Wrong Way Billy thinks we should “Remember the Marne.” He says the Republican center is giving way, and some on the political right are in retreat. Time for John McCain to finally make his case. This shit would be really, really sad if it weren’t so ludicrous. (For the non-history majors, The First Battle of the Marne.) Mr. Cohen asks if we should “Shoot the Horses?” He says it’s a wonder that there are still two guys in the presidential race, pulling out all the stops to be chosen as the one to face this economic nightmare. Mr. Krugman, in “The Widening Gyre,” says the troubles in the banking system, hedge funds and emerging markets are mutually reinforcing. Bad news begets bad news, and the circle of pain just keeps getting wider. (For the non-English majors, here’s “The Second Coming,” by Yeats.) Here’s poor, pitiful Billy:
“My center is giving way. My right is in retreat. Situation excellent. I attack!”
That’s the message supposedly sent by General Ferdinand Foch of France to his commanding general, Joseph Joffre, during the crucial First Battle of the Marne in September 1914. The French and British counterattacks succeeded. The German Army, after advancing for a month, was forced back.
Here in the U.S., after more than a month of Democratic advances, it’s the Republican center that’s giving way, and some on the political right who are in retreat. The Obama campaign is marching toward the biggest nonincumbent Democratic presidential victory since 1932, and the Democratic Party is fighting its way toward its best overall presidential and Congressional year since 1964.
Situation not-so-excellent. Time for McCain to attack — or, rather, finally to make his case.
The heart of that case has to be this: reminding voters that when they elect a president, they’re not just electing a super-Treasury secretary or a higher-level head of Health and Human Services. They’re electing a commander in chief in time of war.
The McCain campaign intends, I gather, to return to the commander in chief theme with an event in Florida Wednesday showcasing former secretaries of state and retired senior military officers. But why not showcase young Iraq vets instead? These young soldiers and marines can testify eloquently to the success of the surge that John McCain championed, and to the disaster and dishonor that would have followed Barack Obama’s preferred path of withdrawal.
As for the future in Iraq, the respected foreign policy analyst Michael O’Hanlon, a Democrat, endorsed Obama this past weekend. But O’Hanlon also wrote on Politico that Obama’s Iraq position is “extremely risky,” and that “getting all American combat forces out of Iraq by April 2010, a position he has held while we were losing the war, during the comeback phase, and now while we are winning, is very imprudent and I continue to hope and pray that he rethinks it.”
McCain could point out that hope is nice and prayer is good. But, he could ask: With respect to our national security, do we really want to elect a president on a hope and a prayer?
That has to be the substantive core of his closing argument. But style and tone matter, too. Last week’s New York Times/CBS News poll showed 64 percent of voters saying McCain is spending more time attacking the other candidate than explaining what he would do as president. Just 22 percent say the same of Obama.
When you’re in a hole, stop digging. McCain could order his campaign to pull all negative ads, mailers and robocalls.
For that matter, he might as well muzzle the campaign. McCain campaign senior staff members now seem to be spending more time criticizing one another than Obama, and more time defending their own reputations than pursuing a McCain-Palin victory. McCain should simply say that for the last week of the campaign, no staff member is authorized to speak to the media about anything beyond logistical and scheduling matters.
Then McCain and Palin can spend the final week speaking for themselves. They should throw themselves open full time to the media. Could the press coverage get worse? Next Sunday, McCain and Palin could divide up the talk shows. Sarah Palin live! Lots of people would tune in.
There could be one other big moment this week. Obama has bought a half-hour of television in prime time Wednesday. McCain and Palin could buy time Thursday night — giving voters some incentive to keep an open mind at least until McCain and Palin get to make their case.
Palin could speak first, reprising her fine recent speeches on women’s issues and special needs kids — speeches that got almost no press coverage. She could then introduce her running mate, reminding people of his heroism, and pointing out, as she does on the stump, that he is the only candidate “who has truly fought for America.”
