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Is The Meltdown ‘Creative Destruction?’

Posted in Barack Obama, Congress, Recession/Depression with tags on December 31, 2008 by John Stodder

Fred Wilson, who blogs at Musings of a VC, guesses the economic meltdown might be about more than the economic cycle and the misdeeds of bankers and the auto industry.

This downturn will be marked in history as the time where many of the business models built in the industrial era finally collapsed as a result of being undermined by the information age. Its creative destruction at work. It’s painful and many jobs will be lost permanently. But let’s also remember that its inevitable and we can’t fight it. Technology and information forces are unstoppable and they will reshape the world as we know it regardless of whether or not we want them to.

Investors have the luxury of acknowledging the inevitable.  Politicians do not.  So, the next few years will be all about shoveling money to stop the “unstoppable.”

Happy New Year!

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Peter Orszag Was A Blogger

Posted in Barack Obama, Economic Statistics, Environment, Health Care with tags , , , , on November 25, 2008 by John Stodder
Peter Orszag (first the s then the z)

Peter Orszag (first the 's' then the 'z')

The newly-announced director of the Office of Management and Budget, Peter Orszag, blogged while he was director of the Congressional Budget Office, I found out today.   So, quick, before it’s scrubbed, go read it.

Here is a link from the blog to Orszag’s slide presentation on climate change.  He’s not a skeptic, but he doesn’t sugarcoat the costs of addressing it, and thus buttresses the skeptics’ case.  If you’ve got about a half-hour, it’s worth your time to follow how he attacks the problem.  He recognizes the cost burden will inevitably fall upon those least able to afford it, so his attempt is to see what formula would spread the burden more fairly.  The conclusion I take away is, we need to be very sure that increasing CO2 emissions are a serious problem for future generations before imposing these kinds of costs on people alive today.

Here is a link to the slides from a talk he gave at Harvard called “New Ideas on Human Behavior in Economics and Medicine.” He’s very taken with the placebo effect.  Wonder if he thinks the placebo effect would be useful in alleviating global warming.

And here is an interesting observation about the tendency of people to overinvest their 401 (k) savings in company stock:

Many participants in retirement plans appear to be taking on unnecessary risk by investing in individual stocks rather than a diversified portfolio. The result is that those workers assume excessive risk for which they do not receive a higher expected return. (Those workers may feel they have inside information or insights that will allow them to outperform the market with particular investment choices, but the evidence suggests that unless you’re Warren Buffett, trying to outguess the market usually doesn’t work.)  Investing excessively in one stock that also happens to be your employer’s stock is even riskier — if the company runs into trouble, both your retirement assets and your job may be in danger.

In Orszag’s world, we are ridden with misperceptions. Some hurt us, and some work in our favor.  The role of government is to clarify matters for some, but use psychology  He’s going to be an important intellectual force in the Obama Administration.

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New York Times Wags A Finger at Geithner, Summers

Posted in Barack Obama, Mortgage/Housing Crisis, Wall Street with tags , , , , on November 25, 2008 by John Stodder

Two members of Barack Obama’s new team of economic advisors, Treasury Secretary-designate Timothy Geithner and National Economic Council Director Lawrence Summers, “played central roles in policies that helped provoke today’s financial crisis,” says a surprisingly tough editorial in Tuesday’s New York Times. After dumping blame on Summers for favoring the deregulation of derivatives when he was Bill Clinton’s Treasury Secretary, the editorial notes Geithner’s role in the Bush Administration’s erratic response to the meltdown:

At the New York Fed, Mr. Geithner has been one of the ringmasters of this year’s serial bailouts. His involvement includes the as-yet-unexplained flip-flop in September when a read-my-lips, no-new-bailouts policy allowed Lehman Brothers to go under — only to be followed less than two days later by the even costlier bailout of the American International Group and last weekend by the bailout of Citigroup.

It is still unclear what Mr. Geithner and other policy makers knew or did not know — or what they thought they knew but didn’t — in arriving at those decisions, including who exactly is on the receiving end of the billions of dollars of taxpayer money now flooding the system.

Confidence in the system will not be restored as long as top officials fail or refuse to fully explain their actions.

But who will demand such explanations?  The Senate?  Right, they can all apologize together.

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Time To “Rebrand” the Zeitgeist

Posted in Barack Obama, Wall Street with tags , , , , , , on November 24, 2008 by John Stodder

I’ve been thinking about what to do with this blog in the aftermath of the election.  As October rolled into November, it didn’t seem like there was much to say anymore.  It felt like talking about the air.  “Politics and profits” was all around us.  The original point of the blog was to write about business and the election, as if business and the election were two separate concepts that needed me to link them.  Ha!

