FINANCIAL CRISIS | Missing Minsky

Dec. 27, 2008–Martin Wolf, at FT.com, wrote on December 24 that Keynes offers us the best way to think about the financial crisis:

We are all Keynesians now. When Barack Obama takes office he will propose a gigantic fiscal stimulus package. Such packages are being offered by many other governments. Even Germany is being dragged, kicking and screaming, into this race. The ghost of John Maynard Keynes, the father of macroeconomics, has returned [and] that of his most interesting disciple, Hyman Minsky.

Hyman Minsky

I first heard Hy Minsky talk in the 1960s. His main message was:

1. Financial systems have a built-in tendency to euphoria. The financial market does not tend toward stability. The opposite is true. Bankers and other financial actors borrow more and more heavily, making the system increasingly vulnerable to panic. Lenders start after a scare by being conservative, hedging their bets. But eventually confidence returns and speculation takes hold again. Then investors get to the Ponzi phase – manic use of credit, a euphoria or bubble.

2. The credit cycle tends to manic, but ends with panic. The Ponzi phase continues until some investors exit with their profits, or the central bank raises interest rates to reduce investor euphoria, and then a financial institution runs into difficulty. The failure causes a bankers' panic. Turning points in the five stages of the cycle are called “Minsky moments”.

3. The system tends to instability and must be regulated. Fashions in monetary theory have moved from a belief that Keynesian sophisticates could “fine-tune” the economy, to fear that the Fed had lost control of the ability to contain inflation, to a belief that markets work best with minimal interference. Hy rejected all these ideas, preaching consistently about the need for regulation and the importance of leaning against the excesses of what Keynes called the animal spirits of investors.

Born in Chicago, Hy taught at Brown, Berkeley and Washington University (St. Louis). He died 12 years ago in Rhinebeck, 77 years old, near Bard College’s Levy Institute, which has a special interest in business cycles and treated Hy as a star in his last six years. Hy didn’t live to see how closely this year’s meltdowns would follow his predicted scenario, with the Lehman failure being one of several clear Minsky moments.

Former Fed Governor Laurence Meyer, who spoke in New York City last week, has said of Minsky: “few have influenced my thinking about economics more than Hy.” If Hy had been listened to, we would have seen less permissiveness, fewer NINJA (No Income, No Job nor Assets) mortgage loans and more aggressive Federal Reserve and SEC oversight over highly leveraged instruments and institutions.

Fed Chairman Alan Greenspan and then-Governor Ben Bernanke were anxious not to “pop the bubble” because (citing the Milton Friedman-Anna Schwartz history) that’s the mistake the Fed made in 1928 - after the guy who knew what he was doing, FRBNY chief Benjamin Strong, died of TB. The Fed was concerned not to stifle financial innovation, arguing that it is ready with new weapons in the event of an asset-destroying credit freeze.

This last theory is now being tested. The stakes are high, beyond an academic debate. Whatever side one takes, any sensible person should be rooting for the outgoing and incoming Fed-Treasury teams to succeed in restoring confidence and the flow of credit.

US Financial Regulation - 2009

Valuable features of blogging are that you get feedback from comments and from Google's ranking of what you have written.

Ranking high right now is a blogspot post from March 22 titled U.S. Financial Regulation 2008. I argued for broader regulation of the financial markets. President-elect Obama has announced it is going to happen. My post begins:

In late 1999, the bulwark bank regulation of 1933, the Glass-Steagall Act - the wall between investment banks and commercial banks - was torn down. This was a great victory for creative bankers, who had found the wall irksome and restrictive.

The post can be read here.

I cited an FDIC staffer with a distinctive floppy hat warning me 40 years ago about the disastrous consequences of a drying up of bank credit. His comment is particularly poignant given what has happened since March 22.

Would I change anything if I was writing from today's perspective? Yes, I would have added references to post-1999 moves toward financial deregulation. In particular, I would reference a Texas Observer article by Patricia Kilday Hart on May 30. It describes the unseemly haste with which at the end of 2000 Sen. Phil Gramm managed to insert a rider facilitating a market in credit default swaps. The CDSs added a whole new layer of risk to the U.S. financial sector and was a large factor in the credit meltdown.

