September 10, 2008

Should Obama demagogue the Fannie/Freddie bailouts?

With Obama falling behind McCain in betting on InTrade.net for the first time this year, David Kane suggests that Obama should break with elite consensus and denounce the bailout of Fannie Mae and Freddie Mac:

Most of the good and great think that this bailout is absolutely necessary. I don’t think it is and, moreover, the politics of the issue line up nicely for Obama. Imagine that he said something along these lines:

For too long President Bush and the Republicans in Congress, led by Senator McCain, have put the interests of the rich and powerful ahead of the interests of working Americans. For too long, Bush and McCain have sought to comfort the rich, have tried to help Wall Street instead of Main Street. Our current recession was caused by the failed economic policies of Bush and McCain.

Yet, this week, they have gone a bailout too far. They propose to spend hundreds of billions of dollars bailing out their rich friends on Wall Street and in China. They want you, working Americans, to back up the promises made by Fannie Mae and Freddie Mac.

But why should we? Why should regular Americans like you and me be on the hook for their failed policies? Why should our tax dollars go to Wall Street Banks and International Sovereign Wealth Funds? They invested stupidly. They should face the consequences of their mistakes.

When you make a mistake, does the federal government bail you out? No. Why should we bail them out? McCain and Bush want to send your money to China and to Wall Street.

A lot of recent Bush Administration actions are designed to kick the can down the road until January 20, 2009, when the troubles of the economy become somebody else's problems. For Obama, however, the sooner the economic collapse arrives, the more likely he will be elected in 2008 and re-elected during a recovering economy in 2012.

In thinking about the politics, one analogy might be to FDR. Roosevelt ran in 1932 on a platform of balancing the budget. During the four month long interregnum, he behaved irresponsibly, refusing Hoover's offers to work together on the economic crisis. This created a fear that he would be a bad president, leading to the bank-run crisis of the week leading up to his Inauguration on March 4, 1933, the lowest point of the Depression.

As he must have planned, however, FDR used the drama of the crisis he had created through his own inactivity to raise the tension to an unbearable point. So, when he finally stepped on stage on March 4th, and instantly deployed his rhetorical mastery, he appeared to be a savior. Fear switched to hope and loyalty instantly. (And the history books have all been written to blame the irrelevant Hoover, not the incoming FDR, for the bank runs of early March 1933.)

Of course, the Depression lingered under FDR for another seven or eight years, but the way he had framed it as proof of the failings of capitalism allowed him to pass a lot of liberal legislation, such as Social Security.

On the other hand, Obama's economic ideology is one that largely assumes that the main economic problem is not a lack of prosperity, but too much inequality. Obamanomics presumes the capitalist system will generate huge prosperity, at least at the high end, so that the rich can be milked for the benefit of the non-rich (defined as an income of no more than $250k per year, which is, not surprisingly, almost exactly the most money the Obamas ever earned in a year before they got rich in 2005). The higher taxes on the rich would go to cut taxes a little for the others, and, especially, go for salaries of social service workers, his core constituency.

Obama is, in large part, a believer in Chicagonomics -- not the U. of Chicago's house brand of economics, but the City of Chicago's brand as practiced under the Daley Dynasty. The Daleys aren't socialists. They are true believers in the capability of corporate capitalism to pile up huge amounts of money, a portion of which they can siphon off, through taxes and shadier means, to pay off their friends and supporters in road-building contracts and in salaries and grants to social service workers to oversee the dysfunctions of the vast underclass.

And it more or less works. Chicago isn't Detroit. The Daleys try not to kill the goose that lays their golden eggs, at least not too quickly. During periods of non-Daley rule since 1945, the parasites would freelance (e.g., each building inspector would have his hand out), driving businesses out of Chicago. But during periods of Daley hereditary monarchical rule, the Daleys would provide corporations with one-stop shopping for all their payoff needs, so businesses could plan their budgets accurately.

Of course, Chicagonomics works better for a single city with big advantages in an installed base of companies, magnificent buildings and lakefront, and crucial transport nodes than it does for a whole country.

Moreover, we are now realizing that some of this prosperity that Obama hoped to tap was a house of cards.

Personally, I think the way to win in 2008 would be to run against the Bush-McCain grand strategy of Invade the World, Invite the World, In Hock to the World. (By the way, how's that working out for you?) But that's too simplistic for the ever-so-sophisticated Obama.

My published articles are archived at iSteve.com -- Steve Sailer

28 comments:

Anonymous said...

