Globalization

New York City -- With the bankruptcy of Lehman and the sale of Merrill this weekend, coming so soon on the heels of the federal seizure of Fannie Mae and Freddie Mac, this financial meltdown now ranks among the worst ever. We've got a panic, if not as bad as the fabled ones of 1929, 1907 and 1893, of the same frightening order. If not a category 4, we have a category 3.  What is amazing, so far, however, is that the panic has not yet led to a sharp contraction in the US and global economies as most panics generally have. It's worth taking a minute to consider what might or might not be different this time.

Recessions have generally grown less severe in the last century. The customary reasons cited are: the expanded role of the Fed (in 1907, it was JP Morgan, not the Fed Chairman locking up captains of Wall Street in his conference room to work out a solution), a learning curve in monetary policy, better data thanks to computers, the move from manufacturing to less cyclical services that don't have inventory buildups and then liquidation and, recently, the globalization of the economy that provides deeper and broader liquidity. That's the good news.  Recessions are now much less frequent than in the past and milder. Unemployment customarily went well into double digits in the recessions of yore whereas it barely brushed 6.5% in the last recession.

The bad news, however, is that the financial system has grown so complex that no one really understands its interactions. In a world of ever more complex derivatives, it appears that even individual companies have trouble understanding their exposure.  Accounting rules, ratings standards and regulation have not kept up with financial innovation.  Indeed, one can argue that the story of the American economy over the last eight years has been one of trying to make up through leverage and other financial means what the economy was not providing in real expansion.

When any country begins to depend on financial engineering to accomplish what it cannot achieve through real engineering it is in a dangrous position. The example of the Asian financial crisis showed that a credit contraction can quickly lead to a real economy contraction.  It took the Asian economies years to recover from the 1998 crisis.  The United States is in a somewhat better position than developing countries because we borrow in our own currency.  Nonetheless, any drop in the willingness of our creditors, notably China, to buy our paper as in the Fannie and Freddie auctions leading up to their seizure by the government, could send shockwaves through the real economy.

It would be naive to try to predict what's in store for Wall Street in the next few weeks let alone the real economy.  One reason that Merrill CEO John Thain reportedly decided to sell his company this weekend to Bank of America--beating out Lehman which had hoped for a deal with BOA--was that he expected Merrill to be the next target of shorts. With Lehman and Merrill out of the way, the shorts will now turn to the next weakest company, perhaps Wamu.  One can say with some certainty that the fireworks are probably not over.

In the short term, the problems on Wall Street are a strong argument for a second stimulus package that as I have argued should address some of our long-term problems as well, notably high energy costs.  A tax credit for weatherization, for example, would not only have stimulus value but would also insulate Americans from fuel cost volatility this winter.

In the long term, the current crisis underscores more than ever the need to create an economy that creates real value and wealth for the American people rather than tries to make up for the loss of industries and anemic growth through ultimately unsustainable financial wizardry.

From tomorrow's NY Times;

In one the most extraordinary days in Wall Street’s history, Merrill Lynch is near an 11th-hour deal with Bank of America to avert a deepening financial crisis while another storied securities firm, Lehman Brothers, hurtled toward liquidation, according to people briefed on the deal.

The dramatic turn of events was prompted by the cataclysm of losses that has shaken the American financial industry over the last 14 months.

The moves came after a weekend of frantic negotiations between federal officials and Wall Street executives over how to avert a downward spiral in the markets. Questions still remain about how the market will react and whether other firms may still falter like A.I.G., the large insurer, and Washington Mutual, both of whose stocks fell precipitously last week.

Coming just a week after the government took control of mortgage lenders Fannie Mae and Freddie Mac, the magnitude of the industry’s reshaping is staggering: two of the most powerful firms on Wall Street, Merrill Lynch and Lehman, will disappear.

NDN's Rob Shapiro offered these reflections on the weakening of our financial markets a few days ago.

It is clear that John McCain would rather lose his integrity than lose this election. After a series of lies and mischaracterizations that have been chronicled by numerous news sources, U.S. Sen. John McCain released an attack ad today about Barack Obama's record on immigration.  Having participated in the immigration debate during 2007 as a Hill staffer as it was happening, and having delved into the dozens of amendments thrown at the bill per minute by those who would try to block immigration reform, and having had to sort through all the "poison pill" amendments, I feel a responsibility to distinguish between truth and fiction in regards to an issue as important as immigration reform.  The truth is that Senator Obama proposed an amendment to the section on a temporary worker program in order to ensure that those workers are a paid a prevailaing wage - i.e., to help push wages up.  It is disturbing to see this attempt to misinform Hispanic voters, as members of the Democratic leadership are accused in this ad for having halted immigration reform, when they were the ones who presented the legislation to the floor and fought to have the issue voted on and passed - not once, but twice.  The reason immigration even came to a vote twice is that many Republicans - including President George W. Bush - also recognize the dire need to fix the broken immigration system, and there was thought to be enough support at the time for reform.  What really happened: there were insufficient votes to close debate and move to vote on immigration reform because the Republicans who had pledged to support the legislation caved to the anti-immigrant rhetoric and voted against cloture.  The truth is John McCain changed his position and did not participate in the 2007 debate to provide the necessary political leadership to pass reform.  And that could have made a difference - one could argue that it was John McCain's absence and lack of leadership on this issue that led to its demise.  I'll refer you to our Hispanics Rising report, where we track the immigration debate and John McCain's abandonment of his own reform legislation.  The truth is, John McCain abandoned the reform he had once promoted because he feared the political ramifications.  As reported by the Washington Post (see Hispanics Rising), John McCain told his party "I got the message", immigration reform was not popular.  Sadly, it remains very necessary.  

