McCain's ties to Rod Parsley and John Hagee in TAP

**UPDATE: This story has legs.**

Two articles by The American Prospect on the link between McCain and two of the nuttiest religious nutballs out there -- Rod Parsley and John Hagee (also this):

1. McCain's "Spiritual Guide" (on Parsley)
2. McCain's Apocalyptic Support (on Hagee)

PS: Also see this and this.

And here are the two articles' full-text:

1. McCain's "Spiritual Guide" (on Parsley)

Yesterday at a rally in Cincinnati, Ohio, John McCain was flanked by Rod Parsley, who called the candidate "strong, true, consistent conservative," according to the Columbus Dispatch. McCain referred to Parsley, who preaches the same word of faith doctrine as the televangelists under investigation by McCain's fellow Republican Senator Charles Grassley, a "spiritual guide."

Later, according to the Dispatch:


Parsley said he supports McCain because the senator will be tough on national security and "protect the unborn."


The megachurch pastor, criticized in the past for mixing religion and politics, acknowledged that McCain isn't the ideal candidate for evangelical Christians, who overwhelmingly backed President Bush in 2004.

"Yet at the same time, when you put John McCain up against Hillary Clinton or Barack Obama, the ideological and philosophical differences are overwhelming," Parsley said.

In conservative circles, Parsley's considered one of the religious kingmakers in the 2008 presidential race. While he's not universally loved in evangelical circles by any stretch of the imagination, McCain is likely very pleased with the, er -- shall we call it an endorsement? Add John Hagee, the chairman of Christians United for Israel (CUFI), along with McCain-endorser Gary Bauer, who serves on CUFI's board, and Parsley, who is a CUFI regional director, and it looks like McCain is lining up the support of a contingent of the Christian right that could make McCain's off-the-cuff bomb-bomb-Iran and 100 years in Iraq remarks seem, well, prophetic.


--Sarah Posner

Posted by Sarah Posner on February 27, 2008 10:56 AM

2. McCain's Apocalyptic Support (on Hagee)

John McCain picked up the endorsement yesterday of San Antonio televangelist and Christians United for Israel (CUFI) founder John Hagee, who cited the candidate's opposition to abortion and "support" of Israel.

Even though Hagee hosted Mike Huckabee for a guest sermon at his church last December, his support for McCain is not a huge surprise. Last year, Hagee and McCain had a private breakfast in San Antonio after which Hagee declared McCain "solidly pro-Israel", which, in CUFI parlance, is code for opposition to a two-state solution. Hagee contributed $1,000 to McCain's campaign (although he also later contributed to Huckabee's as well.)

This past summer, McCain appeared at CUFI's annual summit, where he "joked" about how hard it is to do God's work in the city of Satan. (He repeated a similar line earlier this week at a town hall event in Cincinnati at which McCain "spiritual guide" Rod Parsley shared the stage.) While McCain might be able to laugh this off as a little quip about the foibles of Washington, to followers of Hagee and Parsley, "spiritual warfare" is a very real part of everyday life, in which they, as godly people, do battle with Satanic forces. When talking about CUFI, though, talking about battles is really no joking matter, since Hagee has been beating the drum for war with Iran -- which he believes will result in the world-ending battle at Armageddon -- for over two years.

At the CUFI summit, McCain got a lukewarm reception, and many participants I spoke with were skeptical about his socially conservative credentials -- although Israel was a top issue, abortion was also high on their lists. Most I spoke to supported Huckabee, who at that point (July 2007) was still an asterisk, and some others Sam Brownback -- who is now supporting McCain. But as far as Hagee's endorsement goes, I guess there's not much of a question now what Hagee's upcoming sermon is going to be about.

--Sarah Posner


Posted by Sarah Posner on February 28, 2008 8:37 AM

Hagee is probably worse than Parsley, although it's a tough call. The former is in love with the idea of starting WW3 with Iran. I love how even the most supposedly "independent" and "maverick" members of the GOP are still groveling suckers at the feet of these fat hypocritical preachers.

Last night's Ohio debate

So this was what HRC was referring to last night, with her line about the media oogling over Obama? (more here on the debate, more here on SNL & Obama)

Largest growth in religious affiliation? Unaffiliated.

Well, this is encouraging:

Maybe one day we'll have an inversion, and about 84% of people will be nonreligious...

Although the importance of religion in our society must not be underestimated, neither must secular America, especially the trend as it applies towards younger Americans, something I've emphasized before:

The proportion of atheists and agnostics increases from 6% of Elders (ages 61+) and 9% of Boomers (ages 42-60), to 14% of Busters (23-41) and 19% of adult Mosaics (18-22).

Looking at very recent polls, around 18% of Americans do not believe in God. This trend is in line with other recent assessments of the state of atheism, and the disparity in numbers between "atheist" and "82% of people believe in God" confirms that people are still reluctant to self-identify with "the A word" despite their admission that they don't believe in God. In the largest religious self-identification survey ever undertaken, 14% of those surveyed reported "no religion" but only 0.4% explicitly as "atheist". A more recent Baylor study found only 50% of "religious nones" identify as "atheists" -- again note the disparity between non-religious persons and people willing to identify as "atheist" and/or be active in some sort of atheist organization. Another recent poll in The Nation shows that the number of nonbelievers is much higher than commonly recognized - at around 27% not believing in a God (those willing to self-identify as atheists is still much lower).

The trends are clear: although nonreligious persons are still a minority, we are a very rapidly growing one.

Regardless of the exact number, the number of atheists visible in politics is next to zero, and that is unlikely to change. Atheists are still distrusted and that prejudice won't change overnight. And that's a lot of why people are reluctant to use the label, even when they admit that they aren't theists; I really think part of it boils down to groups like the RRS. Part of it can be attributed to the corrupt and increasingly-irrelevant Religious Right and their hatred and intolerance. When atheists start to look like those people (intolerant of religion in general), we're the mirror image of Falwell and D. James Kennedy, which turns people off in droves.

And that's scary.

Hilarious Clinton vid by Slatev

I love it.

Hilarious.

Obama wins Democrats Abroad -- 11 / 11

Remember that Democrats Abroad contest I mentioned a week ago? Obama won it hands down: 2-1.

February 21, 2008, 1:15 pm
Make That 11 for Obama

By Brian Knowlton

WASHINGTON — Senator Barack Obama won his 11th straight nominating contest on Thursday, carrying the Democrats Abroad global primary by a 2-to-1 margin over Senator Hillary Rodham Clinton and prevailing among American expatriates in every region of the world.

The results represented thousands of ballots submitted from Americans in 164 countries and territories from Feb. 5 to 12.

The overseas Democrats were allocating a small number of delegates –­ 4.5 — on Thursday, under a proportional system that allotted 2.5 to Obama and 2 to Clinton. A further 2.5 will be determined at a Democrats Abroad convention on April 12 in Vancouver, Canada. The group also holds 4 superdelegate votes, for a total of 11 votes at the national convention in late August in Denver.

But in a close contest, Democrats Abroad said they felt particularly engaged.

Democrats Abroad for the first time allowed votes to be cast online, though others were cast by mail, fax or in person, and they came in “from Antarctica to Zambia ­– from A to Z,” said Christine Schon Marques, the group’s international chair, in a phone interview from Geneva. “Many people overseas are very concerned about the war in Iraq; they’re looking for change.”

One of the Antarctica voters was Adam Lutchansky, a 26-year-old Alaska native who just finished a six-month stint working in the power plant at McMurdo Station and voted via the Internet.

“We only get mail service six months out of the year and it takes about a month for a letter to make a round trip to the U.S.,” he said by e-mail message, “but even here in Antarctica we have a dependable Internet connection. It was great to finally see a political body get onboard with the security and flexibility of the Internet.”