As for McCain, he needs to speak about America’s greatness and its future; about how the ingenuity and toughness of the American people will turn around this financial crisis just as the ingenuity of General Petraeus and the toughness of his fighting men and women turned around Iraq; about how America’s spirit was not undone by a terrorist attack, and will not be undone by a financial mess; about how the naysayers will once again be proved wrong; about how America will emerge from its troubles stronger than ever and will win its battles at home and abroad.
McCain has a chance to close this election in a big and positive way. He has a chance to get voters to rise above the distractions and to set aside the petty aspects of the campaign. He has a chance to remind them why they have admired him, and perhaps to persuade them to vote for him on Nov. 4.
Would this turn things around? Unlikely. But why not take a shot?
Let’s just leave that lying by the side of the road and move on to Mr. Cohen:
I was talking to a banker friend, and he told me the “unraveling” could go on for ages. I thought he meant the unwinding of all the leverage that had inflated everything from the price of stocks to the price of homes.
But, just to be sure, I asked him: “Unraveling of what?”
He paused, before saying, “Almost our way of life.”
A friend of his, he went on, has a horse farm north of New York City. “I told him, for heaven’s sake, you have to get rid of your horses. Shoot them if necessary.”
That got me thinking. Are we going to be living on horse meat before we get to the bottom of this?
It’s now clear that our credit system the world over was rotten all the way through, a giant house of cards maintained by the ingenious connivance of banks, rating agencies and insurance companies in a monumental heist. The only buyers anyone trusts any more are governments.
No wonder Alan Greenspan says he’s in a state of “shocked disbelief.” He’s not the only one.
But as the state intervenes, in what Ed Yardeni, an investment analyst, called “a giant global game of Whac-A-Mole,” the moles keep popping out of new black holes in our financial system.
“We’ve tried rubber mallets, now we’re using bazookas, but we’re flying blind,” Yardeni told me.
It’s really a wonder, when you think about it, that there are still two guys in the race to become U.S. president, pulling out all the stops in these last eight days of campaigning to be chosen as the one to face the nightmare.
Let’s fast-forward a year to October 2009. The U.S. unemployment rate stands at 10 percent. Crime is up across the country. The economy is shrinking. No arm-twisting from the Treasury has managed to restore the broken confidence between borrowers and lenders. Banks, the few still standing, are holding fast to their cash. Property prices are down more than 25 percent from current levels.
The Dow is still heading south as people get used to the idea of stocks trading at no more than 10 times earnings, rather than the much higher ratios our former leveraged world delivered.
New buildings stand empty all over New York because at the end of a boom — that’s to say right now — a lot of new construction comes to market. Exports, long a bright spot in the economy, have plummeted because of a rising dollar. The deficit and national debt stand at unprecedented levels.
The hedge fund industry is decimated — its model of flipping cheap borrowings into leveraged bets around the world has blown up — and one desperate, even contrite, former master of the universe has just sold a Rauschenberg for $9 million less than he paid in 2004.
People still have way too much debt, and the collateral for it keeps evaporating. They are angry. Civil unrest is stirring.
I ask you, Senator McCain, Senator Obama, do you still want the job?
It may not get that bad, of course. On the bright side, gas prices are plunging. There’s a lot of money sitting on the sidelines in places like Dubai. And, as I mentioned, the dollar is up — more than 20 percent against sterling and the euro in the last three months.
You can get a plate of pasta in central London now for less than $50. You can even take a short tube ride for less than $6. There must be hope for us all!
In a way, what’s going on with the dollar is a measure of the extent of global desperation. Here’s a currency backed by debt so massive that it will presumably have to be inflated away some day — and it’s rocketing upward.
Every investment position that made sense during a global boom and doesn’t make sense during a global bust is being unwound, and the people doing the unwinding want dollars. They are buying U.S. Treasury bills yielding basically zilch because they are too plain scared to buy anything else. Capital preservation is the name of the game if you have any capital left.
Of course, there’s the option to try preserving that capital in euros or other currencies. But at some very basic level — and we’re down to basics — the full faith and credit of the U.S. taxpayer is still deemed more credible than any other. That’s a confidence vote, slim but real, in the United States and its ability to come back.
As Avinash Persaud, the chairman of Intelligence Capital Limited, told me: “Money, in the end, is confidence. It’s a check the Federal Reserve has issued.”
