Wednesday, October 29, 2008

Needed: Washington Response to the State and Local Fiscal Crisis

Whether Obama or McCain gets elected on Tuesday, an early issue for the new president is the fiscal crisis facing state and local governments. Beleaguered officials have watched July-September revenues come in lower than expected while financial markets have become more risk-averse. They have been trooping to the Congress already - expect them to start pressing the President-elect after the election.

The fact is, the Federal Government is the only one of America's 87,500 governmental units that can print money. A Federal response could be to provide short-term fiscal assistance in exchange for commitment for structural changes that will bring state and local revenues and expenses into balance and will bring debt service below a reasonable ratio to a multi-year average of tax revenues.

It's not just that states and localities have seen revenues decline. Many pension funds that have invested heavily in equities and appeared to have adequate funds to pay pension obligations now look grossly underfunded. The loss in value of pension-fund assets invites further questions about pension-fund accounting. In many cases the answers to these questions will distress pensioners, taxayers and investors in municipal debt. When sorrows come, they come not single spies, but in battalions.

In New York State, Gov. David Paterson has a clear understanding of New York State's fiscal outlook. He has just raised his forecast of the budget gap facing the state this fiscal year to $1.5 billion from the $1.2 billion the state projected weeks ago. States and localities are not permitted to run deficits, so Gov. Paterson has asked the state legislature to meet Nov. 18 to close the budget with decisions that will raise more revenue and cut spending. He says nothing will be off the table and he sounds as though he means it.

New York State's problem is huge and gets worse next year and the year after. Borrowing to fund current deficits faces (appropriate) legal obstacles and would be a hard sell. Muni markets are opening up again, but with the loss of credibility of the mni bond insurers, rates are higher.

The only options seem to be to cut budgeted expenses or raise taxes. California is in a similar bind and, despite budget cuts made earlier this year, more than 20 states have identified budget gaps that combine to exceed $11 billion.

The U.S. Treasury is an attractive option for budget-closing loans. States and localities cannot run deficits but Washington can. State and local officials and their Congressional allies can argue that their problems stem from failures of Federal regulation of financial markets and that if banks can be bailed out, why shouldn't Washington provide short-term help to state and local governments?

I imagine the National Governors Association and the U.S. Conference of Mayors are working hard on this question right now.

Washington's challenge - Obama's or McCain's challenge - will be to respond in such a way that the short-term pain of state and local fiscal adjustments is reduced while changes in long-term fiscal practices are made. Federal crisis assistance to state and local governments should come with conditions that are as thought-through and as tough as new regulations being prepared for the financial sector.

Sunday, October 26, 2008

Poll: McCain Is Losing Because of the Economy

2 a.m. EST: An AOL poll shows a majority of more than 200,000 respondents saying that John McCain can still win on November 4, eight days from now. The poll asks: "What should a McCain comeback strategy focus on most?" Of the 160,000 respondents, 54 percent believe that he should focus on economic solutions. Only 20 percent say McCain should focus on his experience, only 18 percent say he can succeed by attacking Obama. (Only 8 percent say there is some other formula for a McCain victory.)

Comment: As forecasts of a deep global recession grow and some sober economists (like Harvard Professor Greg Mankiw in Saturday's But Have We Learned Enough?) say an economic downturn rivaling the Great Depression can't be ruled out. McCain needed to position himself as a leader offering different economic solutions from the Bush Administration. The AOL poll suggests that McCain's inability to cobble together such a plan is Obama's greatest strength. If he is so experienced, the electorate seems to be asking, why isn't McCain able to explain what he would do differently from George W. Bush about the economy?

6 a.m. EST: More than 183,000 responses. Economic solutions, 54 percent. McCain's experience, 19 percent. Attacking Obama, 18 percent. Other, 9 percent.

Sunday, October 19, 2008

Can a President Affect the Business Cycle? Yes.

The excellent graphic in the New York Times yesterday asked: "Can a President Tame the Business Cycle?" Provocative. Draws attention to the graphic. But it's like asking "Can a President End Poverty?" Unfair. Invites a shrug of the shoulders.

