Election 2012 Wasn’t Close. Here’s Why It Matters.

Note: Here’s a post that I began some time ago and that is increasingly losing relevancy as post-election developments multiply. But it ended up being rather long and, frankly, the idea of having spent the time all for naught gives me a sad. So… enjoy?

Following up on why the results of the 2012 election should not be seen as anything but a decisive endorsement of the Democratic Party, I’d like now to focus on why that matters. Beyond somewhat airy — if undeniably romantic — fantasies of a long-term project to rehabilitate and revitalize American liberalism, there’s a short-term salience to calling 2012 what it was: the upcoming standoff between House Republicans and the president over our near- to long-term fiscal future.

Yes, yes; we’re talking (the unfortunately named) fiscal cliff.

Assessing the politics of the fiscal cliff, the big question — in some ways the only question — is whether Barack Obama means what he says. To put it lightly, this is not a new development in the Obama presidency. Not only is the vexing issue of what Obama really believes painfully familiar, but in essence the very contours of the fiscal cliff negotiation-cum-showdown is a rerun of two of the most defining moments of Obama’s tenure: the 2010 negotiations over the Bush tax cuts, and the debacle of last summer’s deal to raise the debt ceiling. Yet unlike those two examples, and in many ways for the first time since the opening months of his first term, Obama is the one with superior leverage.

In 2010, Obama had his back to the wall due to GOP threats to let payroll tax cuts (among others) passed in the stimulus bill to expire. Recall how shitty the economy was doing at this point and you’ll see why the White House considered letting lapse stimulus tax breaks — as well as the entirety of the Bush tax cuts, including those for the “bottom” 98 percent — to be unacceptable. I think David Corn does a good job in his recent book, Showdown, detailing how that deal was substantively much better for Democrats than the White House was ever given credit for. But it’s hard to disagree that Obama’s acquiescing to Republican demands in the winter emboldened Tea Party Congressmen to wage their debt ceiling brinksmanship in the summer.

And, boy, what an unpleasant summer that was! Because my birthday is August 2, the day the whole debacle reached its merciful denouement, I remember quite vividly what it was like on that day to be someone who had voted for Barack Obama. I remember the “leaks” to the New York Times reporting the White House had offered to raise the retirement age, cut Social Security, lock-in the Bush tax cuts, and all in return for Republicans’ raising the debt ceiling — a once perfunctory measure and nonpartisan necessity — and agreeing, in principle, to find $800,000 worth of revenue (either from closed loopholes or, more brazenly, projected post-tax cut economic growth). Let me tell you, as a liberal, that summer totally sucked.

So I can’t blame those on the Left for being anxious already over a potential fiscal cliff-induced Grand Bargain. Put 2010 and 2011 together and you’ve got precious little in the Obama record to dissuade his lefty supporters from the suspicion that, if he can, the president will slice ‘n’ dice those social insurance programs that have become the very identity of the Democratic Party in the modern era. And for what? Pleasing a bond market that’s still setting interest rates so low it’s almost begging the US to borrow money? Receiving plaudits from frivolous self-styled centrists like David Gergen or The Economist? Burnishing his own legacy by securing the holy grail of modern Washington, the Grand Bargain, despite the fact that such grandiosity is currently unnecessary if not outright ill-advised?

During his first press conference since reelection, Obama didn’t calm anyone’s nerves. As has been the case often with the president, it was supremely difficult to parse from his comments what he really thinks about the fiscal cliff and what he’s really planning to do about it. Is he looking to take another swing at a Grand Bargain along the lines of that discussed last summer? Is he secretly confident that when America finds itself doing its best Wile E. Coyote, Republicans, having already lost the battle to preserve lower tax rates for the top 2 percent, will acquiesce and reinstate Bush-era rates for lower 98? Here’s how little anyone knows: two of the more astute left-of-center pundits around, New York‘s Jonathan Chait and Washington Monthly‘s Ed Kilgore, watched the same presser and came away with diametrically opposed conclusions.

Now here’s where the Democrats’ left-of-center coalition and its resounding — not close but resounding — victory on November 6 becomes important.

The fact is that, if he wants it, the president has an enormous amount of leverage over House Republicans. Last summer, when it was Republicans who were all too happy to do nothing and let the debt ceiling become a guillotine, the caucus rejected a Grand Bargain that was heavily tilted in its favor. Thinking was, I suppose, that agreeing would improve Obama’s chances for reelection and thus ultimately decrease the likelihood that upper-income taxes would stay put or even decrease further still. Democrats already terrified by the prospect of the GOP finishing what it started in 2010 were willing to make concessions for the sake of Obama that they’d usually consider unthinkable.

No longer. With Obama’s having won, convincingly, while running the kind of populist center-left campaign that isn’t supposed to work in center-right America, the leftwing members of the president’s coalition feel justifiably emboldened. Conversely, with Republicans still reeling from defeat — and looking for people to blame — the once-strutting Tea Party is, at least for the moment, in something of a strategic retreat. The Grand Bargain of 2011 was only thinkable with an assumption of overwhelming Republican, and significant Democratic, support.

If we buy into the framing pushed immediately and relentlessly by Gergen and the like, that this was a close election from which no one could claim any sort of mandate or leeway (besides for austerity, that is) then Obama and Congressional Democrats are indeed obligated to cut the lowest-common-denominator deal: Simpson-Bowles or the like. But if the media and political class conceives of recent events as clearly beneficial for the center-left, there’s an open space for Obama’s lefty supporters — unions, especially — to demand a deal that actually gives them something they want. Stimulus, card-check, a millionaire’s tax; whatever.

It’s unlikely they’ll get any of the above. It’s not like America is completely different than it was five weeks ago. But unless we look at November 6 as a reset, any new Grand Bargain is inevitably going to look a lot like the old one.

