The Big Picture | Politics

The End of a 20-Year Energy Cycle

Tuesday, July 08, 2008 | 02:30 PM

in Commodities | Energy | Markets | Politics | Psychology/Sentiment

Following up on our Polyanna post last week, here's some more Leonhardt:

While Congress is barking up the wrong tree -- blaming speculators for high Oil prices -- consider this simpler explanation for $100+ Crude Oil:

"The world is now at the end of a 20-year energy cycle. From the mid-1980s to the middle of this decade, oil prices fell even as the world economy grew. A barrel of crude cost $68 in 1983 (adjusted for inflation) — and just $33 in 2003.

How did this happen? The high prices of the early 1980s gave producers an incentive to take more oil out of the ground and also gave consumers reason to use less of it. With supply growing quickly and demand growing less quickly, prices plummeted.

The low prices of the 1990s reversed those incentives. Americans fell in love with Hummers and pickup trucks, and the Chinese and Indian booms were fueled by cheap energy. Oil supplies, meanwhile, weren’t growing so quickly. To top it off, the decline of the dollar since 2001 has reduced Americans’ purchasing power. Without that fall, a barrel of oil would cost less than $110 today, rather than $141, according to Stephen P. A. Brown at the Federal Reserve Bank of Dallas."

Oil will stay expensive until two things happen: the fundamentals of the supply and demand equation changes, and the scarcity psychology around crude oil shifts.

Bottom line: Oil prices will eventually fall as the global economy cools off. But you can forget very cheap oil -- under $30 or even $40 dollars a barrel -- until we find a cheaper adequate replacement.

Previously:
The Costanza Energy Policy: 25 Ways to Drive Oil to $150 (May 29, 2008)
http://bigpicture.typepad.com/comments/2008/05/how-to-drive-oi.html

Source:
Dispelling the Myths of Summer
DAVID LEONHARDT
NYT, July 2, 2008
http://www.nytimes.com/2008/07/02/business/02leonhardt.html

~~~

Quote of the Day: Citibank on Glass Steagel

Tuesday, July 08, 2008 | 12:30 PM

in Credit | Politics | Real Estate | Taxes and Policy

We're going way back for this one:

"With an aggressive legal maneuver, Citicorp is taking another step in the battle to unshackle the banking industry from the restraints of the Glass-Steagall Act of 1933. The strategy, being watched closely by the entire banking industry, has been used for years to push the deregulation of the financial industry: Explore every loophole in existing law to do what you want to do. As they have in the past, the House and Senate are watching, rather than legislating, as the industry and its regulators make changes that will reshape the financial landscape…

In a securities deal announced last week, Citicorp, the bank holding company, said it was issuing $47 million of mortgage-backed securities through its Citibank Delaware Inc. subsidiary. The move was aimed at avoiding - some say circumventing - a Federal court order that would have blocked the New York-based Citibank from issuing securities backed by residential mortgages originated by the bank.

-New York Times, March 23, 1989

>
Would someone please tell me why the Taxpayers are on the hook to bailout these cretins?

Hat tip: Bill King

Source:
Talking Deals; Citicorp Strategy On Glass-Steagall
JONATHAN FUERBRINGER
NYT, March 23, 1989
http://query.nytimes.com/gst/fullpage.html?res=950DE2D81F39F930A15750C0A96F948260

~~~

Pricing in a Bush Presidency

Tuesday, July 08, 2008 | 07:08 AM

in Markets | Politics | Psychology/Sentiment | Trading

We continue to hear a steady drumbeat of partisan political market commentary from all the usual quarters. Their claim -- stunningly ignorant in its naïveté -- is that the current market selloff has nothing to do with the Housing debacle or the credit collapse, $145 Oil, six consecutive months of negative employment data, nearly $5 per gallon gasoline, a 40% devaluing of the US Dollar, an exhausted US consumer, and massive financial sector write offs.

No, those are irrelevant to the market. Instead, we get an explanation that the market weakness is due to . . . Obama's lead in the polls.

I have previously criticized this poor form of analysis as one that confuses Cause & Effect. It is a classic error of misunderstanding causation versus correlation.

Whenever a challenger is winning in a national election, it is most often because the current economy is so weak that it gets reflected in market conditions. That negative backdrop is also why the party that is not in possession of the White House outpolls the incumbent party. The SAME FACTORS -- a punk economy, high inflation and weak employment -- are causative of both the market selloff and the challenger's lead.

Those who do not understand the difference between Causation & Correlation blame the market on the challenger, rather than recognize the reality. The same economic forces driving the market down are what also drive the challenger up.

