Why the Republicans will cave on the bailout…

This was first published at NetRight Nation here.

People continue to talk about how the Republicans are tied to Wall Street and since they are fighting the bailout with the Wall-Street/Banking money in their back pocket they are going to cave in. Well, I have a better reason for why they are going to cave in. This is to save the 2008 Presidential election for John McCain.

It is a little something called the “Bread and Peace” model. The Bread and Peace model states that in a post-War time election the dependent factor of if the incumbent party person will be elected is based upon economic performance, in this case the incumbent party candidate is John McCain. The model uses two measurements. One is measured in growth in per capita income the other is the number of deaths in foreign wars that are not sanctioned by a formal Congressional declaration. Which are Korea, Vietnam and now Iraq. The model itself with the equation is a little more complicated but this is the basic idea.

According to this paper each percentage point of income growth equals bout 3.6 percent increase in votes. Of course, the last quarter of growth has a bigger effect. Every 100 fatalities of U.S. Military personnel will decrease 5 percentage points of votes. Here are the elections mapped out:

On one side of the chart we have incumbency percentage and the other is the per capita income growth. As you can see the two wars threw the economic stats off in 1952 and 1968.  That means that the economic factor can be a good guide of the winner of the election except in major war times. As we would expect the war at those times lowered the incumbent vote %. This means that the 2008 election will depend upon the economy and be discounted by the deaths in Iraq.

Over the first twelve quarters of President Bush’s administration growth of personal income was 1.04%. It is below the average of 1.8%, which has been the post-War average, but it doesn’t rule the Republican Party out of being re-elected to the Presidency. Of course now the economy has weakened and the deaths of the war are somewhere above 4,000, this is obviously a problem for Republicans come November.

With the fiscal stimulus package being passed and being a short term fix for growing income per capita. Hibbs believes that we will probably see growth rates equal 0% to balance out the current mess. I think we might even see lower. So if we assume that the deaths in Iraq reach 4,300 since they have slowed since the surge, then it will still keep the election close. Here is the analysis Hibbs does:

This chart shows the different results of the Presidential election depending upon the growth rate. This basically says that if the economy grows around 2 percent and only 4,100-5,000 U.S. soldiers die in Iraq then he will win. If we grow less than two percent then John McCain is not going to be elected, but not by much.  This will still be a close election. This model is a simple one and doesn’t account for much of anything else. While we say that it is important to keep in mind that it has been a good indicator of election results.

So what does this have to do with the bailout? Well the bailout like the fiscal stimulus package will also have a short-term economic boom effect. The stock market will go up and people should have more money to spend. This is not quite as direct as the fiscal stimulus package but if the Republicans continue to hold up the bill they will kill John McCain’s election. Purely based on economic factors.

Now the Republican Party is faced with a dilemma. Do they stand with their small government/fiscally conservative/capitalistic free market values and continue to oppose the bailout? Or do they stand with John McCain and President Bush at boosting the economy in the short-run in order to hurt us in the long run but will help McCain get elected and Bush keep a legacy? Since the Republican Party has been more about getting Republicans elected than standing on principle lately I would imagine when the bet is called they will fold. Of course when it is all said and done everything will be blamed on Bush, while the Congressmen will go back to their constituents and saying they voted against the bailout.

Hibbs, D.A. (2008).Implications of the Bread and Peace model for the 2008 Presidential Election. Public Choice 137: 1-10. DOI 10.1007/s11127-008-9333-7



BB&T to Government: We don’t need your help!

Everyone should read this letter from BB&T’s CEO to the Government. I agree so move your money to BB&T!

(If it is hard to read then click on it to make it bigger.)


Published in: on September 29, 2008 at 10:49 pm  Leave a Comment  
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Smithian Markets: Got Breast Milk?

Tyler Cowen often does the “Markets in Everything” segment and lately I have been finding some myself so I am going to start calling them  “Smithian Markets.” This is because a lot what Adam Smith showed was even with stuff in the way, like government people still found ways to get around them and exchange goods. Not to mention the invisible hand is taking these rare markets and allocating them interestingly and efficiently.

For those who have been overly distracted by the latest financial market bailout, there has been a milk crisis in China. Here is from the Times Online:

“The Health Ministry said the number of children ill after being fed milk powder tainted with the industrial chemical melamine had soared to 12,892 from a previous total of 6,244. Many of those have already been treated and have left hospital. More than 80 percent of the sick were toddlers under two.”