To their credit (worth noting given that Democratic legislators have recently been criticized as deregulatory co-conspirators), former SEC Chairman Arthur Levitt and Sen. Chuck Schumer both expressed deep concerns about the new law. Levitt worried about the increased leverage and risk that CDSs would create, and the splitting of regulation between the SEC and the Commodities Future Trading Commission. Sen. Schumer agreed with him and told Sen. Gramm, Chairman of the Banking Committee, that "I would rather do it right than do it quickly." See the Joint Committee Hearings on S. 2697 - The Commodities Future Modernization Act of 2000, pp. 45-46.

What's on the Bernard L. Madoff Website Now

The links are operational on the Bernard Madoff website - http://www.madoff.com. If you check and what you find differs from what follows, please email me at john@cityeconomist.com and I might do a followup.

Saturday, December 20 02:38 ET
On December 15, 2008, the Honorable Louis L. Stanton, a Federal Judge in the United States District Court for the Southern District of New York, appointed Irving Picard as Trustee for the liquidation of Bernard L. Madoff Investments Securities LLC (“BMIS”) pursuant to the Securities Investor Protection Act (“SIPA”) as set forth in the attached order. LINK

Mr. Picard supersedes Lee S. Richards, the previously appointed Receiver for BMIS and all claims by customers of BMIS will be processed by Mr. Picard as SIPA Trustee. Customers and claimants should refer to the website of the Securities Investor Protection Corporation for information about the processing of claims. SIPC.ORG

Mr. Richards continues to serve as Receiver for Madoff Securities International Ltd. pursuant to the attached order. LINK

The Trustee Irving Picard has engaged Lazard Frères & Co. LLC to assist in the sale of the trading operations of Bernard L. Madoff Investment Securities LLC.

Should you have further questions, please contact the Trustee at the following number: 888-727-8695.

Copyright ©2008 Bernard L. Madoff Investment Securities LLC. All Rights Reserved.
Member FINRA & SIPC

JOBS | Maloney–NYS Lost Big from Big 3 Shutdown

A feud of sorts has broken out between Tennessee and Michigan. A Tennessee senator led the battle against approving a proposed bailout of the Big 3 auto companies. Tennessee is the home of some automobile factories owned by foreign-based manufacturers.

Joining the argument now on the side of Michigan, Rep. Carolyn Maloney (D-NYC) has issued a report that reminds New Yorkers that 150,000 New York State jobs are dependent on the U.S. auto industry. Of this figure, 3,000 jobs are in GM and Ford plants. The rest are in auto parts and other suppliers of goods and services to auto manufacturers, dealerships, and indirect losses from suppliers of goods and services to the auto workers who lose their jobs.

The job loss would be the largest single-year loss since 1991, says Rep. Maloney, using data from an Economic Policy Institute report. The EPI report provides data to show NY State could lose 144,600 jobs if the Big 3 shut down -- out of 3.3 million jobs at stake nationally. The NY State comptroller has predicted that New York could lose as many as 225,000 jobs over the next two years. The 150,000 possible lost jobs would presumably be in addition although there may be some overlap in the projection methods.

A Bush Administration spokesperson has argued that a fallback possibility (given that the outgoing Senate refused to vote for an auto industry bailout) is for an "orderly" bankruptcy of GM and Chrysler instead of a bailout. President Bush on December 19 announced $13.4 billion emergency loans to GM and Chrysler, with $4 billion more in February, provided the companies develop reorganization plans that show they can become profitable soon.

This is what Rep. Maloney has been calling for, i.e., immediate use of some of the TARP funds to buy time for the automakers. Ford is not in such dire straits as the other two of the Big 3 and can reportedly operate for another year without government support, but joined in the request for immediate aid.

Rep. Maloney is among those who have been mentioned as possible candidates for the NY State Senate seat that is expected to be vacated by Sen. Hillary Clinton when she takes up the position of Secretary of State in the Obama Administration.

