The presidential campaign has gone on for so long that it feels like one of those bad dreams in which you run in slow motion but never get anywhere.

There will be blood.

From the archive:

I was describing this to a friend over lunch in Palo Alto. As I was describing this the waiter came up behind me to take our order. I was in the middle of saying "it's very hard to enter the rectum, but once you do things move much faster", only to hear the waiter gasp. Whoops. I tried to explain saying "well, this is about" but with a horrified look he said "I do NOT want to know what this is about! Some people are just not interested in natural history, I guess.

A war born in spin has now reached its Lewis Carroll period. (“Now here, you see, it takes all the running you can do, to keep in the same place.”)

People say to me, "Whatever it takes." I tell them, It's going to take everything.

I've come to the conclusion that you actually want shifty, dishonest politicians elected by an apathetic populace. This means that things are working.

There are two reasons that people act: Carrots and Sticks. Lowering the barrier to entry might be a carrot, but the sticks are much more effective and come when the political situation makes it impossible for people to go about their lives without acting.

I'm confident that technology has improved the resources available to people if/when they choose to act. So far they don't need to, largely. Don't wish for times when they do. When people are involved and committed and political leaders are honest and have clear vision; that usually happens when things are really, really fucked up. Who are the U.S. Presidents we most admire? What was going on during their presidencies?

Eloquence is a sign of interesting times.

The Next Administration's Economy

Robert C. Merton, founder of Long Term Capital Management:

Let me give you this analogy. If you're driving in inclement weather, you'd say that a four-wheel-drive car is safer than a two-wheel-drive car. Now suppose that we observed that over the last 15 years, the number of passenger accidents per passenger mile driven hadn't changed at all. And someone says, Now wait a minute: Has four-wheel drive made us safer? And the answer would be, Technically, no, because we're having just the same number of accidents we used to have. So, was this all a waste, or were we wrong? I think you know the answer, as I do. What really happened is that people get something that will unambiguously make you safer if you behave the same way you did before. That's the key element to understand first. The amount of risk we take personally, individually, or collectively is not a physical given constant. We choose it. What happens is, we look at some new, safer instrument and we say, Yes, we could be safer doing the same thing. Or, we could take the same amount of risk and do things that were too risky to do before. So with a four-wheel-drive car, you look out the window and see six inches of snow, and you say, That's okay: I'm going to go over and visit my family. So the question to ask is not, Are we safer? The question to ask is, Are we better off?

On Markets and Complexity

Goldman Sachs's latest calculations (*), which suppose that American house prices will eventually fall by 25% from their peak, suggest that total losses will reach just over $1.1 trillion.

That suggests a serious problem, but not a catastrophic banking crisis.

Unfortunately, things are not quite so simple.

It would not take many homeowners to walk away from their debts for the losses to grow rapidly.

(*) About that estimate, and a more pessimistic alternate view:

In reaching its conclusion, Goldman estimated a peak-to-trough house price fall of 25 per cent. In his comments on the FT’s forum, Professor Roubini suggests that, after price falls of 20 per cent from the peak, losses on mortgages could be as much as $1,000bn. With a 40 per cent fall, they could be $2,000bn. He adds another $700bn for other losses, to reach total financial sector losses of close to $3,000bn, or about 20 per cent of GDP.

So how does Roubini reach these much higher figures? The difference between him and Goldman is not so much in assumptions about the house price fall: 25 per cent for Goldman Sachs and 20-40 per cent for Roubini. Both also estimate that lenders would lose half of the loan value after repossession. But Goldman believes that just 20 per cent of households in negative equity would default, while Prof Roubini believes 50 percent might default.

Wall Street's crisis

Here's President Bush:

“The good news is, we anticipated this and took decisive action to bolster the economy, by passing a growth package that will put money into the hands of American workers and businesses.”

"He didn't do anything!"

Lisa: I'll stop buying Malibu Stacy clothing.
Bart: And I'll take up smoking and give that up.
Homer: Good for you, son. Giving up smoking is one of the hardest things you'll ever have to do. Have a dollar.

[Homer gives a dollar bill to Bart]

Lisa: But he didn't do anything!
Homer: Didn't he, Lisa? Didn't he?

Maybe you'd like to reconsider:

Clerk: Son, are these counterfeit bills?
Butt-head: Uh, why do you ask?
Clerk: Son, I've got a mind to throw you out of the store.
Butt-head: Maybe this will change your mind. (gives him another counterfeit bill)
Clerk: I don't think you understand. I could have the cops in here to bust you.
Butt-head: Here, let's just forget all about it. (gives him another fake bill)
Clerk: Do I look like a moron? Why don't you get the hell out of my store?
Butt-head: Maybe you'd like to reconsider. (he gives him a fake dollar, Beavis gives him a fake nickel)
Clerk: GET OUT! (rips up the fake money)
Beavis: Ah, what are you doing?
Clerk: GET THE HELL OUT!
Beavis: Butt-head, he's ripping all our cash!

Sharp Drop in Jobs Adds to Grim Economic Picture

The median household earned $48,201 in 2006, down from $49,244 in 1999, according to the US Census Bureau.

It now looks as if a full decade may pass before most Americans receive a raise.

Seeing an End to the Good Times (Such as They Were)

The central question for the economy is this: Will the medicine work?

If the American economy were entering a standard cyclical downturn, there would be good reason to believe that a timely countercyclical stimulus like that devised by Washington would be effective. But this is not a standard cyclical downturn. It is a post-bubble recession.

American authorities may be deluding themselves into believing they can forestall the endgame of post-bubble adjustments. A more effective strategy would be to try to tilt the economy away from consumption and toward exports and long-needed investments in infrastructure.

American authorities harbor the mistaken belief that swift action can forestall a collapse. The greater imperative is to avoid toxic asset bubbles in the first place. Steeped in denial and engulfed by election-year myopia, Washington remains oblivious of the dangers ahead.

(This article was published at NYT as Double Bubble Trouble.)

Double Bubble Trouble

This highly recommended article is now freely available.

The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being. Spurred by the actions of the Federal Reserve, financed by exotic credit derivatives and debt securitiztion, an already massive real estate sales-and-marketing program expanded to include the desperate issuance of mortgages to the poor and feckless, compounding their troubles and ours.

That the Internet and housing hyperinflations transpired within a period of ten years, each creating trillions of dollars in fake wealth, is, I believe, only the beginning. There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle.

The Next Bubble, by Eric Janszen | Harper's, February 2008

The rescue operation brings to mind John Kenneth Galbraith's dictum that in the United States, the only respectable form of socialism is socialism for the rich.

Massive Bailout Planned for Banks

Fortune offers a Flash animation showing the S&P 500 on a time line, alongside the US President and the Federal Reserve Chairman. Bear markets and recessions are highlighted for easy comparison.

50 years of market swings

The underlying problem is as old as finance itself—borrowing short to lend long. As a strategy it can be extremely profitable but it is very vulnerable to crisis. Three things can go wrong: the costs of borrowing can go up, access to borrowing can dry up, or the assets bought with borrowed money can fall in value. All three have happened at various stages over the last six months.

The credit crunch will be with us for a while.

Market.view: Still Here | Economist