Quick and Dirty. And of These, Dirty.

Yesterday an alert reader sent me a link to this compelling article by Floyd Norris of the New York Times, about the financial crisis--in which Mr. Norris sounds the first major alarm bell regarding the Wall Street bailout--not on the principal of the idea but on the (all too typical) parameters the Bush Administration is demanding from congress. The upshot? Just as the White House responded to 9.11 by crashing a piece of legislation that enabled them to hold people without charges and invade their privacy, just as the White House belatedly responded to Hurricane Katrina by waving environmental protection laws, the specific bailout proposed by the White House is, in its current form, a $700 Billion blank check for the Administration to do with as it pleases.

If passed, the bill in its present form will codify neither an explicit separation of failure-prevention from routine loss, nor a repayment scheme or equity participation for the American taxpayer. There is no new regulation in the bill, no provision for accountability--either in hindsight or moving forward--and no mechanism to prevent speculators from profiting at the public's expense as the bill goes into effect. There is even talk of a provision that will excuse banks from using the market-value of their assets to report their own financial well-being, on the truly Orwellian grounds that it was peoples' discovery of all this worthless paper, and not the accumulation of it, that caused all the trouble.

As stated unequivocally yesterday, The Key Grip does not believe that skipping the bailout is economically practical, despite the cheery images of multi-homeowning fat cats auctioning their twelfth and thirteenth car to make the mortgage on their own, scandalously kited property, since the after-effects of telling the wealthiest among us to eat cake would be far more damning for the rest of us. Rotten economic conditions will have their first impact on people who have less cushion, and in this context the temptation to permit the fat cats their ugly consequences will result in graver, more immediate consequences for everyone else. Something will definitely have to be done, and there are few thoughtful people left inside the beltway who haven't accepted this.

But, objections of Secretary Paulson notwithstanding, there is no reason why this matter has to be crashed through the legislature, and certainly no reason why the final bill cannot include repayment of the taxpayer as either a creditor or an equity partner (a la the Savings and Loan bailout of the early 1990s), and certainly no reason on earth why the bill should not constitute a reinstatement of the Glass/Stegall Act (or perhaps an even more ambitious form of regulation), with an eye toward ensuring that some sort of broader lesson can at last be learned, here. Time is the thing, now--as it always is when this Administration is on the cusp of getting its unchecked way: By manufacturing urgency for the bill's passage, Paulson and the White House have left the door open to accusing the Democrats of being responsible by "dragging their feet," a mantra that, no matter how cynical and preposterous, we've seen work all too well before.

This author would therefore like to ask that everyone reading this column write immediately to his or her elected representatives in Washington. The webpage that allows an electronic correspondence to be sent to the appropriate congressman, even if one does not know in advance who that person happens to be, is conveniently provided within the House of Representatives website, and is accessible here. The contact information for one's Senators can be found by repeating the process here. A clean, easy-to-read message might succinctly object to the crashing of this bailout through the halls of the capitol, and the absence of provisions for oversight and repayment. Those feeling especially frisky could copy and paste the text of the Norris article at the bottom of their own, personalized message. But at the very least, it's incumbent upon each of us to register our disapproval of the current legislation before it is too late.

And what of the political ramifications? This author still believes that the larger issue of a stumbling economy is a deal-clincher for the good-guys, if only with a few slightly more sober caveats than have been chronicled in these pages up to now. Clearly Mr. McCain is on the defensive at the moment, and clearly he has had, in the words of Cokie Roberts, "difficulty finding his voice" on the issue--presumably some sort of scared-NPR-journalist euphemism for the Republican candidate's sudden reversal of a career's worth of calling for deregulation of this very industry.

In the Sixty Minutes interviews last night, Senator Obama appeared comfortable and collected (and far more substantive than some lazy journalists have been suggesting), while Senator McCain appeared, even with the benefit of unlimited re-takes, to sound muddled and out of his depth. Just the sorts of things he would not have wanted to sound, if seeking to neutralize the charge of too much similarity to the current occupant of the White House.

Obama's argument on the state of the crisis, in two easy-to-digest doses, as interviewed by Steve Kroft:

Kroft: Should the government be bailing out all of these banks and insurance companies? We're talking about hundreds and hundreds of billions of dollars.

Obama: I think that our basic principle has to be that you don't bail out shareholders. You don't bail out CEOs who are getting golden parachutes and $100 million bonuses. That you are doing everything you can to protect taxpayers, making sure that people are able to stay in their homes, and that their mortgages don't go overboard because of bad decisions that other people make.

Kroft: You think we're in a recession?

Obama: Oh, I think there's no doubt that we're gonna see, when the numbers come out, that we are officially in recession. I think, for a lot of people, they've been feeling like we've been in a recession for years now. When their wages and incomes don't go up, and the cost of gas and groceries and home heating oil and prescription drugs are all going up, that feels awfully like a recession to them.

...Senator McCain's turn at the same issue, as interviewed by Scott Pelley:

Pelley: If you were President of the United States tonight and you were going to make an address to the nation regarding this economic emergency, what would you say?

