Tuesday, September 16, 2008

Today's Vocab: "OBE" (Overtaken By Events)

In the very last days of 2004, after a summer and fall spent contributing well over $1,700 to the doomed campaign of Frenchy Swiftboat and his sidekick Clairol Philanderer, I assembled a fax list of contacts at regional newspapers in medium-sized battleground cities, printed up a half-dozen official looking press releases describing the worst Bush/Cheney antics I could find on the entire worldwide web, drove over to Kinko's, and spent an entire evening fax'ing those releases all over the country. The next morning I staggered blinking from the Kinko's back to my car, tumbled into the driver's seat with an air of supreme (exhausted) satisfaction, turned the ignition and flipped on NPR. The story? There was a brand-new Osama Bin Laden tape, and on that tape he was endorsing John Kerry for President. So much for my grassroots-527, huh.

Yesterday, in this very column, I called upon frustrated progressives to enhance the productivity of their efforts by contacting media outlets in battleground states--that very moment--to implore them to press harder on a series of naked mistruths being repeated over and over with impunity by the Bush/Cheney/Rove/Palin/McCain ticket. I asked that loyal readers peruse a long list of links pages, choose one or more newspaper or television contacts in medium-sized, battleground cities, and politely suggest that the question of Governor Palin's Iraq visit, among rather a lot else, be promoted to front-burner status. The column was unusually long and it took an unusually long time to get right (or as close to right as any of these columns ever are), but if nothing else the exercise left me with that same, wobbly sensation of heightened accomplishment that I'd carried with me four years earlier in my stumbling lurch into a Kinko's parking lot. Too bad for me.

The news yesterday and today, as I knew instantly upon turning to the same local NPR affiliate for my drive to work, would never in a million liberal biases be about Sarah Palin's non-visit to Iraq, or about her continued use of the flagrant teleprompter lie, or even about her sudden and categorical refusal to cooperate with the Troopergate investigation, the last of these on the stupefyingly Orwellian grounds that the attorneys dispatched to Alaska after the fact by McCain aren't attorneys working for McCain at all, but are instead, we are led to believe by Palin, attorneys working for Obama to politicize the inquiry. (Republican playbook page number 137: you only know how much you can get away with when you've been called on it. So far they haven't. Which see, yesterday's post about contacting media outlets.)

No, the news of this and presumably all subsequent days, from the moment I posted that column, would only be about the rapidly and continually unraveling situation in what used to be the largest, most redundant, safest financial markets on planet earth.

In case you were vacationing on Mars yesterday, it was announced that Treasury Secretary Poulson's desperate efforts to find a buyer for Lehman Brothers--one of the largest and most-respected investment banks in the known universe--ended in failure and the company will soon be dissolved in an orderly auction of its remaining assets. Across town, equally troubled Merrill Lynch was being bought-up for a song by Bank of America, which is a little bit like passengers from the Titanic being cheerfully transfered to the Andrea Dorea, but at least they won't be drowning today. In another corner of the financial sector, the insurance giant AIG appears ready to tumble into oblivion next, if it cannot find a similarly scavenge-minded sap to buy it out, too.

In one of those rare cases wherein a rudamentary knowledge of the situation is every bit as illuminative as a more advanced one (perhaps even more so), most of us happen to be at least vaguely aware of the root cause of all this impending doom: an unusual burst of greed in the housing market, which for years gorged itself on low interest rates and scandalously lax underwriting, together propagating rates of return that simply couldn't be sustained indefinitely. In the summer of 2005, the housing stock in Maricopa County, Arizona was appreciating at an annualized rate of over fifty percent--meaning that a house for which you paid $250,000 on June 1st could be sold on July 1st for $268,500: a thirty-day profit equal to the bulk of your down-payment, closing costs, and points.