By way of comparison, Mr. Obama’s global 66-to-33 percent lead over Mrs. Clinton was nearly identical to the edge he recorded in states like Minnesota, or his home state of Illinois.

Mr. Obama won by strong majorities in every region and nearly every country. The senator, who was born in Hawaii, did particularly well in the Asia-Pacific region, winning 79 percent of the vote in Japan and 76 percent in Indonesia, where he lived as a youth. He also did well in Europe, carrying more than 70 percent of the vote in France and Switzerland.

Mrs. Clinton won in Israel, the Dominican Republic and the Philippines. Her best regional showing was in the Americas, with 44 percent of the vote.

Republicans do not hold a global primary. They cast votes directly in their home districts, as overseas Democrats also have the option of doing.

To recap:

Basically, the DNC is allowing expatriates to vote overseas using e-votes and paper ballots in local polling places. The voting began on Feb. 5 and will end today (12). The results should be in...some time soon.

Although some might downplay the significance of an estimated 20,000 votes from all around the world, I think they are a strong barometer of what diverse and well-informed people think about the Democratic horse race. Obama is expected to pull out a victory, and I will ramble more about it later (when that happens) with more numbers and such.

There is a great article at TNR on it, as well as Wired.

I think this is a great win for him.

Real differences between Barack & HRC

If you want to get a feel for the substantive policy differences and voting record bifurcations of the two Democratic candidates, read this and this.

In the meanwhile, enjoy the newest national poll numbers showing this race is a dead heat, with Barack steadily gaining ground:

Baby Bible Bashers

**UPDATE: There is more attention on this now, and you can watch the full program clips here (as of now)**

As if you need more incentive to gag than seeing young kids scared out of their minds by religious bullshit: demons, hellfire, God's anger...then take a gander at Samuel Boutwell and other "pint-sized preachers" featured in Channel 4's "Baby Bible Bashers" series. They are placed outside of abortion clinics, made to scream at the "homersexshuls" that are ruining our country and using gay penguins to transform us into Sodom...

You can watch a lot of this on YouTube, or see a clip of him here.

We've seen this little brainwashed joker Boutwell before, and in his interview with Juju Chang on ABCNews, which you can see the extended version of on YouTube (see another clip here), when asked why he was preaching, he admitted that his dad wanted him to. When she asked him further questions, he was stumped. It became painfully obvious he was regurgitating the shit he'd been programmed to.

Clinton & Obama surrogates present science proposals

Well, it wasn't exactly Science Debate 2008, but it was something, at least. At least we've made some progress. Now wait and see how poorly the McCain proposals stack up against the Democrats'...oh, wait, he has no such proposals on his site, unlike Barack's technology and energy/environment sections and HRC's innovation and energy sections.

More animal outrage

I just read the CNN article about the largest beef recall in American history, and watching the accompanying video made me want to cry and punch the slaughterhouse workers at the same time. They take these poor sick diseased animals that are unable to stand and jab them with electric prods, stab them with forklifts, drag them by ropes attached to one foot...

The animals literally scream in pain. It's horrible. If you can't see the ethical implications, you're not capable of rational thought.

If you want to see more animal abuse TV, see here. If you need rational arguments for becoming a vegetarian, or at least cutting meat down to a rare item in your diet, see here. As I said a few months ago, some people just don't understand the environmental impacts of the meat industry -- how much of our fresh water supplies are polluted and how much forest is burned simply to raise cattle. The toll is significant. It really can't be overstated. For those interested in sustainability and the relationship between oil and agriculture, the data is out there.

"Meet your Meat" (12:28), narrated by Alec Baldwin, follows below:

Oil industry conference

The question is not that at some point in the future, demand for oil will outstrip production. The question is whether it has already come.

Another CNN Money article examines the question of peak oil, which I've written on here and here within the past few months. There are a few eye-opening quotes from oil industry executives:

"An oil crisis is coming, and sooner than most people think," said John Hess, chief executive of Hess Corp (HES, Fortune 500)., the integrated oil and gas company with 2006 sales of $29 billion. "All oil producers are not investing enough today."

Rising income of consumers has propped up demand even as crude prices have spiked five fold in the past six years. Hess offered some perspective: On a unit-to-unit basis, oil is still about 10 times cheaper than a Starbucks latte.

Runaway growth in oil use in India and China - the two countries are expected to boast a combined 1.2 billion vehicles by 2050, up from 20 million a few years ago - is expected to push demand above supply sometime between 2015 and 2020, Hess said.

"It's not a matter of endowment, it's a matter of investment," he said.

A small but growing number of analysts disagree with Hess' assertion that there is enough oil in the ground. They say production of oil has peaked or will peak soon, followed by a slow but steady period of decline that could cause major social unrest.

Oil executives, while acknowledging that crude deposits are ultimately limited, said that new technologies should keep crude production rising for at least several decades.

"Many perceive the supply challenge as one of scarcity," said Mark Albers, a senior vice president at Exxon Mobil (XOM, Fortune 500). "There is no question oil is a finite resource, but it's far from finished."

Albers pointed to a U.S. government survey saying the world has three trillion barrels of oil left - compared to the one trillion used so far in history.

The question is how those three billion barrels are stored: are they heavy crude? Shale oil deposits? Far below conventional drilling limits at around 5 miles?

Many of these reserves would be more expensive to produce than the current price of oil would make profitable. Obviously, if we narrow our supply down to these reserves, the price would escalate further and make recovery economically feasible. However, at those same prices, producing energy from alternative and renewable resources would be morally, environmentally and economically superior.

Even as they claim that there is still plenty of oil left, they ignore the essential question of whether the rate of production can keep up with the rate of demand. The short and simple answer is...no.

Later in the article there are some admissions from executives that the oil industry will have to play a positive role in addressing climate change. They sound more realistic than the chimp-in-chief...whose days, by the way, are thankfully numbered:

Obama wins VA, thoughts on Democrats Abroad

**UPDATE: I updated the primary results files after last night's wins for Obama. He now leads in the popular vote and has won 22 states to Clinton's 13.**

So it looks like Barack will win VA (probably MD & DC as well). Next week, he should carry HI & WI as well. Then, it will be a nice two week break until the Mar 4 contests in OH, TX & PA. He'll gain ground in those states by then. I am pretty optimistic about things. I can't believe it's been over a year since I decided to support him.

Something interesting I just started reading about today: Democrats Abroad. Basically, the DNC is allowing expatriates to vote overseas using e-votes and paper ballots in local polling places. The voting began on Feb. 5 and will end today (12). The results should be in...some time soon.

Although some might downplay the significance of an estimated 20,000 votes from all around the world, I think they are a strong barometer of what diverse and well-informed people think about the Democratic horse race. Obama is expected to pull out a victory, and I will ramble more about it later (when that happens) with more numbers and such.

There is a great article at TNR on it, as well as Wired.

One of the most fascinating points about this global election (talked about in the Wired article) is that the technology being developed could/should be used one day in online voting in all elections. I don't see why not -- fraud is possible in any system, and a feedback email could be auto-generated that would send back to the person (immediately) a .pdf version of their completed ballot as a "paper record" and to confirm their choices. Real-time data collection would give the results to the exact vote to the exact minute.

Who wins a protracted primary battle?

A few days ago, I left a comment on TCR that I thought a protracted primary election would help, not hurt, the Democrats in the general election. My logic is that the media will continue to give lots of air time to the Democratic candidates, that the supporters of said candidates will continue to be energized and enthused, and that the GOP attack machine(s) will have a more difficult time honing in on two targets.

After reading this analysis of what a long primary could mean, I still feel the same way:

The record of the party is mixed in binding up its wounds. President Jimmy Carter was hurt by Ted Kennedy's primary challenge in 1980, and lost to Ronald Reagan. Bill Clinton overcame a series of contentious primaries in 1992 with Jerry Brown.