McCain: I would tell the American people that we're in tough times. This certainly isn't a Great Depression, don't get me wrong: um, lay out the problem and the cause of the problem they're badly frightened right now. And we've gotta get their trust and confidence back.

Pelley: Are we in a recession?

McCain: Sure. Um, technically I don't know. Ah, unemployment is, ah, is up. Wages are down. Home foreclosures are, well, they're just incredibly high. Incredibly high. Those people, you know, those people, they don't care whether technically we're in a recession or not. The fact is they're hurtin'. And they are hurting very, very badly.

Pelley: In 1999 you were one of the senators who helped pass deregulation of Wall Street. Do you regret that now?

McCain: No. I think the deregulation was, ah, was probably helpful to the growth of our economy.

In a just world, these two performances would seal the whole deal--and if my grandmother had wheels she'd be a wagon. Already Obama's "Lehman Leap" has topped-out, with the two candidates stabilized in a tight national tracking band around D+5, far less than should be the case after a week in which McCain inadvertently compared himself not so much to George Bush Jr. as to Herbert Hoover. The Key Grip's error in assessing the ramifications of his gaffe, it would seem, is that the public capacity to retain a big news story past its usual ADHD-media shelf-life had already been so diluted by Paris Hilton ads and lipstick wars, that by the time something worth keeping in focus had come along there was no such focus left in reserve. It would seem that only further melting of the situation, and further gaffes by Senator McCain, will continue to sway voters in Mr. Obama's favor in large numbers on inertia alone.

Worse, the Obama camp must be genuinely worried about its two most visible (if uncompensated) surrogates, Nancy Pelosi and Harry Reid--as it is in the hands of these two people that his fragile image as the man with the better plan for Wall Street is inescapably entrusted. If Reid and Pelosi were to suddenly grow something resembling a spine, and stand up to the nonsense being advanced by Paulson and Bush with something resembling a confident tone of indignation for the outrageous lack of detail in the current bill, Mr. Obama could parlay the situation to his further advantage as yet more proof that the Republicans across the aisle "don't get it." But after the two years we've just had, those are very big if's indeed.

Probably the Obama people have already internalized this concern and forged a strategy--and probably their strategy will be to talk about the bill in terms that are just specific enough to alert the persuadable middle to its business-as-usual flavor. Ordinarily one would not have much reason for optimism that this strategy will work: were this 2002 or 2005, the White House would simply sink in its heels on a this-or-nothing proposition, and threaten to blame any Democrat who didn't vote with them for foot-dragging in a moment of crisis. But this time around things are different: The public is galvanized in its opposition to any bailout at all, and even more so in its opposition to a federally funded golden parachute. Senator McCain, pressured again last night to prove that he was different from President Bush, has already pledged to take a different approach to government spending and reform. He has (albeit belatedly) embraced the public consensus for increased oversight. He has pledged himself to empathy. With such a strong undertow of public opinion, it is conceivable that Mr. McCain, and not Mr. Obama, could find himself backed into a difficult corner when at last the time comes for a vote on the Senate floor.

And the most exciting aspect of this situation is that, this time at least, what happens between now and then is up to us.

Dave O'Gorman
("The Key Grip")
Gainesville, Florida Click Here to Read More...

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 Click Here to Read More...

A Momentous Week Leaves McCain's Map in Tatters

Most of the top political junkie websites are of the opinion that Mr. McCain lost the week by a margin of 4-1, having salvaged Friday (the day no one notices anyway) on the publication of an Obama fundraising letter that could be seen to gloat over the financial crisis, and an increasingly resonant assertion by McCain that Mr. Obama himself hasn't bothered to say very much about his own plans for fixing it. This has "worked" for the (transitory) moment, but it also paints McCain into a far narrower box when along comes the inevitable temptation for future demurral: He's already shot himself in the foot once, perhaps even destroyed his entire campaign--now, by criticizing Obama for his lack of substance on the subject he has left himself no choice but to risk doing it again.

But even if McCain's counter-offensive continues to have traction (my guess is that it won't, precisely because the "low information voters" we've been studying so fastidiously over the past two weeks now confront an issue on which they favor the Democrat by default, instead of the Republican), Mr. McCain's early misstep, coupled with the vulnerability for "re-definition" that he was suffering from at that moment, courtesy of The View, have left his polling numbers for the week in something of a slow-motion free-fall. McCain is now five points down in the Gallup daily tracking poll--an instrument so shameless in its Republican bias that its operators have intentionally left up a series of outdated hypertext links to stories of people favoring McCain on the economy. And as George Bush Sr. can surely attest, when you're five points down with your friends, you're not having a good time running for President.

Of course as we all know, in theory Mr. McCain could lose the national popular vote by fifteen points instead of five, and still be President. Any conversation about the direness of his straits must by definition be a conversation about the map. And even though (as yesterday's column noted) the state polling data tends to be saddled by a curious, roughly seven-day lag, it doesn't take more than a casual survey of the various map-lighting websites to see that Mr. McCain's electoral difficulties aren't as bad as being five points down in a tracking-poll run by Goldwater voters.