Perhaps I was prescient. When TV news started showing the Dow Jones Industrial Average live while the president and president-elect hold press conferences, tracking market movements up or down as a verdict on whether what was being said was wise or foolish, it became pretty obvious that once again, as Calvin Coolidge once said, “the business of America is business.” And our portfolio is getting fatter:  Citibank and soon, perhaps, the Big Three automakers. But we hardly feel like Captains of Industry, do we?

So, after taking a vow of blogging silence for a few weeks while I pondered whether this little venture should continue, it hit me that, more than ever, we are residents of Marshall McLuhan’s global village, all in our separate tribes but joined in watching this phenomenon, to use another 1960s term, this “happening” — the meltdown.  As individuals, families and communities, the ground under our feet might be solid right now, but we all have to watch it give way in other precincts knowing ours might be next.  And we can capture it all in real time.

So that’s what this blog will be all about: Chronicling the meltdown, from an unsafe distance.

President-Elect Barack Obamas News Conference Monday

President-Elect Barack Obama's News Conference Monday

There are some who believe our current political class, up to and including President-elect Obama, is not capable of managing the crisis.  Moreover, there are many who think popular history and partisanship has inflated the roles played by past presidents who inherited crises, Franklin Roosevelt and Ronald Reagan. Their policies, some say, either made things worse (FDR) or deserve no credit (Reagan).  But at this point, we can be a little naive, a little hopeful.  Cynicism at this moment would be unearned although we might achieve it.

Today’s scorn should be apportioned to those who stuffed several successful business models into a thing called Citicorp, and proceeded to wreck it:

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Why Upper-Middle-Class Voters are Deserting McCain

Posted in Barack Obama, John McCain, Mortgage/Housing Crisis, Wall Street with tags , , , on October 28, 2008 by John Stodder

Michael Barone thinks Sen. John McCain’s campaign is in denial about Pennsylvania — that they don’t believe what a consensus of polls are telling them about the GOP’s slide in the suburbs around Philadelphia.  Things have changed so quickly since 2004, and Barone thinks he knows why:

My hypothesis is that that is because places like the Philly suburbs are places where the recent decline in household wealth has been most conspicuous. Housing prices mean a lot more to you when your house started off at $400,000 and declined to $290,000 than they did when you started off (as may be typical of Scranton or a blue-collar town in metro Pittsburgh) at $140,000 and declined to $110,000. Newspaper coverage of our current economic distress focuses on the very poor (like a recent Washington Post story on North Carolina, which focused on an ex-convict in a cheap motel in Charlotte), but the people who are getting hurt most visibly in their lifelong project of accumulating wealth are the more affluent. They’re the ones whose house values have most visibly and spectacularly declined, and whose 401(k) accounts and stock portfolios have tanked in the last few months as well. Folks in Scranton or in the cheap motel in Charlotte didn’t expect to live comfortably ever after off their increased house values, 401(k)’s, and Merrill Lynch accounts; a $700 monthly check from Social Security is about what they have long expected and that’s not in danger (yet). Folks in the Philly suburbs did expect to live comfortably off such assets.

Barone’s description reminded me of the “swing voters squared,” swing voters in swing states, who I discussed in this post a few weeks ago:  Upper-middle-class homeowners in their 50s and 60s who expected to retire comfortably but now fear the future.  They know the economy will turn around eventually, housing prices will get off the floor and the bear market will turn bullish again.  But they’re afraid the turnaround will come too late to do them any good and now are facing the fact that they’ll have to keep working. These people are as angry as they are scared.  Weren’t Republicans supposed to be looking out for them?

To Barone, Sen. Barack Obama’s ability to take advantage of this situation is richly ironic. Obama

is interested in advancing policies that could have serious wealth-destroying effects: higher taxes on high earners, protectionism, government-controlled health insurance, the card check bill abolishing secret ballots in union elections, which could have the effects on much of the private sector that United Auto Worker contracts have had on what used to be called, quaintly, the Big Three U.S. automakers. Will voters in the Philly suburbs, and their equivalents in target and nontarget states, like the consequences?

These crucial voters who are putting Obama over the top?  All they want is for him to reverse the stock market’s trajectory and revive housing prices so they can reacquire the wealth the Wall Street fiasco vaporized. If elected, will Obama alter his plans in order to keep these voters on board?

ADDED:  Today’s David Brooks column fills in more of the picture.  He explains the widespread cultural failure to perceive how much risk all of us implicitly accepted when we pinned our retirement hopes on the stock market and ever-rising housing pricess. Brooks cites the work of Nassim Nicholas Taleb, author of The Black Swan.

