Support First Things by turning your adblocker off or by making a  donation. Thanks!

In the absence of a clear policy alternative (or even a muddy alternative) to Obama, conservatives have taken to their rocking chairs, waiting for Obama to fail so that a repentant populace will come back to them. The fact that Obama’s approval rating fell slightly below the 50% mark in one of the polls looked to some Republicans like a green shoot of political recovery.  I do not think it will play out this way; in fact, I think that the Republicans’ collective hope that Obama will self-destruct is the most pernicious delusion in the sorry history of the party of Lincoln.

Two things, I believe, should be kept in mind:

1) There won’ t be any economic recovery.

2) Absence of recovery hurts Obama in superficial ways and helps him in profound ways.

Regarding the prospects for recovery, please see “Dave’s Top 10 Reasons the Recession Will Last Forever” over at my Asia Times’ financial blog, “Inner Workings.” The number two reason is that America is entering a demographic black hole comparable to Japan’s at the start of the “lost decade.” As I wrote,

American demographics look suspiciously like Japan’s in 1990, at the beginning of the “Lost Decade.” Japan’s elderly dependent ratio jumped from 18% to 26% over the 10 years; between 2010 and 2020, America’s will rise from 19% to 25%. In other words, a huge component of the labor force is nearing retirement. They have no savings to speak of and what they thought was their nest egg (home equity) just vaporized. Their savings requirements are bottomless. The combination of demographic and wealth shocks should produce a loop-de-loop in the “marginal propensity to save” such as we have never seen before, except, of course, in Japan.

But the number one reason that America won’t recover is that Obama has no incentive to foster a real recovery:
Bill Clinton, the last Democratic president, thought in effect, “Let’s get economic growth so I can tax it and pay for all my toys and games.” That was the “New Democrat” approach. Obama knows that if the economy crumbles and he’s the only one left with a checkbook, then everyone has to come to him. Where is the independent base of entrepreneurial business to which the Republicans might to to raise money against Obama? The banks, the hedge funds, the manufacturers, the municipalities, in fact everyone who is left standing in the economy is beholden to Obama. This is Chicago city politics writ large. Leave aside all of the individual things that Obama is doing that harm economic growth: Obama is the first American president (with the possible exception of FDR) to actually benefit from economic weakness.

As a practical example, take the financial business, my old stomping grounds. Bank stocks have rallied strongly this year. During the past six months the banking index is up 60%, against a 20% improvement for the S&P 500.


Bank stocks in turn benefit from the recovery in “toxic waste” securities pricing, such as securitized packages of subprime mortgages. The chart below shows the price of (don’t snicker) AAA-rated securities issued in late 2007 against pools of subprime securities.

ABX Index of Subprime Home Equity AAA’s Issued in Late 2007 (Markit)

This 2007-2 vintage is the sloppiest part of the market, and its price is up 40% from the bottom. That has nothing to do with improvements in underlying cash flows. The rally in subprime paper is driven by cheap government financing through the PPIP and TALF programs, under which the government itself buys such securities, or lends money cheaply to private-sector operators to buy such securities.

Another benchmark for the distressed assets market, the AAA-rated portion of the commercial mortgage backed securities market, is doing even better in the face of rising losses.

CMBX AAA Index (Markit)

This is even more remarkable than the surge in subprime ABX prices, because the worst already has hit ABX, but is yet to come with CMBS. According to Deutsche Bank’s CMBS analyst Richard Parkus in a July 21 report to clients, “The speed of deterioration in loan performance is unprecented, even relative to the early 1990s.” He predicts that delinquency rates will reach 8%-12% over term for the 2007 vintage. The total delinquency rate for the universe hit 4.1% in June, 2.2 times higher than in March and 3.5 times higher than in December.

Pardon the excursion into the sort of technicalities I usually relegate to the “Inner Workings” venue. But there is an important political point here: the only way to make seriously money in this market is to get in on a government handout. If you have a big balance sheet, and if the Treasury selects you as a money manager for one of its programs, and if the regulators treat you nicely, you will make money in the financial business. But woe betide anyone who gets out of the good graces of the administration.

Come 2010, from whom are Republicans going to raise funds? There aren’t any entrepreneurs out there. They are lying face up on the beaches with swollen bellies and vacant eyes. There aren’t any independent financial institutions. There’s only a long  line of prospective monopolists looking for a handout from the federal government. And the worse the economy gets, the longer the line gets. That’s the way banana republics work.



Filter First Thoughts Posts

Related Articles