The text accompanying the chart - which depicts the consequences of the economic policies of rec ent presidents - asks a more reasonable question:
Today, Americans save less and earn a lower minimum wage — in real, or inflation-adjusted, terms — than at nearly any other time since 1950. Can voters reasonably expect these and other indicators to change significantly after a new president takes office in January?


But the appropriate question is not whether one can always “tame” a tiger. It is whether we have to feed people to it.

Voters reasonably can expect better policies than the disastrous laisser-faire policies of the last eight years.

By ignoring the unsustainable runup in asset values (especially housing values) that occurred under George W. Bush, recent policies have invited the collapse of these values in recent weeks. In Keynesian terms, Dubya had the furnace running during the month of August. Allowing and encouraging the extreme increase creates the probability of an extreme correction. Dubya is responsible for the economic hardships and inefficiencies that accompany the correction.

Starting in January under President Obama one can expect a move toward less inequality of income and a less extreme business cycle.

Wednesday, October 8, 2008

Letter from London - Big Bang Bugs British Banks

LONDON - It has come to this. London's Big Bang was to open up UK financial markets to stop the grousing by Oxford-Cambridge graduates about how much more money their Wall Street cousins earned. But opening up the UK markets also allowed in the U.S. subprime-CDO-CDS virus that laid low many U.S. institutions and now has more UK victims. Europe's more regulated financial sector has been relatively immune to the disease.

How the right and the left do converge in such a crisis. Dubya's administration with Phil Gramm's leadership was engaged in a methodical deregulation of the financial markets. But it showed no hesitation about swiftly seizing the commanding heights of the mortgage lending and investment banking industries.

In Britain, Gordon Brown's Labour Party - ideologically far more prepared to turn its banks into government bureaucracies - delayed taking action but is now following in Uncle Sam's tracks. The Financial Times calls the bank bailout a "part-nationalization".

Newspaper headlines this morning focus on a £50 billion UK bank bailout. The Times, Daily Mail, Telegraph and Independent have major headlines, all explaining that the number is an estimate of an initial infusion of capital by H.M. Government to buy equity primarily in three major banks - Royal Bank of Scotland, Lloyds TSB and Barclays. A fourth bank, the Halifax Bank of Scotland, is also involved because it is in the process of being absorbed into Lloyds. (The Royal Bank of Scotland has already absorbed National Westminster.)

The Evening Standard, however, perhaps because it has a later deadline, reports that the bailout is for much more, £500 billion or about $870 billion. The larger number is huge for an economy that is substantially smaller than that of the United States. It is also more realistic, because it includes £50 billion to guarantee bank bond issues, £200 billion for short-term lending and another £50 billion for recapitalization.

Besides the big banks that have been huddling with the Chancellor, four other banks are mentioned in the Evening Standard story - Abbey, Nationwide, HSBC and Standard Chartered. The list is still "in formation" as HSBC, for example, isn't convinced that it wants or needs the government's money.

The complaints over here are similar to the ones aired in the United States, except that in addition Her Majesty's Government is being called dilatory. Simon Jenkins of the Guardian describes as "dithering" by Brown's Chancellor Alistair Darling as "dithering" and Parliament as "useless" - postponing action because of a schedule "fixed by the grouse-shooting season." London traders are described by the Evening Standard as calling the new act "Too little, too late." Alistair Osborne of the Daily Telegraph headlines his story: "Action at last - but is it too late?"

Most of the commentary, of which there is much, focuses on the control that the government will exercise and the taxpayer perspective. The Daily Mail says the banks will "fall under state control, the biggest nationalization of modern times."A typical comment is by Alex Brummer, who says that "the heavy hand of government" will exercise "ever more control" over the banks.

The IMF is reportedly about to release a projection that the UK is the "biggest casualty of the world downturn", with bank losses reaching $1.4 trillion and the GDP growth turning negative in 2009 for both the United States and Britain. Brits are asking the same question as Main Street USA - "What do we get for our blank check?"

Armageddon-friendly theorists go further and predict that the financial crisis will be the death knell for the euro and some suggest raises questions even about the future of the EU itself.