Elias tweets here and sometimes shares some of his more frivolous musings here

Please do be so kind as to share this post.
Share

140 thoughts on “Election 2012 Wasn’t Close. Here’s Why It Matters.

  1. I think we’re looking at Simpson-Bowles or something similar; a small rise in marginal rates for the wealthiest, eliminating some loopholes — which will likely slide further down the income scale — and some cuts in spending that liberals will moan about, but stomach for long-term benefit.

    And I think Obama’s going to play the ends against one another to get there. Because somebody’s gotta act like a grownup.

      Quote  Link

    Report

    • Oops, I’m bad. I said, and some cuts in spending that liberals will moan about, but stomach for long-term benefit.

      And that’s completely wrong. The spending cuts are already baked in. That’s the sequester, remember?

      This is a libertarian/conservative PR moment, let me tell you. Because retraining from the precipice calls for increasing spending demanded by the sequester; it’s an increase in government. Big Government.

      And for liberals, it’s also a PR bonanza; tax cuts galore.

      Status quo is that the cuts will happen. Taxes will go up. To avoid the cliff, we need to increase spending and cut taxes.

      Everyone wins!

        Quote  Link

      Report

      • And that’s completely wrong. The spending cuts are already baked in. That’s the sequester, remember?

        Not so. The “sequester” has been sold to everyone as if it were baked-in. But it’s not. As I explained at the time, a Congress cannot bind either itself or future Congresses with non-repealable legislation. What Congress writes into law, it can always un-write as well.

        The national media has obscured this fact, but a fact it remains. It will be somewhat embarrassing for them to have to explain how all the spending cuts went away, but I am confident that they will, and the media can probably manage the transition, what with their near-total lack of shame and love for all forms of Washington power.

          Quote  Link

        Report

        • There was some black humor in that; PR (pubic relations) for the cuts for Rs, PR for tax increases for Ds, which are the law of the land and will happen if they continue their fruitless bickering.

          Doesn’t mean this Congress or a future Congress cannot change the law. And Greginak reminded of how many Simpson Bowls cuts have already happened. Restoring spending is an increase. Taxes will rise with the expiration of the Bush tax cuts. Lowering them is a new tax cut. The point of measure is from what’s already law, what will happen with no action*.

          *Unless repeal and replace grand bargains suddenly becomes sexy again. Not much time.

            Quote  Link

          Report

  2. unless we look at November 6 as a reset, any new Grand Bargain is inevitably going to look a lot like the old one.

    I wouldn’t go that far.
    I think the President, and Senate Democrats have more bargaining leverage now.
    Granted, the next Grand Bargain may well take form other areas.
    But I don’t think that you’ll see so many programs cherished by the Left on the chopping block.
    I believe the President really does want to be perceived as fiscally responsible.

    It will be interesting to watch it unfold.

    The big thing that I think you glossed over (though mentioned in passing) was the Tea Party waning.
    This implies that Cantor will carry less weight in future negotiations.
    The big Boehner – Cantor struggle was something else going on (not-so-) behind the scenes at the time.

      Quote  Link

    Report

  3. Given that the stock market rises and falls based more on superstition, rumor, and witchcraft than solid economic indicators, I’m not sure why the DJIA is worthy of discussing in partisan context.

      Quote  Link

    Report

    • Which one of those is causing the Dow to fall right now, superstition, rumor, or witchcraft?

      Because…um… it can’t possibly be the threat of massive tax increases and spending cuts?

      I can’t help but think there’s a fairly effective way to spin this against the Republicans in here, if only you’d bring it out. But absolutely any suggestion that a market knows what it’s doing is just too much, huh?

        Quote  Link

      Report

      • The markets know nothing. They react to many things but they don’t know anything. Mostly, markets react to risk of various sorts, though often they will take profits when it looks like the bloom is just about off a particular market component.

        Why is the stock market going down these days? Uncertainty over the fiscal cliff is one reason but there are many. Will the GOP be as belligerent this time as they were last time, when our credit rating was dinged as a result of their game of Chicken?

        Only rubes look at “The Market” and see a single entity but there is a perverse note of truth in this observation. AAPL’s market cap sways the market far out of proportion to its effect: they were trading over 700 in Sept and now they’re trading just north of 500. AAPL’s current market cap is just about 500B.

        The fallacy of Market Wisdom arises from some anthropomorphic view of markets. Trust me on this: years of analysis and trading and writing specious trading schemes for supposedly super-smart people has taught me this — markets don’t react. Market components react and there’s no overarching rationale for any of it, taxes least of all. Taxes are predictable. They’re not a component of risk, they’re a component of order.

        Markets only appear to self-organise. We live in a Market Society: there is no sharp division between markets over here and governments over there, though often we wish there was such a division. The Republicans have been flailing away, attempting to tell us otherwise. Laws are made by politicians, subject to the whims of the voters. Since the GOP convention, it’s been Paul Ryan, loudly thumping the tub, rattling on about the Dangers of Collectivism. But if we’re to view the market through simplistic lenses, attributing knowledge to markets and not to external circumstances (and to his credit, even Romney stuffed a sock in Ryan’s mouth when Ryan’s shrill Objectivist cant became too much for even Mr. Bain Capital), we’re left with an ignis fatuus.

        Markets are composed of individuals and corporations, acting in their own interests, buying low and selling high. The self-organising market is a myth. Markets form and grow where buyers and sellers meet on the common ground of a market floor. They’re affected by many factors: interest rates, consumer spending, inflation, oil prices, weather and suchlike. But mostly the market is driven by fear or optimism and these two cancel each other out. One market agent panics, another sees a buying opportunity. Markets only fail when a seller can’t find a buyer.