Thus, these market based political comments end up being a Rorschach test, revealing nothing about equities, and everything about the speaker's partisan leanings.

Remember the following article, circa Summer 2,000? It also wrongly blames the Nasdaq crash on the challenger's rise in the polls -- then Governor Bush.

Pricing in a Bush Presidency?
New York Times, July 9th 2000
(insert link)

"Stocks sold off again today as the markets is pricing in the likely impact of a George W. Bush presidency.

Since Bush has emerged as the polling leader in March, stocks have been hit hard. The NASDAQ has fallen 37%, while the S&P500 and the Dow are both down 20%, placing equities squarely in bear market territory.

Various Wall Street strategists have expressed concern regarding how a new set of Bush monetary and overseas policies could impact equities.

"My biggest concern is that the promised Bush tax cuts will be in extremely expensive. That would create huge deficits and be extremely inflationary" said Peter Leslie, a trader on the CBOT floor." Governor Bush has promised to reduce captial gains and dividend taxes, and lower the marginal rates on the nation's biggest earners. He has not explained how these tax cuts will be funded.

Maverick Capital fund manager Henry Carlyle is more concerned with government spending than Tax cuts. The Dallas resident stated "I have followed Governor Bush in Texas, and fiscal discipline is not his strong suit." Cabot expects a big increase in federal spending and budget deficits that will have ramifications for both inflation and an interest rates.

Vanguard chief John Bogle is more concerned with a lax regulatory environment: "A return to the sort of crony capitalism that we've seen in the past would wreak havoc with investor confidence. We need a strong SEC to make sure companies are transparent, and report their accounting fully and fairly. We should not throw the individual investor to a wild and woolly free market that is totally lacking in supervision." The Vanguard chief has long been a proponent of a strong regulatory environment for the protection of individual investors. "I do not see that sort of regime under a President Bush."

Robert Rubin, the Treasury Secretary under Presdient Clinton who retired last year to join the Board of Citigroup, focused on the Federal Reserve. "The next president needs to make sure that the Federal Reserve fulfills its obligations as bank supervisor. I am concerned that Governor Bush, as President, would move away from strict regulation of markets for ideological reasons." Rubin, a Democrat, warned of negative repercussions for the housing and financial sectors. "[Since joining Citigroup], I have been looking into the issue of derivatives. This is another area that requires close scrutiny from both the Treasury Department and the Federal Reserve. I see Bush lacking expertise in this crucial area."

Goldman Sachs chief investment strategist Robert Hormat, was even blunter in his assessment of a Bush Presidency: "I am looking for a market crash as a reaction to the election of George W. Bush. Investors should brace themselves for losses of 50% or more -- and even worse in the Tech sector -- should he be elected."

Legendary legendary oil trader T. Boone Pickens is more optimistic. "We should expect several military conflicts in the Middle East under President Bush, and while this may not be great for the economy it will be terrific for my energy holdings." If Bush gets elected, Pickens plans on opening a new oil based hedge fund, and is forecasting 100% increase in the price of oil to $40. "I'm an Oil, George is an Oil man, and his VP DIck Cheney is an Oil man. I expect energy returns to significantly outperform equity markets over the next eight years" he said."

For some strange satirical reason, I cannot seem to find the URL for this specific article . . .

Previously:
Confusing Cause & Effect: Elections and Markets (January 2008)
http://bigpicture.typepad.com/comments/2008/01/confusing-cause.html

The John McCain Market Selloff (March 2008)
http://bigpicture.typepad.com/comments/2008/03/the-john-mccain.html

Stock Market Politics & the McCain Market Rally (March 2008)
http://bigpicture.typepad.com/comments/2008/03/mccain-market-r.html

Related:
Dow Jones Returns by President Since 1929
http://paul.kedrosky.com/archives/2008/07/04/dow_jones_retur.html