Not wanting to be left out of such a plum little racket, the largest players in the financial sector (companies like Lehman and Merrill and AIG) fanned the fires by offering to buy shares of consolidated home-mortgage portfolios, into which the risk from the more "questionable" of these individual mortgages could be diversified across the shares. This had the effect of making mortgages far easier to get--and, since the prices of these houses were surely going to go up forever, far bigger in principal--than they ever should have been. The people in the worst economic shape relative to the house they'd picked out for themselves were encouraged to enter into agreements by which the bulk of the monthly payment and all of the principal would be deferred for two years: the lender would resell the mortgage as part of one of these consolidated portfolios, and the purchasers of the shares would never be the wiser because the homeowner would resell the house at a profit before he had to scrape together a monthly payment that he couldn't afford.

As long as the market continued to spiral upward (in this way that it self-evidently could not), everyone would win: The home-buyer would got into a house he should never have even been shown by the realtor, with effectively no money down and no ability to pay. The mortgage lender got all of their money from the note up-front, by selling the mortgage to a consolidator. The consolidator got a hefty return by reselling the shares to institutional investors, and the institutional investors continued to profit as long as someone, somewhere, was willing to pay the mortgages off through resale of the houses before anyone actually had to make a payment.

(Stop me when all of this starts sounding eerily like the summer and early autumn of 1929, won't you?)

Naturally, the preposterous capital appreciation in the residential housing market that was driving the whole process couldn't last forever. Indeed what's baffling about this particular crash is that, whereas it usually takes gut intuitions to recognize the transitory nature of these bubbles, in this case all it took was a reasonable assessment of the future direction of interest rates, without whose historically low expenses the next buyer in the musical-chairs-fest wouldn't be able to afford even the minimum monthly interest that would be necessary to agree to buy the house. Once those interest rates started back upward, as surely everyone involved had to have known they eventually would, the pool of those "next" buyers dried up almost overnight, and the institutional investors--way at the other end of the machinery--were left holding shares in a portfolio of mortgages that couldn't possibly be cash-flowed by the homeowners.

Even more perplexing, at least to me, is why everyone is acting so baffled by the time-line. We are asked to believe that the news stories we've been reading and hearing about over the last twenty-four hours are curiously disconnected from their supposed root cause, but that suggestion ignores the effect of the deferred-payment structure on which these mortgages were written: It has taken about two years from the time of the crash at the front-end of the process (the value of the house itself) to work its way backward to the institutional investors, who've finally had to write-down their assets by the amount of the shares, precisely because it's taken those same two years for the current crop of homeowners to find themselves needing principal to keep from defaulting. Never in the history of Wall Street has a financial market surprise been less surprising.

And the worst part of all of this is that we're not even seeing the worst part of all of this: Since the institutional investors in these mortgage portfolios are themselves dealers in financial securities who interact with each other on massive scales when they perceive an opportunity to swipe a bargain, once one of them spectacularly implodes it is all but inconceivable that this firm's creditors will emerge from that implosion unscathed--meaning that the orderly sell-off of Lehman could one day be thought of as the first domino in an October-29-style cascade, dragging into oblivion ever larger swathes of the only market that mates capital to industry. Once businesses can't raise the capital they need to continue to invest in the means of production, the entire melodrama could spill over dramatically into the other sectors of the economy.

At all events, the news coming from the throbbing heart of the world's biggest economy could hardly be any worse.

So what does John McCain have to say about it? Well, color me silly for asking my readers to write to newspapers about Sarah Palin's Iraq shenanigans, in light of this little quip from the man at the top of her ticket: "Our economy, I think, still, the fundamentals of our economy are strong," sayeth he--at a rally conducted yesterday mid-morning in Jacksonville Florida, at the very moment that the Dow was registering its own barometric reading on the situation by dropping over three hundred points in its first hour of trading. For once, the Obama people hit back immediately with a commercial. And it's a good one.

Of course it remains to be seen whether this news story will explode between now and November 4th with the kind of all-squelching gravitas that it surely must eventually
--and in the meantime it doesn't hurt to keep tabs on the Impunity Express, chronicling their untruths against the day that a media critique might fall on anything other than monumentally distracted ears. It likewise remains to be seen whether a gaffe that should by rights sink McCain into a George-Bush-The-First defensive morass will gain any further traction with those who hear about it, than have any of his other diverse and filigreed kaleidescope of gaffes (though my guess is that it will).

