Like a clown suit in line at the soup kitchen

Fluff like lipstick on a pitbull just doesn't distract voters like it used to.

Paul Krugman:

As someone who’s spent a lot of time arguing against conservative economic dogma, I’d like to believe that the bad news convinced many Americans, once and for all, that the right’s economic ideas are wrong and progressive ideas are right. And there’s certainly something to that. These days, with even Alan Greenspan admitting that he was wrong to believe that the financial industry could regulate itself, Reaganesque rhetoric about the magic of the marketplace and the evils of government intervention sounds ridiculous.

In addition, Mr. McCain seems spectacularly unable to talk about economics as if it matters. He has attempted to pin the blame for the crisis on his pet grievance, Congressional budget earmarks — which leaves economists scratching their heads in puzzlement. In the immediate aftermath of the Lehman failure, he declared that “the fundamentals of our economy are strong,” seemingly unaware that he was closely echoing what Herbert Hoover said after the 1929 crash.

But I suspect that the main reason for the dramatic swing in the polls is something less concrete and more meta than the fact that events have discredited free-market fundamentalism. As the economic scene has darkened, I’d argue, Americans have rediscovered the virtue of seriousness. And this has worked to Mr. Obama’s advantage, because his opponent has run a deeply unserious campaign.

[snip]

The McCain campaign’s response to its falling chances of victory has been telling: rather than trying to make the case that Mr. McCain really is better qualified to deal with the economic crisis, the campaign has been doing all it can to trivialize things again. Mr. Obama consorts with ’60s radicals! He’s a socialist! He doesn’t love America! Judging from the polls, it doesn’t seem to be working.

Will the nation’s new demand for seriousness last? Maybe not — remember how 9/11 was supposed to end the focus on trivialities? For now, however, voters seem to be focused on real issues. And that’s bad for Mr. McCain and conservatives in general: right now, to paraphrase Rob Corddry, reality has a clear liberal bias.

What do you mean foxes can't guard the henhouse?

The inmates can't run the asylum? ... Corporations can't self-regulate?

I'm shocked, shocked, I tell you!!

In opening statements, Rep. Henry Waxman, D-Calif., committee chairman, said the current economic crisis could have been prevented "if regulators had paid more attention and intervened with responsible legislation. The list of regulatory mistakes and misjudgments is long and the cost to taxpayers and the economy is staggering."

Waxman put Greenspan on the spot, asking if he made any mistakes during his tenure as Federal Reserve chairman that may have contributed to the mortgage crisis.

Greenspan said he made a mistake in presuming that lenders themselves were more capable than regulators of protecting their finances. He said he was "shocked" when that system "broke down."

"I still do not understand exactly how it happened," said Greenspan.

Well... you see, Mr. Greenspan, it's like this.... human nature by default is self-obsessed and greedy. We must assume that those who know they won't be caught will do things that benefit themselves, ignoring the cost to others. We need checks and balances built into the system. When you take those away, you see the wreckage before you as an illustration of the end result.

Will this lesson take? Nah, I give it ....oh... another twenty years or so before we hear the pleading for deregulation again... long enough for the next generation of neocons to spawn and for voters to forget.

crossposted at American Street

A snowball rolling down a hill

And getting bigger all the time:

Ben Bernanke, the Federal Reserve chairman and the man who controls the central bank strings, made a game effort to explain the numbers to legislators here this week.

The big demographic bulge known as the baby boomers is getting ready to retire, he noted. Meaning they will start to collect social security, and will likely require considerably more medical attention.

Those two items represent an unfunded liability that can also be measured in the trillions, and no one has done a thing to prepare for it.

Bernanke delivered a simple lesson about the public ledger sheet. Basically, that the money has to come from somewhere.

Either taxes have to go up, and considerably, or spending has to be slashed on an unheard-of scale. Keep borrowing, and the public debt balloons so fantastically it becomes an unmanageable fiscal crisis.

