FrICTION                                      Election 2008

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Artists Against McCain  Maxed Out Moms We Love Sarah Palin McCain flip flops on Wall Street

Fed Chairman Ben Bernanke warns of more pain ahead

AFTER the VP Debate: Analysis and Comments Palin talks about Wall Street  Palin bad for USA

Till Debt Do Us Part

An Interview With Financial Analyst And Investment Adviser Gordon Smith

"It may be better to wait until the market falls to a point where share prices are more affordable for any rescue effort. "

President Bush's bailout package has been passed by the House. Is this the first or last of its kind? 

"Look, this is all about confidence. When there's confidence in our leaders and in the marker, we'll be fine. Right now, the smart money is on holding off with any further long-term rescues in the corporate sector. It may be better to wait until the market falls to a point where share prices are more affordable for any rescue effort ... there are so many uncertainties. It's herd mentality." 

"A fundamental principle of free-market capitalism is that investors take on big risks to reap big rewards — but they also assume any losses that occur. The government's plan would radically alter that model, leaving profits private while making losses public." (NPR)

And of course, as more banks and corporations go to the wall, that has the added benefit that there will fewer rescue operations to mount, saving taxpayers’ dollars. So recession isn’t bad news for everyone – far from it.  I've been looking at what Washington insiders really think about this -- is there ideological conviction about the bailout or is it mere populism? -- and it doesn't look like they're thinking at all. I'm not sure the Senate Committee on Finance has many answers, certainly not convincing ones. I have studied Governor Palin's responses to the current crisis and, well, how should I put it? The woman doesn't understand the market. When she talks about regulation, or lack of it, it's as though she talking about the rules for a snow machine race. It's election year, I guess."

"There was deception there [in the housing market], and there was greed and there is corruption on Wall Street. And we need to stop that," says Sarah Palin.

Why has this terrible crisis happened?

"There are several abnormalities in the home loans market right now, which isn’t too surprising if you consider that many of the lenders have not so much been scraping the bottom of the barrel as tearing the whole barrel apart. If your policy is essentially to give mortgages to crack-addicts, you can’t be too surprised if you end up with abnormal outcomes. You have to wonder, too, whether folks like Trent Lott, Orrin Hatch, Blanche Lambert Lincoln, those types of folks, really have a handle on this. You can present them with the data, give them options, but do they really understand at a fundamental level what's going on. There's a lot of showboating at the moment. Tragic!"

Who should we blame? Is it right to blame anyone?

"The blame game can be a lot of fun. This is a case of throwing poop at the fan and watching it hit everybody. How far back in the chain of decisions do you want to go? You can blame Wall Street bosses for some really foolhardy decisions, basically playing Las Vegas with our money. You could wave an angry finger at folks like Phil Gramm, John McCain's ex-economic adviser, the guy that called us a nation of whiners. He was a big proponent of the deregulation that turned Wall Street into Atlantic City. You could criticize all the decisions that turned America from being a manufacturing nation, the nation built by Indiana and Pennsylvania steel, to a consumer nation built on credit. What's the international symbol of America today? The shopping mall! You could blame all those folks who weren't happy in their homes, who wanted McMansions for half a million, even if they only earned $20,000 a year." 

Ben Bernanke: “Our understanding of the best practice in monetary policy evolved during Alan Greenspan's tenure at the Fed."

If you listen to the insiders, there isn't much faith in the bailout working, and Main Street is somewhat oblivious to the seriousness of the meltdown...

"Americans are so used to smooth and constant economic growth that the bad news and terrifying possibilities are going to take a while to trickle down to Main Street. There are also a lot of pundits more interested in their next book than the financial well-being of the country, that's capitalism, right? But this head-in-the-sand denial is going to come back and haunt the United States. Look wider afield. Iceland, one of the richest countries in the world per capita, is going bust."

"How concerned should we be about the crisis in Iceland? I suppose the focus should be on German banks about to fold and the Dow continuing to nosedive -- these things are truly terrifying -- but Iceland is fascinating and amusing. I've always been puzzled how you can build one of the world's highest standards of living on the back of a few herring boats, though I suppose that singer Bjork probably accounts for around 85 percent of their GDP. Clearly, Icelanders are up to something dodgy, so I guess they are only getting their comeuppance now. And wasn't the famous English soccer club West Ham United bought out by an egg-headed chap called appropriately enough Eggert Magnusson? He was in the bread and cookies business, I believe. His cookies have certainly crumbled."