          Quote  Link

        Report

        • The best description I ever read of the Stock Market goes something like this:

          Suppose a local newspaper, perhaps in a bid to increase circulation, decides to conduct a beauty contest. So they talk it up, recruit a number of local hotties, and publish them on the first page. Anyone can vote, but each vote costs a dollar, and then all the voters who voted for the girl that winds up winning get to split the proceeds. Sort of like pari-mutual wagering.

          Now do you see the dynamic? Instead of each man voting honestly for the girl he really thinks is the cutest–some guys like brunettes, some blondes, some redheads, some like them skinny, some like them buxom, etc.–the men, at least the ones interested in the potential payout, vote more strategically. Instead of voting for the girl he actually prefers, now he tries to divine which girl all the other guys think is the cutest. And since everybody knows that gentlemen (and not-so-gentle-men) prefer blondes, that’s the one that wins, even though a reasonably objective take on it is that she’s too skinny, and a bit skanky, and the buxom brunette is really much prettier.

          Rather than an honest read of the contestants based on their respective virtues you have everyone trying to outguess the other guys, listening to rumors about which girl is getting the most votes, cleaning out their savings to vote multiple times for the same girl to swing the vote that way, spreading rumors, etc.

          My understanding is this is something that has gotten a lot worse in the last few decades than it used to be. Back in the day stocks were valuated based on expected returns from dividends. Now it’s about buying low and selling high. Microsoft went something like twenty years without declaring a dividend and even as late as the nineties sometime (IIRC) they were saying that they had no intention to do so anytime soon, if ever. I understand how a stock can have a value based on its ROI compared to other investments. But I don’t understand how a stock that pays no dividends has much, if any, value. At least it would seem to take a big hit on its speculative value given how uncertain the actual, tangible, returns on that investment would be.

            Quote  Link

          Report

            • That’s tautological. The original logic behind owning stocks is that you were then entitled to a share of the company profits in the form of dividends. If a company never pays dividends then that stock is worthless.

              It’s like buying a mortgage that the borrower never makes any payments on. Where’s the cash-flow? What’s the point?

                Quote  Link

              Report

            • So how much it goes up is based on how much it goes up.

              This is a small thing, no doubt, but I’m confused: how is the above statement not tautological or circular or trivial or false (depending on how we read understand the term “based on”)?

                Quote  Link

              Report

            • Honestly, it’s like you people have never seen a joke before. Fine, I’ll be (shudder) serious.

              Valuation is based on a combination of current value (assets plus income stream) and expectation of future value. Dividends are in a sense irrelevant: paying a dividend is one use of income, while retaining it and re-investing it in the company is another. The value of “share plus dividend” in the first case should equal the valued of “share” in the second case. Obviously, as the re-investments do or don’t pan out, the results will diverge.

              In either case, the main driver of stock moment in the short term is a change in expectations. (Sometimes, as with Enron, it turns out that current value wasn’t close to what they’d been reporting, but that’s unusual.) That is, if XXXCorp goes up significantly, it’s because their prospects are perceived to have improved significantly, or to say it another way, XXXCorp goes up because people think XXXCorp will go up.

                Quote  Link

              Report

                • Actually I think firms are being wholly rational in keeping more cash. Recall that for about a month in 2008 the market for loans to business essentially shut down completely and took the fed to bring it back by making the needed loans. If I was a CFO I would want to be sure that I could have the company survive 2 or 3 months without borrowing any money, and indeed paying back any expiring loans without having to go into chapter 11.
                  There was a meme related to the efficient market model that one could always borrow when one needed to which ignored the whole issue of panics when no one trusts anyone else and is unwilling to loan any money.

                    Quote  Link

                  Report

              • I understand all that. I think we’re talking past each other here, because I’m asking/posing a more fundamental question.

                The logic of investing is that you purchase some investment vehicle on the hope/expectation of realizing more money later due to the ownership of that investment vehicle. Take a bond, for instance. It’s an agreement that a corporate or government entity will pay the holder of the bond an amount certain on a date certain. The market value of that bond will depend on the face value of the bond, the maturation date, and a comparison with the yield of other instruments of similar risk profile. It’s typically expressed as an equivalent annual rate of interest. The point here is that if you hold the bond and do nothing else, at some point in the future you will get a check in the mail. So you might purchase a bond now for $95,000 that will result in you receiving a check for $100,000 a year hence.

                So what’s the investment logic behind stocks? It’s that you own a pro-rata share of a corporation, which translates into a pro-rata share of the profits down the road. So setting aside for the moment the initial purchase price, the current value of a share of stock should represent the net present value of an anticipated stream of dividend checks down the road discounted by some estimate of the market interest rate (to compare to other investments). And of course, that in turn is going to be some function of the profitability of the company or prospects thereof.

                So in either case, bond or stock, you’re buying a claim on a future income stream. When a company isn’t paying a dividend, most importantly for my question, when it declares that it may never do so, what the hell is the point of owning that stock? “Oh, they don’t really mean that…”?? You would think that sort of deal would be speculative as to be a penny stock, heh?

                  Quote  Link

                Report

                • Even in the days when all big companies paid dividends, they weren’t paying out every cent of profits that way; that would be like you spending every cent of your take-home pay. And valuation was still based on total income, not on dividends alone.

                  Bonds are an entirely different thing. When you buy a bond, you’re lending someone money, and your return is principal plus interest. Why you buy stock, you own part of the company, and your return is growth in the company’s valuation. Which is a real thing: it’s the price someone who wants to buy the company from its current owners would pay.

                    Quote  Link

                  Report

                  • That’s what I’m trying to get at. I own stock and the value of that stock is based on the underlying value of the company based on it’s profit potential. So you’re saying that the value of the company doesn’t depend on dividends or the prospect thereof, just that value (the same sort of number one could assign to a privately held company). And it’s real because someone else is willing to pay that, presumable because someone else is willing to buy it from him for that amount, and yet someone else is willing to pay that to that buyer, etc…

                    Turtles all the way down. Got it.