Taleb believes that our brains evolved to suit a world much simpler than the one we now face. His writing is idiosyncratic, but he does touch on many of the perceptual biases that distort our thinking: our tendency to see data that confirm our prejudices more vividly than data that contradict them; our tendency to overvalue recent events when anticipating future possibilities; our tendency to spin concurring facts into a single causal narrative; our tendency to applaud our own supposed skill in circumstances when we’ve actually benefited from dumb luck.

Millions of people lost a big chunk of their life savings.  They believed such an outcome was inconceivable.  They thought they were being conservative, prudent and were playing by the rules, working hard, saving, and getting richer due to the magic of the marketplace.  It will take a long time to persuade them of their personal responsibility for their own misfortune.  For the next eight days, they’ll be looking for someone to blame.

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The Risks for News Organizations that Publish Polls

Posted in Barack Obama, John McCain with tags , , , on October 14, 2008 by John Stodder

Why do newspapers and broadcast organizations publish polls?  Well, it’s information, it’s news, sort of manufactured news, but still of interest to consumers.  But I suspect the bigger reason is marketing.

Whenever your poll is quoted, your news organization’s name gets mentioned.  It enhances your reputation and puts you on the shopping list for web- and channel-surfers and maybe even potential subscribers.

Is this marketing plan upset if your poll is wrong?

This question came to mind as I read this column by political science professor Todd Eberly on National Review’s website, which raises some intriguing questions about two recent polls by the Washington Post/ABC and Newsweek. Their most recent polls made news because they showed Sen. Barack Obama opening up a big lead.

With these two polls, the political junkies’ much-watched Real Clear Politics average of polls jumped up to 8.1 percent at this writing.  For a couple of weeks, Obama’s lead had been hovering at around 4-5 percent on RCP. (In fact, since the National Review column, the LA Times/Bloomberg and CBS/New York Times polls were released showing Obama with leads of 9 and 14 percent respectively, boosting his margin even higher.)

Looking at the WaPo/ABC poll and the Newsweek poll, Eberly discovers that both polls assume that far more Democrats will turn out to vote on Election Day than Republicans.  Newsweek’s weighting assumes the following turnout scenario:

  • Democrats, 40 percent
  • Republicans, 27 percent
  • Independents, 30 percent

Which means the Democratic turnout edge will be 13 percent.  WaPo/ABC assumes a Democratic turnout advantage of 9 percent.

Such ratios would represent a profound shift in party identification.  According to Eberly’s research, Democrats had only a slight turnout advantage in most of the past few elections:

  • 2006: 2 points
  • 2004: Tied
  • 2000: 4 points
  • 1996: 4 points

Using the historical data and assuming a high-end turnout differential of four points, Eberly claims the two polls under examination would actually show Obama with a four-point lead — a lead consistent with the recent results published by a couple of independent pollsters including John Zogby. If one assumes 2006 is the most relevant point of comparison because of its recency, Obama’s lead would only be two points.

What this means to the presidential campaigns is not my concern here.  You’ll get arguments on one side saying Obama has excited a massive wave of new voters that will leave historical models in the dust.  You’ll get arguments on the other side saying these news organizations are biased and the bias extends to how they weight their data.  Dunno.

What interests me is the business impact.  Doesn’t it hurt the Washington Post, ABC or Newsweek if their polls turn out to be wrong?

For whatever reason, these three news organizations have attached their names to polls that have adopted assumptions starkly different from the actual data of the recent past.  It’s a roll of the dice.  If they’re wrong, and if their error derives from making unusual, unprecedented assumptions that don’t prove out, the effect on their reputations will outlast the polls’ effects on the news cycle.  Won’t they?

The news business is in trouble.  Circulation over the past few years has dropped like a rock for most daily newspapers, as have TV news ratings, in part because the mainstream media aren’t trusted implicity the way they used to be. If these polls turn out to be way wrong, and if the turnout assumptions turn out to be the underlying reason, political insiders, bloggers and commentators will zing them publicly, as will their competitors in the political research business.  Is it prudent for these news organizations to gamble with their reputations this way?

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McCain: Some Economists Endorse Not-Obama, Some Endorse My Plan

Posted in Barack Obama, John McCain with tags , , , on October 13, 2008 by John Stodder

Senator McCain has compiled a list of hundreds of university economists that have signed a statement of opposition to Senator Obama’s economic plans and another list of several hundred economists who support his plan.