Perhaps that’s why Obama and McCain are still in the race: because they believe confidence can be restored.
But both candidates should be clear-eyed about what’s looming. They shoot horses, don’t they?
Here’s Mr. Krugman:
Economic data rarely inspire poetic thoughts. But as I was contemplating the latest set of numbers, I realized that I had William Butler Yeats running through my head: “Turning and turning in the widening gyre / The falcon cannot hear the falconer; / Things fall apart; the center cannot hold.”
The widening gyre, in this case, would be the feedback loops (so much for poetry) causing the financial crisis to spin ever further out of control. The hapless falconer would, I guess, be Henry Paulson, the Treasury secretary.
And the gyre continues to widen in new and scary ways. Even as Mr. Paulson and his counterparts in other countries moved to rescue the banks, fresh disasters mounted on other fronts.
Some of these disasters were more or less anticipated. Economists have wondered for some time why hedge funds weren’t suffering more amid the financial carnage. They need wonder no longer: investors are pulling their money out of these funds, forcing fund managers to raise cash with fire sales of stocks and other assets.
The really shocking thing, however, is the way the crisis is spreading to emerging markets — countries like Russia, Korea and Brazil.
These countries were at the core of the last global financial crisis, in the late 1990s (which seemed like a big deal at the time, but was a day at the beach compared with what we’re going through now). They responded to that experience by building up huge war chests of dollars and euros, which were supposed to protect them in the event of any future emergency. And not long ago everyone was talking about “decoupling,” the supposed ability of emerging market economies to keep growing even if the United States fell into recession. “Decoupling is no myth,” The Economist assured its readers back in March. “Indeed, it may yet save the world economy.”
That was then. Now the emerging markets are in big trouble. In fact, says Stephen Jen, the chief currency economist at Morgan Stanley, the “hard landing” in emerging markets may become the “second epicenter” of the global crisis. (U.S. financial markets were the first.)
What happened? In the 1990s, emerging market governments were vulnerable because they had made a habit of borrowing abroad; when the inflow of dollars dried up, they were pushed to the brink. Since then they have been careful to borrow mainly in domestic markets, while building up lots of dollar reserves. But all their caution was undone by the private sector’s obliviousness to risk.
In Russia, for example, banks and corporations rushed to borrow abroad, because dollar interest rates were lower than ruble rates. So while the Russian government was accumulating an impressive hoard of foreign exchange, Russian corporations and banks were running up equally impressive foreign debts. Now their credit lines have been cut off, and they’re in desperate straits.
Needless to say, the existing troubles in the banking system, plus the new troubles at hedge funds and in emerging markets, are all mutually reinforcing. Bad news begets bad news, and the circle of pain just keeps getting wider.
Meanwhile, U.S. policy makers are still balking when it comes to doing what’s necessary to contain the crisis.
It was good news when Mr. Paulson finally agreed to funnel capital into the banking system in return for partial ownership. But last week Joe Nocera of The Times pointed out a key weakness in the U.S. Treasury’s bank rescue plan: it contains no safeguards against the possibility that banks will simply sit on the money. “Unlike the British government, which is mandating lending requirements in return for capital injections, our government seems afraid to do anything except plead.” And sure enough, the banks seem to be hoarding the cash.
There’s also bizarre stuff going on with regard to the mortgage market. I thought that the whole point of the federal takeover of Fannie Mae and Freddie Mac, the lending agencies, was to remove fears about their solvency and thereby lower mortgage rates. But top officials have made a point of denying that Fannie and Freddie debt is backed by the “full faith and credit” of the U.S. government — and as a result, markets are still treating the agencies’ debt as a risky asset, driving mortgage rates up at a time when they should be going down.
What’s happening, I suspect, is that the Bush administration’s anti-government ideology still stands in the way of effective action. Events have forced Mr. Paulson into a partial nationalization of the financial system — but he refuses to use the power that comes with ownership.
Whatever the reasons for the continuing weakness of policy, the situation is manifestly not coming under control. Things continue to fall apart.
On that happy note, I bid you good day.