Stocks point to Bush loss?
Mark Gongloff
CNN/Money, June 23, 2004: 4:55 PM EDT
http://money.cnn.com/2004/06/23/markets/election_stocks_bush/index.htm

~~~

Federal Lands in the US

Saturday, July 05, 2008 | 05:30 PM

in Economy | Politics

Here is an odd little Fourth of July weekend data point.

I didn't realize how much of the West is essentially empty Federal Lands.

via Strangemaps

Political maps of the USA seem skewed by the West, which is mostly Federal Land. Turn that into neither Red or Blue, and you get a country that has been fairly evenly divided.

That seems to be changing this year . . .

Quote of the Day: Knowledge, Science, Enlightenment

Tuesday, July 01, 2008 | 11:45 AM

in Financial Press | Politics | Science

For those of us who dwell in that hypothetical construct known as reality, the following E.L. Doctorow keynote address -- critical of ideological fundamentalism of all types -- is a breath of fresh air.

Its from the April 2007 joint meeting of the American Academy of Arts and Sciences and the American Philosophical Society on the theme of "The Public Good: Knowledge as the Foundation for a Democratic Society" titled "The White Whale."

Here is an excerpt:

"What does it say about the United States today that this fellowship of the arts and sciences and philosophy is called to affirm knowledge as a public good? What have we come to when the self-evident has to be argued as if--500 years into the Enlightenment and 230-some years into the life of this Republic--it is a proposition still to be proven? How does it happen that the modernist project that has endowed mankind with the scientific method, the concept of objective evidence, the culture of factuality responsible for the good and extended life we enjoy in the high-tech world of our freedom, but more important for the history of our species, the means to whatever verified knowledge we have regarding the nature of life and the origins and laws of the universe.... How does it happen for reason to have been so deflected and empirical truth to have become so vulnerable to unreason?
For some time now we have been confronted by a religiously inspired criminal movement originated in the Middle East that advertises its values by suicidal bombings, civilian massacres and the execution of arbitrarily selected victims by the sawing off of their heads. However educated, well-to-do and politically motivated the leaders of this conspiracy may be, they have invoked an extreme fundamentalist reading of their sacred text to mentally transport their rank and file back into the darkness of tribal war and shrieking, life-contemptuous jihad.

So that history, as we look to that part of the world, seems to be running backward, as if civilization is in reverse, as if time is a loop...

Apart from this uncanny synchronous spin, the domestic political fantasy life of these past seven years finds us in an unnerving time loop of our own making--in this country, quite on its own, history seems to be running in reverse and knowledge is not seen as a public good but as something suspect, dubious or even ungodly, as it was, for example, in Italy in 1633, when the church put Galileo on trial for his heretical view that the earth is in orbit around the sun.

I am not a scientist and don't deal in formulas, but as a writer I would, in the words of Henry James, take to myself "the faintest hints of life" and convert "the very pulses of the air into revelations." That surely provides me with a line to unreason. And so when I read that the President of Iran denies the historical truth of the Holocaust, and when I hear the President of the United States doubting the scientific truth of global warming, I recognize that no matter what the distance they would keep between them, and whatever their confrontational stance, they are fellow travelers in the netherworld.

Two things must be said about knowledge deniers. Their rationale is always political. And more often than not, they hold in their hand a sacred text for certification.

The entire screed is well worth your time reading it. Joe Kernan, I am talking to you.

Thanks, Kitty.
>

Source:
The White Whale
E.L. DOCTOROW
The Nation, June 26, 2008 (July 14, 2008 print edition)
http://www.thenation.com/doc/20080714/doctorow

George Carlin on HBO

Wednesday, June 25, 2008 | 06:30 PM

in Politics | Psychology/Sentiment | Television | Video

George Carlin recorded 14 live comedy stand up specials for HBO, over the course of three decades.

HBO will air Carlin's most recent live comedy special, "It's Bad for Ya," at 9 p.m. Friday, June 27.

Tonight and tomorrow, HBO2 will air 11 of those earlier shows:

Wednesday, June 25th
8:00pm George Carlin at USC (1977)
9:00pm George Carlin Again! (1978)
11:00pm Carlin at Carnegie (1983)
12:00am Carlin on Campus (1984)
1:00am Playin’ with Your Head (1986)

Thursday, June 26th
8:00pm What Am I Doing in New Jersey? (1988)
9:00pm Doin It Again (1990)
10:00pm Jammin in New York (1992)
11:00pm Back in Town (1996)
12:05am You Are All Diseased (1999)
1:00am It’s Bad For Ya (2008)

Also, this weekend, NBC will be running the very first ever 1975 Saturday Night Live, hosted by none other than George Carlin. Its a must TiVo show.

Those of you who may not be all that familiar with Carlin's earlier works should especially catch the 1970's and 80's work. Its probably tame compared to what you are used to today, but Carlin was groundbreaking. Most modern comics owe a huge debt to Carlin.

For those of you without HBO, there's always the complete set: All My Stuff

Previously:

George Carlin (1937 - 2008)
http://bigpicture.typepad.com/comments/2008/06/george-carlin-1.html

Presidential Watch '08 Political Blogsphere Map

Tuesday, June 24, 2008 | 04:30 PM

in Politics | Web/Tech | Weblogs

Cool interactive map of the Political Blogosphere -- now if only it were 3D !

Presidential Watch 08

Thanks, Dave!

Did Bank of America Write the Housing Bailout Bill?

Monday, June 23, 2008 | 09:30 AM

in Credit | Politics | Real Estate

"We call it the 'Bank of America bill on steroids.'"
-Anonymous House staffer

The staffer was referring to the Dodd-Shelby bill that would let mortgage lenders off the hook for bad loans, ultimately shifting the burden to taxpayers.

The Bank of America paper referenced is this document, a PDF marked Confidential and Proprietary, titled the "FHA Housing Stabilization."

This was first picked up by the NY Examiner, followed by the National Review Online, who noted that "the similarities between BofA's ideal bill and the bill before the Senate are obvious." Then lastly, an LA Times blog, LA Land, put all the separate pieces together with this post: Did Bank of America write the Dodd bailout bill?

The White House has now promised to veto the bill. That suggests that, barring any last minute changes, this Housing Bill looks to be DOA.