Shit, I hope he does bring it up:

http://www.freerepublic.com/focus/f-news/2077889/posts


Top Recipients of Fannie Mae and Freddie Mac Campaign Contributions, 1989-2008

Name Office Party/State Total

1. Dodd, Christopher J S D-CT $133,900

2. Kerry, John S D-MA $111,000

3. Obama, Barack S D-IL $105,849

4. Clinton, Hillary S D-NY $75,550

5. Kanjorski, Paul E H D-PA $65,500

MQ said...

Of course, the Depression lingered under FDR for another seven or eight years

Diehard conservatives endlessly recycle this contention. But economic growth resumed very rapidly after Roosevelt's first hundred days, and nothing like the enormous crash seen in the 1929-1932 period ever happened in his presidency. I'd encourage you to look at the actual historical GDP and employment numbers from that time. (See this employment graph, for instance -- http://en.wikipedia.org/wiki/Image:US_Employment_Graph_-_1920_to_1940.svg).

What we think of as the "Depression era" continued for two reasons. First and most important, it took quite a number of years to make up the ground lost from 1929-32. Second, there was a second, brief but sharp recession in 1937, after which economic growth resumed.

There's a reason Roosevelt was so popular. You'll never understand it by listening to revisionist right-wingers, but just look at the raw employment numbers and it will be instantly apparent.

MQ said...

Also, Obama is by nature a cautious, somewhat establishment type who has great respect for economic orthodoxy. He's not going to get radical populist about Fannie and Freddie. Unfortunately.

halfbreed said...

I'm certainly against privatized gain and socialized risk -- I chortled when Bear Stearns collapsed -- but the problem with Fannie and Freddie is that if you don't bail them out, then there's a significant risk the entire system craters. The doomsday scenario goes something like this: housing prices continue to spiral downward, more people walk away from their mortgages, more people who have taken out secondary home equity loans can't repay them, since a large portion of the population has much of their net worth tied up in a house, they'll stop spending money on extras, corporate profits spiral down, employees get laid off, housing prices go down even further, etc. By bailing out Fannie and Freddie, you effectively allow them to do practically anything to save peoples' houses, including reducing their mortgage rates, and that stops housing prices from going down too much further.

Does it suck that some people get a free pass on being irresponsible and that the responsible (taxpayers) have to foot the bill? Absolutely. But the alternative is a potential depression, and that would suck even worse for all of us. Remember, Citi, Merrill, Washington Mutual, A
IG, Ford, and GM are all potentially at risk right now. (Ford and GM are not only at risk because of gas prices, but because of their huge portfolios, which are larded with mortgage-related stuff like financials, and also because cars are often the first big ticket item not to be bought when the home equity loan market dries up.) And if some of those large companies go under, we're surely headed for a depression. It's all so interrelated now, and all so leveraged (the average investment bank was carrying something like 36times their net equity in assets) that Steve's description of the whole thing as a house of cards is exactly right.

I know, this stuff is boring compared to probing Obama's fragile (and dishonest) psyche, but it's better to know than not know.

Anonymous said...

Sailor makes good points. But Fannie and Freddie *are* after all Democratic party institutions, have there are a lot of Democrat who have defended them throughout the housing crisis (Barney Frank, Paul Krigman etc). If Obama goes after Fannie/Freddie bailout this could give the conservatives the chance to re-frame the debate as the failing of Bush/capitalism to failure Washington/Liberalism.

He should go after immigration, and even more so race. He can do anything he wants on race. Just move to the center minimally, say something like “If I win it proves affirmative action worked, now the country doesn’t need it in the same form”.

If an Obama victory is perceived as the penance people have to pay to get rid of racial tensions he could win.

Mq: You are wrong. Roosevelt grossly mismanaged and probably prolonged the depression. As Sailor points out he was a good marketer, so people remember things wrong (more importantly Roosevelt won WWII, so there was never critical mass to go after his legacy).

It is an objective fact that the depression lingered longer in the US under Roosevelt policies than almost any other industrialized country (remember most of the world fell into the depression).
“First and most important, it took quite a number of years to make up the ground lost from 1929-32”
There is a crucial difference between underutilized economic capacity (capital, unemployed workers) and new growth. Typically when you have a sharp reduction from previous levels it’s easy to go back, once the economic mood recovers. This clearly didn’t happen with Roosevelt policies.

Born Again Democrat said...

I think that if Obama suddenly announced he was going follow James Webb's prescriptions on immigration -- strict immigration enforcement (with a verifiable national ID if necessary) and only a limited amnesty for those illegals who have been here for 5 years or longer and have put down roots -- he would sieze the initiative from McCain on the one political issue that voters understand best and feel most strongly about.