Democrats have a reason for concern, said Julian Zelizer, a Princeton University historian. With Mitt Romney out of the race and Mike Huckabee not a real threat, McCain has the time to hone his themes, criticize the Democrats, raise money for the general election, bone up on the economy and begin the process of choosing a running mate.

"His differences with some conservatives are important, but now he has time to repair them," Zelizer said. "Choosing someone more conservative would be one thing."
...
Rosenberg, who is neutral in the race, said that Obama or Clinton will likely emerge as the front-runner by mid-March, and that would blunt any head start McCain has on the general election campaign.

In any case, Wayne, a Georgetown University historian, predicted that Democratic leaders and office-holders - the so-called superdelegates - will want to resolve the contest soon, and will gravitate to the front-runner.

"They're politicians," Wayne said. "They will go whichever way the winds blow."

I simply don't think that people will be satisfied with a primary decided by superdelegates on either side. I would be pissed for either Barack or Sen. Clinton if the person who won the most votes/pledged delegates lost the primary because of backroom pandering. I mean that: whichever Democratic candidate wins the most pledges and votes ought to be the next POTUS. And I'll stand by those words no matter whose name it applies to, come March, April or August.

While I think a long primary could be a boon for the Dems, of course, a protracted legal battle would be very ugly, should legal recourse be sought in a scenario like the one outlined above: one candidate wins the most votes & pledged delegates but loses because of superdelegates. Would the candidates engage in litigation, or would they defer to the will of the DNC under the auspices of "for the sake of the party" (cue Romney's twisted illogic). One of Bush's hack 2000 election lawyers writes:

As the convention nears, with Sen. Clinton trailing slightly in the delegate count, the next step might well be a suit in the Florida courts challenging her party's refusal to seat Florida's delegation at the convention. And the Florida courts, as they did twice in 2000, might find some ostensible legal basis for overturning the pre-election rules and order the party to recognize the Clinton Florida delegates. That might tip the balance to Sen. Clinton.

We all know full well what could happen next. The array of battle-tested Democratic lawyers who fought for recounts, changes in ballot counting procedures, and even re-votes in Florida courts and the U.S. Supreme Court in 2000 would separate into two camps. Half of them would be relying on the suddenly-respectable Supreme Court Bush v. Gore decision that overturned the Florida courts' post-hoc election rules changes. The other half would be preaching a new-found respect for "federalism" and demanding that the high court leave the Florida court decisions alone.

Let's all hope it doesn't come down to that.

CNN Analysis: Barack beats Sen. McCain

CNN has Barack beating Sen. McCain, but HRC just tying him.

PS: Barack has won 18 of the 31 states so far. See my updated primary results.

HRC and tax returns, education gap

Yeah. Remember that little thing I mentioned a month ago, and a long while back in May, about the difference in Obama's efforts towards transparency and HRC's? It's come back up:

Mr. Obama, speaking to reporters, zeroed in on Mrs. Clinton’s loan and said that her decision not to disclose her income tax returns raised questions about the loan.

“I’ll just say that I’ve released my tax returns,” he said, responding to a question about tax returns. “That’s been a policy I’ve maintained consistently. I think the American people deserve to know where you get your income from.”

Mr. Obama stopped short of issuing a call for Mrs. Clinton and former President Bill Clinton to release their returns.

“I’m not going to get into the intricacies of their finances,” Mr. Obama told reporters as he flew to a rally in Nebraska. “That’s something that you’ll have to ask them.”

Nebraska holds nominating caucuses on Saturday.

Clinton campaign officials said she would release her returns if she won the nomination. The officials said there was enough information in her public Senate financial disclosures to assess her personal finances.

Her Senate forms do not list exact deductible expenses like interest or medical costs. The tax returns would show exact interest and dividends from investments, not just the ranges on the disclosure forms.

Mrs. Clinton has been an advocate for transparency in campaign finance, as has Mr. Obama.

For all the confidence expressed by the Clinton campaign, the onus remains on Mrs. Clinton to show fund-raising muscle, in view of her raising less and relying on the loan as well as a $10 million transfer last year from her Senate campaign account to her presidential account.

Advisers said the loan was made on Jan. 28 from Mrs. Clinton’s share of her personal funds that she has with Mr. Clinton. They said it was not a bank loan, nor was collateral needed to secure it. The advisers said no investments were liquidated to make the loan.

The loan was not disclosed widely until after the vote on Tuesday night, Clinton advisers said, for fear that the news might make Mrs. Clinton look like a fading candidate. Several donors said Wednesday that they were concerned that the campaign was essentially running on fumes, especially when they learned that some aides were working without pay. Shortly after midnight Wednesday, however, the Clinton team issued an e-mail message saying that it had raised $3 million in 24 hours. By daylight on Thursday, the advisers said the campaign was so successful that all aides would be paid and that Mrs. Clinton’s war chest seemed to be stabilizing.

The advisers used the conference call in part to focus attention on the Ohio and Texas primaries. The aides say Mrs. Clinton believes she has a better chance in those states than in many of the contests this month like Hawaii, Louisiana, Maryland, Virginia and Washington State.

“I think we’ll have some bumps in the road, some difficult states in the next week or two,” Mark Penn, the senior strategist of the campaign, told the donors.

He and Mr. McAuliffe emphasized the importance of the Ohio and Texas primaries.

Want to know why they're looking ahead to Ohio and Texas, instead of today's primaries? David Brooks tells us why -- the education gap between HRC voters and Barack supporters:

Hillary Clinton is a classic commodity provider. She caters to the less-educated, less-pretentious consumer. As Ron Brownstein of The National Journal pointed out on Wednesday, she won the non-college-educated voters by 22 points in California, 32 points in Massachusetts and 54 points in Arkansas. She offers voters no frills, just commodities: tax credits, federal subsidies and scholarships. She’s got good programs at good prices.

Barack Obama is an experience provider. He attracts the educated consumer. In the last Pew Research national survey, he led among people with college degrees by 22 points. Educated people get all emotional when they shop and vote. They want an uplifting experience so they can persuade themselves that they’re not engaging in a grubby self-interested transaction. They fall for all that zero-carbon footprint, locally grown, community-enhancing Third Place hype. They want cultural signifiers that enrich their lives with meaning.

Obama offers to defeat cynicism with hope. Apparently he’s going to turn politics into a form of sharing. Have you noticed that he’s actually carried into his rallies by a flock of cherubs while the heavens open up with the Hallelujah Chorus? I wonder how he does that...

Observe the marketplace. The next states on the primary calendar have tons of college-educated Obamaphile voters. Maryland is 5th among the 50 states, Virginia is 6th. But later on, we get the Hillary-friendly states. Ohio is 40th in college education. Pennsylvania is 32nd.

But it’ll still be tied after all that. The superdelegates will pick the nominee — the party honchos, the deal-makers, the donors, the machine. Swinging those people takes a level of cynicism even Dr. Retail can’t pretend to understand. That’s Tammany Hall. That’s the court at Versailles under Louis XIV.

And that's what kills me.

The BS on Barack as "the most liberal" Senator

Media Matters has an item explaining why the National Journal's rankings of Barack as the Senate's most liberal member are bogus.

Don't get me wrong: there is nothing bad about being liberal. Hell, people like Krugman ought to be reminded of this whenever they act like HRC is more progressive than Barack.

But...isn't it convenient that in 2004 the Democratic nominee also happened to be ranked this way by the National Journal? And how there is no real logic to the assignment of "conservative" and "liberal" to the votes cast?

