Would you like some fries with that crow?

Did you see it? Did you see it? It was like Toto yanking away the curtain to reveal that the Wizard was, essentially, just another schmuck (except, in this case, most of the world would have preferred to stay in Oz and not go plummeting back down to Depression era Kansas.) Well, the hearing still was intensely satisfying, at least for me. My only regret is that Milton Friedman died a little too soon, and so never got to eat his own portion of crow while watching his immensely destructive life's work going down in flames.


Speaking of screw-up economists, one of the architects of Reaganomics, Arthur Laffer, was on Bill Maher's show tonight. Remember the "Laffer curve," which purported to show how cutting taxes would increase government revenues? That bit of graphical nonsense was discarded years ago, but the stupid idea it was supposed to "scientifically prove" remained a basic tenet of the Republican faith, and is still alive and well in the McCain campaign.

* * *

It's now the next day, and I have to say I have a certain amount of admiration of Greenspan for eating his crow with an appropriate mix of contrition and dignity. We'll never know, but my guess is that Friedman would have choked on his own bile before admitting he was wrong.

Confronted by nothing more threatening than Maher and the bunch of college kids in Maher's audience, Laffer did the slippery-slide and disavowed his responsibility for three decades of ideologically driven economic auto-immolation. Perhaps, had he appeared on Maher's show instead of before Congress, Greenspan might have done the same -- but maybe not.

One way or another, if I were on the board of Mercer University, I'd try to find a way out of that unfortunate contract with Arthur Laffer. Tell me, provost, how are Soneshine Partners doing these days? How well is Alpha Theory software doing at predicting current market trends?

No matter. History has spoken. Laffer is a loser, and the epistomological paradigm shift is upon us. Maybe. Sigh.

Yikes!

As much as I hate to admit it, occasionally I'm wrong. Very occasionally, I'm extremely wrong.

As gasoline prices drop below $3 a gallon, commodity prices in general crash, and the CPI comes in unchanged, I have to consider the possibility that my fears regarding inflation (and the concomitant stagflation I've ranted about) well may be unfounded. On the other hand, all of us might be in better shape if I'd been right.

Gasoline prices fell because the price of oil is down, due, we're told, to a steep drop in demand. And how much of a drop in demand does it take to bring about a 50% drop in the price of a barrel of light, sweet crude? Since oil is valued in dollars, the calculation is easy -- 50% -- and we know it can't be just from people cutting back the mileage they put on their SUVs.

(Yes, I know -- gasoline prices have fallen by about a third, not by a half. So where has that extra money gone? Give it a little thought. It will come to you.)

Since we haven't exactly gone green in the past few weeks, demand for oil ought to be a pretty good indicator of the world's level of economic activity -- which leads one to surmise that the global economic slowdown might be a good deal worse than we've been told. Also, consider that if the CPI has dropped again the next time the figure comes out, we'll have entered the realm of deflation. Bye bye recession, hello depression.

Apparently, a new stimulus package is in the works. I sincerely hope there are no "checks in the mail" to individuals this time, given how little multiplier effect there was last time. Previously, I called for aid to the states, tied to infrastructure spending, to get the construction trades back to work. Now, I say, just give the money to the states -- no strings attached. A lot of it easily can be spent on infrastructure -- not even by creating new projects, but just by continuing existing projects. Did you ever notice how the roads always seem to get repaired in the months just before an election? Keep fixing those roads, governor! Build us some new schools, and repair some bridges! Even if all the contracts are assigned by patronage, and half the federal aid is used to pay relatively unproductive bureaucrats, people who otherwise might be unemployed will be working instead.

Of course, nobody actually has a clue what's really going on in the economy. Bernanke really seem to be playing it by ear, and Paulson changes direction as often as John McCain. Movement in the stock markets, as you've noticed, is totally erratic. Marketplace should forget about playing "We're in the Money" or "Stormy Weather" when it reports the Dow and the NASDAQ, and just play Willie Nelson's "Crazy" every time.

Way back in my youth, there was a frequently quoted fortune cookie that went something like this:

"May you live in interesting times."
-- ancient Chinese curse

Well, whatever. Life sure is interesting these days -- but I can't help but hope that out of this painful mess may arise a kinder, happier, post-capitalist world.