Instead they are much, much worse.

The Key Grip doesn't want to plug for one map-following blogger over the others, since they are all fine websites with excellent columns and other features that make none of them optional reading material for gorging on political news--but when it comes to trying to catch the shifting trends of the thing in real-time, the first reference is undoubtedly fivethirtyeight.com, since that particular site isn't just a snapshot (if the race were held today, what would happen), as are the others. Instead fivethirtyeight includes a right-hand column of trend analysis, in which econometric regressions on all state polling data are calculated and statistically corrected--for the existence of outliers, basic structural differences between polls and demographics, even weighting by the reliability of different polling sources. With this resource a person can see a single, tied poll in Pennsylvania for the poppycock that it is, since all the polling data is listed together with the site author's own assessment of each poll's usefulness in gaging the race.

Furthermore, since the data in the right-side column is classified into seven major groups, "safe GOP," "likely GOP," "leans GOP," "toss-up," "leans DEM," "likely DEM," and "safe DEM," a quick trip across cyber-town to the undisputed cham'peen of the interactive map sites, 270towin.com, will enable a curious onlooker to light and "un-light" states, based on their inclusion in one or the other of these categories. On any given day, it would seem to this author, the state of the race can best be measured by loading the default map at 270towin, then lighting any un-lit states that fivethirtyeight is showing as "likely" or "safe," and un-lighting any states showing as "lean" or "toss-up."

If all the states currently showing on fivethirtyeight.com as "safe DEM" or "likely DEM" are today lit up in blue, Mr. Obama stands comfortably on 260 electoral votes. This total represents all of the John Kerry states except New Hampshire (which incidentally hasn't polled since Mr. McCain decided to see what his own pancreas would look like while speaking to an audience in Jacksonville), plus New Mexico and Iowa, both of which have receded from McCain to such an extent that further efforts in either one would seem at this point to be a waste of resources.

If, by contrast, all of the states currently showing on fivethirtyeight as "safe GOP" or "likely GOP" are today lit up in red for Mr. McCain, by contrast, his total is a comparatively paltry 170 electoral votes. That's a deficit of 90 as compared to the comfortable total enjoyed by Obama, and a 10-1 disadvantage in reaching the golden figure and the keys to the White House. But even this version of the story paints a rosier picture for McCain than the reality on the ground, since the states that aren't currently safe or likely for him are all places where he will now have to play frantic and expensive defense to prevent defections from the '04 Bush total. And even a quick glance at the map reveals just how improbable and diverse this assortment of states has turned out to be:


In addition to the four states that the Key Grip has been calling critical to the Obama recipe for success for weeks now--Ohio, Virginia, Colorado, and Nevada, any one of which gets him 269 if he can also hold New Hampshire (or 270 if he takes NE-01, as he expects to)--the newly minted list of potential turnovers adds, in order of increasing dramatic effect, Florida, Missouri, West Virginia, Montana, and Indiana. That's a lotta states for the financially disadvantaged and uncharismatic POW to pull from the fire.

Moreover, the entire list is an assortment not just of states that Mr. Bush won in 2004 (except for New Hampshire), but also of states that Mr. McCain categorically, all but mathematically, must somehow persuade to support him, starting today, from scratch, if he hopes to become our next President. He can count on neither a "celebrity" ad, nor a convention bounce, to win back these wayward electoral votes--and indeed must hope that they don't continue to slip further and further from his grasp as Mr. Obama continues to recycle the footage from Jacksonville, as he surely will.

It's not quite true that McCain can't slough a single unlit state on this map, you will perhaps have noticed--he can win New Hampshire and lose Montana and West Virginia, or Montana and Nevada, and if the others hold he gets to 271. But the problem with such a scenario is that it assumes such disconnects are plausible in the behavior of the electorate. Indeed they are not. If Mr. Obama is winning in Montana and West Virginia, for example, it seems unlikely that the people of Missouri and/or Ohio and/or Virginia wouldn't see things the same way.

On the other hand, McCain faces the job of trying to sell a single vote-for-me message in places that are as geographically and topically diverse as Florida and Montana, Virginia and Nevada, Indiana and ...well, anywhere else. And if Mr. McCain knows how to cobble a message that will resonate equally well with doubting voters in Fairfax and Bozeman and South Bend, then, gosh, he probably deserves the White House--because this author certainly can't imagine what that message would be.

And so once more we come to the place at the bottom of the column where a responsible author caveats the current-day analysis with provisos about how long a week is in politics and how much of the discussion is left to be had. "Anything can still happen," I am bound by the by-laws of the political hack-writers' society to say, here.

But here's the thing: it's a caveat that, by the day, almost by the hour, rings increasingly hollow. Mr. McCain is now all but assured this coming Friday of spending his hour in the pre-debate greenroom listening to an avalanche of punditry about the tall odds he will face in trying to "shake up the race" with his performance. The low-information voters, keenly attuned to the first such shakeup, have demonstrated in past elections a steep learning curve for further such efforts, and Mr. McCain has undoubtedly already spent his shakeup capital by choosing a tongue-speaking racist who shoots wolves from airplanes to be his running mate. Any further attempts to shake the race again will be seen by exponentially larger and larger swathes of persuadable voters as just so much pure desperation.