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"With toxic assets off the books for firms, lenders would once again be willing to lend and the money would start flowing freely through the markets, the theory goes." (NPR)

     "Actually, to make it even more confusing, one of the biggest food retailers in England is also called Iceland, only I don't think there's a connection. If there is any confusion between the two that could be pretty unsettling for the folks in England. As I understand it, Iceland play a big part in keeping the underclass there fed - go to any inner city neighborhood and you'll see a big Iceland store, sort of like Aldi but the assets are entirely frozen -- perhaps they'd be helped by a meltdown."

How serious is this crisis? What are you insiders telling each other?"

"This is the real deal. It's a matter of confidence, or rather lack of it. There is a very real danger that the $700 billion bailout is not going to do the trick, and these failing institutions are going to be back cap in hand before Christmas. There's virtually no confidence in the political leadership. Let's face it, George Bush is a lame duck and a laughing stock. Not even conservatives like John McCain want to be associated with him. Not even evangelicals like Sarah Palin want to be photographed with him. When there's a crisis of leadership, anything can happen. Look at the facts: the Dow fell 369.88 points to slump at 9,955.50. London's share index lost 7.85 percent - its biggest percentage fall since 1987. In Paris the Cac-40 suffered its largest fall on record. The Nikkei has fallen to its lowest since February 2004. This is no minor blip."

"People better start finding out about their personal finances. They need to act calmly and long term, but most of all they need to know what might happen with their money if the market keeps freewheeling. We're talking mass unemployment, recession, the worst times many Americans have ever witnessed. That's what might happen ... No, that's what IS happening."

What's the future for Fanny and Freddie?

"While it has widened to include other sectors of the financial economy, I think the fundamental issue is to figure out a way to make two major home loan businesses that have been bought out by the US Government and find a way of making them viable again. I think the most likely scenario is to merge the Freddie Mac portfolio with the Fannie Mae book –- creating, if you will, Big Fannie. That's going to take some time -- from here on it depends what state the home loans market is in at that time, or indeed whether we have a home loans market left to speak of. We could all be living at our Moms and Pops by then, of course – the home loans business as we know it could have effectively ceased to exist. We have to watch Washington's direction on this . I was talking to some folks from the senate subcommittee on international trade and global competitiveness and their perspective is not really market driven, but anyway that's another story. In the meantime, we've all learned about credit default swaps, so it's been an educational roller coaster ride if nothing else."

"The more holes you drill, the more stuff you find – oil, iron ore, base metals, whatever. It's all out there to be got. If the whole of Alaska ends up looking like a Swiss cheese, so be it – you could kind of say it's the price of progress," says Gordon Smith.

Do you see the bailout which has just been agreed as a form of creeping socialization of finance and business?

"The American economy is not as free market as many like to believe. The entire state of Alaska, led by Governor Palin, is more or less a socialist republic in its taxation and business development policies. Wouldn't you like an annual dividend check from the government? Plus, there are huge sectors of the American economy that are so regulated or controlled by Washington that they could indeed be called socialist or collectivized. In other words, yes the argument can be made that we're seeing a new wave of socialism in America. You know, if you're going to, in effect, nationalize the home loans business, why not go the whole hog and just take whole swathes of the US housing stock into public ownership? You might argue it smacks of the old Soviet Union, but after all they had that system for years and it never seemed to do them any harm. They were better off than today."

     "In fact, if I speculate a little, with the lending markets effectively at a standstill, I can see a kind of wholesale Sovietization, state socialism if you like, of the whole US economy – the banks, the railroads, real estate, manufacturing. It might not sit comfortably with some folks, but that's the reality we're facing, unless we want to see entire parts of our economy just disappear. Warning bells have been sounded by conservatives and libertarians alike, but no one listens to them anymore. Even Bernie Sanders of Vermont, the closest you'll come to an out-of-the-closet socialist in America, calls the bailout a form of state ownership of the banking sector. Bernie is welcoming of it, but plenty of a different persuasion are not. We can only guess what Ron Paul is thinking."

Is the war in Iraq placing a burden on the global economy? Is the war resulting in more oil on the market?

Sarah Palin: "There was deception there [in the housing market], and there was greed and there is corruption on Wall Street And we need to stop that."

How do you rate the chances of producing more oil quickly if the next president wants to drill offshore and in the Arctic National Wildlife Refuge? 