~~~

I don't understand why a realistic bill can't be hammered together. It should reflect the following realities:

Home prices remain elevated;

Artificially propping up home prices is counter-productive;

Those Homeowers who are in houses they cannot and never could afford are going to have to give up those homes and move;

The banks that made these bad loans to unqualified borrowers are going to have to take the writedowns;

It is not the taxpayers responsibility to bailout borrowers who are in over their heads, or lenders that made bad loans.

How hard can that be? (Do I really have to do everything myself?)

UPDATE: June 25, 2008 10:55am

I see the Washington Post has discovered this story . . .

Vital Part of Housing Bill Is Brainchild of Banks
Jeffrey H. Birnbaum
Washington Post, Wednesday, June 25, 2008; D01
http://www.washingtonpost.com/wp-dyn/content/article/2008/06/24/AR2008062401389.html

Sources:
FHA Housing Stabilization
Bank of America, March 11, 2008
Download: BoA FHA Housing_Stabilization.pdf

Did Bank of America write the Dodd bailout bill?
Peter Viles
L.A. Land, June 21, 2008
http://latimesblogs.latimes.com/laland/2008/06/did-bank-of-ame.html

NRO Doc Drop: BofA-Scripted Bank Bailout Looks Awfully Similar to Dodd-Drafted Housing Bill
National Review, June 20, 2008
http://corner.nationalreview.com/post/?q=ODJkN2Q3NTY0MjAwYjJlNTY0NTJmMWEzZTI1OGZjZTg=

Bank of America PAC money behind Dodd's Countrywide loan
Timothy P. Carney
The Examiner, Jun 19, 2008 1:37 PM
http://www.examiner.com/a-1449448~Bank_of_America_PAC_money_behind_Dodd_s_Countrywide_loan.html

Gas Prices & Income, Nationally (by County)

Tuesday, June 10, 2008 | 03:30 PM

in Energy | Politics | Wages & Income

Today's Chart Porn is The Varying Impact of Gas Prices (via the NYT), which looks at local Gas Prices, Median Income, and (surprise!) Percentage of Income spent on Gas :
>
click thru for interactive graphic

courtesy of NYT

>
It would be interesting to compare this chart with another overlay: How various counties voted in 2006, and how they end up voting in 2008 Presidential and Congressional elections.

Hedonically-Adjusted, Well-Spun, Nominal Misery Index

Monday, June 09, 2008 | 11:30 AM

in Employment | Inflation | Politics | Taxes and Policy

Numerous pundits have taken to claiming that the Misery Index -- a combination of Inflation measures and Unemployment -- is still relatively low when compared with the 1970s.

~~They are full of shit~~. I have to call shenanigans on that foolishness. The way Inflation and Unemployment are measured today versus 30 years prior makes this an apples & oranges comparison. Merely showing 2008 versus 1973 is nonsense (see the chart of the misery index, below via the WSJ).

Why? If we were measuring Inflation & Unemployment the way we did in the 1970s, we would see unemployment much closer to U6 Unemployment levels of 9.7% (versus the popularized headline inflation level, U3 now at 5.5%); the inflation measures would see an greater differential -- CPI might be closer to 10+.

That would put the Misery Index somewhere between 17 and 21 -- pretty close to the 1970s highs.

(If any of you chart wizards can figure out how to create a more accurate Misery Index, please tag me. I figure we can use U6 for Unemployment, but I am not sure where to get more accurate data history for CPI)

Miserable Index:

Chart courtesy of WSJ

Compare the above chart above with the two below:

Inflation, Pre-1983 Measures

Unemployment, Various Measures

courtesy of Harpers

Source:
Recession Fears Reignited
KELLY EVANS and KRIS MAHER
WSJ, June 7, 2008; Page A1
http://online.wsj.com/article/SB121279701661353763.html

The Costanza Energy Policy: 25 Ways to Drive Oil to $150

Thursday, May 29, 2008 | 07:10 AM

in Energy | Politics | Taxes and Policy

On last night's Kudlow & Co., I discussed how absurd US energy policy is.