Not all the signatories are on both lists, which is a little confusing.  For example, five Harvard University economists are on the “not-Obama’s-plan” list.  Six Harvard economists are on the “support-McCain’s-plan” list. Only four overlap.  If the lists are accurate, Robert Barro dislikes Obama’s plan but isn’t supporting McCain’s; while Joshua Coval and Markus Mobius support McCain’s but don’t join in the condemnation of Obama’s.  That’s just Harvard. Seven University of Chicago economists support McCain’s plan, but only four signed on to blast Obama. And so on.

It could just mean the McCain campaign assigned two different interns to collect these signatures, and one of them was more charming or had a better contact list.

Some reports had McCain outlining a new economic plan today. But now reporters are being told it will be Tuesday.  Again, maybe two interns?

The two statements are after the jump.  The signatories can be found at the links. Read more »

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The Chicago Model for Buying Off Radicals

Posted in Barack Obama, Democratic Party, History, Marketing Advertising PR with tags , , , , on October 13, 2008 by John Stodder

This story made me laugh.

Its writer, John Kass of the Chicago Tribune, helps us understand how the lure of public money can tame even the most revolutionary impulses.  Anymore, William Ayers is no radical.  Today, he’s what they used to call a sellout.  But it’s a soft kind of selling out, the kind that allows you to keep calling yourself a progressive while living comfortably under the protection of a big-city political machine.

(T)he reason Ayers is not a big deal in Chicago has to do with the Chicago Way, and the left fork of that road that has been bought and paid for by the (Mayor Richard) Daley machine, subsidized by taxpayers who foot the bill for public relations contracts from City Hall.

The new Daley machine is much more sophisticated than his father’s. And the stereotype of knuckle-draggers and wiseguys—they’re still around, and there are jobs on the city payroll for those who work the precincts.

Yet what’s often ignored is that their university-educated cousins get city contracts to spin the news and shape the symbolism and tell out-of-town reporters that Ayers is no big deal. They won’t bite the hand that feeds them….

Marilyn Katz, Chicago PR Consultant and Ex-Radical

Marilyn Katz, Chicago PR Consultant and Ex-Radical

One friend of Obama and Ayers is former ’60s radical Marilyn Katz, now an Obama fundraiser, strategist and public relations maven. She’s often a go-to quote for reporters to knock down the Ayers-Obama story….

(D)uring the violent protests of the 1968 Democratic National Convention here, Katz was the security chief for the radical Students for a Democratic Society. She once advocated throwing studded nails in front of police cars, back in the SDS days when the group was alleged to have thrown cellophane bags full of human excrement at cops and cans of urine and golf balls impaled with nails.

How things change.

Under this Daley, her firm, MK Communications, has many city deals, and one involves public relations for the Chicago Police Department’s community policing program. From nails to contracts, the Chicago Way. Apparently, irony was not a ’60s thing.

Now, as Daley prepares to lay off more than 1,000 city workers, he’s given Katz and other public relations firms five-year contracts that could pay them as much as $5 million each for consulting, advertising and promotion.

And, folks, that’s why Barack Obama did not recoil from the “unrepentant terrorist” William Ayers.  We’re talking about two Daley Machine regulars, trusted members of the brother- and sisterhood.  Why would Ayers even stand out?  He was just another insider angling for a contract.  Yes, “another guy from the neighborhood,” but the neighborhood Obama was referring to was not a physical place, but a political citadel.

Given the impotence of the Republicans’ attacks on Obama for his ties to Ayers, maybe voters subconsciously understand this. You can’t hold it against a guy for wanting to make a buck.  Selling out obviously civilized him long before Obama crossed his path.

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Running to Obama’s Left to Capture the Center?

Posted in Barack Obama, John McCain, Mortgage/Housing Crisis with tags on October 8, 2008 by John Stodder

The idea was launched a bit awkwardly, in response to a debate question tonight, but apparently Sen. John McCain has decided to offer a bailout to homeowners with negative equity. Total cost to the taxpayers: An estimated $300 billion.

From McCain’s campaign press release, as quoted on a Wall Street Journal blog:

John McCain will direct his Treasury Secretary to implement an American Homeownership Resurgence Plan (McCain Resurgence Plan) to keep families in their homes, avoid foreclosures, save failing neighborhoods, stabilize the housing market and attack the roots of our financial crisis. America’s families are bearing a heavy burden from falling housing prices, mortgage delinquencies, foreclosures, and a weak economy. It is important that those families who have worked hard enough to finance homeownership not have that dream crushed under the weight of the wrong mortgage. The existing debts are too large compared to the value of housing. For those that cannot make payments, mortgages must be re-structured to put losses on the books and put homeowners in manageable mortgages. Lenders in these cases must recognize the loss that they’ve already suffered.

