Presidential Update: Nomination, VP's and the Financial Crisis

So it has been a while since I talked politics and much has happened. Obama managed to wrest the nomination from Clinton. I for one was not surprised at Hillary's initial reaction when Obama got the delgates. I was surprised when she back tracked on her vow to fight all the way to the convention in less than 48 hours. I really would love to know the details behind that change of heart. It could have been her already regrouping for another run down the road. Because if she had taken the fight all the way in I think all bridges would have been burnt. The Democratic nomination process got pretty dirty towards the end and I think it let McCain steal a march on them.

Of course we now have the VP nominations to talk about. I think enough dust has settled from the Palin decision to take a better look at it. But first let us talk about Biden. The choice is one I have a hard time understanding from Obama. He road 'change' and 'new' and 'not typical washington' all the way to the Democratic nomination. He flaunted his lack of credentials to a large extent by showing how inept those who had them were already proving to be. Then he picks a VP candidate who pretty much embodies all of those characteristics. Same old washington? Check. Not new? Check. Not someone credible as representing non-partisan change politics? Check. Biden is about as stereotypical politician as you can get this side of an SNL skit. The only reason I could see going that route would be to add some 'gravitas' to the ticket and Biden just does not add that. He is most famous for telling a wheelchair bound person to stand up, and for plagiarizing speeches. On the other hand he is all and all unremarkable and safe in terms of VP picks. He might help swing his home state, he is aggressive and can walk a more dangerous line in terms of his interactions with the opposition. In otherwords picking him was a page out of Politics 101. A very disconcerting move in my mind for a candidate predicated on changing politics.

On the flip side we have McCain breaking new ground, anointing a wet behind the ears freshly minted Governor of Alaska. 2 years state governor experience and prior to that mayor of a flyspeck bush town in the hinterlands of Seward's icebox. To say the least she was not on the radar, and she is NOT politics as usual when it comes to VP picks. In short she is the kind of pick I much more expected from Obama. She enhances aspects of McCain in the way Biden dims down aspects of Obama... the choices here could not be more diametrically opposed. Any arguments about her ability to perform her job or even to step into presidential shoes if McCain dies are largely moot because it would be hard to argue she has less experience than Obama. To debate the differences will only hurt Obama because democrats cannot not shine a light on Palin in that regard that will not also land on Obama. I for one think Palin would be a better choice than Biden in terms of being president. On the other hand I have compared the Republican effort in this election as doomed to repeat Mondales fate when facing Regan... I didn't think they would go so far as to pick a stand in for Geraldine Feraro to boot :-) Ok that is it for reffering to the second major party nomination of a woman for VP and the first republican nod. In my mind it just is not an issue.

So the stage is set. McCain has rolled the dice and for the most part I think he succeeded in showing folks he is still a Maverick, not just a tired cliche. Obama has moved to the center a bit to solidify his shaky party. The question now is did Obama dial it back to much or did McCain reach to far? For the most part it does not matter. Forget the stage that has been set by the past year of posturing by the candidates. The scene has been changed and the stage is fresh. Financial problems are the new Iraq. It is not going to be fixed quickly. In all likely hood it is going to get worse before it gets better. Right now I honestly believe that a presidential win for either candidate is going to be a poison pill "Herbert Hoover" style. For those not up on presidential history, Hoover was the president in office when October 29th 1929 happend and it rapidly torpedoed his administration through no real fault of his own. Of course this situation is slightly different as this election is rapidly going to become focused on this particular problem. So they will have an advantage Hoover did not have. But I do not think that is going to be sufficient to shelter them from the fallout of the first serious economic meltdown of the new millennium. In one sense it could be far worse as they will spend the next couple of months promising they can avert and/or fix the problem and then be clearly 'to blame' when their solutions fail to work. It isn't that their plans have no chance. I just don't see them being able to back out years/decades of problem rapidly enough to matter come the next election cycle. The current attention span of public discourse just is not sufficient which is a shame. To make matters worse the public patience has already been severely tried by the debacle that has become Iraq and the war on terror.

Financial Crisis:

This crisis is nothing new. We saw a massive downturn in the late 90's when the tech bubble burst. We saw the savings and loan scandal in the late 80's and now we have the sub prime crisis. They ALL have a very common thread. Irresponsible high risk economic decision making on a MASSIVE scale. What makes this one worse than the previous two is the scale and distribution of the risk. Fannie Mae and Freddie Mac alone comprised 12 trillion dollars of assets, much of which has been poisoned by the sub prime meltdown. The securities floated from many other institutions based on the same mess have circulated the globe. A very large part of me wants to say just let them lie in the graves they dug, consequences be damned. The problem with that is this has the potential to destroy multiple national economies as we now know them. How so? Economies are largely based on trust. The higher flying international trade has gotten the more based on trust it has become. Investment is all about trust. I am going to give you X amount of Money in hopes I will get Y amount back. When faith in that process dies it kills investment. As for what actually drives that trust? Good luck finding out or explaining it. Reading tea leaves, monitoring skirt lengths or even super bowl victories have as good a track record of predicting it as 'expert opinion'. What really is not up for debate is that when trust in the process fails it is devastating. Basic economic interaction today is based on trust. Trust that a piece of paper is worth goods and services. Stop and think about that for a second. We accept money in exchange for the lion's share of our efforts through the day. We do this because it is something we trust to be more productive than going out and trying to meet our needs in other ways... like hunting. Trust in the investment processes is fundamental to the monetary system. Without it banks are a non-starter. They can only afford to hold your money if their is profit in it for them, and without investment there is no way for banks to make money short of taking yours. That in turn reduces the appeal of banks in general which starts a vicious cycle. If you want a crash course in some of the potential side effects study post WW 1 German economics, or for a more recent example check out Zimbabwe.

Anyway, when you hit times like this it takes wide reaching leadership from the top to chart a course out of it. In short, problems like this are why government exists. The problem is we have been so prosperous for so long that we have allowed our government to invent new roles and responsibilities for itself and now we are stretched to far to react well to problems like this one. In short, the US government is just as over leveraged as the whole sub prime mortgage industry. Thus we are in a catch 22. A card government has to play is the bottomless bucket of cash card... IE we spend it first and ask where the hell it came from later. It is something of a slight of hand trick and the idea is that the results of spending the money eventually serves to justify from whence it came. Sort of arguing that the chicken comes before the egg, or that the ends justify the means. The problem with that method is it can backfire and it might become obvious to everyone that the egg does indeed come before the chicken and that the means are as important as the end result. Which is right? There is no way to tell. To the victors go the spoils, or in other word what actually happens will in fact determine what was right. The problem is you can only pull so much money out of a hat before people begin to question money period... and the US government has been pulling money from nowhere for quite a while now. You may not think of it as such but I am sure you are familiar with the term 'Deficit spending' as it has been a standard sound bite for most of the war on Terror. When the common person engages in deficit spending we pull out a credit card. It is the same for the government in that they spend money they do not have. The difference is the US government doing it is like you doing it when you own the credit card company. If you really consider that for a while I think you will begin to see the problems. A little is fine, a lot bankrupts the company.

Let me try to place the proposed financial system bailout in perspective. The number being thrown about for it is 700 billion dollars. 1000 billion is a trillion. Government revenue for 2007 was estimated at about 2.4 trillion... or 2,400 billion. Translation. The proposed bailout represents about 30% of the US governments income from 2007. For every $1 dollar in taxes you spent that means $0.30 would go to the bailout. The problem is before the bailout the government already had a budget spending something like $1.14 dollars for every dollar they received. In other words the US government was already spending more money they they collected, and now they are talking about spending ~30% more. Another way to look at this is the government did not even collect more than 700billion total until 1985. The only time we have seen deficit spending in that range was at the hight of the cold war and Reganomics... and even Regan only got it up to 25% ('82). The current 2008 budget is estimating 13.9% deficit spending. This would ADD another 30% to toss us out there at 43.9%. Imagine if you will... that you went out and overan your household budget by 43%. That is you had to go on credit for almost half of what you earn in a year. Assuming 10% of your budget was discrectionary (able to spend on anything) it would take you 4+ years of spending it on nothing else to catch back up. Or you have to impact other budget items... like saving for retirement etc... You could make minimum payments to your card and ease the pain in return for paying back craploads more money over a much longer term. Now imagine if you did this every year. Sooner or later you get so far behind it just does not work and you end up spending all available money just to deal with interest. The US government is rapidly working itself into a similar situation.

Something has GOT to give and there are only 3 chunks of government spending large enough to even think about carving this kind of money out of in any kind of reasonable time frame. They are DOD, Social Security, and Medicare. All of them sit around 20%, or in other words those three things account for 60% of the US budget year in and year out. Social Security is the piggy bank that gets raided when we 'deficit spend' and it is overdrawn to say the least so we would have to pull from somewhere else. The only other choice is to produce more money. In the past that effectively meant sacking another country for their wealth. Today with paper currency a choice is also to just print more of it. Taking money from any of the three major budget areas has severe consequences. Generating money from thin air has even more severe consequences... and conquest is really no longer a viable option. Now, sit down and try to figure out how you juggle the problems and I think you will see why I think Obama and McCain are completely and utterly screwed. Change... it is an over tired cliche, but change is coming no matter who wins and not just because it is in their campaign slogans. Change is coming courtesy of the financial crisis, ready or not here it comes.