New Yorkers Suffer Collective Anxiety Disorder

Economic uncertainty has contributed to a 7 percent spike in prescriptions for sleep aids and 5 percent growth in anti-depressant and anti-anxiety drugs in New York City compared with a year earlier. The data are published by Crain’s New York and were collected by Wolters Kluwer Health, a global provider of medical information.

The spike was particularly evident in September, when an economic tsunami bankrupted Lehman Brothers Holdings Inc., forced Washington to bail out insurer American Insurance Group Inc., prompted Bank of America Corp. to rescue Merrill Lynch & Co., and led Goldman Sachs Group Inc. and Morgan Stanley to reorganize as bank holding companies.

“If we looked to diagnose the city, I would say it has an anxiety disorder,” said Mel Schwartz, a psychotherapist with practices in the city and in Westport, Conn.

The following link to a short video is not from the Crain’s article but provides advice for those who are suffering from Irritable Bailout Syndrome – see Doctor Decline.

Not My Dad's Fed

I went to work for the Fed in 1964, when William McChesney Martin, Jr. was Chairman. He would be surprised at the activism of today's Fed as it drops the equivalent of napalm on the dangerously frozen peaks of our financial landscape. Back then I was a financial economist in the Division of International Finance headed by Ralph Young, editor of the third edition of The Federal Reserve System: Purposes and Functions, 1954. (The first edition was drafted by the great Bray Hammond in 1939.)

The marble building at 21st and C Streets hasn't changed much since 1964. But three things definitely have - the link to gold, the size of Fed assets and the reach of the Fed into financial markets.

1. Link to gold broken. Back in 1964, the Treasury bought gold at a fixed price of $35 an ounce from private owners of gold, forbidden 30 years earlier from holding gold for speculative purposes. Purposes and Functions, 3rd edition says (97-99):

Gold is the ultimate basis of Federal Reserve credit and gold movements are an important factor in member bank use of Federal Reserve credit. The power of the Reserve Banks to create money is limited by the requirement of a 25 percent reserve in gold certificates against the total of deposits and issued Federal Reserve notes. All gold that enters the monetary mechanism becomes reserve money of the Federal Reserve Banks in the form of gold certificates. In practice most of their reserves are represented by a credit in a gold certificate account on the books of the Treasury.

The last connection between gold held by the Treasury and Federal Reserve Bank deposits was ended by President Nixon in 1971, under the pressure of the OPEC-led oil shortages. This also ended the gold standard and removed the cornerstone of the Bretton Woods system.

2. Increase in Federal Reserve assets. Fed assets from 1920 through 1953 are shown in Purposes and Functions, 3rd edition. They rose from $6 billion to $53 billion in 33 years.

Combined Assets, Federal Reserve Banks ($bil.), Year-End

Asset Category	1920	1930	1940	1953
Gold certificate reserves	2.06	2.94	19.69	21.34
U.S. Govt. securities	0.29	0.73	2.18	25.89
Discount loans to member banks	2.69	0.25	0.00	0.42
Subtotal	5.04	3.92	21.87	47.65
Other assets	1.21	1.28	1.28	5.18
Total	6.25	5.20	23.15	52.83

Source: CityEconomist based on data from The Federal Reserve System: Purposes and Functions, 3rd ed., 187.

Fast forward to November 2008. Fed assets were growly slowly toward the $1 trillion mark until the freeze hit and Fed assets (Reserve Bank credit) more than doubled from a year earlier, to $2.17 trillion as of December 3. The President of the Dallas Federal Reserve Bank opined in early November that Fed assets will reach $3 trillion by the end of 2008.

3. Market Operations

A "bills only" policy was abandoned in 1961, but a "bills preferably" goal still made sense because open market operations to pursue monetary policy are easiest to manage in the most liquid part of the market, the short end. In recent weeks, however, the Fed's efforts to defrost bank vaults have driven the return on Treasury bills to zero and the Fed has no choice but to operate at longer maturities.