He might also consider imposing a carefully calculated tariff on U.S. imports from China and the far east, but with a special exemption for Mexico. The idea would be to redirect international manufacturing investment to Mexico, thereby making it possible for Mexico to absorb all the emigrants coming home from the U.S.. The alternative is mass pauperism.

Thirdly, Mexico might consider a tariff on corn to allow Mexican farmers to compete with imports from the U.S., as a way to cushion the shock of the industrialization process. Right now Mexican peasants are being forced off the land because they cannot compete with U.S. agribusiness.

We should also insist on political reform throughout Mexico.

Anonymous said...

There are a few problems with any attempt to demagogue the takeovers of Fannie and Freddie. The first is that they were government creations in the first place -- Fannie Mae was created by FDR in 1938. The only reason it was quasi-privatized by LBJ thirty years later was to take its liabilities off the government's balance sheet, so the rising debt from his guns & butter spending wouldn't look as high.

The second problem is that the GSEs have long provided sinecures for well-connected Democrats like Franklin Raines. Dems were running the show, cooking the books, and giving themselves fat bonuses along the way.

The third problem is that the shareholders just got 80% of their equity wiped out -- they didn't get bailed out.

The fourth problem is that mortgage rates are coming down as a result of the government intervention -- middle class homeowners, not Wall Street execs, are benefiting from this intervention.

- Fred

Anonymous said...

Mq:
I think your graph illustrates the problem with populist economics. It’s designed to trick readers, rather than inform them.

It creates the false impression of a sharp improvement during Roosevelt by:

1. Cutting off the start of the chart at 20 million, so that small increase look impressive (oldest trick in the book I might ad)

2. Includes the NUMBER of workers, instead of the unemployment RATE. The US population increased by 10 million (8%) during this period.

Here is a graph of actual unemployment rate.

http://www.thegreatdepression.co.uk/wp-content/img/usunemployemtngraph.JPG

Pre-depression unemployment was low (3.2% during the boom, although that was artificially low, like the last year of the Clinton economy). When FDR won in 1932 unemployment was 23,6%, and it was still 19% in 1938 when the war buildup started and the depression era ended.

This is not particularly impressive data if you want to sell the “New Deal saved America” story.

Anonymous said...

"just look at the raw employment numbers and it will be instantly apparent."

Unemployment remained steady throughout the depression until he got the US involved in WWII, then they dropped. Hence my suspicion that entering into unpopular and (from an American perspective) irrelevant war was a ploy to distract people from his failed economic policies.

Jewish Atheist said...

I love when you give Obama "advice." Should he criticize the economic move that practically everybody says was necessary before or after he tells everyone he was on antidepressants?

Anonymous said...

Obama and the Dems are too neck deep in the F*Mac fiasco to complain.

Remember it was McCain whose first instinct on the housing bubble naturally deflating was "Suck it up". It was only after the MSM and monied interested started attacking him on this did McCain relent.

Obama's did his typical evasive "present" non-vote strategy when this crises started to erupt. Nothing but empty suit and empty rhetoric. The guy would push his own grandmother under a bus if it advanced his career...

Eric said...

As the first anon pointed out, Obama won't demagogue this for the same reason he won't demagogue corruption in Chicago.

some chick said...

"There's a reason Roosevelt was so popular. You'll never understand it by listening to revisionist right-wingers, but just look at the raw employment numbers and it will be instantly apparent."

All produced by deficit spending which FDR planned to increase so as to float to the end of his second term. Business did not recover b/c investment remained stagnant.

"Second, there was a second, brief but sharp recession in 1937, after which economic growth resumed."

The only way FDR pulled out of the re-emerging depression was by embracing the defense driven industrial boom. This despite the Neutrality Acts and his stern warnings against building an economy on defense spending. WWII was the hypocrite FDR's savior.

tommy said...

Love that graph from MQ! It is all so apparent now: the employable U.S. population didn't grow for 20 years, the sharp increase in the period 1938-1940 couldn't be attributable to ramping up for WWII, and FDR's New Deal worked wonders!

rob said...

Born Again,

Fixing Mexico, to the extent we can, should the the top foreign policy goal of the next administration.

JA,

I think Steve is falling into the Blank Slate of Obama paradigm. He's just so much more interesting than McCain. Admitting to taking antidepressants might be smart. Bush admitted to being a recovering alcoholic. A bit of human weakness helps "de-other" someone. Overcoming those common flaws gives us average sad sacks, dare I say it, the hope that we can change.

tommy said...

