, pushed for what was called 'Old Testament Justice', meaning firing a bank CEO and or possibly nationalizing one of the megabanks. In contrast, Geithner, who it would appear is more of a protege of Bob Rubin than Summers, fought hard to treat the banks with kid gloves and use stress tests to help instill confidence back into the marketplace.

Obama ultimately sided with Geithner, which seems to contradict earlier reporting that Geithner had ignored Obama's instructions to dissolve Citigroup. Frontline definitely presents Summers in a better light and Geithner and Obama in a worse one.

I have only a minor gripe with this Frontline series, which is the annoying editing. In a multi-part, complex story, reusing clips to aid telling the story is probably unavoidable. However, I felt they recycled too many from within the four part series, as well as from an earlier Frontline special on the financial crisis from a couple years ago. But this is a minor, forgivable quibble given the extraordinary job the Frontline team did to compile and document the crisis up through present day.

Overall, perhaps the key point made in the series - and one I could not agree more with - is that the financial crisis still has not ended. Where it will go from here is as much dependent now on politics as markets or economics.

'Government Bank Bailout Was Profitable' Myth Receives Another Nail in the Coffin

Bravo to Jonathan Weil of Bloomberg, who uses the U.S. Treasury's own footnotes and figures to dispel the myth that the bank bailouts were profitable to taxpayers here.

2012 Prediction #4: Romney Will Not Win the U.S. Presidency

It's looking like Romney has the Republican nomination, but I am very doubtful that he can carry the country in 2012 for a whole variety of reasons:

1. U.S. economic figures are showing signs of life, at just the right time.
2. Like Eichengreen, Dalio, and others, I think the next leg down in the ongoing financial crisis won't make landfall until 2013 at the earliest.
3. There is a decided lack of enthusiasm about Romney. He comes across as a Wall St. guy who, policy wise, isn't all that different from Obama. He also isn't well liked by the Republican base. In short, Romney seems positioned somewhere in political no-man's land.
4. There is a reasonable chance for a third party candidate to be a factor, and should that happen it will work against Romney more than Obama.
5. Even if Eurogeddon boils over the world's central banks have plenty of space to deploy more monetary artillery. Central banker hands won't begin to be tied until core inflation starts to increase significantly, and that's unlikely to happen over the next 10 months. Even though Bernanke was appointed originally by a Republican, he would probably prefer that Obama (who reappointed him) be reelected given Romney's and general Republican hostility towards the Fed.
6. An Iranian conflict (perhaps the biggest X-factor in 2012) likely favors the incumbent as it would provide Obama with an opportunity to exercise leadership and look presidential.

What could upset this prediction is any material economic deterioration or a geopolitical flub by Obama.

Video: Goodbye, Geithner!

Should Obama be re-elected call me sceptical that we'll get someone better than Turbo Tax Timmy, but in the meantime lets all shout a collective Hallelujah!

Video of Geithner breaking the news that he won't be around next term after the jump:

The PolyCapitalist Endorses Laurence Kotlikoff for U.S. President

Professor Kotlikoff just announced that he's running for U.S. President! More on the announcement and Larry's plan to get the U.S. back on track here.

And here are my previous posts about some of Professor Kotlikoff's great ideas.

Video: Jeffrey Sachs Full LSE Talk on The Price of Civilization

Ever Heard of Somaliland, the Peaceful and Democratic Neighbor of Somalia?

Somaliland's flag

Contrary to the piracy and kidnappings which the media tends to focus on positive things are happening in parts of the Horn of Africa.

Somaliland is one such example. President Ahmed Mohamoud Silyano describes his people's quest for international recognition here.

Here's the BBC's profile of Somaliland.

Though not internationally recognised, Somaliland has a working political system, government institutions, a police force and its own currency. The territory has lobbied hard to win support for its claim to be a sovereign state. 

The former British protectorate has also escaped much of the chaos and violence that plague Somalia, although attacks on Western aid workers in 2003 raised fears that Islamic militants in the territory were targeting foreigners. 

Although there is a thriving private business sector, poverty and unemployment are widespread. The economy is highly dependent on money sent home by members of the diaspora. Duties from Berbera, a port used by landlocked Ethiopia, and livestock exports are important sources of revenue.

Information about traveling in Somaliland, including guidance on safety, can be read about here.

Video: SNL Parody of Republican Presidential Debates

If Not Obama, Who Does Secretary Geithner Take Orders From?

Here's the story about how Treasury Secretary Tim Geithner, perhaps emboldened by his ability to get away with tax evasion, decided in March 2009 to ignore President Obama's directive to dissolve Citibank.

As MIT Professor Simon Johnson and others have pointed out, the most recent financial crisis marked the third time in the last three decades that Citibank has needed a taxpayer financed bailout. In other words, once every 10 years on average Citibank goes bust.