If there is a concern for avid Obama supporters like this author, it is the uncertainty of wondering just how that desperation will manifest, and of whether or not Mr. Obama will be ready for it when it shows itself. But as the days wear on and McCain's poll numbers continue to sag, even the chance of forcing Team Good-Guys back onto a defensive posture gets narrower and narrower. Polls that show this kind of movement after the second convention aren't generally blips, after all--generally speaking they represent persuadable voters choosing to become un-persuadable, moving forward. As an alert reader so adroitly pointed out yesterday, early voting begins very, very soon in some of the biggest and most important prizes left unlit on the map, notably Colorado and Ohio, after which no amount of October-surprising will save McCain from what is expected to be massive early turnout by the Democrats. If Team McCain had anything left in their bag of tricks, they'd be fools not to have played it already.

Right now I'm betting that they do not.

Dave O'Gorman
("The Key Grip")
Gainesville, Florida Click Here to Read More...

How Much Trouble is McCain in?

A very compelling article appeared yesterday in the pages of fivethirtyeight.com, in which it was argued that Mr. McCain may be in a little trouble, right now, or he may be in a lot.

Most of the polls as of this moment suggest that he's in a little trouble. He's between zero and five points behind in the national tracking poll, depending on which pollster you believe--which is certainly not where he and Steve Schmidt would have wanted to be at the end of the second full week after their convention. That's trouble, for sure. But a little?

As political analysts are wont to do, of course, the kids at fivethirtyeight are hedging their bets for the moment about how much trouble Mr. McCain is in--supported in their hedge by what seem to be tight races in many of the biggest and most important states in this, or any, electoral vote contest. Pennsylvania is supposedly very tight right now. The other kids, the ones at electoral-vote.com, are actually calling it tied. They also have Obama a mere four points up in Washington State, three points up in Michigan, and clinging to an improbably small single-point lead in Minnesota. If any of these states fail to hold, we are reminded in dour language by an assortment of media outlets, it is unlikely that Mr. Obama can become President. Indeed, though fivethirtyeight is currently projecting a slim cushion of electoral votes in excess of 270 for Obama, at the moment electoral-vote.com doesn't even have him reaching the 270 milestone (though, to be fair, that site doesn't have Mr. McCain reaching it, either).

All of this stimulus, we are led to believe, is to be filed under the general heading of proof that the race is still completely up for grabs--certainly this is what the conservative commentators on the various non-partisan political blogs would strongly and perhaps even desperately suggest. But there are also numerous problems with using these state-by-state polls to take the temperature of the two candidates' chances--most of them having to do with timing.

To begin with, not every state polls every day. The bulk of the data for the aforementioned must-win states was published on Wednesday, September 17th, less than forty-eight hours after McCain's "fundamentals of our economy are strong" gaffe. Since most state polls are conducted over a three-day rolling average, it seems vanishingly unlikely that many of the questioned respondents had even heard about this incident, much less taken the time and energy to absorb it into their heuristic of support--the latter of which is widely agreed to take between two and seven additional days after new information is received. In other words, the closeness of these states reflects not a desperate call for redeployment of resources by Obama, but rather a predictable if slim lead at a time in peoples' psychological chronologies when the Rove/Cheney/Palin/McCain ticket was still riding high on its convention bounce. After the week they've had since, it seems unlikely that these polls will get anything but worse for the team already trailing in those states. Indeed in one of them it already has.

The second source of timing difficulty for assessing this supposedly close race is the extent to which it has deviated from the well-established pattern of past Republican victories. By having their convention last, the Republicans generally manage to engineer a much more durable bounce, changing the agenda for the conversation away from blue-friendly topics like education and health care, and toward more red-friendly topics like whether or not John Kerry deserves his purple hearts or Michael Dukakis should have worn a battle helmet for his ride in a tank. Once the agenda for the discussion is changed in this way, so sayeth the Lee Atwater playbook, the Democrat will look weak and indecisive no matter how he responds: be it with rapid response, in which case he can be dismissed as thin-skinned and vulnerable, or with stoic non-engagement, in which case he can be dismissed as weak.

As the media begins to circle the story back onto itself with headlines like "Democratic Leaders Urge Kerry Campaign Changes," the supposed second-convention bounce becomes solidified as the de facto state of the race, and then the Democrat finds himself needing to go for broke in the debates--after which he can be dismissed as mean-spirited and shameless. Then the Republican dribbles out the clock, disenfranchises a few hundred thousand voters here and there, and more-or-less cruises to victory. None of this works if you're behind.

If you're behind, even by a little, your entire strategy must be improvised using far fewer (recent) historical data points and almost no preexisting contingencies. A John McCain who trails in national tracking polls can't press the media into stories about a rift within the other guy's inner circle about how to regroup, because the other guy's inner circle doesn't need to regroup. A Republican with a track-record as a lousy debater can't dismiss a trouncing by the other, smarter guy on the stage on the basis of desperation, because the other guy doesn't have to act desperate. In short, if the race is only three or four points different than it was in the first few days after Sarah Palin's lie-fest on the Upper Mississippi, then they are the biggest three or four points of difference in the history of three- or four-point differences.