Monday, October 6, 2008

Brand Expert Scores Obama v. McCain 7 Ways

Pat Cottingham
The Obama and McCain brands have been rated by branding-strategy expert Pat Cottingham of Genuine Imprints, Ltd. Her paper "Brand Obama or Brand McCain?" is featured this week on brandchannel. It's astute. Here's a summary she wrote for me:
On November 4 the American people will buy the Obama or McCain brand. I think the Obama brand is winning on seven criteria:

1. Logos.
The Obama Campaign chose an icon that captured the feeling of sunrise over a field of red and white stripes. There is also a subtle "O" for Obama that is in play here though the name Obama is not used in the icon. This makes it a universal logo/icon to which anyone can bring his or her own meaning. It also communicates the Obama brand style. The McCain Campaign chose a logo that comes directly out of his family heritage of three generations in the U.S. Navy, as well as his prisoner-of-war-hero-status political leader. The colors of blue and gold are the U.S. Navy colors, the star icon comes directly from military-rank designations on uniforms. Graphic icons are more new-school in the branding world, indicating change. Names on logos are more old school, indicating traditional values.

2. DNA. The Obama brand has a clearly defined brand code delivered in a simple three-word line. "Yes We Can". McCain has not clarified his brand code. His brand has delivered multiple messages - "Change You Can Believe In", "Country First", "Reform Prosperity Peace", "Don't Hope for a Better Life, Vote for One", "Courageous Service. Experienced Leadership. Bold Solutions".

3. Benefit. Obama has a clear product benefit. "Hope". It is hard to discern from the variety of McCain's brand messages what his product benefit actually is.

4. Positioning. The Obama brand positioning is We/People based. The McCain brand positioning is more Me/McCain based. If you would like to see evidence of this go to the Brooklyn Art Project site and see their Visual Word Maps. These word maps reveal the Obama and McCain campaign strategies by the top words used.

5. Values. If a brand is to be trusted it has to shed light on its values. Obama conveys the values of hope and unity. The McCain campaign has attempted to undermine these values, starting with exploitation of the Rev. Jeremiah Wright's sermon on YouTube. This inspired Obama to give a well-regarded speech on race in America on March 18 at the Constitution Center in Philadelphia. This strengthened the Obama brand, as Obama showed he could stand up to adversity. McCain has clearly communicated that he values country and service but it's not clear how this message relates to current economic, energy, and environmental challenges facing America. Television coverage today showed Palin with "Country First" in the place of McCain's name on the campaign logo. These two words sound like implicature - a new word for the ancient practice of implying or suggesting something more than what it said. Saying that McCain puts his country first implies that Obama does not. It's as if Coca-Cola advertised "No Arsenic Added" - a statement that is surely true, but carries the (false) implication that other brands of soda do add arsenic. Sarah Palin at the same time was suggesting that Obama "pals around" with terrorists, the evidence being a long New York Times story on Bill Ayers that in fact concludes that the connection between Ayers and Obama, who both served on the Chicago Annenberg Project, was not very strong.

6. Mission. A brand must have a clearly defined mission so that its messages flow in one direction. Obama's mission is to bring "Change to America". The fact that he is the first African American running for the president of the United States is the embodiment of this mission. There could be no bigger change than an Obama administration and the Obama family in the White House. McCain's claim that he will bring reform to Washington with bold solutions is harder to buy into, no matter how much he positions himself as a maverick. The McCain brand simply hasn't demonstrated that his administration would be different from the last eight years under George W. Bush.

7. Vision. Finally, every great brand must have great vision. The Obama brand's "One Nation" vision is wrapped up in his quote "There is not a Black America and a White America and Latino America and Asian America; there's the United States of America." This viewpoint is the uniting principle that the Obama brand has promulgated throghout the country. The McCain brand vision is a world that is more threatening and fear based. He says: "We must win in Iraq. If we withdraw, there will be chaos; there will be genocide; and they will follow us home." A vision of fear in how we face our challenges here and around the world will diminish us. It will make us smaller and this is not the America that we want to see at home or how we want to continue to be seen around the world.
For a longer version of this post showing the logos and including links, go to HuffPost.