Steve at The Carpetbagger Report points out that:

Better yet, National Journal’s press release on the rankings noted the criteria was based on 99 key roll-call votes last year: “Obama voted the liberal position on 65 of the 66 votes in which he participated, while Clinton voted the liberal position on 77 of 82 votes.” So, Clinton voted for the liberal position 77 times, Obama voted for it 65 times, which makes Obama the chamber’s single most liberal member. Got it.

More from Steve Benen here and here.

More reasons to worry about the economy

**UPDATE: 2/9/08, the hits just keep on coming**

I was introduced to Nouriel Roubini through a friend's stepdad, and I'm glad I was. A few days ago, Roubini gave us the 12 steps to a systemic financial crisis, and today he tells us why the government and Fed's actions leading to successful aversion of this crisis is unlikely.

I've posted interesting snippits below, they are long but worth the read:

Why the aversion of a systemic financial crisis is unlikely:

I will present in this article the eight reasons why I am skeptical that such a systemic risk scenario can be avoided…

Before we get to the many reasons why one should be pessimistic let us consider at least one reason why one could be more optimistic. The main good news in this respect is that, after being behind the curve in its assessment of the economic and financial risks, the Fed now gets it and is worried about a serious systemic financial crisis. For over a year the Fed assessment of the risks to the economy and to the financial markets was flatly wrong. The Fed argued that the housing “slump” would bottom out over a year ago; instead the housing recession got deeper and is nowhere near bottoming out; Bernanke argued repeatedly that the subprime problem would be a niche and contained problem; instead we have observed a severe liquidity and credit crunch that has spread to the entire financial system; the Fed argued that the housing recession would have no significant spillovers to the other sectors of the economy in spite of the importance of housing and in spite of the fact that housing is the main assets of most households; instead we are now observing an economy wide-recession. So to put it simply the Fed – as well as most macro analysts and forecasters - got it totally wrong in its assessment of the risks to the economy and to financial markets.

Today instead the Fed is certainly aware of the risks not just to the real economy but also to financial markets. As senior Fed officials argue in private the risk of a catastrophic event – a small probability of a systemic financial meltdown that would lead to a severe recession – is rising and this scenario, however unlikely, has to be avoided at any cost. This is the main reason why the Fed has thrown caution to the wind and has taken a very aggressive approach to risk management, as signaled by the 125bps Fed Funds easing in eight days in January.

What is the Fed's and the financial officials’ strategy to avoid the vicious circle of a severe recession and of a systemic catastrophic financial meltdown? Here are the main elements of this strategy and the important limitations and constraints to that strategy.

First, an aggressive monetary easing with the reduction of the Fed Funds rate to reduce the risk of a deeper and more protracted recession. The limits to this monetary policy easing are twofold. First, at some point the Fed needs to worry that an aggressive Fed Funds easing will lead to a disorderly fall of the US dollar, to foreign private investors pulling the plug on the financing of still large US external deficits and to higher imported inflation. Second, monetary policy is relatively ineffective in stimulating the economy as: there is a glut of housing, consumer durables, automobiles and it will take years to clear that glut; i.e. monetary policy becomes less effective as the demand for such capital goods becomes less interest rate sensitive under glut conditions or, in other terms, easing money is like pushing on a string. Second, the problems of the economy are not just problems of illiquidity but rather more deep seated problems of insolvency; and monetary policy cannot resolve serious credit problems in the economy.

Second, a strong provision of liquidity to financial markets to reduce the liquidity crunch in interbank and money markets. Such provision of liquidity failed to reduce such a crunch in the fall of 2007 until the Fed became much more aggressive in December with its new liquidity auctions. Since then interbank spreads have become smaller – especially because markets were pricing very aggressive Fed Funds easing - but such a liquidity crunch has not disappeared – as proxied by the crucial BOR-OIS spread while the credit crunch in credit markets has now become even more severe than in the fall. Also, interbank spreads may significantly widen again for several reasons. First, such spreads include two components, a liquidity premium and a credit premium; while the Fed can affect the former through its provision of liquidity it cannot affect the second and recent evidence suggests that interbank spread are now more driven by credit spreads. Second, with a worsening economy and increasingly large losses in an opaque financial system where lack of trust in counterparties is increasing and where counterparty risk will increase in a deepening recession, credit premia will become larger.

Third, an robust attempt to coordinate a private rescue of the monolines to prevent their rating downgrade and thus avoid another round of writedowns in the financial system. As a senior policy official put it in a private meeting at Davos rescuing the monoline is “a no brainer”. The trouble is that, while a few weeks ago it was thought that a $10 to $15 billion recapitalization of the monolines was thought to be doable and sufficient to prevent such a downgrade it is now becoming increasingly clear that the monoline losses on their insurance of toxic structured finance products are massive and that $10-15 billion will not be enough to avoid a now necessary and unavoidable downgrade.

Also, as argued here before, a business model that requires a AAA rating to remain in business is a business model that does not deserve an AAA rating in the first place. As also agreed by Bill Gross of PIMCO bond insurance of structured products was a form of “voodoo finance” that created AAA ratings for toxic instruments that should have never had such ratings in the first place.
And once the unavoidable downgrade of monolines occurs financial institutions will be forced to write down another $150 billion structured finance assets kicking another round of large financial losses. The downgrade of the monolines could also lead to large losses – and potential runs – on the money market funds that invested in some of these toxic products. The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters. Finally, the monolines’ downgrade will then also lead to another sharp drop in US equity markets that are already shaken by the risk of a severe recession and large losses in the financial system. Indeed, in the last few weeks movements of the stock markets have been driven more by news about the fate of the monolines rather than the monetary easing news of the Fed, a signal that markets realize that the economy suffers of credit, rather than just illiquidity, problems.

Fourth, avoiding a more severe credit crunch by an aggressive support of the recapitalization of the financial system through capital injections by sovereign wealth funds (SWF). The risk of a credit crunch following the losses in financial institutions and their reduction in capital is serious. For example, Goldman Sachs estimated that $200 billion of losses in the financial system will lead to a contraction of credit of $2 trillion given that such institutions hold about $10 of assets per dollar of capital.

That is the reason why the Fed, the US Treasury and other financial officials have totally set aside any other concerns about SWFs (their foreign government ownership, their lack of transparency, etc.) and have aggressively supported the recapitalization of the financial system by such SWF. To avoid a more severe recession it is better to restore the balance sheet of the banks via a recap that reduces the need to contract lending and credit than via a contraction of the asset side of such balance sheet. However, this recapitalization of banks by sovereign wealth funds – about $70 billion so far – will be unable to stop the credit crunch and the credit disintermediation (the move from off-balance sheet to on balance sheet of SIVs, conduits and other vehicle; and the moves of assets and liabilities from the shadow banking system to the formal banking system) and the ensuing contraction in credit as the mounting losses in the financial system will dominate by a large margin any bank recapitalization from SWFs.

Based on our analysis such losses in the financial system could add up to more than $1 trillion - not just $200 billion – and a good part of these losses will be among financial institutions such as commercial banks and investment banks. Thus, unless SWF or other financial institutions are willing to throw much more good money after bad money (the Chinese SWF – CIC - lost 30% of its investment into Blackstone in three months alone; while BofA lost most of its $2 billion investment in Countrywide and is not at risk of doubling up its losses by taking over the insolvent Countrywide) it will be impossible to avoid a significant reduction in the capital of the financial system and the severe credit crunch that is now underway. And there is now evidence that even long-investment horizon investors such as SWF are starting to become skeptical about throwing good money after bad money into US and European financial institutions.

Also notice that recent data suggest significant losses and the beginning of a credit crunch among smaller banks and even some medium sized regional and national banks. The chances that banks with serious problems such as Wachovia or WaMu – as opposed to the Citis or Morgans of the world - will get massive support from SWF are very low.