"Smile! You're on television!"

I was able to stay awake for tonight's debate thanks to Bob Schieffer and a really superior debate format. McCain and Obama actually were forced to listen to each other, and, more or less, respond. Granted, it wasn't Lincoln-Douglas, but what the hell -- by contemporary standards, it was quite good.

On the other hand, I suspect what the candidates had to say was lost on much of the audience. What may have counted most, I'm afraid, were the smiles -- the reaction shots. How did the candidates look when they weren't talking? How did each of them look in the background while it was his opponent's turn to speak? Hell, the American people never cared all that much about words. How confident did each of them seem to feel? Americans love confidence.

As we all know, eye-rolling isn't allowed -- not even in response to the inanities of Sarah Palin. The only alternative is a knowing, deprecating smile -- and both candidates did their best to maximize the knowingness and deprecatingness of the smiles they proferred while their opponents were speaking. Obama's grin was broad and crocodilian. McCain's was forced, distorted, and suggestive of the crazed irrationality the Obamites have attempted to attach to McCain's image over the past couple of weeks.

McCain smiled so badly, in fact, you might think Obama had won the debate -- but that broad, "I'm a wide mouthed frog" Obama smile was just a little too smug, a little too "Ivy League." I'd guess the broad Obama grin antagonized the rabid McCainiacs more than the McCain grimace amused the Obamites -- and that any semi-mythical "undecideds" who may or may not exist in the real world continue to wish they had a third viable choice.

* * *

Yes, the markets tanked again today as a few newly released figures reminded the herd and the computer programs designed to emulate the herd that, bailout notwithstanding, it's still a recession out there. Other figures, by the way, indicate that it's still an inflation out there as well, despite the recent sharp decline in the price of oil. A few mainstream economists -- in the media, no less -- are beginning to use the word, "stagflation."

Over the next few weeks, the implementation of the bailout probably will ease the credit markets considerably, but we'll still be deep in the woods as far as the broader economy goes. Thirty years of ideologically driven screw-ups are not about to be remedied in a few days.

Thank you notes

Yesterday's market gains were quite dramatic, and at least as of this writing, we don't seem to be giving them back today. So who gets the thank you notes?

First, we should thank Barney Frank and anyone else in Congress who helped him slip that provision into the bailout bill which allows Treasury to directly infuse cash into the banks by buying equity shares. Henry Paulson didn't ask for it, and didn't want it, but Congress gave it to him anyway.

Clearly, the former Goldman-Sachs CEO would have preferred to limit his actions to buying those nasty toxic assets from his old pals in finance. Having the power, clearly, was not enough to get him to use it -- and so thanks go out to France, Spain, Italy, and especially the UK for semi-nationalizing their own banks and thereby forcing his hand. (I think a nod is also due to Ireland, which started the ball rolling last week when it guaranteed all deposits in Irish banks. That meant the rest of Europe had to act fast to keep depositors from moving all their money to Ireland.)

So now $250 billion of our taxpayer $700 billion will be buying shares of preferred stock instead of shares of unwanted subprime derivatives. Let's hope the other $450 billion also is diverted from Paulson's original purpose. I suspect there is a good chance that can happen, because it is likely to take more time than the Bush Administration has left in office to chase down the relevant crap and approximate how much it may be worth.

* * *

I'd also like to extend personal thanks to the Nobel Committee that awarded this year's prize in Economics to Paul Krugman. To me, Krugman winning the prize is a kind of personal validation, since my perspective on economic policies coincides with his about 95% per cent of the time.

Did those wily Swedes pick Krugman this year to extend one parting middle finger to George W. Bush? That probably helped them decide to give Krugman the award this year -- but if it hadn't been this year, it still would have happened eventully. Krugman has a marvelous talent for seeing things that are right in front of our eyes, but which other academic economists miss because they are blinded by orthodoxy or ideology. His contributions to the field are very real, and very significant -- and I offer him my sincere congratulations

Is it a crash yet?