The third timing problem for Bush and Rove and Palin and Schmidt and Fiorina, and McCain, is one that requires more of a micro-level focus on what has just happened. The fact that McCain had a terrible week is, in the end, something that McCain supporters wouldn't need all that much back-pedaling to explain away, under normal circumstances. Every candidate has a bad week, and sometimes they're even bad enough to blip the polls, without actually meaning anything over the slightly longer haul. We could make such arguments about the week McCain just had, too, but for the unfortunate coincidence of the types of stories that went into making it such a bad week--indeed the coincidence of their arrangement within that week.

Personally I would argue that it isn't so much that McCain had a bad week and now the polls are coming to reflect it, or even that McCain fumbled away his bounce and the polls are coming to reflect that, so much as that the terrible week McCain had, which fumbled away his bounce, was laid out in such a way as to inflict maximum damage on his chances of becoming President, specifically with undecided voters. I would argue that in modern election dynamics there is a moment in every campaign where the eventual winner must show the persuadable low-information voters in the middle exactly who they'd be getting if they picked the other guy to be their President, and that this play will either work or not depending on how the suddenly questioned other guy responds with his own news.

Dukakis rode in a tank, Bush Senior and his surrogates made hay on it, but what most people don't remember is that very shortly thereafter Dukakis took the stage in the firt debate and behaved in a way that was wooden, affectless, seemingly phony--precisely the ways in which the persuadable voters had been subconsciously worried that he might act, after watching footage of him riding in a tank. Mr. Atwater himself referred to this as "stripping the bark off the little fucker"--a two-stage strategy by which a wobbly performance by an opponent must take place on a visceral level, first, before the campaign can move in with a more substantive argument to close the deal.

If this vision of how such things works is indeed accurate then Mr. McCain is in far bigger trouble than the current crop of polling data would suggest, precisely because this very two-step of bad campaigning befell him with improbably little input into the matter by Senator Obama: We had the macabre spectacle of McCain being publicly eviscerated on The View--which may not have been seen by every persuadable voter in the country but was certainly heard about, after the fact, by every persuadable voter in the country with a television. And then almost immediately thereafter we had the even more macabre image of McCain, standing on a stage in Jacksonville, acting just as confused and indecisive when speaking (without interruption from Barbara Walters) about the fate of the economy.

The effect of this Texas two-step of misfortune was to paint McCain as being exactly like George Bush Junior--something the Obama campaign had been trying to do for months, and which McCain ultimately proved far more successful at doing to himself. That the polls have quickly moved to reflect this is a grim sign for McCain because it represents people locking-in on a decision not to support him.

Of course, to accept that the state of this race is unfolding in such a stealthy manner at the expense of Mr. McCain, we would need more than idle theorization from an avowed Obama supporter who started blogging less than thirty days ago. We would need some hard evidence. And this afternoon, buried deep amid the stories of McCain being blasted in the Op/Ed pages of none other than the Wall Street Journal, buried deep amid the stories of the breathless speed of Palin's fall from polling graces with the undecided middle, buried deep amid the stories of McCain's willful lie about Obama's connections to Fannie Mae, buried deep amid all the documented cases of mistruth and bungled message, The Key Grip notes the release of a sleepy little poll from Colorado, showing Mr. Obama with an astonishing ten point lead, there.

As this column has been arguing for weeks, it seems vanishingly unlikely that Mr. McCain can win the White House without holding Virginia, Ohio, Nevada, and, most notably Colorado, where until this week the race has ebbed and flowed with just the sort of drama that gives Bill Schneider and Mark Halprin very, very pleasant dreams at night. Were Colorado to remain cracked wide open like this, it is all but inconceivable that the larger country will not ultimately be called the same way. What's worse for McCain, this is the first in the major battleground polls whose entire data sample was conducted in the aftermath of his "fundamentals are strong" / Gerry-Ford-moment, thus sowing in this single page of data the seeds of some very earnest doubt that any of the other aforementioned states will be polling anything like as close as we're seeing them right now, after the next round of updates.

With this much apparently settled, October surprises may now become the chief threat to Obama's victory--be they complete surprises or cynically engineered ones. We are still hearing, for example, that there is some magic bombshell of damaging information about Obama, floating around un-leaked from the dustiest files of the Republican dirt-machine, but to this author the notion seems increasingly implausible, especially since the Republican playbook is so solid on using such information the day after the Democrat accepts his nomination. A bigger worry is that the Bush Administration might know exactly where Osama Bin Laden is, at this very moment, and could be waiting until October 29th to apprehend him. There is nothing Mr. Obama could do about this, other than to coolly and methodically consolidate his before-the-fact cushion, by consistently hammering McCain for his economic ham-fistedness--which in case you haven't noticed is exactly what he is doing, right now.