No one really knows why it happened, but it has. All I can say is that this is a communist country with heavy regulations. The market that has been created is the selling of breast milk.

This information is from the Wall Street Journal.They are called Nai Ma or “wet nurse.” This is when a woman feeds her own breast milk to someone else’s child. Tina Huang, who produces more milk than her baby needs, says “It’s a pity that I waste my breast milk when I see on TV so many kids with no milk to drink because of the contaminated powder.”

Her old job paid just $146 dollars a month and she earns 12 times that now. There has also been a social back lash because people are treating it as prostitution. Since most people are poor that sell their milk, this is looked down upon. Some people even consider it exploitation but if you ask me I’ll be exploited for 12 times my current wage.


Published in: on September 29, 2008 at 5:48 pm  Leave a Comment  
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Socialism didn’t work the first time…

From 1933 to 1938, the New Deal was created by FDR after the financial system had a meltdown, somewhat like we have seen now. The point was to get the United States out of the Great Depression and prevent future downfalls. As we can see this didn’t work so let’s break down the Great Depression and see if it can shed any light.

The Emergency Banking Act was passed. This was to close down the insolvent bank and reorganize. This also allowed the Treasury Secretary the authority to take private citizen’s gold and exchange it for paper currency.

We are currently under a fiat standard still, which allows more centralized control on our currency. It also allowed the Federal Reserve to inflate money as much as they want. This seems to shed no light on the current situation.

They then created the FDIC to insure that bank runs wouldn’t happen, while at the same time suspending the gold standard. This was under the Glass-Steagall Act. This legislation also allowed the Federal Reserve to control the interest rates on savings accounts (which was repealed in 1980). It also doesn’t allow bank holding companies to own other financial companies (repealed in 1999).

The FDIC today is at $100,000 per account. This allows banks to invest the first $100,000 riskly because they know it is insured no matter what. This is what Economists call a moral hazard problem. This could be some of the read why we had over investment and investment into risky loans like sub-prime.

This was just the financial industry, there was much more socialism programs that FDR implemented and there are even more regulations on banks. The point is none of these were able to stop the problem and could have been possibly the problem in the first place. It is the most regulated industry out nation has. Here is more regulations after FDR:

Capital Requirements – these are put into place to limit how the banks handle their capital versus their assets. This is suppose to reduce risk.

Reserve Requirements – in the case of a bank run these are suppose to make sure that you have enough cash on hand and that you would reduce insolvency.

There is also Corporate Governance Regulations, Financial reporting requirements, and credit rating requirement to give the consumer more power in the banks.

This didn’t work either. So sure someone could come to the conclusion that it was not enough regulation that caused this problem but why hasn’t anyone said the regulations were put in place to prevent this and they failed? Therefore, they do not work.

We are okay with the fast food industry being on it’s own and they do fine weeding out the bad banks and letting them fail. Instead, we expect every bank to survive and prosper. The argument goes that everyone’s life savings is tied up in banks and when one fails a certain number of people lose their life savings.

Well that isn’t how banks are suppose to work. They are instruments in which investments can be transferred from the savers to the people who want mortgages. Banks handle figuring out who deserves a loan and at what rate so you don’t have to. Some banks may take more risk than others but you wouldn’t know because the FDIC insures your money. The banking system should work in that you have some of your money in multiple banks. This way you earn different rate of returns and you don’t have all your eggs in one basket.

You wouldn’t do this with stocks so why would you do it with banking?


Published in: on September 29, 2008 at 11:07 am  Leave a Comment  
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EU to U.S.:Free Up Your Airline Market

As we all know the amount in which airlines in the United States file for bankruptcy is huge. The amount that they continue to charge is getting higher and higher. Little did we know that the U.S. was protecting the airline industry. They only allow U.S. ownership of their airlines. This from the Wall Street Journal:

“The European Union pressed the U.S. to ease restrictions on foreign ownership of U.S. airlines in the latest round of deregulation talks. But the meeting produced few substantive proposals, in part due to uncertainty over who will be the next U.S. president.

Briefing reporters in Washington on Friday, the EU’s chief negotiator, Daniel Calleja, said the agreement has already led to additional trans-Atlantic flights and more options for travelers.