Here is the translation of the ad, called "Which Side Are They On":

ANNCR:Obama and his Congressional allies say they are on the side of immigrants. But are they?
The press reports that their efforts were 'poison pills' that made immigration reform fail. The result:
No guest worker program.
No path to citizenship.
No secure borders.
No reform.
Is that being on our side?
Obama and his Congressional allies ready to block immigration reform, but not ready to lead.
JOHN MCCAIN: I'm John McCain and I approve this message.
ANNCR: Paid for by McCain-Palin 2008 and the Republican National Committee. Approved by McCain-Palin 2008.

I must say, this ad insults my intelligence, and it is a shame because John McCain was the first to come out promising to keep this campaign "clean", and to not reach for baseless attacks like this one.  You will see below, McCain said, "Do we have to go to the lowest common denominator? I don't think so". Well Mr. McCain, you already have - this is just another example of how low you can go. Is lying to voters putting "country first"? I don't think so.

A new intelligence report, discussed yesterday by Thomas Fingar, the top analyst in the American intelligence community, outlines the challenges the next president will face. In the midst of debates about lipstick on pigs and other such nonsense, it’s important to consider what some of these challenges may be.

According to an article from today’s Washington Post about the report, the next President will lead an era through which American dominance and the significance of military power will diminish, as will the roles of international institutions. This shift, which comes as a result of globalization, and, as the article points out, is described by Fareed Zakaria as not the "decline of America, but rather about the rise of everyone else."

Climate change, energy security, and immigration policies will also figure heavily into the challenges the next president will face:

The predicted shift toward a less U.S.-centric world will come at a time when the planet is facing a growing environmental crisis, caused largely by climate change, Fingar said. By 2025, droughts, food shortages and scarcity of fresh water will plague large swaths of the globe, from northern China to the Horn of Africa.
…

Floods and droughts will trigger mass migrations and political upheaval in many parts of the developing world. But among industrialized states, declining birthrates will create new economic stresses as populations become grayer. In China, Japan and Europe, the ratio of working adults to seniors "begins to approach one to three," he said.

The United States will fare better than many other industrial powers, in part because it is relatively more open to immigration. Newcomers will inject into the U.S. economy a vitality that will be absent in much of Europe and Japan -- countries that are "on a good day, highly chauvinistic," he said.

"We are just about alone in terms of the highly developed countries that will continue to have demographic growth sufficient to ensure continued economic growth," Fingar said.

Dealing with the effects of globalization, confronting climate change, and formulating a rational immigration policy have been hallmarks of NDN’s economic narrative. For more on how to confront these challenges and make globalization work for all Americans, visit NDN’s Globalization Initiative page, and visit the Hispanic Strategy Center’s page for more on NDN’s immigration work, including a brand new poll.

On Morning Joe today, MSNBC’s panel got into some of these issues, and how they do (or don't) play into the state of the election. Take a look:

Today, NDN released polls conducted among all voters in four key battleground states - Florida, Colorado, New Mexico and Nevada - that show strong support for comprehensive immigration reform. As Simon and Courtney mentioned, the poll was conducted in key swing states that also have a large Hispanic Population. Additionally, the states in question are reflective of the cross-section of Hispanics in the United States, with Florida's Hispanic population consisting mainly of foreign-born Hispanics from the Caribbean and South America, Nevada with mostly foreign-born Hispanics from Mexico, and New Mexico and Colorado with largely native-born Hispanics.

For an in-depth look at how the public views the immigration debate in these four states, please view our full Immigration Survey Report here.

As stated in the Executive Summary, our findings indicate that in each of these four states, voters:

• Overwhelmingly support Comprehensive Immigration Reform as:
  1. Strengthening border security
  2. Strengthening interior enforcement through an employer verification plan
  3. New visa program for 200,000 workers annually
  4. Increasing the number of family visas available
  5. Path to earned citizenship for the undocumented once they meet certain requirements.

• Have a positive view of undocumented immigrants, believing that they have come here to work and seek a better life, are not taking jobs from American citizens and are not interested in receiving public handouts.

• Blame the federal government and businesses - not immigrants - for the broken immigration system. This tells us that the anti-immigrant message of the Lou Dobbs and Rush Limbaughs of the world actually doesn't resonate with the large majority of voters.

The data also shows:

• The issue of immigration remains an important issue to voters, particularly Hispanics, and Democrats and Barack Obama are more trusted to handle the immigration issue than U.S. Sen. John McCain and the Republican Party.