                      Quote  Link

                    Report

                    • It’s more the “greater fool” game. OpenTable has a great potential for expansion, because all they need to do is buy a new server occasionally. So, yeah, they can grow a LOT, really easily. But, some people see others getting in, and the stock going up. They think since it went up, it will go up some more, and they also get in. Cycle this through five people’s paws,a nd you’ve got something entirely out of any rational expectations.

                      Zipcar’s stock was worth something like 100 times what their current assets were, for a few hours. And then you sell, and voila, tons of cash.

                        Quote  Link

                      Report

        • Yet another overlong comment from Blaise, in which he tells me I’m all wrong but ultimately agrees with me.

          Why is the stock market going down these days? Uncertainty over the fiscal cliff is one reason…

          The rest is just details and commentary.

            Quote  Link

          Report

          • It was more a reply to LWA than you, Jason.

            But absolutely any suggestion that a market knows what it’s doing is just too much, huh? , well Jason, I can’t stop you from saying stupid things. I can, however, respond to them. The markets do move on rumour and innuendo. Lots of what constitutes market information is witchcraft, insofar as it’s an attempt to control nature rather than understand it.

            Why did this man sell a stock and another bought what he sold? Uncertainty drives fear but uncertainty lies at the heart of risk which varies with reward. There is no understanding markets. Anyone who says it’s possible is either a liar or an idiot. We can only observe the external world, a world filled with uncertainty. Probability theory is of some assistance but not all that much.

              Quote  Link

            Report

            • The markets do move on rumour and innuendo.

              And I wouldn’t deny it, of course. But there are times when changing prices in stocks actually do make sense.

              Why did the markets fall so much in 2008-09? Nothing but rumor and innuendo? Surely not. There were very good reasons to think that these corporations were losing value, and stock prices shifted to reflect that entirely correct belief.

              Offering an explanation for why a market moves shouldn’t be ridiculed out of hand.

              Now, some explanations really are doubtful or unsupported, sure; on this thread I’ve already argued that “Obama’s re-election” is a very doubtful reason why the markets are going down. But the idea that markets never move with any sort of possible explanation to them, which seems to be lurking hereabouts, is as unfounded as its opposite, that all market movements are easily explicable and perfectly rational. (A position I haven’t once taken, by the way.)

                Quote  Link

              Report

              • Why did the markets fall so much in 2008-09? Nothing but rumor and innuendo? Surely not. There were very good reasons to think that these corporations were losing value, and stock prices shifted to reflect that entirely correct belief.

                This is something I’ve always found weird about the stock market. Nothing big of actual value was destroyed in summer/fall of 2008. The markets didn’t change in response to an actual change in the amount of net physical and human assets in the world. They fell because people stopped believing they were going to keep rising. If people had kept on believing, they would have stayed high. We had a massive recession not because any good or service of actual use stopped existing, but because a bunch of computers had lower numbers one week than they had the week before.

                That strikes me as a very irrational basis for an economy.

                  Quote  Link

                Report

                • Nothing big of actual value was destroyed in summer/fall of 2008.
                  That’s not true. Foreclosures were spiking. Banks were failing. The commercial paper market was having all kinds of problems. Even meeting payroll was threatening to become impossible for significant parts of the U.S. economy.

                  These were very real things, not simply a change in investors’ arbitrary emotions.

                    Quote  Link

                  Report

                  • Don’t play games with history. You’ve got the cart before the horse. Foreclosure rates weren’t all that bad. Bonds were doing pretty well.

                    The foreclosure crisis happened when the stock market crashed after the Lehman bankruptcy. That’s when the doo-doo hit the whirling blades of fate. The panic and resulting credit crunch which resulted on 15 Sept 2008 was entirely due to the Lehman bankruptcy. There used to be laws which governed capital requirements but they were repealed in 2004.

                      Quote  Link

                    Report

                    • “Foreclosure rates weren’t all that bad”

                      This is entirely incorrect. There were in fact over 3 million foreclosures of homeowners, which was a record in this country. In fact, foreclosures increased 81% from 2007, which was also a watershed year.

                      And that does not include the millions of specs, tract homes and other houses that, because of the bubble, were either just built or in the process of being built that were never owned by homeowners, but were certainly a big part of the housing market collapse.

                        Quote  Link

                      Report

                    • I agree with Tod. The meltdown started – tho lots of players knew it was coming, one in particular – because actual for realsis foreclosures (at reliably predictable rates) were obliterating investments in MBS. Blame CountryWide, if anyone. They began a trend which went national to loosen up requirements for obtaining a mortgage based entirely on the premise they could bundle and sell before anyone was the wiser.

                        Quote  Link

                      Report

                    • This had nothing to do with foreclosure rates. The lower and riskier tranches were supposed to cope with the foreclosure problem. The problem was, as always, massive overexposure to trillions of dollars in debt on an unregulated market.

                      Foreclosures could have gone through the roof and the market could still have coped — if the CDO and CDS markets had been regulated. But they weren’t. Yes, a lot of investors would have gotten skinned. But when Lehman Brothers went bankrupt, it was obvious the CDOs and the deregulated banks, not the foreclosures were the problem instruments. They’d played with fire, commingling retail banks and investment houses. And it was the taxpayer who got burned.

                        Quote  Link

                      Report

                    • I agree with everything you said here, BP, except the first two sentences. I think what you discount there is precisely why the lack of regulation on CDOs and CDSs, and even naked shorts, became an issue.

                      Could be wrong about that, acourse.