But he said further deregulation is needed to stabilize the struggling airline industry. His team is pushing for the U.S. to remove rules that limit foreign investment in U.S. airlines to 25%. Removing barriers to foreign ownership would lead to industry consolidation and a “restructuring” of airlines in the U.S. and Europe, a process he called necessary to help ailing airlines.”

What is the argument of not allowing foreign ownership of airlines? We have foreign planes fly in all the time so it cannot be a security issue. I wonder if it is too protect the big businesses unnecessarily. I am disappointed to see Europe telling the U.S. how to be more free market. Is this what we are going to continue to move towards?

They even go on to say in the article that they cannot do anything because they don’t know the next President’s policies. So when we try to deregulate it becomes an issue, but when we want to spend $700 billion dollars on a bailout then it isn’t?

Explain that to me. The rest is here.


Published in: on September 28, 2008 at 8:15 pm  Leave a Comment  
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How much is $700 Billion Dollars?

Many people do not understand things in billions or even millions of dollars. Very few people have run a major bank and even less people have tried to run an entire sector so when people talk about how much something costs, they do not know too much or too little. To help put this in perspective an article from Slate Magazine measures it all out:

  • There are about 300 million men, women, and children currently living in the United States, so the bailout is equal to roughly $2,300 per person.
  • Which is right around what we each paid, on average, for gas and oil in 2006 ($2,227) and a bit less than our average personal tax burden ($2,432).
  • $700 billion is equal to about 12 Bill Gateses.
  • The assembled net worth of the Forbes 400 is $1.57 trillion, or more than twice the cost of the bailout.
  • Titanic, one of the highest-grossing movies of all time, raked in $1.8 billion from the worldwide box office, so James Cameron would have to make roughly 381 Titanic-sized blockbusters to settle Wall Street’s debts.
  • According to the Centers for Disease Control, the single-year cost of obesity in the United States was $117 billion in 2000, or about one-sixth the bailout
  • If the federal government siphoned off Florida’s gross domestic product, we could cover the bailout.
  • Invading the Netherlands might be advisable—that nation’s GDP was $768.7 billion last year. Of course, invasions cost a lot of money.
  • Back in 2003, the Bush administration told Congress that the Iraq war would cost between $60 billion and $100 billion, but it’s estimated that, so far, we’ve spent about $600 billion
  • MY FAVORITE:Let’s say Slate charged its advertisers $30 per 1,000 ad impressions, a common industry rate. And let’s imagine for a second that the federal government decided to nationalize Slate in order to pay for the bailout. We’d need our readers to rack up enough page views to see 23.3 trillion banner ads before the feds were satisfied.
  • For historical perspective, consider that the Marshall Plan, which helped finance the recovery of Western Europe after World War II, cost the United States about $13 billion. Of course, in 2008 dollars that’s more like $100 billion.
  • If nothing is done to change the way we finance Social Security, the trust fund reserves will be exhausted by 2041. This means that, in 75 years, there’ll be a shortfall of $4.3 trillion—or about six bailouts.
  • According to the Stern report (issued by U.K. economist Sir Nicholas Stern), global climate change could cost the planet $9 trillion (or 12.86 bailouts) if we don’t address the problem within the next decade or so.

There you go that is what $700 billion dollars looks like in different terms. So we could pay for everyone’s gas for a year. Nice.

The rest is here.


How does WaMu effect you?

This from U.S. News:

“What will happen to my bank account?
If you had an account with Washington Mutual Bank yesterday, you now have an account with JPMorgan Chase Bank. All deposit accounts, including savings, checking, money market, and retirement accounts and certificates of deposit, have been transferred to JPMorgan Chase Bank. No depositor has lost any money, even if it was above FDIC insurance limits. Direct deposits and Social Security checks will continue as normal.

Can I get access to my money today?
Your debit card and bill-paying services will continue to work. You can still use the checks you have now, and checks already written that did not clear before the institution closed will be honored if there are sufficient funds in the account. Local branches will be open as usual. “For bank customers, it will be a seamless transition,” FDIC Chairman Sheila Bair said in a statement. “There will be no interruption in services, and bank customers should expect business as usual come Friday morning.”