"As one senior executive at an energy and mining firm said: 'Hell, if it’s down there, go look for it. You never know what you might find if you dig enough holes', which certainly coincides with the GOP line. Palin is correct in asserting that gut feeling plays a big part in this. I mean, everyone thinks there's a whole load of scientific research behind oil prospecting, but basically it's a matter of you drill a hole and see what's down there. You may get lucky, most times you won't. But the more holes you drill, the more stuff you find – oil, iron ore, base metals, whatever. It's all out there to be got. If the whole of Alaska ends up looking like a Swiss cheese, so be it – you could kind of say it's the price of progress; wildlife and wilderness in exchange for oil. People want oil."

Thank you Dr. Smith for your time.

"My pleasure. Remember, as they say in some parts of the world, you need ice in your stomach to get through times like these -- nerves of steel, as it were."

* Gordon Smith will periodically answers readers' questions on global trends and markets. Use the Guestbook for any questions. Gordon Smith was educated at Brigham Young University, Liverpool University, and Karlsruhe University. He has worked for a number of investment banks in London, New York, and Bonn. He is currently a maritime transport consultant and a writer on global investment matters, with emphasis on transport, mining, pulp and derivatives. He has advised the governments of Gabon and Togo on shipping matters, and has worked as honorary consul for Cap Verde.

What do you think? We welcome contributions from left, right and between

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What must the GOP be thinking now? Get Out Palin

Which Way For Wall Street?

Financial markets are notoriously jittery. A misstep or foolish comment from a leading politician can send stocks plummeting. Fortunately, we have the reassuring words of Sarah Palin on which to build a secure future. Below, she explains financial crisis to Katie Couric.

COURIC: You've said, quote, "John McCain will reform the way Wall Street does business." Other than supporting stricter regulations of Fannie Mae and Freddie Mac two years ago, can you give us any more example of his leading the charge for more oversight?

PALIN: I think that the example you just cited, with warnings two years ago about Fannie and Freddie-- that's paramount. That's more than most did.

COURIC: But he's been in Congress for 26 years. He's been chairman of the powerful Commerce Committee. And he has almost always sided with less regulation, not more.

PALIN: He's also known as the maverick though. Taking shots from his own party, and certainly taking shots from the other party. Trying to get people to understand what he's been talking about--the need to reform government.

COURIC: I'm just going to ask you one more time, not to belabor the point. Specific examples in his 26 years of pushing for more regulation?

PALIN: I'll try to find ya some and I'll bring 'em to ya.

More Palin Wisdom

Sarah Palin on the need for government reorganization: "This, the vital job, you know, to reform Washington, improve it, cut out the waste because there is so much waste and people are crying out for change wondering where their dollars are going and I wonder too -- but you see we can't rest until the job of creating jobs is done, and that job is a part, cleaning up Washington, taking on the networks of good ol' boys, the greed, the corruption, being ready for that fight because insiders, people who have been there since I was in second grade and I am 44, who don't want change and they want to keep on like it is, which is not good for America obviously because we wonder where our money is going -- and health care reform which plays into that though it should be private and government has extended into that part of our lives so there is government everywhere where it shouldn't be so I will be looking at that, with advanced research another matter too to be encouraged with the education system as a whole, the schools and so on and military spending, the need for a strong defense-- it's reform on those levels, bottom up and the top down, and the middle."

On whether American oil can stay in America: "Oil and coal, of course, it's a fungible commodity and they don't flag, you know, the molecules, where it's going and where it's not. But in the sense of the Congress today, they know that there are very, very hungry domestic markets that need that oil first. So, I believe that what Congress is going to do, also, is not to allow the export bans to such a degree that it's Americans that get stuck to holding the bag without the energy source that is produced here, pumped here. It's got to flow into our domestic markets first."

Writing's On The Wall For McCain: Pulls Out of Michigan, Drops Ads

In a startling and embarrassing move for John McCain, he is throwing in the towel in Michigan. McCain has hoped that his brand of populist Republicanism would resonate with urban and industrial Michigan, but voters are turning their backs on him in droves.

McCain will pull all his tv ads, stop dropping mail, and pull out nearly all his staff, moving them to more competitive Ohio and Wisconsin.

Obama is building a substantial lead in Michigan, which McCain has no chance of closing. McCain has canceled an event in Plymouth, Michigan, which was scheduled for next week.