Fifth, attempts to reduce the number of foreclosures among distressed homeowners and provide measure of support of the housing markets. These include the Hope plan to freeze the reset of some ARM mortgages, the lifting of some of the limits to the portfolios of the GSEs, the use of the Federal Home Loan Bank system to provide liquidity to mortgage lenders, use the FHA Secure loan refinance program to reduce the number of foreclosures, etc. But some of these plans are too little too late to make a difference while others are outright inappropriate uses of public money.

To understand the gargantuan challenge that policy makers face in controlling the severity of the housing recession note that it highly likely that US home prices will fall between 20% and 30% from their bubbly peak; that fall would reduce household wealth between $4 trillion and $6 trillion. Also, while the subprime meltdown is likely to cause about 2.2 million foreclosures, a 30% fall in home values would imply that over 10 million households would have negative equity in their homes and would have a big incentive to use “jingle mail” (i.e. default, put the home keys in an envelope and send it to their mortgage bank).

Given the size of the meltdown in the housing market and the risks of massive default the measures undertaken so far are either minor band-aid solutions or inappropriate uses of public funds. The Hope plan – while going in the right direction in spirit – is so constrained that it will help only a very small fraction of subprime borrowers in avoiding a reset of their ARMs; studies suggest that – at best – only 5% to 10% of such borrowers will be able to benefits from such a reset. The severity of the housing crisis is such that even a hypothetical plan that allowed all of subprime borrowers to freeze their resets would not be enough. Currently politically unthinkable appropriate solutions – such as an outright across the board reduction of the face value of the mortgages of the order of 10% to 20% to reduce the jingle mail are unconceivable now but may become necessary in the near future to stem a tsunami of defaults and foreclosures.

The time will come – unfortunately too late – when financial institutions will realize that they are better off freezing the resets and, at the same time, write down a part of the face value of the mortgage, to allow strapped homeowners to avoid default as the alternative of foreclosure and selling homes at steeply discounted prices in a very illiquid markets involves larger losses for the creditors than a reduction of the debt burden of illiquid and/or insolvent borrowers. Unfortunately this rational solution to the mortgage credit problems will come too late and only when massive insolvencies will lead banks to appreciate the benefits of this alternative and more radical approach to mortgage distress. In the meanwhile the housing and mortgage carnage will continue at accelerated rates.

Similarly, the FHA Secure program has been so far a total failure and there are now suggestions to vastly expand it to make it more effective. The proposals to allow the GSEs (Fannie and Freddie) to buy or guarantee mortgages above the current conforming limits of $417k (all the way to a new limit of $729k) don’t have much merit. The jumbo loan market may be in distress now but why should the GSE heavily subsidize very large mortgages of upper class Americans. At the $417 limit the GSE are already seriously subsidizing the mortgages by middle and middle upper class households. Now extending this subsidy to the wealthiest households buying McMansions and expensive condos is highly inappropriate public policy. Also, as suggested by OFHEO, such plan may lead the GSE to divert their lending activities from buying and guaranteeing smaller and less expensive mortgages towards bigger jumbo loans.

Finally, the widespread use of the FHLB system to provide liquidity – but more clearly bail out insolvent mortgage lenders – has been outright reckless. Countrywide alone – the poster child of the last decade of reckless and predatory lending practices – received a $51 billion loan from this semi-public system; in the absence of this public bailout Countrywide would have ended up where it should, i.e. into outright bankruptcy. And the largesse of the FHLB system does not stop at Countrywide. A system that usually provides a lending stock of about $150 billion has forked out loans amounting to over $750 billion in the last year with very little oversight of such staggering lending. The risk that this stealth bailout of many insolvent mortgage lenders will end up costing massive amounts of public money is now rising.

Sixth, the Fed and other financial regulators have concentrated on trying to avoid the liquidity and insolvency problems of banks and other depository institutions. Through the provision of massive liquidity – including the new TAF auctions - to these depository institutions, the reduction of the discount rate and the easing of access to the discount window, via actions of forbearance such as the waiver of Regulation W or via the effective bailout of some subprime lenders such as Countrywide via the FHLB system the Fed and other financial regulators have been busy to avoid a “Northern Rock” style of bank collapse and run. Whether such actions are wise as some banking institutions are insolvent and whether such actions will be effective in preventing some bank defaults is open to discussion. There is increasing likelihood that some banks – even some large regional ones or some smaller national ones – may go under during a severe recession, regardless of what the Fed does.

But much more importantly the Fed is not directly able to resolve the liquidity and credit problems of the “shadow banking system” (as defined by the PIMCO folks). A more appropriate definition of this system would be the “shadow financial system” (as it is composed by non-bank financial institutions) and this system is now facing serious problems that cannot be easily addressed by the Fed. This shadow financial system is composed of financial institutions that – like banks – borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions.

All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don’t have direct or indirect access to the central bank’s lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers.

Dealing with the distress of this shadow financial system will be very problematic as this system – stressed by credit and liquidity problems - cannot be directly rescued by the central banks in the way that banks can. The Federal Reserve Act does allow lending by the Fed to non-depository institutions only in extreme emergency conditions and after a very restrictive and cumbersome voting and approval process. And since the Great Depression such emergency authority to lend to non-depository institutions has not been invoked. Thus, while the liquidity injections by the Fed has been helpful in reducing the liquidity crunch among many depository institutions they have been ineffective in dealing with the liquidity and credit problems of such shadow financial system. This is the reason why the SIVs collapsed and their assets and liabilities had to be brought back on-balance sheet. This is why money market funds that experienced massive losses on their holdings of toxic ABS had to be rescued by their holding banks or financial groups. If some large hedge funds were to experience a significant run on their funding – as the risk of redemptions is rising given the large losses by some of them in recent months and in January and the coming deadline for redemptions – no one would be able to bailed them out, thus forcing a potentially dangerous fire sale of their assets in an illiquid market. And at this point one cannot now rule out that one or more large broker dealer may end up into liquidity or credit problems and face bankruptcy. These are all problems that the Fed and other financial regulators cannot resolve, either directly or indirectly.

Seventh, the Fed and financial regulators and supervisors are walking a very fine line between transparency/recognition of losses and forbearance. On one side they recognize the need for financial institutions to be transparent and reveal fully the losses on their balance sheets as the uncertainty about such losses is an importance source of the lack of trust and confidence that has made this crisis severe; they also recognize the need to avoid forms of policy forbearance that would exacerbate such a lack of confidence. At the same time the authorities are trying to avoid – via appropriate forbearance actions - a self destructive asset price deflation and fire sales of assets that would exacerbate the financial meltdown, the credit crunch and the collateral damage to the real economy. The trouble is that finding the right and appropriate “middle way” between transparency and recognition of losses and “appropriate” forbearance is very hard.

The logic of finding a middle way is obvious. Transparency and openness about the losses that financial institutions suffered is necessary to resolve the “Where is Waldo?” problem, i.e. the uncertainty among the investors on who is holding the toxic waste and how much of it; this uncertainty has been the source of the risk aversion, lack of trust in counterparties and liquidity hoarding that has worsened the liquidity and credit crunch. So, greater transparency and recognition of the losses is appropriate to restore confidence in the financial system.

On the other hand there is also recognition that under very distressed and illiquid market conditions too much transparency and too much marking to market may lead to a self-destructive cascade of asset prices falling below medium term fundamental values and the credit crunch getting worse. Specifically, there is now a risk that a vicious circle of financial losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will take leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets. Capital losses then will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit.

As one former senior financial official put in a private Davos session on systemic financial risk if we had today for the auto loans and credit cards an instrument similar to the ABX for pricing the value of subprime loans such form of market transparency would be self-destructive and lead banks to show massive additional losses, even larger than those warranted by the worsening fundamentals in the consumer credit market. In other terms, marking to market in a market where prices are discounted by illiquidity may be self destructive.