                        Quote  Link

                      Report

                    • The rest of the comment was supposed to justify those two sentences. Some mortgages were inherently riskier. The CDO was supposed to be the Excalibur which could cut through this problem, pooling many mortgages, thus distributing the risk, or so we were told. But those risky mortgages were supposed to be treated like corporate paper, segregated into junk and not-junk status. But what with all the lying and secrecy and deregulation, Lehman and the rest of those assholes kept thinking they’d go on finding bigger fools.

                      As it happens, there’s a working market in junk bonds. It also happens to be a regulated market going through a bit of a boom just now, what with better regulations in place, allowing for ETFs to trade. Yes, folks, that’s Exchange Traded Funds, not some crappy, unregulated, over the counter operation such as Lehman.

                        Quote  Link

                      Report

                    • Sure. My point is that distinguishing the mortgages into A and B categories was inherently suspect, because the “market makers” were basing those evaluations on faulty evidence. If the facts justifying the reliability of that mortgagee were clearly known – and part of this of course includes the wildly optimistic expectation that home prices would continue to rise at an 8 or 10% clip year over year – then lots of those mortgages would never have been approved to begin with. So, lots of junk that was never characterized as junk. That was the genius of CountryWide, actually: to realize that the “market” woudn’t understand the difference between a good mortgage and a bad one, especially based on short term historical trends. (Ever increasing home values, independently of ability to actually make the payments.)

                      So … investors weren’t digging into the details. And maybe that’s on them (and their representatives). Interestingly, that was Goldman’s defense before Congress: it’s a big boys game, and people have a responsibility to read the fine print. Even in cases where Goldman was acting as an investors agent agent and was tasked with reading and conveying to their clients the fine print, the burden was on the purchaser.

                        Quote  Link

                      Report

                    • Again, there were no details to dig into. Get that straight. Here’s what a mortgage tranche looks like: a spreadsheet with an address, sale price and one column for payment history.

                      A good payment history cell in that tranche ssheet looks like this: AAAAA. That means five months of on-time mortgage payments. If the next payment is 30 late, you get AAAAAB in that cell. Late 60, C, late 90, D If there’s no payment, you get AAAAAF.

                      That’s all the information you get. Bupkis.

                        Quote  Link

                      Report

                    • “Before the CDO there was no subprime mortgage market to speak of.”

                      Yes, but how that means that foreclosure rates weren’t”all that bad” I can’t parse. Here are the statistics since 2000:

                      http://www.statisticbrain.com/home-foreclosure-statistics/

                      You are correct, of course, that there were new circumstances that drove those numbers up. But I am not seeing how that translates to the numbers not being bad.

                        Quote  Link

                      Report

                    • Let’s pull the word “bad” out of the discussion. It’s not helping things along here. If the CDO -> CDS markets had worked as advertised, foreclosures would have not been a problem.

                      But let’s not put the cart before the horse. Sure, foreclosure rates were going up, but that was part of the bargain in the go-go markets of the time. But it wasn’t the mortgages which created the problem. I say, with the conviction of experience in these things, that it was the unregulated derivatives market which created the credit crunch and the Crash of 2008. The mortgages themselves were incidental, essentially irrelevant. So much debt had been created nobody knew where it all was.

                        Quote  Link

                      Report

                    • I say, with the conviction of experience in these things, that it was the unregulated derivatives market which created the credit crunch and the Crash of 2008.

                      I think this is one of those formal v proximal cause type arguments. What you’re argument is neglecting to account for is that AIG (for example) got broke because of the insurance other companies took out on securities they knew were going to fail.

                      So sure, if the CDO/CDS markets were better regulated, then the whole collapse would have been averted. But the cause of the collapse (sufficient condition) – which regulation potentially could have prevented from being realized – was that underperforming securities were being duplicitously traded, insured, bet against, sold and leveraged, etc. If the MBS weren’t wildly underperforming/failing, then there would have been no need for more stringent regulation.

                      Could be wrong about all that, acourse.

                        Quote  Link

                      Report

                    • Call it a weakness, Stillwater, I argue from what I know and have seen. Beyond that, all I can bring to bear on this or any other argument is nonsense or ginned-up Google Geniusity for the most part.

                      But this much can be stated as a formal proposition: a derivative instrument is not its component parts. A derivative is fundamentally a bet. A CDO is not a mortgage any more than a bet on the Packers is playing the game.

                      But when you say If the MBS weren’t wildly underperforming/failing, then there would have been no need for more stringent regulation. , you’re off the track here and onto Alan Greenspan’s Primrose Path and there he sat like a wizened little marsupial blinking and stammering and just couldn’t figure how these jamokes had created such a mess. The MBS system wasn’t really a security because precious little of it was on the balance sheets. Nobody had any picture of the true risks involved because nobody had a clear picture of anyone else’s exposure. Mortgages were regulated. The derivatives weren’t.

                        Quote  Link

                      Report

                    • I’m having a bit of trouble finding the disagreement between us. I think it’s that you think the mortgage-sector was functioning properly, but the regulation on derivatives wasn’t.

                      I’m disagreeing with that assessment. The first part, not the second. So, here.

                        Quote  Link

                      Report

                    • Oh, okay, I think I see what you’re saying here. When CDOs first appeared in the 80s, they were sort of an offshoot of the quasi-privatised FHA loans, which had been backed by the government.

                      But then came Reg T. With it came the notion that these CDOs could become collateral. And that’s where it all started getting Vurravurra Stinky. It would first lead to the S&L crisis in the 80s and then the Crash of 2008.

                      No need to read my balance sheet, Mr. Regulator, sir. Looky here, I have a stack of pictures of homes with little kids playing in the front yard and a spreadsheet with all their addresses on it which I bought from a Fine Upstanding Firm name o’ Lehman Brothers, an august name on Wall Street. If that doesn’t meet your approval as a margin requirement, well, I’ll just call up Senator Bortenpaidfer and he’ll fix your little red wagon.