The United States is heavily dependent on fossil fuels (>80%), most of which come from places we would rather not send our money to. We consume 26% of the world's energy, with only 3% of the world’s known oil reserves.

It turns out that for the past 3 decades, we've had a George Costanza Energy policy -- every decision we have made as a country has worked to drive energy prices higher. Had we made the opposite decisions, Crude Oil prices would be much lower than they are today ($130.17 as I type this).

What follows is a list of energy-related policies of the United States. On many of these, I have no opinion -- but I wanted to list as many as I could to demonstrate why Oil is where it is

US Policies with an impact on Energy:

1. Limited areas available for offshore drilling;

2. Stopped the rise of CAFE standards for automobiles;

3. Restricted nuclear power generation of Electrical;

4. Federal Reserve policies since 2001 led to a very weak US dollar (raising Oil prices);

5. Energy conservation policies? None

6. Iraq and Afghanistan wars contributing to Middle East tensions

7. No major United States funding for R&D on energy;

8. Kept CAFE standards for light trucks/SUVs much lower than autos;

9. Failed to raise efficiency standards for appliances for decades;

10. Provided no tax incentives for consumer purchases of hybrid automobiles for decades (in 2005, provided a modest, now expired tax credit);

11. Suburban Sprawl: Americans, on average, live further from where they work than Europeans do;

12. Mass transit system not a high priority;

13. Allowed tax credits for residential solar power to expire;

14. No special capital gains treatment for VC alt.energy investment

15. Ridiculous corn ethanol policy helped drive food prices higher also;

16. Amongst the lowest gasoline taxes in the developed world;

17. No special capital gains tax treatment for clean energy technology development;

18. Created a tax incentive (ADCS) that encouraged purchases of large inefficient vehicles;

19. Game changing breakthroughs over the past decades in solar, battery, or energy generation technologies? None

20. Exempted light trucks, SUVs, and pickups from gas-guzzler tax;

21. Discouraged clean coal, including gas liquification from coal;

22. Limited (or non-existent) state tax incentives for building energy efficient homes;

23. Failed to aggressively promote compact fluorescent light bulb;

24. Limited hydro-electric power generation;

25. Aggressive tax incentives for battery technology development? None

26. Failed to aggressively promote efficiency improvements for residential energy use, transmission of power, or consumption;

27. No new oil refineries built in the USA over the past 25 years.

And that's just off the top of my head.

Some of the above is being responded to by the private sector. With Oil at $130+, there are significant price incentives for these technologies.

However, markets develop solutions only AFTER the economics of it are feasible. This means we are starting R&D with Oil at previously unthinkable levels. Imagine if we had some form of energy leadership 10 or 20 years ago when Oil was $8.