The problem is that this principle of avoiding – via appropriate forbearance - a self destructive cascade of asset fire sales in illiquid markets is a sensible idea that it is easier expressed in theory than being applicable in practice. Some of the early attempts to provide such forbearance were actually faulty and destructive of confidence: for example the super-SIV plan was conceptually faulty in the first place and its failure appropriate. If a fire sale of the illiquid assets of the SIV was inappropriate the right solution was not to park such assets in a freakish super-SIV. It was rather to bring back those assets on the balance sheet of banks where they belonged in the first place.

Similarly, the concern about the writedowns that will follow a downgrade of the monolines is well taken. However, desperate attempt to avoid a rating downgrade of monolines that do not deserve such AAA rating are highly inappropriate as the insurance by these monolines of toxic ABS was reckless in the first place. If public concerns about access to financing by state and local governments during a recession period are warranted it is better to split the monoline insured assets between muni bonds and structured finance vehicle, ring fence the muni component and let the rest be downgraded and accept the necessary writedowns on the structured finance assets. If these necessary writedowns will then hurt financial institutions that hold this “insured” toxic waste so be it as these assets should have never been insured in the first place. The ensuing fallout from the necessary writedown – such as the need to avoid fire sales in illiquid markets - should then be addressed with other policy actions.

These examples suggest that while the concerns of authorities on avoiding self destructive fire sales and asset price undershooting (relative to fundamentals) may be warranted providing appropriate – as opposed as inappropriate and self destructive forbearance – is easier said than done. The Fed and other financial authorities are looking for a “middle way” but that middle way may not clearly exist in practice. Thus, there are serious limits to the authorities’ ability to follow sensible policies that avoid a vicious circle of asset price undershooting and excessive credit contraction.

In this regard market perceptions that the Fed is out there to bail out investors and the stock market are also not conducive to greater confidence in the monetary authorities. While the Fed goal may rightly be that of bailing out Main Street rather than Wall Street a recession is now not only unavoidable but also necessary to reduce the imbalances – excessive spending relative to income – that were festered by the asset and credit bubbles that burst last year. While public policy should be concerned about a contraction of demand and economic activity that is in excess of what is necessary to restore economic and financial sustainability public policy should not aggressively prevent the necessary economic adjustment that is now required, i.e. a painful reduction of consumption relative to income and an increase in the saving rate that is necessary to bring the economy on a more sustainable growth path over the medium term.

Thus, the perception by markets that the Fed is trying to avoid the necessary economic correction and the necessary adjustment in asset prices – including a needed sharp reduction in equity price and in home prices and the necessary increase in credit spreads – is a matter of concern. While moral hazard will be contained by the massive losses that lenders and investors will suffer regardless of what the Fed does the perception that the Fed is trying to prevent the necessary adjustment in asset prices is not confidence building. While the Fed may be running out of bubbles to create and while inflation may end up being the last of the problems that the Fed faces ahead market perceptions that the Fed has now altogether ignored concerns about moral hazard and concerns about future inflation are now starting to undermine the credibility of the Fed.

Eighth, and finally, the Anglo-Saxon financial system is in a severe crisis – as argued by Martin Wolf or – as argued here – this is the first crisis of financial globalization and securitization. The reform of the financial system to reduce the risk of future destructive credit and asset bubbles is a massive undertaking that the G7 and the Financial Stability Forum have just started. Formally senior financial official argue that everything is on the table and open to discussion and reform: the flaws and wrong incentives of the securitization (originate and distribute) model, the conflicts of interests of the rating agencies, the poor risk management in financial institutions, the lack of true stress testing, the importance of liquidity risk, the wrong incentives deriving from the system of compensation of bankers and financial sector operators who have an agency problem relative to the firms’ shareholders and an incentive to gamble for redemption, the lack of information and transparency in the financial system, the flaws of Basel 2, the problems of pricing and valuing complex structured finance products, as well as other issues.

Reforming this system is urgent to restore confidence in the financial system and reduce the risks of boom and busts in asset prices and credit that are becoming increasingly self-destructive. It is one thing to have such boom and busts in less developed and complex financial system with lower degrees of financial innovation. It is another one to have these repeated and increasingly unstable cycles in very complex systems that private sector agents and public sector regulators and supervisors don’t fully understand and are unable to control. The risk that a systemic financial meltdown in this most complex “black box” financial system that has run amok will cause a “black swan” event with destructive real economic and financial consequences is rising.

And while policy makers and regulators now claim that everything is on the table in terms of reforming a faulty financial system they stress in private that their preferred approach would be one of “self-regulation” and reforms undertaken by private financial institutions rather than new rules and regulation imposed by authorities. While the right balance between principles and rules in regulation and supervision is open to discussion the recent experience suggests that excessive reliance on principles not backed by appropriate rules, the delusional hope that internal models of risk management will provide the right amount of risk taking, the wishful thinking that “self-regulation” will work, the hope that financial institutions will self reform the system of compensations of bankers are all mistaken views. A more robust set of rules, regulations and supervisions will be necessary as excessive reliance on self-regulation and market discipline has shown its failure. Starting with the interim report that the FSF group headed by Mario Draghi will present to the G7 finance ministers we will see how serious financial official are about reforming the system and reducing the medium terms risks of a systemic financial crisis. For the time being there are good reasons to be skeptical that the right policy actions and reforms will be undertaken.

In conclusion, the risks of a systemic financial meltdown of the sort that I described in my previous article are rising. While the Fed and the financial policy authorities are now fully aware of the risks of this scenario – after a long two years where they misdiagnosed the problems in the economy and the financial system – and they are starting to take some of the appropriate policy actions in the monetary and financial spheres, a realistic assessment of the risks in the real economy and in the financial system suggests that it will be very hard to avoid a severe economic recession and the financial fallout of such a recession. And the risks of a systemic financial crisis that will exacerbate such a US recession and will lead to near recession conditions around the world are now rising.

The 12 step program:

Here are the twelve steps or stages of a scenario of systemic financial meltdown associated with this severe economic recession…

First, this is the worst housing recession in US history and there is no sign it will bottom out any time soon. At this point it is clear that US home prices will fall between 20% and 30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of household wealth. While the subprime meltdown is likely to cause about 2.2 million foreclosures, a 30% fall in home values would imply that over 10 million households would have negative equity in their homes and would have a big incentive to use “jingle mail” (i.e. default, put the home keys in an envelope and send it to their mortgage bank). Moreover, soon enough a few very large home builders will go bankrupt and join the dozens of other small ones that have already gone bankrupt thus leading to another free fall in home builders’ stock prices that have irrationally rallied in the last few weeks in spite of a worsening housing recession.

Second, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages as the same reckless lending practices in subprime (no down-payment, no verification of income, jobs and assets (i.e. NINJA or LIAR loans), interest rate only, negative amortization, teaser rates, etc.) were occurring across the entire spectrum of mortgages; about 60% of all mortgage origination since 2005 through 2007 had these reckless and toxic features. So this is a generalized mortgage crisis and meltdown, not just a subprime one. And losses among all sorts of mortgages will sharply increase as home prices fall sharply and the economy spins into a serious recession. Goldman Sachs now estimates total mortgage credit losses of about $400 billion; but the eventual figures could be much larger if home prices fall more than 20%. Also, the RMBS and CDO markets for securitization of mortgages – already dead for subprime and frozen for other mortgages - remain in a severe credit crunch, thus reducing further the ability of banks to originate mortgages. The mortgage credit crunch will become even more severe.

Also add to the woes and losses of the financial institutions the meltdown of hundreds of billions of off balance SIVs and conduits; this meltdown and the roll-off of the ABCP market has forced banks to bring back on balance sheet these toxic off balance sheet vehicles adding to the capital and liquidity crunch of the financial institutions and adding to their on balance sheet losses. And because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing – rather than reducing systemic risk – and making the credit crunch global.