I'd been studiously ignoring the value of my 403(B) over the past week -- but with the close of the market today I said, "What the hell," and had a look. A share of my (you guessed it) "socially responsible" fund has lost about a quarter of its value since the start of the year. Since I wasn't planning to cash out any time soon, it doesn't bother me too much -- I'm one of that shrinking group of Americans collecting a defined benefit pension, and since I've been convinced that the market has been overvalued for the past twenty years or so, my 403(B) really never got all that large.

To tell the truth, I've actually been kind of upbeat as the market's tanked. It seems that Barney Frank and friends did manage to work a little wrinkle into the bailout bill that makes it possible for government to turn a profit on its rescue of the financial industry -- and, stranger than fiction, Henry Paulson is ready to avail himself of the power to do exactly that. Paulson is ready to intervene by buying equity in the banks instead of just buying the crap that's been clogging the toilets of the credit markets.

On NPR today, there was coverage of a McCain rally -- one of his "town hall meetings" -- where some pathetic supporter was ranting about how an Obama victory would send the USofA sliding towards socialism. I'm quite sure that's not Obama's intention, and even more sure it's not Robert Rubin's nor Paul Volcker's intention but, as Jeanne Kirkpatrick said, "History is a better guide than good intentions."

The last major capitalist meltdown, affectionately referred to as the "Great Depression," brought us "socialist" innovations like social security, unemployment insurance, and market regulation that worked fairly well (if not perfectly) until the Reaganauts and the minions of Milton Friedman tore it apart. There's good reason to hope that this latest meltdown will help us regain the ground that was lost to all the presidents who put their faith in Allen Greenspan -- and, if we're lucky, even make a little progress. National, single payer health insurance, for example, could do wonders for the bottom lines of GM, Ford, and Chrysler.

Hmmm.... where did I put that red flag? Oh! There it is!

"Aw, shucks!"

I wasn't planning to say anything at all about the vice-presidential debate, but I have to congratulate Senator Joseph Biden on his remarkable self-control. Had it been me up there, there is no way I could have stopped myself from rolling my eyes.

Gosh darn it.

Bailout 0.1 beta2

Okay, I admit it. If I'd had a seat in the House the other day, I'd have been one of the many "It sucks but we have to try something" votes. Now that the Senate has tacked on a few hundred pages of unrelated nonsense -- much of which the McCain campaign, under different circumstances, would identify as "pork" -- nothing much has changed.

The Senate bill still gives entirely too much unbridled power to Henry Paulson. Bush may be the lamest duck in the history of the presidency, but somehow Paulson has managed to dissociate himself, in the public eye, from the administration he serves. Let's not forget that Paulson's last job was CEO of Goldman-Sachs -- and that his next job is likely to be something very similar.

Speaking of Goldman-Sachs, Warren Buffett negotiated a pretty sweet deal with that firm. Goldman is only minimally exposed to the kind of toxic debt Paulson will be buying with taxpayer money, but Goldman will be paying huge dividends -- the equivalent of credit card interest rates -- on the $5 billion dollars of preferred stock it sold to Buffett's Berkshire-Hathaway. Don't expect Paulson to drive that kind of bargain.

The missing factor in the bailout bill -- the one that actually could make the whole thing worthwhile to those of us who will be funding it -- is a provision that would give government a chance to turn a profit on its investment. If a bank wants to unload its bad debt, perhaps it should be required to toss in some stock options -- redeemable in five to ten years at current market price. If the bailout doesn't work, taxpayers still absorb the loss -- but if the banks bounce back as they're supposed to, the public gets back its initial investment and then some. In some alternative universe, the House might amend the Senate bill to accomplish something like that. In this universe, it's next to impossible. In this universe, if the government of the United States of America managed to turn a profit on anything, it would be decried as socialism.

Today, Obama said that if elected he'd make a point of regaining the taxpayer investment in the bailout bill -- which he and McCain both support. If Obama wins, and we get somebody like Robert Rubin (or, better still, Robert Reich) as Treasury Secretary, I think that pledge will be fulfilled. If McCain wins, and we get Phil Gramm or some similarly unreasonable facsimile, there's no saying what kind of economic calamaties might befall.

In the meanwhile, though, we'll have to sweat through as much as $350 billion of Henry Paulson's judgment. Keep your fingers crossed.