As I mentioned on the show last night, whoever is elected President in November should put together a blue ribbon panel, and develop a real energy policy. Otherwise, we will revisit this post in a few years with Oil at $200 . . .

~~~

What other policies does the US have that has led to higher Oil prices? Use comments to add to the list . . .

Crude Oil, Cash Contract, 1986-2008 (Log)
click for larger chart

Non-Log Chart
click for larger chart

Coincident Index by States

Thursday, May 22, 2008 | 11:45 AM

in Economy | Federal Reserve | Politics

And speaking of the Philly Fed, here is a cool map of Coincident Indicators, broken down per state.

This is not a political breakdown per se -- pink means negative growth, blue means expansion -- but it obviously has huge implications for the coming election.

Someone (else) should do a correlation between Dem vs GOP states and compare that to Economically expanding versus contracting states.
>

via Federal Reserve Bank of Philadelphia

Excerpt:

"The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for April 2008. The indexes increased in 26 states for the month, decreased in 16, and were unchanged in the remaining eight (a onemonth diffusion index of 20).

For the past three months, the indexes increased in 25 states, decreased in 21, and were unchanged in the other four (a three month diffusion index of eight). For comparison purposes, the Philadelphia Fed has developed a similar coincident index for the entire United States. The Philadelphia Fed’s U.S. index increased 0.1 percent in April and 0.3 percent in the past three months."

This implies that half of the States in these here United States are experiencing significant economic weakness.

Source:
State Coincident Indexes
Federal Reserve Bank of Philadelphia, APRIL 2008
http://www.philadelphiafed.org/econ/indexes/coincident/2008/CoincidentIndexes0408.pdf

Markets: As Good With Elections As They Are With The Economy

Tuesday, May 13, 2008 | 02:30 PM

in Markets | Politics | Psychology/Sentiment

>

"What you're doing is collecting bits and pieces of information and aggregating it so we can watch it and understand what people know. People picked this up and called it the 'wisdom of crowds' and other things, but a lot of that is just hype."

-California Institute of Technology economist Charles Plott
>

Interesting piece in the WSJ on prediction markets and politics, Traders' Calls Just as Bad On Elections. (I may have mentioned something about this in the past).

"John McCain's presidential campaign is doomed -- at least, if you still believe what political futures markets indicate. At the Irish electronic exchange Intrade, on which people bet on election outcomes and other events, the futures market suggests Mr. McCain has a 38% chance of becoming the 44th president. In the Iowa Electronic Markets, set up at the University of Iowa, Mr. McCain's Republican Party gets a 41% chance of winning the popular vote for the White House.

Then again, six months ago, the Iowa markets gave Barack Obama less than a 30% chance of winning the Democratic nomination. Academic studies suggest these markets are more reliable than opinion polls, but that might be giving the markets too much credit.

Intrade futures had John Kerry beating President Bush well into the evening of Election Day 2004. They also said there was a good chance Mr. Obama would top Hillary Clinton in January's New Hampshire primary, which she won."

The article details many of my favorite quibbles: thinly traded, plagued by bad information, skewed participation, bubbles, head-fakes and manipulation.

What did it reflect when all those people bought all those Hillary Clinton and Rudy Giuliani presidential futures when each was a front runner? Somehow, the phrase "Wisdom of Crowds" just doesn't seem to capture the full essence of that . . .

Previously:
Iowa and Prediction Markets, January 24, 2004 http://bigpicture.typepad.com/comments/2004/01/iowa_and_predec.html

Why Prediction Markets Fail January 11, 2008 http://bigpicture.typepad.com/comments/2008/01/prediction-mark.html

Misunderstanding Prediction Market Failures February 14, 2007 http://bigpicture.typepad.com/comments/2007/02/misunderstandin.html

Source:
Traders' Calls Just as Bad On Elections
MARK GONGLOFF
WSJ, May 13, 2008; Page C1
http://online.wsj.com/article/SB121063385437486555.html

When Should the Fed Bailout the Economy?

Sunday, May 11, 2008 | 09:27 AM

in Credit | Economy | Federal Reserve | Inflation | Politics

Peter Bernstein, author of such books as Against the Gods: The Remarkable Story of Risk, has an interesting piece in the Sunday NYT, titled, When Should the Fed Crash the Party?.

"In the darkest days of the Depression, Treasury Secretary Andrew W. Mellon, one of the richest men in the United States, opposed any government action to stem the tide of plunging business activity and soaring unemployment. Instead, he urged a policy of supreme indifference.

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” he said. “It will purge the rottenness out of the system,” he added, and values “will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

John Maynard Keynes, for one, thought that prescriptions like Mellon’s were preposterous. The economist called those who held such views “austere and puritanical souls” who believed that it would “be a victory for the mammon of unrighteousness” if general prosperity were not “subsequently balanced by universal bankruptcy.” Keynes perceived too much good in prosperity to treat it as the enemy, and he revolutionized economic theory to prove his point.

