Tuesday, July 22, 2008

McCain will pick Romney as his Vice.

I have come to think that McCain will pick Romney as his Vice. McCain doesn't respect him at all because Romney totally flip flopped on virtually every social issue (and other issues) in the GOP primary. (For McCain to dislike someone on the grounds that he's a hypocrite is rich, but never mind). And McCain is one of those people, very much like Bush in this regard, where a personal connection is absolutely critical. Still, it is becoming clearer by the hour that the economy will be THE issue in this campaign. McCain had hoped to make it a war-time Commander-in-Chief election, where he is perceived to hold a significant edge on Obama, but as of this writing, and subject to change (Iran?) that is not to be. Iraq is much less violent and, more importantly, Americans have lost interest. Worse (for McCain's campaign), Prime Minister Al Maliki came out explicitly in favor of OBAMA'S withdrawal plan. Now he walked it back, but still. And worse still (for McCain's campaign), even the BUSH WHITE HOUSE is now talking about "time horizons." The difference between a "time horizon" and a flexible but strong goal of a timetable is angels dancing on the head of a pin territory.

So everyone but McCain is moving towards Obama's position (as refined, smoothed, and changed a bit) which, unsurprisingly, is the median voters' position.

On Afghanistan there is much more agreement than disagreement. On Iran, I find it hard to believe McCain's going to run on the "let's do another big middle east war platform." If he does, Obama will win in a landslide. All of this is a very long way of saying that (as of now, and subject to change based on a big crisis) this is a repeat of the 1992 "Its the economy stupid" election. And the best GOP VP candidate for that kind of an election, BY FAR, is Romney. He created and ran a wildly successful business, ran a successful Olympics, and was a governor. He's incredibly smart, thoughtful and serious (unlike the clown he ran as in the GOP primary-- its a sad indictment of GOP primary voters that one simply has to say idiotic things on a hugely regular basis to have any chance).

McCain and his people are thinking, "if this is an economy election, we're toast! Only chance is to get Romney, hope he carries Michigan (not at all impossible in a close election), helps in the Midwest some, and helps elsewhere because he so obviously helps McCain with his big weaknesses in matters economic."

From McCain's perspective, I think this is a wise move. I still think he's toast (my 8 point victory prediction for Obama looks conservative; absent a big racist backlash he'll beat that, even WITH a big racist backlash he'll still win, this is THAT bad of a year for the GOP), but hey, you may as well go down with your best. And for McCain right now, Romney is his best choice on the economy, and by a whole lot.

Saturday, July 19, 2008

You absolutely positively HAVE to watch this video, with sound on. Its the funniest thing I think I've ever seen.

And note the Flying Pink Unicorn!!!! I had nothing to do with it; maybe Flying Pink Unicorns is finally getting noticed.


Friday, July 18, 2008

Andrew is absolutely WRONG. I don't get to say that very often. In fact, other than on matters Israel (where he sometimes is wrong) I almost never do. But he's 100% wrong this time.

We have traded a few e-mails about what the fed and Congress should do about the economy.

First things first. We are in recession, effectively. Whether we have 2 consecutive negative growth quarters or not (and we likely will) is really academic. The real question as far as most people are concerned is whether the economy has slowed sharply enough that people are losing jobs and feeling less secure in them, and whether wages stop rising/start falling in real terms (real means adjusted for inflation). And that's clearly the case.

Anyway, I asked him if he would support a second, HUGE stimulus package. The first one, you will recall, were the tax rebates. At around $150 billion I wouldn't call it small, but it wasn't HUGE. And it was only temporary. And much of it was probably saved, providing little stimulus. I opposed it at the time, favoring a LOT more spending, which is much more stimulative. But the democrats caved, and off we went. A lot of serious people (incredibly, the Treasury Secretary, Henry Paulson, is a serious person, though he's often reading from White House provided cue cards) wanted to wait before enacting a second stimulus package.

Well, the economy is headed down the crapper. The fed, just as I wanted, has cut rates VERY rapidly. In fact, it even went 25 basis points lower than I wanted. With the federal funds rate at 2% and headline inflation now above 5%, short term interest rates are sharply negative. The fed is pushing incredibly hard for the economy to get moving again. The last time real short term interest rates were THIS low for any real length of time was the mid and late 1970s. And that didn't end well. Inflation took off, the fed raised rates to the moon under Volcker, and threw the economy into a deep recession, on purpose, so as to stop inflation from getting out of hand. Painful as the early 1980s recession was (and it was PAINFUL), it was well worth the pain.

But back to the present. Rates are REALLY low, just as I advocated. The financial system is teetering, as you all likely know. A big bank failure in California, and, much more importantly, Fannie Mae and Freddy Mac are nearish to the brink. They will not be allowed to fail, no way, no how. Nor will any of the BIG banks-- Chase, Citigroup, Bank of America. I have long felt that if a BIG money center bank just flat failed that such a failure could pretty much unleash the four horsemen of the Apocalypse. Now yes that's an exaggeration, but nonetheless Citi or Chase failing would be a monumental disaster, could bring the financial system crashing down, which would cause a short term (at least) depression. Not recession, depression. Hence the four horsemen.

None of this will happen, but I point this out as background for why I pushed Ben Bernanke so hard to cut rates to the floor to begin with. To save the financial system.