"This is sort of like a snowball rolling down the hill," said Bernanke, striving for a metaphor to impress a panel of skeptical politicians. "It's already a pretty big snowball, but it's going to get a lot bigger a lot faster."

And:

A lot of wags have noticed that for the US stock market, bad news is frequently treated as good news. Unemployment is up, or industrial production is down, and stocks rally (due to attendant possibility seen in these reports of upcoming Fed interest-rate cuts). However, when major financial institutions have what are delicately called "liquidity issues" (ie, their loans aren't being paid back - they have no income), that is always bad news. What if the bank defaults, declares bankruptcy? Other banks that it had borrowed money from now won't be getting paid back, they'll lose whatever income stream they were receiving from the first bank. The same with that bank's creditors, and then other banks and so on.

This kind of cascading financial catastrophe is often called a "contagion", and with good reason. Like a virus, it can spread and bankrupt the entire financial system. It almost did in 1998, during the LTCM hedge-fund crisis; in 1929,in an era when the worldwide financial system was far less globalized and integrated than it is today, after the Great Crash it actually did, and so initiated the Great Depression of the 1930s.

Is it over? Not necessarily. Two little-known indicators that more investors should be cognizant of are what are called the VIX and VXN indicators. (Put these letters in the stock symbol line of your quote website; they should come up - watch how their values move inversely to stock prices.) Technically, what these two indices measure is what is called stock-option volatility (stock "beta", in jargon), but what they really tell smart investors is just how much fear there is in the markets. When these levels get very high (roughly above 30 in both indices; after the selling caused by the Enron corporate-management scandals of 2002, the VXN actually topped out over 70), it indicates that the market has seen so much fear-driven panic selling that, by the rules of what is called contrarian investment philosophy, stocks are due for a turnaround. As of the first weekend in March, neither index had reached those extreme levels.

So it's not China. It's not Nancy Pelosi, it's not the Easter Bunny, nor is it the War on Easter. It has been said that all market psychology, all market movement, is a continuous oscillation between the mental polar opposites of optimism and pessimism, between greed and fear, between Pollyanna and Cassandra. Since at least the market rally that started in early 2003, optimistic Pollyanna has ruled the markets, and greed has run rampant. As the markets wait for Fed chairman Ben Bernanke to put on his best Donna Reed mask to bail out the subprime lenders with the Bailey family's honeymoon money, Cassandra and her fear are ruling the day.

And:

While the most recent slump was set off by a 9.2 percent plunge in the Shanghai and Shenzhen 300 Index on Feb. 27, U.S. shares have been hit by concern economic growth will slow.

Last week, reports showed that in January new-home sales dropped by the most in 13 years, while the economy also expanded less than initially estimated in the fourth quarter of 2006.

Alan Greenspan, former chairman of the Federal Reserve, weighed in by saying profit margins at U.S. companies are peaking and the growth cycle is in a mature phase. He also said there's a ``one-third probability'' of a U.S. recession this year.

Meanwhile, delinquencies and defaults on subprime mortgages, or home loans made to people with limited credit records or higher debts, are at the highest in at least seven years, a Feb. 22 report by Barclays Capital showed.

``We were just due for a correction,'' said Steven Folker, who helps oversee $3 billion as managing director at Fifth Third Asset Management in Cincinnati. ``We may not have seen the worst'' of the slump.

Wheeeeee!

Update: Yen carry trade:

NEW YORK (CNNMoney.com) -- As investors wonder if the global market selloff is reaching a bottom, economists are keeping a close eye on one big trading bet that could send more seismic tremors through Wall Street.

For more than a decade, investors have profited by borrowing yen at ultra-low interest rates and using the funds to buy higher-yielding investments based in other currencies - known in Wall Street parlance as the yen carry trade.

But last week's market swoon has brought risk back into focus, and a number of these borrowers have been unwinding those trades lately.

"There's been complacency and under pricing of risk across the board," said Nouriel Roubini, chairman of Roubini Global Economics, a research firm. But now many big investors, as well as policy-makers, are bracing for more volatility in the markets, he said.