Former Fed Governor Laurence Meyer is speaking to the New York Association for Business Economics on December 17. The title of his talk is: "Monetary Policy: Whatever It Takes." That says it all.

JOBS | Dismal News for U.S. Metro Areas

I posted this a few hours ago on Huffington Post. Unemployment tends to lower tax revenues to states and localities and raises expenditures, so it's one of the contributors to the fact that 41 states are facing budget gaps, some of them daunting.

When the Governors appealed to President-elect Obama for help today, they had support from today's Bureau of Labor Statistics release of dismal October unemployment data for metro areas.

Metro area unemployment rates (not seasonally adjusted) in October were above the October year-earlier rates in 361 metro areas and below in only eight. Unemployment rates exceeded 10 percent in 13 metro areas and were below 3 percent in 11. (The national unemployment rate in October rose to 6.1 percent from 4.4 percent a year earlier.

Unemployment exceeded 7 percent in 98 metro areas, increasing from 16 areas a year earlier. They were below 4 percent in 43 areas, a drop from 151 a year earlier. The highest unemployment was in El Centro, Calif., 27.6 percent. Next highest was in neighboring Yuma, Ariz., 19.5 percent. The lowest unemployment rate was in Bismarck, N.D., 2.2 percent. Next lowest: Logan, Utah-Idaho, at 2.4 percent.

Overall, 148 areas exceeded the U.S. average rate of 6.1 percent and 216 areas reported rates below the U.S. average. This suggests that metro areas on the whole remain better places to find jobs than rural areas.

El Centro, Calif., had the largest increase in unemployment from a year earlier, 6.8 percentage points. The next-highest increase was in Elkhart-Goshen, Ind., 6.3 points. A total of 33 areas had increases of 3 percentage points or more. Another 92 areas had increases of 2.0 to 2.9 points. Jonesboro, Ark., fell the most from a year earlier, -0.6 percentage point.

Of 49 metro areas with a 1 million or more population, Riverside-San Bernardino-Ontario, Calif. had the highest rate, 9.5 percent. Eight other large areas posted rates of 7 percent or more. The large area with the lowest rate was Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.Va., 4.1 percent. Next lowest: Oklahoma City, Okla., 4.2 percent.

All 49 large areas registered higher unemployment rates than a year earlier. The area with the largest increase was Providence-Fall River-Warwick, R.I.-Mass. (+3.8 percentage points). Next largest: Riverside-San Bernardino-Ontario, Calif. (+3.2 points). Fourteen other large areas had rate increases of 2 percentage points or more, and 29 other areas had rate increases of at least 1 point.

TRANSITIONS | Lessons for Obama

Nov. 27, 2008–I was dipping back into a book by Carl M. Brauer, Presidential Transitions: Eisenhower through Reagan (Oxford University Press, 1986) and found much information that might be useful to the Obama transition. The last chapter, "Conclusions: Historical Patterns and Lessons," concentrates all the book's earlier stories and comparisons into a dense guide for any transition staff that has time to look up from the resumes they are reviewing.

Here's one rule Brauer gleans from all of the transitions his book covers:

Relations between outgoing and incoming Presidential administrations have usually been civil... but rarely productive or educational (p. 258).

A common experience is for outgoing staff to prepare themselves for a debriefing, never to be asked for it. I know that in New York City many a briefing book for the next administration has been unopened.

Instead of gleaning as much information as possible from the outgoing administration at every level, incoming Presidents

frequently overreact to a perceived flaw in their predecessor. In reaction to Truman, Eisenhower was too anti-political. In reaction to Eisenhower, Kennedy was too anti-organizational. In reaction to Nixon, Carter was too "anti-imperial." In reaction to Carter, Reagan was too ideological.

Nixon did not overreact in this way, but he did not foresee, says Brauer, how Johnson's war in Vietnam would become his war. This illustrates a general point that

new Presidents and those around them, buoyed by their recent electoral victory, tend to believe that bad things cannot happen to them. But bad things do happen. Some Presidents are reelected, but all Presidents leave office with significant amounts of scar tissue... [A]ll Presidents have made decisions at the start of their administrations that they later regarded as serious mistakes or should have so regarded (p. 258).