On balance, it seems fair to say that the dynamic of this race has shifted in a structural way that will put Mr. McCain squarely on the defensive, even if there are no further meltdowns in the financial sector, as have been ominously suggested could be in the offing. McCain can still win this election, of course, but to do so he will need to "shake up the race" once more--and it seems to this author at least that the once unflappable Republican victory-machine is quickly running out of shakes.

Have a great weekend.

Dave O'Gorman
("The Key Grip")
Gainesville, Florida Click Here to Read More...

With Breathless Speed, Events Slip From McCain

This morning's column was supposed to be called, "Two Dogs Chasing a Car." Envisioned as the third in a three-part series about the massive financial-market crisis, it would have laid out the three, equally unpalatable choices the next Administration would face in endeavoring to clean the whole thing up. Instead a short version will have to do. All but inconceivably, we have bigger fish to fry this morning.

Typically, when the financial sector of a modern, mixed economy starts to melt down in the wake of its own avarice (and note that this development is, more or less, typical), the central bank of that country responds by suffusing those markets with fresh liquidity. Indeed this has already happened, both here and in most of the other major industrialized nations of the world, over the past two days. But this move only reassures the stockholders and potential business investors of the world's capital markets that there will be sufficient credit for the next buyer out there to relieve them of the thing they are now deciding whether or not to buy--to bowdlerize a phrase, these moves only affect the "demand side" of the problem, by encouraging people to feel secure enough to go ahead with their demand.

On the "supply side" of the problem, which is also bowdlerized in this context, we have the institutions themselves, sunk up to their axles in suddenly worthless assets from the unraveling mortgage market and, in consequence, essentially if not actually broke. And unlike the issue of spurring renewed demand for financial assets from potential buyers, this problem is one that the central bank can't do anything about. This one needs government. And here is where the trouble comes in for our two friends, Mr. McCain and Mr. Obama--one of whom will find his jaws clamped firmly around the back bumper of this mess in about six and a half weeks.

Short of letting the whole thing run its course, the Federal Government must spend money bailing out these institutions--and the question is where, exactly, is that money going to come from. The massive deficits wrought by eight years of reckless tax cuts and intractable foreign vendetta have forced the treasury to rely ever more desperately on two principal creditors for our nation's public borrowing: The Social Security Trust, which is obligated by law to buy Treasuries with its transitory surplus, but which will begin making net withdrawals sometime early next year as simple demographics continue to ratchet the pressure, and the government of the People's Republic of China, which buys our treasury securities as a means of holding down its own currency value to artificially cheapen the prices of its exports to us, but which can only continue to do so as long as its own growth rate is sufficient to absorb the inflation that this practice would otherwise create over there.

Neither of these two buyers of our treasuries, you will perhaps have noticed, can actually be counted upon. Indeed neither of them will or even can continue to buy our treasuries for much longer. Faced with the disappearance of these two front-row bidders at the daily treasury auction, the government will have no choice but to lower the asking price for the bonds, which will have the effect of driving-up the interest expense of the bonds, since the payout at maturity is always fixed in advance. Once U.S. Government treasuries are paying a much higher interest rate, of course, their added security compared with other instruments will force those other instruments to re-price their own returns, in order to compete--and we could be looking very soon at an explosion in interest rates the likes of which would make the late 1970's look like a stroll through a Sunday School class.

Which brings us back to AIG: If the government of the United States can't politely and unceremoniously borrow the cost of the financial-sector, then the only three remaining choices are, (1) to raise the money by raising everyone's taxes -- not likely in an election cycle in which the two major candidates are competing to see who can give away more of the largest single swathe of public revenue, (2) to raise the money by cutting spending somewhere else -- which is neither popular nor entirely practicable, given how little of the federal budget remains discretionary, or (3) it can monetize the debt--in essence, pay the bill for the bailout by generating the money out of thin air on its basement photocopier, with all the evocative images of inter-war Germany that this notion might suggest. It's not difficult at all, after the week we've just had, to imagine a third-quarter of 2010 in which the unemployment rate in this country is 16% and the inflation rate is 18.5%. And if it happens, Lehman/Merrill/AIG will forever be remembered as the tipping-point.

Still want to be President?

Okay, so what if you do, and you're John McCain? Amazingly, your biggest problem isn't figuring out how to deal with this mess--or even how to take a coherent and credible position on the subject after years of agitating for less regulation--so much as to stop the hemorrhaging long enough that anyone can quell their laughter and actually hear what you're saying about it. To a professional economist like yours truly it's hard to imagine, but somehow the campaign of a major candidate for elective office has managed over the past six days to saddle itself with more pressing damage-control than would be suggested by the imminent self-destruction of the only mechanism that joins capital to industry. Somehow--somehow--the McCain team has gotten itself into deeper trouble than this.

If you're a regular reader of these columns than you already know most of the juiciest tidbits: from McCain's monumental gaffe about the fundamentals of our economy being strong, to the campaign's grudging admission of Sarah Palin's overt lie about having ever been to Iraq. There was the feeding frenzy on The View, the exposure of Palin's lie about her teleprompter, and the argument, so Orwellian that even low-information undecideds could see it as such--that the Vice Presidential nominee would no longer cooperate with the Troopergate investigation, on the gounds that the Republican-controlled Alaska State Legislature is running a a partisan witch-hunt against a Republican Governor. Words don't often escape me. They do, here.