Third, the recession will lead – as it is already doing – to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans. There are dozens of millions of subprime credit cards and subprime auto loans in the US. And again defaults in these consumer debt categories will not be limited to subprime borrowers. So add these losses to the financial losses of banks and of other financial institutions (as also these debts were securitized in ABS products), thus leading to a more severe credit crunch. As the Fed loan officers survey suggest the credit crunch is spreading throughout the mortgage market and from mortgages to consumer credit, and from large banks to smaller banks.

Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up. Some monolines are actually borderline insolvent and none of them deserves at this point a AAA rating regardless of how much realistic recapitalization is provided. Any business that required an AAA rating to stay in business is a business that does not deserve such a rating in the first place. The monolines should be downgraded as no private rescue package – short of an unlikely public bailout – is realistic or feasible given the deep losses of the monolines on their insurance of toxic ABS products.

Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already massive losses. It will also lead to additional losses on their portfolio of muni bonds. The downgrade of the monolines will also lead to large losses – and potential runs – on the money market funds that invested in some of these toxic products. The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters. The monolines’ downgrade will then also lead to another sharp drop in US equity markets that are already shaken by the risk of a severe recession and large losses in the financial system.

Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one. Lending practices in commercial real estate were as reckless as those in residential real estate. The housing crisis will lead – with a short lag – to a bust in non-residential construction as no one will want to build offices, stores, shopping malls/centers in ghost towns. The CMBX index is already pricing a massive increase in credit spreads for non-residential mortgages/loans. And new origination of commercial real estate mortgages is already semi-frozen today; the commercial real estate mortgage market is already seizing up today.

Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern Rock, will lead to depositors’ panic and concerns about deposit insurance. The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions. Already Countrywide – an institution that was more likely insolvent than illiquid – has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders. Banks’ bankruptcies will add to an already severe credit crunch.

Seventh, the banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans – a good chunk of which were issued to finance very risky and reckless LBOs – is now at serious risk. And hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower). Add to this that many reckless LBOs (as senseless LBOs with debt to earnings ratio of seven or eight had become the norm during the go-go days of the credit bubble) have now been postponed, restructured or cancelled. And add to this problem the fact that some actual large LBOs will end up into bankruptcy as some of these corporations taken private are effectively bankrupt in a recession and given the repricing of risk; convenant-lite and PIK toggles may only postpone – not avoid – such bankruptcies and make them uglier when they do eventually occur. The leveraged loans mess is already leading to a freezing up of the CLO market and to growing losses for financial institutions.

Eighth, once a severe recession is underway a massive wave of corporate defaults will take place. In a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%. Also during such distressed periods the RGD – or recovery given default – rates are much lower, thus adding to the total losses from a default. Default rates were very low in the last two years because of a slosh of liquidity, easy credit conditions and very low spreads (with junk bond yields being only 260bps above Treasuries until mid June 2007). But now the repricing of risk has been massive: junk bond spreads close to 700bps, iTraxx and CDX indices pricing massive corporate default rates and the junk bond yield issuance market is now semi-frozen. While on average the US and European corporations are in better shape – in terms of profitability and debt burden – than in 2001 there is a large fat tail of corporations with very low profitability and that have piled up a mass of junk bond debt that will soon come to refinancing at much higher spreads. Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies. And once defaults are higher and credit spreads higher massive losses will occur among the credit default swaps (CDS) that provided protection against corporate defaults. Estimates of the losses on a notional value of $50 trillion CDS against a bond base of $5 trillion are varied (from $20 billion to $250 billion with a number closer to the latter figure more likely). Losses on CDS do not represent only a transfer of wealth from those who sold protection to those who bought it. If losses are large some of the counterparties who sold protection – possibly large institutions such as monolines, some hedge funds or a large broker dealer – may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay.

Ninth, the “shadow banking system” (as defined by the PIMCO folks) or more precisely the “shadow financial system” (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that – like banks – borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don’t have direct or indirect access to the central bank’s lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system – stressed by credit and liquidity problems - cannot be directly rescued by the central banks in the way that banks can.

Tenth, stock markets in the US and abroad will start pricing a severe US recession – rather than a mild recession – and a sharp global economic slowdown. The fall in stock markets – after the late January 2008 rally fizzles out – will resume as investors will soon realize that the economic downturn is more severe, that the monolines will not be rescued, that financial losses will mount, and that earnings will sharply drop in a recession not just among financial firms but also non financial ones. A few long equity hedge funds will go belly up in 2008 after the massive losses of many hedge funds in August, November and, again, January 2008. Large margin calls will be triggered for long equity investors and another round of massive equity shorting will take place. Long covering and margin calls will lead to a cascading fall in equity markets in the US and a transmission to global equity markets. US and global equity markets will enter into a persistent bear market as in a typical US recession the S&P500 falls by about 28%.

Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates – TED spreads, BOR-OIS spreads, BOT – Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of investors’ risk aversion – will massively widen again. Even the easing of the liquidity crunch after massive central banks’ actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks.

Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets. Capital losses will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit. The triggering event for the next round of this cascade is the downgrade of the monolines and the ensuing sharp drop in equity markets; both will trigger margin calls and further credit disintermediation.

I'm pretty pessimistic.

Senator Clinton won't sign the AFA Pledge

*UPDATE: The story is old news, and she supported the measure shortly after The Nation piece was written. Ed Brayton goofed up and I goofed up by repeating his story. The only way I can still try to spin this is to wonder why the initial delay on her part...

Read about the American Freedom Agenda Act and see the pledge here.

Another reason to support Barack over Senator Clinton: she won't support the American Freedom Agenda Act. More on that here and here.

Time to diagnose this as an act of God

I know it's wrong of me to feel this way, but when I see 60 tornadoes hit the SE and leave 50 people dead, I have to wonder why people can't make the logical connection to God's wrath in the same way that they do when a "liberal" or non-Christian area gets hit with a natural disaster. Oh yeah, it's because they're fu#$*ng stupid.

Maybe God's angry that TN went for Hillary and the SE went for Huckabee?

Politics notes

A few politics notes:

Obama leads in pledged delegates, those who have to vote with the people. He lags with superdelegates, those who are apparently better than other Americans and get to decide close races for us:

It looks like Obama, by the narrowest of margins, won last night’s delegate hunt. By our estimates, he picked up 840 to 849 delegates versus 829-838 for Clinton; the Obama camp projects winning by nine delegates (845-836). He also won more states (13 to Clinton’s eight; New Mexico is still outstanding), although she won the most populous ones (California and New York). And Obama’s argument that he might be the most electable Democrat in a general election was bolstered by the fact that he won nine red states versus four for Clinton. Yet with Clinton’s overall superdelegate lead (259-170, based on the lists they've released to us), and when you toss in the 63-48 lead Obama had among pledged delegates going into Super Tuesday, it appears Clinton has about 70 more overall delegates than Obama does (1140-1150 for Clinton versus 1070 to 1080 for Obama). It’s that close, folks...

See this and this for more details. Yeah, it pisses off John Aravosis too.

Barack has raised $6.7M since the polls closed on Tuesday. I did my part ($25), for the third time. On the other hand, Hillary and Bill are tapping into their personal fortune (how did they make $30M???).

Obama is pointing out the "let's return to the '90s" stuff isn't so smart.

The huge gap between GOP and Dem primary voting is an encouraging sign for November:

Obama/Clinton voters: 14,460,149
McCain/Romney/Huckabee voters: 8,367,694
Or, 73% more Democratic voters than Republican voters...

Some economics logic from Bill Gross at PIMCO for moving away from supply-side insanity that supports making the Bush tax cuts permanent (i.e., John McCain's plans) and towards demand-side, liberal economic policies. Looks like the market is catching on to the ill prospects of further coal-powered plants. Bernanke is tanking among fellow economists.