Brauer believes that Presidents need to damp down "excessive optimism" and too much faith in the potential from "organizational reform".

DoD Retirees Slam Waste, Errors

Read the stunning new book from the Center for Defense Information (CDI) on the budgeting weaknesses and strategic blunders of the DoD. It's a remarkably good read as well as offering a buffet of common-sense reforms for the new President and Congress.

Rep. Barney Frank has already called for a 25 percent cut in the military budget. That may be hard to do right away because of the overstretched troops in Iraq and Afghanistan, but the new book shows lots of ways that the out-of-control military budget can be reined in for more security at less cost.

The book, America's Defense Meltdown: Pentagon Reform for President Obama and the New Congress, is out just two weeks after the election, exemplifying one of the themes that runs through it, namely the importance of speed and the ponderous nature of our military organization, which is critiqued as stuck in the second generation of four generations of warfare. The eleven chapters of the book are written by 13 retired Pentagon insiders, retired military officers and defense specialists. The book is edited by Winslow T. Wheeler (photo at left), Director of CDI's Straus Military Reform Project. CDI has itself found a home in the World Security Institute. Wheeler worked for 31 years for U.S. Senators from both political parties and the Government Accountability Office. His earlier book, The Wastrels of Defense, was published by the U.S. Naval Institute Press.

The book (a 2.3 meg pdf file) can be read for time being online at http://tinyurl.com/6ylwfw. I have been up most of the night reading it - it is fascinating.

The scope of the first chapter by Lt. Col. John Sayers (U.S. Marine Corps, ret.) is global and deeply rooted in history. He observes that for most of human history wars have been fought in first-generation mode, with independently assembled military units engaged in close order drills. The Thirty Years War, largely a battle between Catholics and Protestants, led to the 1648 Treaty of Westphalia, which ushered in the era of the dominance of nation states.

The second generation of warfare began at the end of the 19th century with the rivalry between Germany and Britain. The industrialized states were able to raise their firepower and support large battalions. This was the mode of battle of World War I, a war of attrition in Europe that was disastrous for all the combatants (the United States came late to the war and still lost 250,000 troops in Europe - while the major powers in Europe lost many more).

Already at the end of World War I, with their forces depleted, the Germans were trying a third generation of warfare, decentralized and maneuverable. Sayers says that this approach was used by the Germans effectively in World War II and was imitated by the Chinese in Korea and by the Viet Cong.

Nowadays, we are engaged largely in a fourth-generation war. With a loss of nation-state controls in many parts of the world, independent paramilitary groups have arisen, such as FARC in Colombia, or al Qaeda, or the Chechen rebels in Russia. Parts of Iraq are controlled by independent Sunni, Shiite and Kurdish forces. It's a reversion to the days before the Treaty of Westphalia. The independent groups behave the way SPECTRE does in the Ian Fleming novels - they have specific objectives and they fight to achieve them.

Sayers says we should have moved a long time ago to third-generation and fourth-generation readiness - with smaller and more maneuverable forces. He does not think the large nations have any interest in another war of attrition of the size that the United States prepared for during the Cold War.

Why has the United States been stuck in a century-old military strategy, spending too much money for too little ability to wage a modern war? Here are some of the reasons he advances:

- Budget gaming - frontloading and political engineering of weapons systems (Gordon Adams wrote about this 30 years ago in The Iron Triangle), with the result that the weapons are too big, too complex and unreliable.
- U.S. military forces are led by officers who are inadequately trained to lead, contributing to tbe unpreparedness of the troops.
- Defense costs rise faster than defense budgets and have become "ruinously expensive." Sayers ends the chapter describing the U.S. military creature as a "weak-muscled elephant that cannot even deal effectively with mice."