Keynes won the argument, and government intervention to overcome rising unemployment and falling profits has been standard operating procedure forever after. Nevertheless, the debate over intervention is not ancient history. It replays in today’s headlines."

Its an interesting debate, but I read Bernstein as discussing the wrong debate. He is reviewing criticism of the treatment of the problem, namely, the Fed's clean up duties. But there is a debate brewing on preventative measures, also.

What makes this go round somewhat different is that the Fed's intervention was forced large numbers of people who were exceedingly reckless. Even by comparison to LTCM or the S&L crisis, the risk embracement was unusually widespread.

As we have seen, there is a cost to this.

This is more than a question of creative Federal Reserve intervention. Right now, the nation is only beginning a debate on several related issues -- including, ansd perhaps most importantly, regulation versus deregulation. If unrestrained financial engineering can lead to catastrophe requiring massive Fed intervention with great costs to the public (inflation, debt, etc.) than the "re-regulation" of the financial markets is a very likely outcome.

This is an important issue worth watching as the election season progresses . . .

Source:
When Should the Fed Crash the Party?
PETER L. BERNSTEIN
NYT May 11, 2008
http://www.nytimes.com/2008/05/11/business/11view.html

Ask Your Doctor About GASTAXADROPPIN

Monday, May 05, 2008 | 03:30 PM

in Commodities | Consumer Spending | Energy | Politics

Bloomberg:

More than 200 economists, including four Nobel prize winners, signed a petition rejecting proposals by presidential candidates Hillary Clinton and John McCain to offer a gas-tax holiday.

Columbia University economist Joseph Stiglitz, former Congressional Budget Office Director Alice Rivlin and 2007 Nobel winner Roger Myerson are among those who signed the letter calling proposals to temporarily lift the tax a bad idea. Another is Richard Schmalensee of the Massachusetts Institute of Technology, who was member of President George H.W. Bush's Council of Economic Advisers.

The moratorium would mostly benefit oil companies while increasing the federal budget deficit and reducing funding for the government highway maintenance trust fund, the economists said.

"Suspending the federal tax on gasoline this summer is a bad idea, and we oppose it,'' the petition says. Economist Henry Aaron of the Brookings Institution is among those circulating the letter and said most signers are economists. Aaron said that while he supports Obama, the list includes Republicans and Clinton supporters.

Sad but true.

Ben Sargent via Yahoo!

Source:
More Than 200 Economists Denounce Clinton, McCain Gas-Tax Plans
Brian Faler
Bloomberg, May 5 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aTzCmqCNyLho&r

Huge Project in the Works!

Sunday, May 04, 2008 | 04:15 PM

in Corporate Management | M&A | Politics | Psychology/Sentiment

I have been out of pocket a lot this week at meetings -- I just inked the deal on a huge new project. Details will be forthcoming soon, but I am very jazzed about it.

Hint: It involves Bear Stearns . . .

McCain & Clinton Fail Economics 101

Thursday, May 01, 2008 | 07:22 AM

in Commodities | Energy | Politics

I don't know why, but I always seem to be surprised by the pandering of politicians. I guess that makes me somewhat naive.

The latest bit of idiocy from two of the three candidates for the highest office in the land was a suggestion that federal gasoline taxes -- 18.4 cents a gallon -- be suspended from Memorial Day to Labor Day. To his credit, Barack Obama dismissed this as counter-productive gimmick. I don't have a horse in this race, but I am heartened to see at least one candidate is not clueless. (Note: Please don't email me saying why I should support this idiot over that one; I am not rooting for any of them -- although if this keeps up, I may shift from the neutral column).

A quick lesson in Supply & Demand 101 for the ~~Maverick~~ McSame and Yoko: Strong demand and limited supply of a product lead to price increases. If you artificially lower the price of something -- i.e., waive taxes for a period of time -- all you will have accomplished was stimulating more demand. The higher demand and increased consumption eventually lead to even higher prices.

Hence, the expression the cure for high prices is high prices.

Put this plan into effect and long before summer's end, gasoline prices would have risen to the pre-tax holiday levels. Then, we slap that tax back on, and the electorate is pissed at you. Then, neither of you gets elected. Not only bad economics, but bad politics.

We have no energy policy, and none on the horizon. Candidates serious about the issue of high energy prices should be discussing increased CAFE standards, capital gains tax waivers for alternative energy investments, greater offshore drilling, Pigou taxes, rapid nuclear plant approvals, a huge increase in the basic R&D the government does on energy -- a Manhattan project for energy and transportation science.

Instead, we hear proposals about waiving an 18 cent tax.