The McCain Resurgence Plan would purchase mortgages directly from homeowners and mortgage servicers, and replace them with manageable, fixed-rate mortgages that will keep families in their homes. By purchasing the existing, failing mortgages the McCain resurgence plan will eliminate uncertainty over defaults, support the value of mortgage-backed derivatives and alleviate risks that are freezing financial markets.

McCain would limit eligibility to those who provided a down payment and offered other evidence of creditworthiness at the time they made the loan.

In the debate, as I saw it, neither Sen. Barack Obama nor moderator Tom Brokaw followed up with a question or even a “huh?”  Obama continued talking about his middle-class tax cut as the kind of relief America’s struggling homeowners need, but this idea is both bigger and more targeted.

In the previous post, I talked about “swing voters squared” — the swing voters in the swing states.  Overwhelmingly, they are homeowners, and their small-c conservatism suggests that those among them now in mortgage trouble were credit-worthy at one time.  McCain’s proposal is aimed right at their hearts.

As the talking points from the debate fade from memory — rather quickly this time — McCain’s proposal will loom higher.  It’s another game-changer, he hopes.  Is it?  And will Obama feel the need to counter?

Further, would this idea, if enacted, be enough to stabilize home prices?

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Swing Voters Squared: Go for the Old

Posted in Barack Obama, John McCain, Marketing Advertising PR, Mortgage/Housing Crisis with tags , , , , on October 6, 2008 by John Stodder

Wondering why the Wall Street meltdown has produced such a decisive shift away from John McCain and toward Barack Obama?   It might not be as simple as Obama representing the party out of power.  A recent study by a market research firm paints a picture of the most critical swing voters.  It doesn’t take much imagination to see that these voters are disproportionately affected by the sharp drops in both housing and stock prices.

I just came across a story about the study in Advertising Age, writing up research conducted by Acxiom, a marketing services firm, into the elusive swing voters who end up deciding almost every presidential race. The idea was, first, to determine which states are swing states, and second, to profile the swing voters in those swing states.  Swing voters squared, you might say.

In Axciom’s view, the purple states are:

  • Washington
  • Oregon
  • Nevada
  • New Mexico
  • Colorado
  • Minnesota
  • Iowa
  • Wisconsin
  • Missouri
  • Michigan
  • Ohio
  • Pennsylvania
  • Florida
  • New Hampshire

In those states, who are the swing voters? From the Ad Age article:

Perhaps most surprising was the fact that purple voters identified themselves as more conservative than liberal and, in several categories, aligned more closely with red or Republican voters. On average, purple voters are older and either retired or nearing retirement, factors that likely cause the group to identify as more conservative, said Ray Kraus, a product manager in Acxiom’s Information Products Group. They are the group most likely to watch Fox News, in fact.

“A lot of people say this is a center, center-right kind of country,” he said, and purple voters’ conservative leanings support that theory.

You would think that’s good news for the McCain/Palin ticket.   But let’s keep digging.  Acxiom’s press release on the study goes a little deeper:

Acxiom found that the purple segments are more likely to be older than the other groups, own homes in the suburbs, and be planning for retirement. Their only nest egg tends to be an IRA, which may affect their views on Social Security. Furthermore, their spending on prescription drugs is higher than the other groups, and therefore they are more likely to be concerned about the quality and affordability of publicly financed health care.

Additionally, those in the purple segment tend to get their news from newspapers and television news programs such as Fox News and CNN. The blue segments are likely to watch CNN but also tend to watch CNBC and MSNBC. The purple segment’s affinity for Fox News supports other findings in this study that suggest they lean further to the right.

Not only are these swing voters older, they are also more likely to be married than either red or blue voters, likely to have more kids than blue voters, less affluent than blue voters but more so than red voters, and more likely than red voters to belong to a church board, fraternal order or veteran’s group.

Ad Age’s map provides more information. Worth a click.

Pondering these results, you can more easily see why the financial crisis has helped Barack Obama open up such a wide lead in the past 10 days. It’s not just a case of blaming the party out of power.   This crisis would appear to be hitting the purple voters especially hard.

Looking at the study, you see the swing voters in the swing states are those most reliant on savings and the equity in their homes for their approaching retirement.  Both nest eggs have surely taken a big hit, especially if their savings were invested in mutual funds and if their homes were recently remortgaged. One might suspect some overleveraging among these homeowners, given their high propensity for owning recreational vehicles and vacation homes.  These voters also have less time to earn it back, and less time to outwait the depressed housing and stock markets.

These voters don’t just want change.  They want economic security. They want to make sure they aren’t left out in the cold. That’s a voter who will be much more open to a Democrat’s message than a Republican’s.

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