Well, there are headaches, but that task has probably been largely accomplished. Which is why the fed will begin removing money from the financial system sooner than I had expected, probably in the early Fall. And then shortly after the Presidential election it will begin raising rates, and it won't be slowly. I've said this in an earlier post, but I'm moving up the timetable. The recent oil price surge (though it has come down $10) and inflation surge is absolutely scary. The fed is essentially certain to be raising rates next year, and fast, whether the economy is weak or not, unless its godawful.

Which led me to thinking about stimulus number 2, this time on the spending side. America's infrastructure (roads, tunnels, bridges, ports, rail, airport) has long lagged the best of the rich world. To be blunt, our infrastructure gets a D by the people who rate these things. We could productively spend many hundreds of billions over the next 3-5 years on it. Bridges, high speed rail (Amtrak is a joke), ports (I don't mean security Andrew, I mean efficiency), and so on. The GREAT thing about a massive infrastructure based stimulus package is that it would require the hiring of many hundreds of thousands of construction workers, some of the people hardest hit from the housing disaster. There are, right now, at a bare minimum a few hundred thousand (probably more) experienced constructions workers home unemployed or underemployed and waiting for the phone to ring.

I'm thinking of something in the neighborhood of $500 billion over the next 3-4 years. Above and beyond all the infrastructure spending we're planning. So it would be pretty big. I'd want it as front loaded as possible, but as a practical matter environmental reviews and other things take time, so we REALLY should start this immediately if it is going to have any stimulative effect in 2009 and 2010 as the sharply higher interest rates I predict begin to take hold.

I suggested this to Andrew, and he agreed, but said we shouldn't increase the deficit for it (as I am advocating), but instead should cut a ton of wasteful defense spending to pay for it. I replied that this would cancel out much or all of the stimulative effect. He was fine with that, seeing a recession as not the end of the world. THIS IS WHERE HE WAS SO WRONG. While a recession ISN'T the end of the world of course, and has useful positive aspects, if a person is unemployed today and wanted to work, that is a day of her labor that is gone forever, simply wasted. Its like leaving milk out of the refrigerator for 2 days. A perfectly good day's work, which would have added value to whatever company she would work for, and of course make her money, is lost forever. Unemployment really is a waste. Now I don't want to overdo this point, because as I said there are salutary effects to recessions; as they force businesses (and sometimes governments) that are not spending wisely to shape up. GM is trying again. Etc.

But Andrew is precisely WRONG to mildly oppose a stimulus package right now. As in the late 70s/early 80s, the fed next year and the year after is going to be raising rates. This will SLOW economic growth late in 2009 and early in 2010. This likely slowdown will likely be most unwelcome, as I doubt seriously the economy will be rip roaring strong by then. Increasing the deficit for the next 3 years, significantly, to pay for investments (a good majority of what I propose will be useful investments, even after the Bridge to Nowhere Congress gets through with it) will be a useful counterweight to the coming fed fight against inflation. This is the point Andrew misses.

Now cutting wasteful defense spending may well be worth doing in its own right, that's beyond the scope of this post. But if you did it I would advocate replacing much of that money with increased spending elsewhere (education, perhaps health care in the short run), or tax cuts for the middle class and working class and poor. I am perfectly willing to run up the deficit next year and the year after, high though it will be, to give the fed room to raise rates to prevent the possibility of another inflation outbreak. Inflation doesn't keep me up at night, and as we can all see, it really doesn't keep Ben Bernanke up at night either. But given the coming interest rate hikes, I have laid out the steps we should take to prepare on the fiscal side.

Wednesday, July 16, 2008

Israel has a bad case of the stupids.

In case you missed it, one of the lead stories today (a day full of stories about the drowning American economy, more on that on a post coming to computers near you), is Israel trading a notorious terrorist murderer, several other prisoners, and the bodies of several prisoners, for the bodies of two soldiers captured by Hezzbullah in 2006.

To recap, in 2006, after a series of provocations, Hezzbullah crossed the border and kidnapped two Israeli soldiers. In a shocking response (I'm NOT being sarcastic) Israel began the 2006 Lebanon war. One of their stated war aims was the freedom of the 2 soldiers. As everyone will remember, Israel declared peace with precisely none of their war aims met (a war operation that makes our Iraq mission look like a brilliant success by comparison). So the two soldiers stayed in captivity.

They were apparently killed in captivity, and now Israel has traded a few bodies (fine) and some prisoners (not fine!) and a very live murderer for them. Now the murderer they set free, though unrepentent, is no more dangerous than the next murderer; this isn't some mastermind, from what I've heard.

But THINK about the precedent. You capture Israelis, you kill them, you wait for a Prime Minister under threat of indictment for corruption and you trade their bodies for prisoners, or perhaps something else you want. This precedent is beyond awful.

Apparently this exchange is relatively popular in Israel; has a good deal of support. Now I know you do whatever you have to rescue your own, dead or alive. And I know you never leave a soldier behind. But making this kind of deal with Hezzbullah is beyond awful. If Israel got a lot in return (a Hezzbullah leader willing to recognize it, for example), well to get a lot you may have to negotiate with terrorists, to encourage more kidnappings, to look weak, and to do all of the idiotic and reckless things that Israel has just done. But to get the bodies of two soldiers?

Nope, Prime Minister ME would have told Hezbullah just what to do with this "offer." Of course, had Israel followed MY war plan in 2006, none of this would have happened. The soldiers would still be dead, unfortunately, but Hezzbullah would be badly defanged, not openly welcoming home a cold blooded murderer as a conquering hero.

Israel, and not just its leaders, but especially its leaders, and double especially the Olmert government is just too stupid to root for. So very many of their security related decisions are so badly wrong. This is just the latest.