In the meantime, since this nightmare is so big and has such far-reaching consequences as to disconnect itself from the suddenly all-but-inconsequential seeming issue of who gets to clean it up, it may be enlightening to visit the question of what (if anything) can be done, at this stage, by either candidate. Look for that discussion in the Key Grip's next column--and, in the meantime, don't be shy about using yesterday's media contact list to press regional newspapers anyway. The subject might have changed, but the best strategies for helping Barack Obama win the White House remain, in their fundamentals, strong. And in this case that's actually a true statement.

Dave O'Gorman
("The Key Grip")
Gainesville, Florida


Anonymous said...

"Events" (the ones overtaken by) have left me breathless, but I have two questions for Key Grip. First: if the financial markets are in such disarray, why would the Fed lower interest rates? Don't they need new money to be able to make loans?
Second, how on earth is Obama going to capitalize (no pun intended) on the fact that the prior 30 years of lax or no regulation caused this mess?

Dave O'Gorman said...

The Fed is the agency responsible for controlling the size of the US money supply. They lower the interest rate that they charge to banks when they wish to signal the rest of us that they're creating new liquidity (by a process that would otherwise be difficult to explain and even harder to see).

So by lowering interest rates, the Fed is trying to "calm" the markets with the "reassurance" that credit will be easier for everyone to get -- from the business that might have decided not to expand its factory out of fears that its stock underwriters were about to go out of business, to the homebuyer in Maricopa County who's worried that the next buyer won't be able to find a lender.

As for the second part of your question, that's the second part of this two-part column; you've gotta stay tuned for that one.

nowherem said...

I wonder when someone will ask McGrumpy what part he and Phil Gramm played in the deregulation that led to this Big Shitpile?

Dave O'Gorman said...

Certainly the (strong) possibility exists for a reprieve of the Keating-Five story. But the commercial Obama already has running on this subject is *devastatingly* effective, so I'm not going to quibble.

Anonymous said...

The Obama ad is effective, however network news last night said that McCain said the economy was strong, but that wasn't what he really meant, he meant that it was strong before it was weak then it was strong...you get the picture. The media (all of it) want a GOP prez. and they have already been exposed fixing up and editing a McSlime gaffe on CBS. How can we fight that? Then to pound further injury, I pick up the paper today to the news that the House passed an offshore drilling bill. I don't think that the American people are stupid, but rather that the media are on a mission to subvert democracy--and they have done this in such an insidious way that we haven't even noticed. Your suggestion yesterday that we contact media in battleground states was an excellent one, but gosh, just stop and think that over for a moment. We should have to beg media to cover events fairly and even-handedly. Beg? Thankfully we have the 'net, so at least we have each other for solace. Obama's people have made some progress in organizing individuals, but the man himself has frustrated his loyal fans several times by his sharp right turns. If I could reach him, I would urge him to stay focused.
Do you have more suggestions in this upcoming post?

Dave O'Gorman said...

Personally I am inclined to take the view that the media does most of what it does in an effort to secure higher ratings for itself. In a country of low-information voters, a press that calls attention to every factual mistruth by one side only alienates itself from its viewership.

I don't think they're out to subvert democracy as much as to be led by the people whose opinions they used to take responsibility for leading, as part of their basic duty to find the truth.

As for the reason they would go to such lengths to clarify McCain on behalf of McCain, an interesting article in fivethirtyeight.com today suggests that the reason McCain has gotten away with so many brazen gaffes and lies is because the mainstream press is trying to present balanced reporting on a story that isn't actually balanced -- so every time the McCain people tell an outrageous whopper, half the reporters in the press pool are ordered to scour a recent Obama advertisement for a claim that isn't 100% within its own context, so the media can report this as a both-sides-are-guilty proposition.

It's a sad state of affairs but, first, I don't think it's productive to regard it as insidious (viz, Bill O'Reilly praising Obama for his performance), and neither do I think the Obama people have anyone else to blame for not showing McCain and Palin contradicting themselves, outright, in their commercials. No about of he-said-she-said by the press would counter the literal sight of McCain lying about his supposedly un-armored stroll through an Iraqi food market.