Faux News threatens Barack and Hillary for avoiding the partisan network. "Fair and balanced"? You decide.

Poor Dobson & RR. Watch 'em squirm with schadenfreude.

JibJab VDay Striptease

I made another JibJab movie, this one a funny striptease for Valentine's Day, rather than about politics like the last one:

Don't send a lame Valentine's Day eCard. Try JibJab Sendables!

Primary results in table form

**PS: RealClearPolitics documents the vote tallies, so I'm done updating mine, although I am still the only person (so far as I can find) making mine available as an Excel file.**

LAST UPDATED: 5/5/08 @ 5:15 AM

I don't know why this sort of workup of the primary results isn't more readily available:

Get it HERE as .pdf, HERE as .htm, HERE as .jpg, HERE as .png, and HERE as .xls (Excel '07, R-click and "save as").

My data is from CNN. Here is Barack's data and here is Hillary's.

See this post from DKos for arguments about the (non)merits of using the popular vote tally:

Point Number 1: If the popular vote determined the nominee, no candidate would ever go to Iowa or New Hampshire. They'd spend all their time in big urban areas all over the country from the outset of the campaign, racking up raw numbers. What would be the point of even visiting New Hampshire if you could camp out in Brooklyn? Concrete Example: Barack Obama would not have spent only a day and a half in California before the Feb 5 primary. He would have never gone to Idaho. Duh.

Point Number 2: If the popular vote determined the nominee, no state in its right mind would ever hold a caucus, instantly disenfranchising itself. Concrete example: Minnesota-Missouri. Minnesota gets credit for 214K votes, and Missouri gets 822K votes, but they each get 72 delegates. Is Missouri's voice 4 times more important than Minnesota's?

Point Number 3: The arbitrary distinction between who gets to vote in these primaries is nothing like the general election, where everyone registered gets to vote. In the primaries, sometimes it's just Dems, sometimes Dems and Indies, sometimes anyone. Concrete example: Texas gets a million more votes than similar overall population New York (2.8M to 1.8M), even though New York is far more Democratic, simply due to this arbitrary restriction on who can vote (NY = closed, Texas = open).

Overall point: regardless of the fact that Obama will win the popular vote, it is completely illegitimate in this race. THIS IS NOT LIKE POPULAR VOTE IN THE GENERAL ELECTION.

Also see Barack's page where delegates are tallied. This is cross-posted to my personal page.

Politics notes

A few politics notes:

The bankrupting of our country under Bush is incomprehensible. Taxes for the ultra-rich were cut at the expense of the poor and elderly, as their programs were slashed in order to make up for the account deficits. Senator McCain and other GOP candidates intend to continue his economic policies.

On that note, Ezra Klein delves in to the policy differences between Barack and Hillary. He finds that:

In his book The Audacity of Hope, he admits to appreciating the Gipper's understanding of government's failings. "Reagan's central insight," he wrote, "that the liberal welfare state had grown complacent and overly bureaucratic … contained a good deal of truth." This insight was hardly peculiar to Reagan; it was shared by a generation of community organizers, Obama among them, who fought with public bureaucracies every day. This insight has led Obama to the belief that individuals should experience a government as gentle and unfussy as possible. In my talks with his advisers, the term "iPod government" repeatedly came up, a reference to Obama's desire for a sleeker, easier-to-use state. This guiding principle helps explain how he came up with a health-care plan without an individual mandate. Obama's fears that care would prove unaffordable and individuals would be left begging for exemptions from some unconcerned bureaucrat outweighed concerns that the healthy would opt-out of the system and that the insurers wouldn't cover everyone at a fair price if "everyone" meant only the sick. It's that thread that reconciles his philosophical preference for single-payer with his programmatic eschewing of universal care. Single-payer is simple. Mandates are more complicated, and Obama fears that a mismatch between affordability measures and care costs will leave individuals fighting with the state for coverage. Better the policy be meeker and the experience smoother than risk a strong policy's potential to force the unsuspecting into unwanted dealings with an unfamiliar bureaucracy.

Similarly, Obama's stimulus plan is essentially a quick, across-the-board tax cut. Clinton's is a series of tax credits and targeted subsidies. The difference between the plans, again, is between the ease-of-implementation of Obama's and the specificity of Clinton's. Her targeted credits help worthwhile programs and do more to target the worst-off, but in so doing, they create an essentially means-tested stimulus package that would require beneficiaries to prove their distress. Obama, by contrast, offers a large payroll tax rebate that would require little in the way of administration.

In this, as in much else, Obama betrays a universalist streak. Government is simplest when it is unspecific—it's when it starts trying to subdivide the population and impact only targeted groups that it becomes hard to administer (think of how little trouble seniors have accessing a universal program like Social Security versus how much trouble the poor have trying to determine eligibility for a means-tested program like Medicaid). If Kennedy wanted a rising tide to lift all boats, Obama wants us all in one boat to better navigate the waves. But before he can rehabilitate the universalist approach to government, the experience of interacting with government must be bettered. In a world where a trip to the DMV is such a Kafkaesque odyssey that you can actually hire individuals to undergo the torment for you, unifying the public square first means beautifying it. So Obama's detailed plans for more government accountability and transparency precede and even take priority over his plans for what the newly accountable and transparent government should do. Till that day when government is reformed and citizens' trust is ensured, that new government must be used with care, and its capabilities should not be overestimated.

Harold Pollack responds to Krugman about Barack and mandates. His points about the study summarized:

So we're back where we started: two plans, both with guaranteed availability of insurance regardless of health status, both with subsidies. One has a mandate with (as yet undefined) enforcement mechanisms. The other has no mandate but (as yet undefined) financial disincentives for free-riding. Until the two plans are better specified, there is no basis on which to estimate how many people will wind up not buying insurance under either plan, and therefore no basis for any firm estimate of costs to the taxpayer.

This is hardly justification for the holy war the Clinton campaign is waging on Obama on the mandate issue.

David Brooks follows up on the same issue (Clinton's mandates and dealings with health care):

Moreover, the debate Clinton is having with Barack Obama echoes the debate she had with Cooper 15 years ago. The issue, once again, is over whether to use government to coerce people into getting coverage. The Clintonites argue that without coercion, there will be free-riders on the system.

They’ve got a point. But there are serious health care economists on both sides of the issue. And in the heat of battle, Clinton has turned the debate between universal coverage and universal access into a sort of philosophical holy grail, with a party of righteousness and a party of error. She’s imposed Manichaean categories on a technical issue, just as she did a decade and half ago. And she’s done it even though she hasn’t answered legitimate questions about how she would enforce her universal coverage mandate.

Cooper, who, not surprisingly, supports Barack Obama, believes that Clinton hasn’t changed. “Hillary’s approach is so absolutist, draconian and intolerant, it means a replay of 1993.”

Kevin Drum makes his case for Obama.

The evolution of Hillary's views on Iraq by Spencer Ackerman show a complete lack of clarity and track with polling figures, this is the sort of thing that will hurt her badly in the general election:

...Clinton set herself up to run for president as both a pro-war and an anti-war candidate—depending on the contingencies of the war and the politics of the moment.

Clinton’s statements during October 2002 have received much attention. But what she’s said in the intervening years demonstrates a vertigo-inducing lack of clarity. Her position tracked the political zeitgeist elegantly: cautiously in favor of the war before it started; enthusiastically in favor of it during its first year; overtaken with doubt during 2004; nervously against withdrawal in 2005; cautiously in favor of withdrawal ever since—and all without so much as an acknowledgment of her myriad repositioning. At no point did she challenge the prevailing assumptions behind the war.

This will come back to haunt her.