You may also know about several other plum little bomblets going off in the background of McCain's week-at-George-McGovern's like so many Chinese firecrackers, though The Key Grip has been far too busy mulling the end of global civilization to write about them. You may know, for example, that campaign co-chair Carly Fiorina was quoted on Monday saying that she didn't think Sarah Palin was qualified to be the CEO of Hewlett Packard--a comment which didn't take long to hit the political news-ticker pages like a category-four hurricane, and which she later that afternoon tried to repair by clarifying that she didn't think McCain was qualified to be the CEO of Hewlett Packard, either. And coming from someone who'd lopped the top 30% from the share price of the company before finally being bought out by the Board of Directors, that's a damning statement indeed.

The campaign had no sooner promised to "disappear" Ms. Fiorina (and yes, that was their word for it), than McCain's senior economic advisor, Douglas Holtz-Eakin, was asked what for what accomplishments McCain should be credited in the area of economic policy, and Eakin, apparently channeling Al Gore, held up his Blackberry and said,

"He did this. Telecommunications of the United States is a premier innovation in the past 15 years -- comes right through the Commerce Committee -- so you're looking at the miracle John McCain helped create, and that's what he did."

And if that story didn't break like a tsunami over the political news ticker-sites, it certainly had plenty of traction on the late-night talk circuit, where everyone from Jon Stewart to Jay Leno and back again made mincemeat of the campaign for such a ridiculous assertion. Truly I could go on and on: from the contradictions on fundraising to the spectacle of every major media outlet turning McCain's advertising director into a punching bag over their shamelessly misleading ads, to the hacking of Palin's personal e-mail account (and her possibly criminal destruction of the files, shortly thereafter), to the sudden and aptly-timed quickening of Obama's air-war, things truly couldn't have gone much worse for Team Crankypants if their candidate had decided to skip the Christmas rush and have his stroke, early.

What you probably don't know is that the polls are moving with unusual swiftness to reflect this sea-change in the dynamic of the 2008 election. And friends, you're going to like hearing about it. The national tracking polls range from Obama +2 (Gallup) to Obama +4 (Survey USA, Quinnipiac, and ARG). Meanwhile states that haven't been competitive for weeks, or even months, are showing as dead heats: Obama and McCain are tied in Florida according to both CNN and ARG. McCain is five points up or less in Missouri, between Rassmussen and Survey USA. Montana is a statistical tie. Obama is ahead in Virginia. And, most surprising of all, we have this stupefying result, fresh of the presses in the great state of Indiana, birthplace of the modern Ku Klux Klan, where according to the Indianapolis Star, Mr. Obama currently maintains a three-point lead. Oh and by the way, none of these are states that McCain can lose, and still be President. Not a single one of them.

In talking about something that unfolds in real-time, political analysts have long ago learned the valuable lesson of not over-reporting or over-spinning any particular moment in the drama. A week, as they say, is forever in this game--and boy haven't we learned that over the past week? But still this author believes that Mr. McCain's appearance on the View will mark a turning point from which the race may well recede dramatically and irretrievably from his grasp. The Steve Schmidt strategy, known and obvious to even casual observers of the contest, was to have and protect a lead, headed into the debates. McCain could claim victimization at the hands of pompous bullying by the loquaciously superior Obama, and an abiding press would indulge this half-truth by spinning their analysis the same way.

But an inferior debater can't claim victimization when he's the one throwing the Hail Mary passes on the stage. To win a debate from behind, you have to rock the hall with naked attacks designed to throw your opponent off-guard, and this kind of approach will rob McCain of his only oratory weapon--that of trying to be more like us, than the other guy. It could make for three or four very, very long nights in the lives of ardent Republicans from coast to coast. Indeed it could make for some unusually high ratings for the baseball playoffs.

My guess is that Senator Obama will be six or seven points up in the national tracking polls, and sitting comfortably on perhaps a twenty-five to thirty vote cushion in the electoral college, by the time these two characters take the stage for the first time. With all the pressure on the other guy, Mr. Obama will appear relaxed, comfortable inside his own skin, more "one of us" than he could ever have appeared in displaying his willingness to spar. My guess is that it will take an enormous gaffe or a major scandal--a "September surprise"--for Mr. McCain not to badly lose the debates for looking desperate and off-message.

My guess is that Mr. Obama is going to win this election.

Dave O'Gorman
("The Key Grip")
Gainesville, Florida Click Here to Read More...

Is This the Moment When Obama Slams the Door?

In a semi-departure from our usual fare, yesterday's column dealt mostly with reporting and analyzing the historic events of the previous day's news cycle. (And in case you missed it, the only mechanism for linking capital to businesses who need that capital, came unceremoniously apart in front of our very eyes, with such swiftness and lack of upside so as to leave The Key Grip stocking up on canned goods.) Only in the waning paragraphs did the conversation turn to the spectacular gaffe committed by Senator McCain on the subject, together with an unusually effective commercial that was immediately placed in rotation by Obama/Biden.

