Sunday, September 21, 2008

Why the "Lehman Leap" Is Also a Leap of Faith

We've been hearing a lot these past few days about Barack Obama's startlingly improved poll numbers, from a Gallup daily tracking poll that now shows him six points up (never mind the "related info" stories to the right of the graph, intentionally left over from when the polling news was still favoring John McCain), to the state-level polling data, which is presently showing a statistical tie in North Carolina and a near-statistical tie in South Carolina. We know that this sharp discontinuity in the two candidates' polling fortunes bears many resemblances to a convention "bounce" (thought we don't know yet whether it's as transitory as the comparison would suggest), and since we also know the cause, some columnists have taken to referring to this moment in election 2008 as the "Lehman Leap." At all events it would be hard to spin this as anything other than a near-knockout punch for the Presidential ambitions of John McCain, though goodness knows the McCain people are trying.

The thing is, now that we've had a few more days for the sensation of being on the inside-track to permeate our sensibilities about the race, I for one am inclined to wonder if the events of the past seven days haven't secured the victory for Barack Obama, at the expense of his Administration. Heaven only knows what this mess would do to John McCain's plan for going to war in the trans-caucuses, but for this week at least we may dismiss this second conundrum to the archives of the pure hypothetical, and focus on just how badly weakened Mr. Obama may expect to be, should the current polling situation hold and he becomes President.

For those of you who missed it, the Treasury is estimating that a full rescue of the financial sector will cost something on the order of a trillion dollars. And in an age where figures of this sort get bandied with the desensitized ambivalence of the incomprehensible, allow me to be one of the first people to clarify that a trillion dollars really is real money.

As a first foray into lending the figure some context, let's note that the total amount of "on-budget" (not Medicare or FICA) revenue collected by the Federal Government in 2007, from all sources, was only $1.7 trillion, and that of that figure only $1.1 trillion was collected from all of the individual income tax withholdings and payments that we generally associate with government revenue. Let me just repeat that: If you were to add up all the numbers from all of the 2007 IRS 1040 forms, filed by everyone, the total amount of revenue procured in this fashion would exceed the projected cost of this sumptuously greed-coated mess by a mere $100 billion, or roughly the year's total bill for the occupation of Iraq. Had this crisis happened on 12/31/06, in other words, the 1040 tax revenue collected by the government in the coming year would have paid for this, and Iraq. That's it.

Clearly no President, no matter how charismatic, no matter how post-partisan, no matter how adept at massaging constituencies and brokering compromise--no President--is going to revamp our country's infuriatingly broken health-care system when trying simultaneously to pay off a trillion-dollar tab. The interest expense on such a bill, alone, would swallow well over ten percent of the increasingly narrow slice of federal spending which is considered "discretionary" by people whose full-time job it is to imagine a world without the Smithsonian or the space program or the Grand Canyon National Park. Against such numbers, it seems likely that the budgetary conflicts in Washington will shift dramatically next year--just in the opposite direction as that which has been promised by Barack Obama.

What's worse, in an imaginary 2009 in which Mr. Obama enjoys a fifty-seat majority in the House, a seven-seat majority in the Senate, and a trillion-dollar credit card bill, it is relatively easy to imagine very little of anything being accomplished at all--other than fulfillment of Mr. Obama's equally long-standing promise to secure the revenue stream owed to the country by its wealthiest citizens. With this to show for their first two years and nothing else, an Obama Administration and its Democratic colleagues at the other end of Pennsylvania Avenue would surely face a galvanized and highly effective referendum on their competency in 2010, followed by two years in which Obama's mission would be to re-establish the relevance of his job, a la Bill Clinton after Health Care-I.

None of which is to say that anyone should consider the alternative any better. Indeed it's much worse, since Mr. McCain's principal advantage in this hypothetical is that his forms of proposed spending, in the form of further bloody entanglements on foreign fields, can be forced through congress without concern for where the money will come from. As a Congress terrified of being questioned for patriotism voted bill after bill to commit military resources that we simply do not have, the tab for it all would have to be made up by increasingly expensive borrowing, eventually leading to a monetization of the debt and a runaway inflation that makes that of the late 1970s look vague and indecisive by comparison.

And what of letting the financial market implode? Certainly the popular will seems to be there for the taking, and it certainly seems, if only anecdotally, to cross party lines. I have personally found it increasingly my role in social gatherings to stand more-or-less silent as friends of mine take turns weighing-in on the subject of what a deep and bitter outrage the very idea, is. "We live in an age in which profit is privatized and loss is socialized," remarked one very dear friend of mine, yesterday. Who could argue with that assessment?

The problem with letting the entire industry choke on its own avarice and suffer all the consequences that appertain thereto is that, as poetically just as it may be, it is also simply and categorically untenable. Period.

With the unchecked collapse of the nation's investment banks, commercial banks, and insurance companies--all of whom have lent to each other and sold shares of complex derivate instruments to each other to such an extent as to render none of them immune from the impact of this fiasco--the national economy would awake after a single night celebrating the death of greed to discover a hangover that makes the greed-induced collapse itself pale by comparison. There would simply no longer be any preexisting mechanisms by which all the comparatively innocent business sectors could attract capital to continue to grow, or in some cases even maintain, their businesses.

Without a broad and well-defined financial sector--and make no mistake, that's what we're fantasizing about here when we dream of skipping the bailout: a country without a broad and well-defined financial sector--the entire economy cannot be expected to reliably function. As any first-year student in accounting can tell you, the magic number for consideration of any new spending by any business is the project's "return on funds employed," a figure which can't rise to the minimal thresholds of even the lowest-margin activities in our society, without the benefit of some form of financing. A United States without its Wall Street is a United States with shantytowns on the Washington Mall and shelter-less families living in the deserts near Las Vegas in hopes that daddy might get a job helping to build the dam.

Even worse, it is only the de facto global supremacy of our financial sector in its current form that keeps the U.S. Economy from imploding under the weight of its own, existing debt. We are a nation whose consumer households spend roughly 104% of every dollar they earn, and whose government spends between 110% and 160% of every dollar it earns in tax revenue. Even before the bailout. The only means by which we've been able to keep doing this, year after year, decade after decade, is the subsidization we've been getting from massive inflows of surplus capital from the households of other nations. "I can't tell you much with certainty about the future," I tell my students, when seeking to make this point in class, "but I can tell you that you aren't going to turn on the evening news tonight and see a breaking story about a bunch of crazies who flew a plane into the side of a building in Vera Cruz. Mexico." There is one Wall Street in the world, and we've got it, and it's the only thing that allows the rest of us to avoid the consequences of our own greed--by covering the difference when we spend more than we take in.

Meanwhile, the election is at this hour comfortably Barack Obama's to lose. Indeed an inquiry conducted yesterday on fivethirtyeight on the subject of the under-polling of cell phone users found (rather convincingly, despite the avowed partisan lean of the authors of the site), that Barack Obama is actually ahead of the officially reported numbers for the current state of the race. Adding the cell phone users, they argue, raises Obama's real-time probability of winning the electoral college from 71.5 percent to 78.5 percent--or about as far in Mr. Obama's favor as could reasonably be expected, regardless of further events.

But as the first round of post-Lehman Sunday news programs is just about to get under way, the question of the hour no longer even seems to be whether or not Mr. Obama will secure the Presidency. At least for the moment, that question seems hardly in doubt. The question seems to be exactly what Mr. Obama will be able to do with the job, if he should win it.

And after the past seven days, that, alas, is a very good question indeed.

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

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