Obama, perhaps aware of this fact, maybe thought it was time to put an end to the joke that Citibank and its lackluster management can stand on its own two feet without government backing. Why didn't Geithner agree with his boss?

Friends of Bob: Summers, Orszag and Geithner

Yves Smith has a theory. Another possibility is that dismantling Citibank would have put an end to the #1 preferred post-government destination for officials looking to cash-in like Robert Rubin, who pocketed hundreds of millions of dollars in compensation as Chairman of Citibank following his position as Treasury Secretary, and Peter Orszag, who left the Obama administration for a similar lucrative position with the megabank.

And what consequences has Geithner suffered for his supposed insubordination? Apparently none based on the fact that Obama purportedly had to beg him to stay on through the 2012 election.

Review: Bin Laden: Shoot to Kill (Channel 4 On Demand)

A new Channel 4 docudrama on the Bin Laden raid premiered last night and provides new details on the covert op. It also features interview with senior U.S. government officials, a former Seal Team Six member, and a rather candid interview with President Obama. The trailer is embedded below; full video here.

One interesting element from the White House spin which comes through in the video is President Obama's repeated reference to there only being a 50-50 chance of Bin Laden being in the compound, and that this operation was basically a 'gamble'. President Obama has come under a lot of criticism of late for being too risk averse, so from a messaging and political strategy point of view it could be helpful for the President to beef up his risk taking image.

However, the natural question is whether this is the right spot politically for Obama to be positioning himself as a risk taker? I see two potential problems: first, by emphasizing the 50-50 gamble it makes Obama appear like he got lucky. Second, as opposed to gambling on financial regulatory or budget reform here his gamble here involved the lives of military personnel as well as a Pakistani military backlash.

From a military strategy perspective I can see advantages to emphasizing Obama's willingness to take risk on convert raids in terms of the message it sends to both U.S. enemies and 'frenemies' alike. Americans may also prefer that their President be 'lucky' rather than or in addition to being 'good'.

Overall it's an intriguing messaging strategy and the video is well worth a watch.

Bin Laden: Shoot to Kill (Channel 4 trailer) from Nutopia on Vimeo.

Channel 4's Description:

A stellar cast of White House insiders speak on camera about the operation to find and kill Osama Bin Laden, including the first - and extraordinary - documentary interview with President Barack Obama on the subject. 

From the anxiety-drenched minutes in the White House Situation Room to the deadly stairwells of Bin Laden's secret labyrinth, cinematic dramatisations take viewers deep inside one of the most important moments of our era, showing the US Navy Seals coming face to face with the most wanted man in history. 

Based on high-level CIA and White House briefings, and packed with exclusive stories and fresh insights, the film reveals that President Obama received a downbeat last-minute intelligence assessment, which caused many of his senior advisors to turn against the operation.

Quote of the Day: Paging Mr. Oliver Cromwell

Oliver Cromwell

Putting aside his controversies for a moment, the below words Oliver Cromwell used during his address to the Long Parliament in 1653 feel appropriate for today:

"It is high time for me to put an end to your sitting in this place, which you have dishonoured by your contempt of all virtue, and defiled by your practice of every vice. Ye are a factious crew, and enemies to all good government; ye are a pack of mercenary wretches, and would like Esau sell your country for a mess of pottage, and like Judas betray your God for a few pieces of money. Is there a single virtue now remaining among you? Is there one vice you do not possess? Ye have no more religion than my horse; gold is your God. Which of you have not bartered your conscience for bribes? Is there a man among you that has the least care for the good of the Commonwealth? 

Ye sordid prostitutes, have you not defiled this sacred place and turned the Lords temple into a den of thieves by your immoral principles and wicked practices. Ye are grown intolerably odious to the whole nation. You who were deputed by the people to get grievances redressed, are yourselves become the greatest grievance. Your country therefore calls upon me to cleanse this Augean stable, by putting a final period to your iniquitous proceedings in this House; and which by God`s help, and the strength he has given me, I am now come to do. 

I command ye therefore, upon the peril of your lives, to depart immediately out of this place; go, get you out! Make haste! Ye venal slaves, be gone! So! Take away that shining bauble there, and lock up the doors. In the name of God, go!"

Are there any politicians out there today who can deliver similar words with conviction and credibility?

The SEC: Just When You Think You've Run Out of Outrage...

SEC Commissioner Mary Schapiro

Things were starting to look up for the beleaguered-since-Madoff  U.S. Securities and Exchange Commission (SEC) with its spate of successful prosecutions of high-profile insider trading criminals. But for the U.S. stock market cop it continues to be a case of one step forward, four steps back.

Rolling Stone's Matt Taibbi delivers the latest bombshell:

For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation’s worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – “18,000 … including Madoff,” as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history. 