The reasons for demurring on the political ramifications of the Lehman/AIG/Merrill debacles were threefold: First, the events themselves were so large and so grave that political interpretations seemed, in the heat of the moment, almost beside the point. (One rather doubts that there was much arguing between the helmsman and the crow's nest as the Lido deck of the Titanic was slipping beneath the surface.) Second, the political implications are easy enough to explain but may prove more challenging to capitalize on, which left the column with the dilemma of over-selling Mr. Obama's windfall. And third, the column was going to be long enough already.

Make no mistake: Mr. Obama has a golden opportunity here, but even measured against the strides he's already made on the subject there is much heavy lifting to be done by his air-war tacticians if that opportunity is to find itself fully integrated into the fabric of the fall election campaign. Low informtion voters, after all, don't want a banking lecture in mid-September any more than they want to have their faces rubbed in the fact that Governor Palin, while Mayor of Wasilla, charged rape victims in the city for their own forensic analyses as a means of raising public revenue.

First the story you probably know, and probably presumed this column would be all about: It is the late 1980s, and the Savings and Loan scandal unraveled into a full-scale debacle (remember that little tiny hiccup in the financial sector? remember how it started?). One of the largest thrifts in the country, Lincoln Federal Savings and Loan, is about to fail in such a mushroom cloud of shoddy practices and questionable dealings as to almost certainly destroy, perhaps even criminally, the firm's top executives, including one Charles Keating. So what does Mr. Keating do? He approaches five individual Senators, Alan Cranston (D-CA), Dennis DeConcini (D-AZ), John Glenn (D-OH), John McCain (R-AZ), and Donald W. Riegle (D-MI), to implore them to impede the investigation by the Federal Home-Loan Bank Board into the company's books. He buys them lavish gifts, he sends them on expensive trips, he makes substantial contributions to their campaigns. And then he goes to jail, anyway. Three of the Senators, Cranston, DeConcini, and Riegle, are found to have substantially interfered in the FHLBB investigation, while Glenn and McCain are upbraided on the Senate floor "for having displayed poor judgment."

If you're a Democrat, it's a delicious story to tell (if not to re-live), but it carries with it the fatal flaw of antiquity. At roughly this same time, the McCain people would surely counter, Senator Biden was caught plagiarizing a speech. It wasn't much earlier than this when Senator Obama was still, by his own admission, experimenting with drug use. And naturally the McCain team would emphasize that McCain was "cleared" in the investigation. My guess is that, if the Obama people felt there was fertile ground to be sown in this story, they would have done it by now.

No, the real difficulty for McCain, as he suddenly and breathlessly embraces the idea of increased government oversight, is that he and his own closest colleagues are directly and personally responsible for the entire mess. And this you could be forgiven for not knowing. In 1999, the Republican caucus in the Senate, led by McCain friend and colleague Phil Graham (remember him? of course you do, you whiner), pressed for and got a bill that repealed the most basic cornerstone of financial market regulation, the Glass-Steagall act, which, among rather a lot else, would have prevented insurance companies from speculating in equities markets. McCain, in his senior position on the relevant committees, was front-and-center in pushing the repeal, even spoke on its behalf from the Senate floor.

Slam-dunk for Team Good-Guys? Not a bit of it. For one thing, there is the newest page in the Republican playbook, which says that outright lying is perfectly fine as long as low-information voters perceive an offsetting penalty from the other side. McCain could simply say, "I never supported that legislation," and, as long as Obama didn't show footage of him, supporting that legislation, the fact that it is a patent and willful untruth would register only with those voters who've already decided who will have their support in November. On top of this, banking regulation is a tough sell as a campaign hot-button, even for high-information voters. Some of my closest friends and colleagues at the college where I teach economics don't really understand their own retirement accounts--much less the implications of making it legal (or illegal) for an insurance company to own shares of a stinky mortgage portfolio. In such a climate, pressing Mr. McCain on this subject could make Mr. Obama appear pedantic and shrill, while McCain could simply shake his head and say, "I'm a maverick!" and win everybody back and then some. And don't you dare roll your eyes because it's already worked.

My read of the situation is that Mr. Obama is far, far better off keeping with the bigger theme that McCain's overall philosophy is out-dated, too similar to that of Mr. Bush, and, wait for it, out of touch. Certainly the quote delivered by McCain in Jacksonville has every appearance of one of those "gifts that keeps on giving" in this campaign, and the Obama people would be foolish to retire their swift and snappy advertisement about the subject before every last person in the country is begging them to stop airing it out of pure satiation with its message. In this respect, if none other, the Obama campaign is playing its air-war exactly, perfectly right.

Which leaves only the question of what either one of these two candidates can actually do about the situation, should he become President. The short answer is, nothing that wouldn't hurt. The slightly longer answer is the third in our three-part series on the subject. Stay tuned.

Dave O'Gorman
("The Key Grip")
Gainesville, Florida Click Here to Read More...

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 Click Here to Read More...