The other ten chapters go on in the same vein, urging reassessment of the way that war-making decisions are made, the military personnel system, overdependence on foreign bases, lack of mobility of forces on sea and land, overdependence on technicians, excessive faith in the value of strategic bombing as opposed to air-to-air and close-support operations, misuse of the National Guard for overseas duty, excessive faith in technology and inadequate tracking of defense spending.

Read the book! Here's the link again to the free online file while it works: http://tinyurl.com/6ylwfw.

EPS | Iraq Is a Hard Place

Nov. 15, 2008–Yesterday evening Economics Nobel Laureate Joseph Stiglitz painted a picture of today's dire economic straits with a broad brush, putting the burdens of the Iraq War in the middle and detailing the finer points of Bush-era economic failures around the sides. The canvas was made less miserable to observe by the fine food and wine served in the comfortable Upper East Side Manhattan home of Alan and Catherine Harper, at a fundraiser for Economists for Peace and Security (EPS).

Joe Stiglitz is introduced by EPS Chair Jamie Galbraith. The room is full and buzzing. CityEconomist is in the first of three rows of chairs facing our speaker. Jamie, son of much-missed EPS leader John Kenneth Galbraith, is here from the University of Texas at Austin, and doesn't hesitate to acknowledge the grand contributions of some sons of Texas to the current financial fiasco.

Certainly, the investment bankers in the Big Apple and mortgage hustlers in Orange County, Calif. couldn't have caused such mischief on such a world-wide scale by themselves. They needed Texan Phil Gramm and the Republican Senate to change the laws to make it all possible. Jamie agrees with me that the must-read story on the high point of the credit default swap hijinx is is the May 30 story in the Texas Observer. Send this link to anyone who still talks about the glories of financial innovation with a respectful demeanor (will some people never learn?).

The evening event caps a day-long conference at the New School on the world-wide financial meltdown. Jamie speaks about the origins of the crisis, modestly refraining from promoting his own new book, The Predator State, which these quotes, sans ellipsis marks, summarize:

The judicial coup of December 2000 that installed Bush and Cheney brought back tax cuts for the wealthy, big increases in military spending, aggressive deregulation. Bush and Cheney placed lobbyists in charge of the regulators, representing, in every case, the most extreme anti-regulation perspective. This is the predator state.

Jamie in his book argues that what began as a well-intentioned anti-regulatory movement deteriorated into crude anti-tax crony capitalism. He expresses delight that the nation has now elected someone who is mortgaged to nobody. He introduces Joe as someone with a unique record of insight and foresight about the dangers of ideological economic policies and the disasters they cause, and holds up a copy of Joe's new book, The Three Trillion Dollar War.

Joe says his initial public estimate of the cost of the war in Iraq was $1 trillion. When he presented a paper to an EPS panel in 2006, he and his co-author Linda Bilmes raised the estimate to $2 trillion. "Linda and I thought early on it might be $2-$3 trillion," he said, "but the administration was quoting very small numbers." (The original Pentagon estimate was $50 billion. Lawrence Lindsey, Assistant to President G. W. Bush for Economic Policy, got into pink-slip-level trouble after raising the estimate to a more realistic range of 1-2 percent of the then-GDP of $10 trillion, to $100-$200 billion. See here and here.)

Joe notes that a contributor to the high cost of the Iraq war is the high injury rate among returning soldiers - 15 injured soldiers for every one killed. Joe says that the U.S. government sometimes classifies an injury as an accident, as when a mine takes out a Humvee and then another Humvee plows into the first one. The injuries from the second event may be classified as an accident. The injured soldiers are adding $600 billion to the nation's unfunded liability and constitute a significant fraction of the war's cost - both economic and human.

Joe describes the Iraq War as the first war that was financed entirely on a credit card. Oil was $23 a barrel when the war started, soared to above $145 in July, has now fallen to $57 a barrel today. Latin America borrowed money to pay for higher oil prices, resulting in credit starvation in the 1980s and "a lost decade of growth" How many lost years will the United States suffer from our recent credit binge?