It goes without saying that no ordinary law-enforcement agency would willingly destroy its own evidence. In fact, when it comes to garden-variety crooks, more and more police agencies are catching criminals with the aid of large and well-maintained databases.

Much has been made in recent months of the government's glaring failure to police Wall Street; to date, federal and state prosecutors have yet to put a single senior Wall Street executive behind bars for any of the many well-documented crimes related to the financial crisis. Indeed, Flynn's accusations dovetail with a recent series of damaging critiques of the SEC made by reporters, watchdog groups and members of Congress, all of which seem to indicate that top federal regulators spend more time lunching, schmoozing and job-interviewing with Wall Street crooks than they do catching them. As one former SEC staffer describes it, the agency is now filled with so many Wall Street hotshots from oft-investigated banks that it has been "infected with the Goldman mindset from within."

Anyone seen the latest Intrade odds on SEC head Mary Schapiro keeping her job?

Full Taibbi article here. 

Playing it Safe, Losing it All

Two facts worth highlighting from Drew Westen's controversial NY Times piece titled 'What Happened to Obama':

1. Obama published nothing (except his autobiography) during his twelve years as a faculty member at the University of Chicago
2. Before joining the Senate he voted 'present' (instead of 'yea' or 'nay') 130 times

What is one to make of this?

I won't speculate on Obama's not publishing anything in an academic journal, but one thing presidential candidates are often attacked on is their voting record. During a heated political campaign a candidate's previous legislative votes are scrutinized and picked over for any possible controversy (see John Kerry). As an astute observer of political history and campaigns, Barrack Obama would be well aware of this.

Was his voting 'present' strategy all about playing it safe and as Westen puts it "dodging difficult issues"? Or is there another explanation all together?

From Westen:

Perhaps those of us who were so enthralled with the magnificent story he told in “Dreams From My Father” appended a chapter at the end that wasn’t there — the chapter in which he resolves his identity and comes to know who he is and what he believes in.

One of the hallmark qualities of Barrack Hussein Obama's rise to the presidency has been his exceptional risk aversion. That strategy worked well in the campaign but is not serving President Obama or the country well at a time when bold, visionary political leadership is needed.

Like many, I've been scratching my head trying to put my finger on what it is about Obama that just doesn't seem right. And then I remembered a comment made by fashion designer Karl Lagerfeld when he was asked to describe himself: "I don't want to be real in other people's minds. I want to be an apparition."

I completely agree with Westen that right now the U.S. desperately needs the gregarious optimism and energy of a Franklin Delano Roosevelt or Teddy Roosevelt type personality in the White House, and not the Lagerfeld-esque 'complete improvisation' we seem to have at present.

I will never wholly forgive and forget the missed opportunity in 2009 to conduct a perhaps once-in-a-century overhaul of the global financial system, along with Obama's decision to reappoint many of the same people who led us into the crisis - Larry Summers, Tim Geithner, and Greenspan protege Ben Bernanke.

With the way things are going at Bank of America and the Eurozone we may soon get a second bite at the financial system overhaul apple. Fighting to keep Timothy Geithner on as Secretary of the Treasury doesn't exactly instil in one a sense of optimism, but there is still time for President Obama to do what is necessary to restore American optimism.

Video: Raise the Debt Ceiling Rap

A little late to spot this one, but it's well done and will be relevant again in a few months time when the debt ceiling vote comes up again.

The Root of All Sovereign-Debt Crises (and How to Prevent Them)

A good read and interesting suggestion from Professor Amar Bhidé and Nobel Prize Winner Edmund S. Phelps on how to put a permanent end to sovereign debt crises.

Chart of the Day: U.S. Debt Ceiling Over Last 30 Years

Bailing Out Too Big to Fail: Here We Go Again

The sorry state of Bank of America's financial position, which is trading at less than half its book value, may necessitate yet another bailout.

From Bloomberg's Jonathan Weil:

Ask anyone what the most immediate threats to the global financial system are, and the obvious answers would be the European sovereign-debt crisis and the off chance that the U.S. won’t raise its debt ceiling in time to avoid a default. Here’s one to add to the list: the frightening plunge in Bank of America Corp. (BAC)’s stock price. 

At $9.85 a share, down 26 percent this year, Bank of America finished yesterday with a market capitalization of $99.8 billion. That’s an astonishingly low 49 percent of the company’s $205.6 billion book value, or common shareholder equity, as of June 30. As far as the market is concerned, more than half of the company’s book value is bogus, due to overstated assets, understated liabilities, or some combination of the two.

But wasn't Dodd-Frank supposed to prevent us from having to bail out the megabanks again?

Until we embrace comprehensive financial reform, such as well thought through proposals like 'Limited Purpose Banking' outlined by Professor Laurence Kotlikoff, we will continue to be faced with the prospect of bailing-out reckless and/or incompetent Too Big to Fail megabanks.