• The dramatic swing of Hispanic voters to Senator Obama in Florida, Colorado, New Mexico and Nevada - with a total of 46 electoral votes - has helped turn these previously red states, which were critical to Bush's narrow victory in 2004, into competitive swing states this year.

• But in each state, 14 percent to 20 percent of the Hispanic electorate remains undecided, which translates into a two percent to six percent of the statewide vote in each state - a percentage significant enough to tip dead-even states into one camp or the other.

• The Hispanic vote may very well determine the Presidential winner in these four states. Given how close the election is, this may determine the outcome of the Presidential race itself.

Therefore, the data proves that the paranoia over the prospect of dealing with the broken immigration system due to the emotional nature of the debate as framed by anti-immigrant activists is unfounded. An overhaul of our current immigration system is not only the right thing to do, there is an urgent need for it and the data demonstrates that there is overwhelming support to enact it. Enforcement-only is not an immigration policy. We need to fix the entire broken system. Just this morning, USA TODAY's Emily Bazar wrote a story reporting how the higher application fees at ICE are actually discouraging immigrants from seeking citizenship. Even Mark Krikorian, Executive Director of the research center for a series of anti-immigrant hate groups, CIS, which calls for reduced immigration agrees fees are, "probably too high" and should reflect only processing costs.

When it comes to immigration reform, our data matches the data from the many polls conducted on this issue for the last three years: politically, immigration is actually a positive and not a negative because voters want action, and from a policy standpoint there is a consensus to enact it.

The price of what are called “credit default swaps” for U.S. Treasury debt is rising sharply. Credit default swaps are financial instruments by which one investor holding debt pays another investor to guarantee that if that debt defaults, he will make the first investor whole. 

This week, the Treasury assumed responsibility for $5.2 trillion in outstanding debts held by Fannie Mae and Freddie Mac. A modest but significant share of that is headed for default, and the Treasury will have to absorb the losses. And the result is a rising price for credit default swaps on the U.S. Government: It now costs $18,000 to insure $10 million of U.S. Treasury debt. The market sees a very small - but not negligible - prospect that the U.S. Government would actually default on its debt, which would be, well, the end of the American and global economies as we know them. That’s how bad it is.

Credit default swaps for subprime mortgage based securities, of course, have played a significant role in the current unraveling in the financial markets. But conservative/Republican disdain for normal regulation of those markets has played the larger, underlying role.  Such regulation isn’t intended to “manage” those markets, but to ensure that the rest of us are protected from serious repercussions when problematic choices by financial market players (for example, to double down on subprime mortgages or their derivatives) collide with adverse conditions that make those problematic choices very reckless.

That’s the essential meaning of the Fannie Mae and Freddie Mac regulatory bailouts. Setting aside the many years of astonishingly reckless and self-interested management at Fannie Mae and Freddie Mac, the mortgage market would freeze up if these two institutions suddenly couldn’t operate. Here’s a brief course in why that’s so: there’s always plenty of credit for new mortgages, because those creating the mortgages promptly sell them, in bundles, to investors, so that the credit can cycle back to finance more mortgages. 

Fannie Mae and Freddie Mac both create and buy trillions of dollars in these mortgage-backed securities, and there’s no financial institution that could step in if they were taken out of the picture. That’s why we need to keep them operating, even if it requires a bailout. By the way, the other major holders of these securities include U.S. banks – expect a line of them to go belly-up in the next six months – and foreign central banks. 

The potential unpleasant fallout for our relations with other countries if their holdings went bust is the other reason that the Bush Administration has taken the largest interventionist step in U.S. financial markets since the Great Depression. Once again, the Bush Administration is moved to act not by what’s happening to Americans, but by the implications for our relations with other countries

Déjà vu. In 1992, while managing economic policy for Bill Clinton's campaign, I recall watching the Republican Convention in happy disbelief. For days, the gabfest had veered sharply and angrily to the right; and then, when George H.W. Bush accepted his renomination, it took him 26 minutes to get to the economy, the central issue of that campaign, which he talked about for perhaps five minutes. He didn't get it, and neither did John McCain last night. It took him even longer to get to the deep, economic concerns of a majority of Americans, and then devoted about three minutes to jobs, wages, the housing bust, globalization, trade, debt, and the rest. He doesn't get it either.

Another aging, career politician out of touch is hardly news. But another president who doesn't understand or much care about what's happening to most people in our economy would have serious long-term consequences for the real prospects of tens of millions of American families. And deteriorating conditions for most could well undermine public support for the measures that a responsible president will have to take over the next generation - including broad based IT training for all workers; universal access to post-secondary education; a major national commitment to 21st century infrastructure, including universal broadband and climate-friendly light rail system in most major metropolitan areas; a national commitment to aggressively support and promote R&D in climate friendly technologies and fuels, and support to broadly deploy the new technologies and alternative fuels; new cost-control provisions to slow rising health care costs as we provide universal access to health care insurance; and more.

Somehow, none of this made its way into John McCain's acceptance speech, which is only the most recent evidence that he doesn't have what we need in our next president.