~~~

On a related but very different issue, if any of the campaigns wants some free advice as to a major theme/issue no one has tapped into yet, give me a call. Hint: It has to do with reality. It probably works best for the Obama campaign (a blue collar issue that will help him with the elitist charges) but I could not care less who pushes it -- only that it gets pushed. (Longtime BP readers should be able to figure it out).

The caveat: I know nothing about politics, but a little something about data analysis, markets and the economy.

courtesy of NYT

See also:

Oil Price Rise Fails to Open Tap
JAD MOUAWAD
NYT, April 29, 2008
http://www.nytimes.com/2008/04/29/business/worldbusiness/29oil.html

Tax cut could push gas prices higher
Steve Hargreaves, CNNMoney.com staff writer
CNN Money April 29, 2008: 11:59 AM EDT
http://money.cnn.com/2008/04/29/news/economy/gastax_cut/index.htm

Dumb as We Wanna Be
THOMAS L. FRIEDMAN
NYT, April 30, 2008
http://www.nytimes.com/2008/04/30/opinion/30friedman.html

Is the Fed Causing a Global Food Crisis?

Friday, April 25, 2008 | 07:20 AM

The Federal Reserve's irresponsible bailout of Wall Street's most reckless players is having very significant repercussions, both in the US and abroad.

It starts with the US dollar, now off 40% from its highs earlier this decade. This has had a huge impact on commodity prices, and is the prime reason so many countries are considering dropping their peg to the US Dollar.

Overseas, price spikes in basic foodstuffs has led to riots and political unrest. Considering that in many regions of the world most of a family's income goes to basic survival purchases such as food shelter and energy, it doesn't take much in the way of price rises to lead to significant turmoil. According to Bloomberg, the average household in India spent 32% of its income on food last year. Compare that with 6% in the U.S., and 43% in Indonesia, or 36% for the Philippines.

Hence, the 50% rise in the price of rice in recent months is leading to increasing turmoil.

In the US, the results aren't nearly so dire. With Sam's Club and Costco limiting rice purchases to four 20 pound bags per visit, starvation isn't an issue. But the Government's credibility is, as more and more folks come to the realization that the official statistics are nonsense. And, the absurd Fed focus on the core rate of inflation has people shaking their head in wonder over how out of touch our Central bankers are. Consider this recent San Diego Union Tribune column:

"For the Federal Reserve, the core inflation rate amounts to a green light to continue its policy of lowering interest rates in order to keep the economy from falling into a deep recession. A higher inflation rate could conceivably make the central bank freeze or raise interest rates.

But many economists say the core rate does not show how inflation is affecting the typical consumer. Because salary raises for most people are not keeping pace with the rising cost of living, people are using a greater percentage of their wages to buy a smaller amount of goods."

That's typical of the sort of coverage that is gaining traction -- and it only took $120 Oil and $5 milk to get some attention focused on the issue.

We've been beating the drum on this for years now. The cat is out of the bag, and we will have to see if any of the candidates have the stones to step up and address the issue.

Digging deeper into this situation is the cover story of the May 2008 edition of Harpers is titled "Why the Economy is Worse than We know" ~~(pdf)~~ (print). It contains a review of the myriad ways the government has corrupted the way official statistics are reported for jobs, inflation, GDP, etc. (I have a brief mention in it).

The article is by Kevin Phillips, the author of Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.

Meanwhile, more and more people are recognizing the reality beneath the spin. The President and members of congress seem genuinely perplexed at the public's negativity. (Public's View of Economy Takes Fast Turn Downward). They keep blaming the Iraq war for this, despite the fact media coverage has dropped significantly (and completely disappeared from Fox News).

~~~

The Fed meets again next week, and the expectation is for "only" a quarter point rate cut. That is how distorted our perspectives have become -- parts of the world is having food riots, and merely taking rates down another 25 bps is somehow perceived as a moderate action.

Previously:
Inflation ex-inflation
http://tinyurl.com/4qaek6

Agflation !
http://bigpicture.typepad.com/comments/2007/06/agflation.html

Sources:
Asia Risks `Silent Famine' as Food Soars, WFP Warns
Jason Gale and Paul Gordon
Bloomberg, April 21 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=axuenSYeMBJU

Hard numbers: The economy is worse than you know
Kevin Phillips, Harper's Magazine
Tampa Bay Times, Sunday, April 27, 2008
http://www.tampabay.com/news/article473596.ece

The Fed's inflation gauge isn't realistic, critics say
Dean Calbreath
San Diego UNION-TRIBUNE, April 17, 2008 http://www.signonsandiego.com/news/business/20080417-9999-1n17inflate.html

Public's View of Economy Takes Fast Turn Downward
Jennifer Agiesta and Jon Cohen
Washington Post, Friday, April 18, 2008; Page A07
http://www.washingtonpost.com/wp-dyn/content/article/2008/04/17/AR2008041703769.html

Related:
Era of cheap food ends as prices surge
Steve Hawkes, Greg Hurst and Valerie Elliott
Times Online, April 23, 2008
http://business.timesonline.co.uk/tol/business/industry_sectors/consumer_goods/article3799327.ece

Moms' new battle: The food price bulge
Parija B. Kavilanz,
CNNMoney.com, April 21, 2008: 10:33 AM EDT
http://money.cnn.com/2008/04/21/news/economy/moms_foodshopping/index.htm

Download HarpersMagazine-2008-05-0082023.pdf

The Economist: The Debate We Would Like To See

Thursday, April 24, 2008 | 06:34 AM

in Financial Press | Politics

The Economist offered up another free 4 week trial for Big Picture readers, so I am passing it along.

As I was kicking around their site, I came across this brilliant animated video:

Here's your link for the free trial

Wall Street Political Donations

Friday, April 18, 2008 | 04:00 PM

in Politics

Here's how 5 big Wall Street Firms made their donations to the major presidential candidates:

via Portfolio

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Try not to lose your minds in comments . . .