                        Quote  Link

                      Report

                    • Btw, I wanted to mention this quote from the link:

                      Moody’s spokesman Adler insisted that compensation of Moody’s analysts and senior managers “is not linked to the financial performance of their business unit.”

                      There’s something interesting to talk about there, it seems to me. Something liberals and libertarians get stuck on.

                        Quote  Link

                      Report

                    • Stillwater, have you heard of Brooksley Born?

                      She was head of the Commodity Futures Trading Commission (CFTC), and wanted the Fed to regulate the credit-default swap market back in the 1980’s. Alan Greenspan, Larry Summers & crew basically told her to shut up and stop spoiling all the fun.

                      The link is to a Frontline interview with her, but there’s a wealth of stuff available if you google her name. She explains what caused the financial collapse and the dangers of opaque markets as well as anyone.

                        Quote  Link

                      Report

                  • As I remember, foreclosures were spiking and banks were failing because the stock market collapsed, not before it did. Stocks fell, so everyone started panicked and calling in loans and trying to get their money back, so you had banks failing (or being in danger of failing) and foreclosures. The crash was what started the whole thing off.

                    And none of that answers my basic question. Nothing in the way of physical or human resources was destroyed. If the amount of goods and services doesn’t change, why should everyone be worse off because investors or borrowers panic?

                      Quote  Link

                    Report

                    • Mostly.

                      Banks were primarily failing because in an effort to leverage revenue from the housing bubble, they themselves became part-owners of the mortgage trunches that were being created as an investment vehicle. The banks looked strong on paper because most of their assets offsetting debt were the values of those over-valued homes.

                      When it became apparent that the valuing models they were using were way, way off, it turned out that they were entirely upside, could no longer borrow against the housing investments their lenders had once thought were worth so much, and lacked the liquid capital to continue to keep their doors open.

                        Quote  Link

                      Report

                    • No, Tod. The problem was overexposure. Housing prices had been moving along quite nicely because of a general trend ongoing since the 1970s: rural to urban migration and the formation of the exurb. House prices had been falling in rural areas. Whole towns died when jobs got moved and the tax base dried up. When the school and fire department couldn’t get funded, the rationale for these little towns died.

                      But in places like exurban Los Angeles and Chicago and Atlanta, prices were going up because demand was there. Those big office parks built out in the suburbs, built with all that S&L money (another deregulatory fiasco which left a ton of stranded assets for the government to deal with) were now filling up.

                      The market was coping. Regulation wasn’t. Nobody knew the full extent of the leverage, something regulation would have revealed. It wasn’t until Bear Stearns that anyone, anyone, including the market participants themselves had any real numbers.

                        Quote  Link

                      Report

              • Jason, here’s your problem in a nutshell: you seem to think the market makes sense. And it just doesn’t. Your rhetorical questions about the reasons for the 2008 collapse are (unfortunately for you) answered by exactly what you don’t want to hear: rumour and innuendo.

                Allow me to explain leverage: it seems you don’t get the point here. Here’s what really happened: Lehman Brothers couldn’t sell its last few tranches of subprime mortgages. Those tranches went begging. The other CDO dealers smelled blood. None of them were in the open market, it was all over the counter deals, a handful of Excel spreadsheets being zipped up and sent over the wire.

                The CDO dealers knew if Lehman couldn’t get rid of their tranches, neither could they. If the rates moved as much as a single full point, they would all be uck-fayed. The debt to equity ratios had gone waaaay beyond any rational fraction, up past 30:1. They all knew Cinderella’s clock had struck midnight and they all started screaming as one.

                There was no particularly good reason for this panic. The economy was doing reasonably well, most people were in fact paying their mortgages. Lehman should have pulled apart those last few tranches. But because everyone was shitting their britches, all at once, the DJIA started crashing.

                I was around for that shitstorm. There was no good reason for any of it beyond the simple ratio of 30:1 D:E ratio. The market was saturated, the market was unregulated and it crashed because it wasn’t regulated. That’s what happens when people have faith in markets to internally regulate themselves. Stampedes and panics and runs on banks happen.

                  Quote  Link

                Report

              • Fucking come off it. they weren’t losing value. They had bought rotten eggs, and suddenly they started to smell.
                Mark to market was a happy thing, but it wasn’t them losing value, okay? It was us changing the accounting rules so banks coiuldn’t simply throw darts and assign values.

                  Quote  Link

                Report

      • Jason-
        It is rumor and superstition, to be exact.
        Rumors of what is going to happen in Washington, superstition about “when this happens, that results”.

        Traders themselves acknowledge that it is based on hunches, educated guesses and dumb luck.

        Its only the rubes watching commercials for TD Ameritrade who think they can master the market and accurately predict the results.

          Quote  Link

        Report

        • So stock markets move in different directions for no real reason at all?

          How very convenient for your politics.

          But if it were true, then you should always buy whenever the market goes down, and always sell whenever it goes up. And you’d always make a profit.

          In the real world, that’s not how it works.

            Quote  Link

          Report

          • But the stock market was way up over O’s first term, so does he get credit for that. If he is slammed for the stocks going down after he was reelected, shouldn’t he get credit for the much more longer term rise. And so what if the market didn’t like his re-election, are we contracting out our election to the fishing market?

              Quote  Link

            Report

            • I wouldn’t attribute the recent fall to Obama as a person. That’s very obviously wrong, and you are correct to point it out.

              I think the much more accurate explanation, one that takes into account the rise during his first term, would be that the fall in the market indicates concern about the fiscal cliff. That’s neither crazy nor unreasonable. Nor is it even all that favorable to Republicans. It’s really quite unflattering to them, if you think about it.