Personally, I think the way to win in 2008 would be to run against the Bush-McCain grand strategy of Invade the World, Invite the World, In Hock to the World.

That would be a good move, but I think Obama's strategy will instead be one of "Escape from the World, Embrace the World, In Hock to the World."

testing99 said...

Steve -- Obama is in deep along with most Dems in Freddie and Fannie. Lots of money, lots of lobbyists, lots of protection in many legislative actions.

He can't make that move.

As far as "Invade/Invite," it's a nice soundbite but not responsive to reality.

Reality: Pakistan has 100 nukes, each one of which has about ten times the total destructive power of the entire Japanese War Machine WWII. Iran will shortly have about that much. North Korea will sell to anyone.

Our oceans don't protect us, and the enemies who seek to nuke us have no fixed return address. They also doubt quite reasonably any retaliation. When asked Obama ruled out retaliation for America being nuked.

Heck Pakistan's generals would probably not even know if cousin Rashid gave cousin Mohammed a nuke or two to kill Americans.

Libertarian fantasies about returning to 1888 are not going to happen -- nuclear proliferation guarantees it.

More to the point, Obama's whole belief system and that of his backers, is to make America grovel before the world. Ask "UN may I?" or "Europe may I?" before America does anything in it's national interest. Why the heck did he go to Germany and tell screaming Berliners he's a citizen of the World?

Because that's his belief system.

Lucius Vorenus said...

GOOD GRIEF YOU PEOPLE - THIS IS iSteve!!!

Where in the world is the name Jim Johnson in this thread?!?

Or the name MBNA?!?

PLEASE let Obama & Biden try to make this an issue - this is like "Lipstick on a Pig" times about positive infinity.

Anonymous said...

"Chicago isn't Detroit."

As you always say Steve, it's all in the demographics. Unfortunately, America is looking ever more like Detroit, so we won't be able to fund Chicagonomics.

Also, if Obama attacks bailouts of Fannie Mae and Freddie Mac, wouldn't that piss off China, the Arab oil states and all those other countries with sovereign wealth funds that are so heavily invested in them? If he does that, who will he borrow from to cover all those wonderful social programs he is going to give us that will grow like a tumor over the years.

eh said...

You should probably call it a takeover since FNM and FRE owners/stakeholders -- those who bought common and/or preferred stock -- most likely don't exactly feel like they've been 'bailed out'.

And yes he should. Although it might make him look like a hypocrite because he was probably a big supporter of making mortgages available to 'underserved communities'.

KlaosOldanburg said...

Reality: Pakistan has 100 nukes, each one of which has about ten times the total destructive power of the entire Japanese War Machine WWII. Iran will shortly have about that much. North Korea will sell to anyone.

Our oceans don't protect us


Please, enlighten us about Pakistan's ICBMs.

Or maybe you meant, "Our oceans don't protect Israel."

And how do you measure a "war machine" in terms of megatons? How many megatons is the US war machine?

headache said...

halfbreed said...

"Remember, Citi, Merrill, Washington Mutual, AIG, Ford, and GM are all potentially at risk right now."

Nice response, I enjoyed reading it!
I must say that for the sake of the management I would not mind if any of those company's went bust. However workers would lose out first, that's the downside.

Management certainly deserves to hit the curb on their ears. But what would be better if outfits like the Ford Foundation would tank. Unfortunately they are probably immune to all this. Those Foundations cause most of the damage we see nowadays.

MQ said...

If you don't like employment numbers, look at GDP growth:
1930 -9.4%
1931 -8.5
1932 -13.4
1933 -2.1
1934 +7.7
1935 +8.1
1936 +14.1
1937 +5.0
1938 -4.5
1939 +7.9

Same story as employment -- turnaround happens just as Roosevelt takes office.

When FDR won in 1932 unemployment was 23,6%, and it was still 19% in 1938 when the war buildup started

1938 was the second recession (I misdated it to 1937 above), which caused a temporary unemployment spike. Unemployment was 14.2% in 1937, down from the Depression high of 24.7% in 1933, before Roosevelt's policies took effect. That's a very impressive drop.

It is an objective fact that the depression lingered longer in the US under Roosevelt policies than almost any other industrialized country (remember most of the world fell into the depression).

Wrong and misleading. The Depression was by far the most severe in the U.S., Canada, and Germany. Other countries had much milder slowdowns (in part because they hadn't grown fast in the 1920s, probably for other reasons too). E.g. peak to trough industrial production decline in Britain was only 16%, about one-third the U.S. level. However, recovery was slow in other nations as well. The standout exception was Germany, which pursued a far more aggressively statist economic policy than Roosevelt.