The failures of recent economic policies may be summarized, says Joe, under three headings:
1. The stimulus and bailout were both misconceived. Most of the stimulus package was used to pay down debt and didn't do much for consumption. Allen Sinai presented a paper projecting the worst downturn since the Great Depression and 8-12 percent unemployment. The bailout amounted to cash for trash, whereas the Brits did it differently and better, with conditions and sanctions. The bailout money has been spent on bonuses and dividends.
2. Financial regulation has failed. The financial boats have holes, their steering is gone and their pilots are drunk.
3. The budget has been mismanaged. A deficit can be a good idea if it is spent on something useful, like roads and technology, which have high returns. Using taxpayers' money to buy toxic assets is not a good use of money. We can evaluate public spending from a long-term and a short-term perspective. Our military spending has been poor managed on both counts. We have been buying less security for more money instead of the reverse.

The $700 billion commitment of the Troubled Assets Relief Program (TARP aka Bailout) amounts, says Joe, to ten years' worth of global foreign aid. Treasury Secretary Paulson seems to have seen the light and is halting the purchase of the toxic assets, following Gordon Brown's path of buying bank equity [see Telegraph story today].

Summing up, Joe says the United States has been kept going since 1993 by the tech bubble and then the housing bubble and now some improvement in exports. What we have to look forward to is perhaps two years more recession and then a continuing period of slow growth, maybe focused on renewable energy, green jobs.

Note on EPS: CityEconomist is proud that so many good groups owe their existence to New Yorkers. One of them is EPS, which sponsors economic discussions and reports about unnecessary wars and wasteful military contracts. It was founded by the late Bob Schwartz, an economist and investment adviser whose years as a Marine (he never liked being called an ex-Marine - once a Marine, always a Marine, he said proudly) led him to champion the cause of peace. I was Bob's first paid-up member in the late 1980s and followed him as the second EPS Treasurer. Alan Harper is the third. EPS Executive Director Thea Harvey has made a major contribution to bringing EPS to its current thriving condition. Legacies from Bob Eisner and Bob Schwartz have been major factors in the organization's endurance.

BRANDING | Will Obama Skill Rub Off on USA?

Will the American brand improve under President-Elect Obama? AdAge is running a poll right now. Positive responses are sweeping the field. And why not? We know Obama is tremendously popular overseas. He's a citizen of the world.

More than that, Obama has shown he knows how to handle his own brand. He stayed on message, whereas McCain's Most Vicious Attack Was on His Own Brand Name (Bob Garfield, 11.10.08):

Country second. Political expediency first. Strategic rigor about 18th. My friends, what a terrible campaign. John McCain lost the election for many reasons: Bush's failed presidency, the economy, the Wall Street meltdown at the most inopportune time, the disastrous bet on towering ignoramus Sarah Palin, and not least the lavishly financed, nearly flawless campaign by his opponent, already a singular figure in American political history. Still, strategically and executionally, it was not merely a disaster; it was an embarrassment -- whatever "it" was, because "it" was a moving target. Over the course of two months, McCain's marketing messages were, variously: 1) Country first. 2) Maverick. 3) Don't listen to those ridiculous, un-American, liberal, intellectual, coastal elites. 4) Barack Obama is a superficial celebrity. 5) Tested. 6) Change. 7) Obama is a dangerous unknown quantity. 8) Obama is a socialist. He should have stopped after No. 2, exactly as Obama never stopped talking about the economy, health care and education over and over and over and over no matter what flak the Republicans were shooting in his direction. He was relentless, McCain was reactive.

McCain’s agency was Foxhole Productions in Arlington, Va.

Obama Fundraising a First, Says Election Commission Chairman

Thanks to Congressional Quarterly for noting today ("Obama’s Operation May Become the Model of Fundraising") the comments of former Federal Election Commission Chairman Bradley A. Smith in a Washington Post op-ed piece a week before the election.

Brad Smith was commenting on the fact that the campaigns of both Barack Obama and John McCain had exceeded $800 million in combined spending two weeks before Election Day. The CQ story emphasizes that "It’s not just the amount of money that was spent but also the way it was raised — much of it online, in small chunks and, in Obama’s case, completely independent of the public financing system for the first time in the post-Watergate era."