              But it appears to annoy the liberals around here to say so. They’d prefer to think that markets move for no reasons that are at all connected to reality. They’d much rather laugh at any proposed explanation for any market move, as if it were merely a metaphysical supposition.

                Quote  Link

              Report

              • 1) Market manipulation is a fact, not a supposition.
                2) Over the long term, nobody’s wealthy enough to manipulate the market.
                3) There are a lot of downtrend indicators around (has conjure bag declared a global depression baked in the cake yet?), and they have been for quite some time.
                4) Market runs just as much on psychology as anything else. “free money!” makes quite the hit, and I can show you the market post “Fed Lowers Interest Rate” if you don’t believe me.

                  Quote  Link

                Report

            • No, even those random fluctuations are the direct results of buyers and sellers actually posting orders, and either seeing them fulfilled or not.

              And, over a period of a couple of weeks, a several-hundred-point drop probably indicates some collective reaction to… well, something. It’s very unlikely to have been dumb luck. That is what we were talking about, you know.

                Quote  Link

              Report

              • Well, certainly sometimes there is a very real reason for markets to move- a storm that kills a crop, for example. And often traders interpret economic data to make decisions, based on historical evidence.

                But just as often, traders act out of fear, panic, rumor, and superstition. Panic sell-offs or panic buying binges are a historical fact, easily documented. “Irrational Exuberance” isn’t a term that some liberal coined.

                I don’t know why this is controversial.

                  Quote  Link

                Report

                  • Hell will break loose if you assert on the Internet that kittens are cuter than puppies.
                    However, the assertion that the market is reacting to the impending “fiscal cliff” is true.

                    If we all agree that by “market is reacting” we mean the collective actions of traders who are using data, clear-eyed analysis, intuition, suspicion, fear and gamesmanship to make trades.

                    In which case, my intuition and suspicion is that we would all agree.

                      Quote  Link

                    Report

                  • Because we had a multibillion dollar storm in the meantime?
                    Meh, I’m not saying you’re not right.
                    I’m saying there are multiple explanations, and that you aren’t
                    making a decent argument for “Fiscal Cliff” being more serious than “Large Scale income destruction on East Coast” or “Global Depression”

                      Quote  Link

                    Report

              • Or a confluence of reactions to different things, or herd instinct, or a mini-bust following a mini-boomlet. Trying to attribute it to a single cause is pointless: even if that were true, we don’t have the evidence to draw that conclusion. Blaming it on the election is pure post hoc ergo propter hoc.

                  Quote  Link

                Report

              • No, Jason. Markets move when the clouds move. This stock market is driven by insane price/earnings ratios on a few heavily-traded stocks. Apple was the market darling for a good long while, then the Apple Maps fiasco blew 200B off their market cap when investors realised Apple could screw up just like everyone else like Microsoft did. Just bad luck. Apple’s earnings, good as they are, didn’t justify the price tag and the market responded to it.

                That’s a lot of market cap, in case that 200B number didn’t register. Float-adjusted market cap for the entire DJIA is about 3.4T. In Sept, AAPL’s total market cap was about 0.7T and even now, sagging hard, blowing off 200B, it’s about 0.5T. Do you have any idea how this incredible market distortion came about? Well allow me to let you in on a little secret: it’s not dumb luck, it’s a horde of dumb investors.

                  Quote  Link

                Report

                  • Read the chart, Jason. Why has AAPL volume picked up over time? Because the stock was overbought. It’s back where it was at the beginning of the year. When AAPL crossed 510, market volume went crazy on Friday about noon, everyone bought back in and it shot up 20 points.

                    Which rather goes to my point, rather than yours. DJIA is composed of many entities. It makes no sense to view that average as anything but a gauge of market cap and it’s been carefully jiggered to that end. DJIA doesn’t tell you what any one such stock is doing. That’s not what it was built to do.

                    Stop anthropomorphising the market. The markets declined after the election because investors grew fearful and sold. They don’t like the prospect of another debt crisis because they saw the last go-round, as I said. It’s just like Tommy Lee Jones said in Men in Black: People are dumb, panicky dangerous animals and you know it.

                      Quote  Link

                    Report

                    • Let’s moot the proposition the market’s upset over the Fiscal Cliff fighting. It doesn’t mean it’s a sane response.

                      Standard wisdom says the Wall Street crowd backed Romney big time in hopes the GOP / Dem fight over the Fiscal Cliff could be prevented. Well, yes and no. Lots of big money backed Obama, too.

                      Standard wisdom and the Mouthbreathers over at Mainstream Media kept on blasting the meme-du-jour. The nation spoke and now the market has to deal with the prospect of compromise. This sell-off was stupid. The Congress got up and said they’d behave responsibly and the Fearful Ninny Community responded with equally-trivial enthusiasm. Sure, ask a schizophrenic for reasons, you’ll get them in spades. Doesn’t mean they make any sense.

                      There’s no reason for this crap, either the sink or the rise. Earnings are starting to come back, unemployment is still pretty bad but firms are starting to hire again. When LWA pointed out how this was mostly rumour and superstition, he was right.

                        Quote  Link

                      Report

        • Of course. The collective abstract entity we call society doesn’t actually exist. But the collective abstract entity we call The Market (Blessed Be) is omni-present, omniscient, and omni-benevolent. And it’s embroiled in an eternal spiritual struggle against the master of the underworld, Government.

          Of course the logic gets a little dicey when you consider that the market is a component of society. Hmm… oops.

            Quote  Link

          Report

          • Well, I might have said

            “The actions of various buyers and sellers are creating a pattern that indicates their collected, weighted confidence about future events, and at the moment it appears congruent to a pattern that might be produced by ‘the market’ — understood, mind you, not to have any sentience what-so-ever, no-siree, but were we to infer some form of sentience anyway, we would be forced to infer likewise that this entity (which doesn’t really exist, of course, of course) is less than confident about the American economy.”