What about my loan or mortgage?
All Washington Mutual loans have been assumed by JPMorgan Chase Bank. Payment amounts and due dates will not change, and automatic payments will still work. Customers should continue to make checks out to Washington Mutual Bank.

Will my interest rate change?
Interest on deposits accrued through Sept. 25, 2008, will be paid at the previously stated rate. JPMorgan Chase Bank will be reviewing rates and will provide customers with information at a later date.

What if I already have an account with JPMorgan Chase and the combined balance will put me over the FDIC insurance limit?
Your transferred deposits will be separately insured from any accounts you may already have at JPMorgan Chase Bank for six months.

CDs from Washington Mutual are separately insured until the earliest maturity date after the end of the six-month grace period. If a CD matures during the six-month period and is renewed for the same term and in the same dollar amount, it will continue to be separately insured until the first maturity date after the six-month period. If a CD matures during the six-month grace period and is renewed on any other basis, it would be separately insured only until the end of the six-month grace period.”

This doesn’t sound so bad. Even if it was over the FDIC limit you still have your money. Go figure. I thought a bank failure was going to have to be handled through FDIC. So I guess bank failures aren’t so bad. This is where the market worked and allowed another company to buy out a failing one.


Published in: on September 27, 2008 at 8:10 pm  Comments (1)  
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Communism in America

Published in: on September 27, 2008 at 12:09 pm  Leave a Comment  
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Hugo Chavez = George W. Bush?

That is what Hugo Chavez said himself:

“BEIJING (Reuters) – Venezuelan President Hugo Chavez broke into an unlikely snippet of song for bitter ideological foe George W. Bush on Thursday, trilling “you are so like me” about the man he has called a donkey and the devil.

“Socialism is the only route to the salvation of the world.”

Outspoken Chavez says Venezuela’s socialist economic system, based around state-owned national champions, has protected it from the worst of the turmoil now roiling global markets.”

So does = ?


Published in: on September 26, 2008 at 6:49 am  Leave a Comment  
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Shots in Pakistan

With all the attention of the nation given to the recent credit crisis, has anyone been watching the recent activities on the Afghan-Pakistani border? After the US military incursion into Pakistan last week, many have been wondering if the recent NATO anti-terrorism operations would lead to a conflict with Afghanistan’s neighbor. It would appear we are already there.

Last week, American special forces crossed the infamous Afghan-Pakistani border to engage suspected terrorist forces hiding in the eastern nation’s back country. After years of refusing NATO troops to enter  Pakistani territory, the recently appointed President, Asif Ali Zardari, condemned the infiltration of the sovereign nation. Zardari warned that repeated crossing of the border would result in Pakistan’s defense forces returning fire.

Earlier today, Two American helicopter gunships came under fire of Pakistani forces while on patrol with a NATO border force. The twin U.S. Army OH-58D Kiowas are used in predator-prey hunting and ground support operations for NATO and American troops in the region. Pakistani official at every level claimed the aircraft crossed into Pakistani airspace, requiring defense forces to open fire.

US commanders claim the shots were threatening, and ordered nearby American ground troops to suppress the Pakistani forces in order to redirect fire. Pakistani forces then opend fire on the American troops, engaging a full scale firefight. While the details of how the conflict was resolved are not yet known, Pakistani officials claim the initial shots taken by defense forces were warning only, and did not warrant a return volley.

While NATO and Pakistani officials discuss the engagement, Pakistan still maintains a respectful policy of sovereignty, promising to fire at any invasive incursion into their territory. This whole chain of events is quite interesting as it seems that American forces, right or wrong, are gradually antagonizing the defense forces of Pakistan. As of today, NATO and Pakistan have at least one exchange of fire in the name of political borders, and I’m wondering if it will be the last.

The recent aggression of US and NATO forces at the Afghan-Pakistan border is not for nothing; terrorist cells and positions must be moving further into Pakistan, where the western nations have no official jurisdiction. Could this recent change in the operational policy of US military field commanders have a relationship to the current state of politics in America? We have a pro-war like President who seems bent on securing American/NATO-occupied lands at all costs (at least ones where American investments are). With the November elections looming, it would seem the perfect time for a horribly unpopular figurehead to relish in his last few months of power.

What do you think?


Published in: on September 25, 2008 at 8:10 pm  Comments (1)  
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