There is a crucial difference between underutilized economic capacity (capital, unemployed workers) and new growth.

True enough, but if recovery is so easy then why didn't it happen under Hoover?

All produced by deficit spending which FDR planned to increase so as to float to the end of his second term.

Roosevelt's biggest economic problem was that he didn't do ENOUGH deficit spending. The Keynesian solution of massive borrowing to pump the economy works. The military Keynesianism of WWII finally pulled us completely out. Just because it's military doesn't mean it's capitalist -- it's still a statist government-led solution, which could have been done more completely in peacetime. (Through more extensive borrowing-funded public works).

Roosevelt was hardly perfect, and with hindsight it's easy to suggest better ways to do things. It is certainly true, as Steve said, that the effects of the Depression "lingered" through the 1930s, in that sense I might have been too contentious. But Roosevelt's massive popularity is directly traceable to his many policy successes.

Anonymous said...

KlaosOldanburg,

testing99 is the representative on this blog of the "Theatrical" theory of war. He believes that the main benefit of the Iraq War is in maintaining the appearance of toughness, so that Pakistan will be too scared to smuggle a nuclear bomb into the US. It isn't about achieving a particular military objective, it's about evoking certain emotions in nearby countries. The costs for this performance, paid for in borrowed money, are building up, but the show must go on -- because Pakistan has nukes and our borders are irremediably porous.

Big Bill said...

born againdemocrat:

"Thirdly, Mexico might consider a tariff on corn to allow Mexican farmers to compete with imports from the U.S., as a way to cushion the shock of the industrialization process. Right now Mexican peasants are being forced off the land because they cannot compete with U.S. agribusiness."

So corn is too cheap, eh? If only corn were more expensive in Mexico, farmers could make a decent living. Its those damn white folks in America have driven the price of corn to artificially low levels.

Sorry, BAD, but I don't buy it.

Six months ago, when the price of corn went up in Mexico (and the price of commodities went up around the world), every damn democrat I knew stopped with the "get rid of subsidies!!" rap, and started talking about Evil White People using corn for making ethanol.

"Food is too expensive!!", they cried, and the MSM ran article after article on how poor folks in Mexico City and Kenya, and Darfur, and Egypt could not afford to buy food.

I only saw one (1) article that interviewed a peasant farmer and told of his joy that he could now make a decent buck off his crops.

It remind me of the racism shuffle: if you send black folks to jail for murdering their fellow blacks and black folks will b!tch that too many black men are in jail compared to white men.

Slack off and stop arresting black criminals, and black folks will b!tch that there is too much crime in the ghetto as compared to white neighborhoods, and white folks just don't care.

Damned if you do, damned if you don't. Never changes.

Martin said...

"Anonymous said...

KlaosOldanburg,

testing99 is the representative on this blog of the "Theatrical" theory of war. He believes that the main benefit of the Iraq War is in maintaining the appearance of toughness, so that Pakistan will be too scared to smuggle a nuclear bomb into the US. It isn't about achieving a particular military objective, it's about evoking certain emotions in nearby countries. The costs for this performance, paid for in borrowed money, are building up, but the show must go on -- because Pakistan has nukes and our borders are irremediably porous."

Then it would seem to me that the solution is to make our borders not porous, while simultaneously pledging to make porous (highly porous) any person or group of persons who sold nuclear weapons to non-state actors.

Martin said...

"MQ said...

The military Keynesianism of WWII finally pulled us completely out. Just because it's military doesn't mean it's capitalist -- it's still a statist government-led solution, which could have been done more completely in peacetime. (Through more extensive borrowing-funded public works)."

This is a good point. It always frustrated me to hear conservative pundits (this was 15 and 20 years ago, before the complete ascendency of neo-conservatism, when conservatives were still mildly concerned with the health of our economy) say things along the lines of "The New Deal didn't pull us out of the depression, WWII did." Well, as you said, economically WWII was nothing but a massive dose of Keynsian spending.

However, I think it unlikely that any kind of New Deal like program could work today. The money would never actually be used to build stuff, it would just get frittered away providing jobs to surly welfare cheats. Neither the government, nor the people of this nation, are made of the same stuff they were in the 1930s.

Anonymous said...

Then it would seem to me that the solution is to make our borders not porous, while simultaneously pledging to make porous (highly porous) any person or group of persons who sold nuclear weapons to non-state actors.

I agree, but testing99 is having none of it.