            ..but that would have been, well, wordy. So I counted on your charitable reading of what I said, trusting that you all know just as I do what’s going on.

            I should have known better. Clearly.

              Quote  Link

            Report

            • I was being facetious, Jason. Like over-the-top and stuff.

              But quite honestly, I do hear quite a bit of “just trust the market” rhetoric from libbies. And the truth is I DO trust the market. I trust it to be rational in some areas and at some times and to be irrational in others. And I trust it to exhibit behavior that is desirable in many, perhaps most, situations but to also lead to outcomes that I consider problematic given other moral/ethical side-constraints. And I trust some markets to fall into naturally monopolistic or oligopolistic patterns and other markets to cheerfully avoid that fate. And I trust some markets to naturally throw off serious negative externalities absent regulatory intervention. And I trust that a lot of the bad behavior and negative consequences I just mentioned will be worse in large, impersonal, markets than in smaller, more personal, markets.

              In the end I trust markets to be a fantastic, natural, vehicle for meeting human needs and desires and I also trust in the ability of human beings to devise ways to utilize, harness, and improve the workings of these wonderful mechanisms in the exact same way we utilize, harness, and improve the workings of every other natural resource and force we encounter. Houses are better than caves, electricity beats candlelight, and filet mignon is MUCH better than raw gazelle. In the same way, a carefully and intelligently regulated market is better than laissez faire.

                Quote  Link

              Report

      • Jason,
        Oh, they’re just getting ready for Christmas…
        Seriously, anyone who dropped the stock market after Obama got elected (and folks did) were just doing it for ideological reasons.
        Obama was running 95+% chance of getting elected — the market had it all priced in.

          Quote  Link

        Report

    • My understanding is that historically, the stock market usually falls a bit after an election. My take on it is that there existed a certain cohort of investors who were a) confident that Romney would win (i.e. bought into the Fox/Rove meme), and b) had invested accordingly, assuming certain changes in economic policy were in the offing.

      When Obama won, they immediately got on the phone with their brokers and barked out orders to “Sell, sell, sell! For god’s sake, sell!” So the market suffered a moderate setback. Nothing unusual; nothing to be surprised about. The same thing could have happened if Romney won, it would have just been a different set of investors and a different set of companies. It all would have depended on how many investors were confident, in which way, and held positions that depended on that confidence.

        Quote  Link

      Report

      • You don’t have small time investors in this market anymore, too high risk. Sharks eat guppies for lunch. (advice: stay the hell out of the pond)
        After Obama’s first election, people deliberately sunk the stock market, for a day or two. With enough money, youc an afford to do that to make a rhetorical point (to be repeated by fox ad infinitum).

          Quote  Link

        Report

  4. I have fairly little confidence that he’ll hold out for a strong deal that involves a rational tax system and actually paying for the social services that, in truth, most Americans support. But then, I’d be quite happy to see see sequestration (the original term; “fiscal cliff” is a media catchphrase designed to make it sound like not coming to an agreement isn’t even a political option) go into play, because the combination of removing the Bush tax cuts and cutting military spending achieves two things that would be incredibly difficult in any other circumstances and that will contribute to getting finances back on a decent footing.

      Quote  Link

    Report

      • Gosh. When Bush43 pushed through his Medicare Part D, where were the conservative hordes, clamouring for fiscal discipline and prudence and restraint?

        That’s right, there weren’t any. The difference between Democrats and Republicans boils down to this sad truth. The Democrats are about Tax and Spend. The GOP is about Spend and Spend.

          Quote  Link

        Report

        • Actually Borrow and Spend. Like maniacs. Then scream and whine and throw temper tantrums about the deficit when the pendulum swings around and they’re no longer in power.

          It’s an actual strategy. The Twin Santa Claus Theory by Jude Wanisky (sp?).

            Quote  Link

          Report

      • Taxes have been cut a great deal from what they were in the 1960s and 1970s. If Americans want the social programs implemented in the 1960s and 1970s, like Medicare – and overwhelmingly they do – then they are going to be need to be paid for. Of course that will mean more taxes than exist now.

        On military spending, it’s difficult to comprehend why the US should need to spend more money on its military budget now, when it has no major enemies, than it did when it was actively involved in the Vietnam War. If you can’t deal with a few terrorists without spending more than every other country in the world combined, then the problem is with how you’re spending the money.

          Quote  Link

        Report

  5. It should be a mightily interesting month and change. If Obama genuinely wants a grand bipartisan bargain the ground is pretty ripe for it now with Boehner. The GOP/TP simply can’t do their traditional full on obstruction routine; if they do and the cliff happens taxes go way up AND they’d end up wearing it. Obama and the Dems obviously don’t want the cliff to slap down (though if it had to happen perhaps now would be a good time? If austerity hawks are to be believed the economy should respond positively to this blow in the medium to long term) while they are owning the outcome so compromise is definitely in the interests of both parties.
    Still, if Obama settles only for the deal he offered during the previous showdown it’d be political malpractice.

      Quote  Link

    Report

      • If Obama gets his tax raise on the rich, the sequesters land on everything and the middle class taxes stay where they’re at I’d expect the market to be doing pretty well* by 2014 and the GOP could be in serious trouble.

        *presuming Europe doesn’t go mad max on us and nothing shakes Asia up too horribly.

          Quote  Link

        Report

      • Come the midterms, they’ll use this as a stick to beat on the Democrats.

        Oh, no doubt, if it comes to that. But it’s not a very big stick, it seems to me. It’s been whittled down by excessive use this election cycle.

          Quote  Link

        Report

Leave a Reply

Your email address will not be published. Required fields are marked *