Smith, in his op-ed, says: "I’ve studied all the great fundraisers of the past, from William McKinley to Richard Nixon to George W. Bush. American politics has never seen anything remotely like this before.”

Smith is overtly partisan - he was a Republican appointee. The online discussion of Obama's citizen "juggernaut" is all the more interesting. He thinks the system has worked, even though his candidate was losing. Here are some excerpts.

Arlington, Va.: Just to counter some of the paranoid posts -- I'm one of those small donors that you fear so much. In <> early September I became so disgusted with the McCain/Palin campaign that I went to Obama's Web site and made a donation. I since have made two additional donations. All three were responses to something that was said by the McCain/Palin campaign. In all I've given less than $100. I was born in the U.S. and have lived here all my life, and despite various Republican's claims I'm not a communist or anti-American. I'm just a regular person who has every right to vote and to support a candidate with my time and money.

Bradley A. Smith: I wish more people thought like you -- not your support for Obama ;-), but regarding your motives for supporting Obama and your willingness to back up your beliefs.

_______________________

Reston, Va.: McCain keeps saying that Obama is trying to buy the election. Isn't it more like the citizens are? They're the ones contributing the money.

Bradley A. Smith: Right on!

_______________________

Wilmington, N.C.: "Former FEC chairman." Given your obvious political leanings, I must say I find that very disturbing. Is that a partisan political post? Should it be?

Bradley A. Smith: The FEC has six commissioners, with no more than three from any one political party. Four votes are needed for most action. So one party can't dictate outcomes. I found that the Commission worked pretty well. But you've really hit the nail on the head -- how can you maintain over time a truly unbiased political police? That's why I generally would deregulate the system, or at least start in that direction. We need separation of campaigns and state, you might say.

_______________________

Maryland: The other day a friend and I were having a friendly argument. He was saying there should be more rules to limit how much a campaign can spend because $200 million is outrageous. I said "$200 million is rock-bottom cheap for a good presidential administration!" It's just a fifth of a billion dollars -- compare that to the cost of the Iraq war. Just saying.

Bradley A. Smith: You are right. Political spending needs to be kept in perspective. Americans will spend about $12 billion on potato chips this cycle. Coca-Cola will spend more on advertising this year than will be spent by all the candidates who have run for president combined. Auto makers will spend more than twice as much this year advertising cars as all political spending for federal office. It cost money to communicate, whether you are talking about cars, cola or politicians.

AdAge: Obama Makes Marketing History

On October 6, I posted on Huffington Post an analysis from my friend Patt Cottingham that impressed me. She limned seven cogent reasons why the Obama brand was better than McCain's. See Brand Expert Scores Obama v. McCain 7 Ways.

Now Obama has been elected President and AdAge announces today that November 4, 2008 is the biggest day for marketing in universal history. President-Elect Obama's "Change" theme gets this all-time cosmic award. Here's the picture (as if you need to see another) and what AdAge had to say about it.

Take a relatively unknown man. Younger than all of his opponents. Black. With a bad-sounding name. Consider his first opponent: the best-known woman in America, connected to one of the most successful politicians in history. Then consider his second opponent: a well-known war hero with a long, distinguished record as a U.S. senator. Obama owns the 'change' idea in voters' minds. It didn't matter. Barack Obama had a better marketing strategy than either of them.

Barack Obama used "Change" as the "big truth."

If you tell the truth often enough and keep repeating it, the truth gets bigger and bigger, creating an aura of legitimacy and authenticity. Hillary Clinton first tried "experience." When she saw the progress Mr. Obama was making, she shifted to "Countdown to change." Then when the critics pointed out her me-too approach, she shifted to "Solutions for America." What word is associated with Ms. Clinton today? I don't know, do you?

AdAge gives three marketing reasons for the triumph of Obama's campaign:
1. Simplicity. About 70 percent of the population thinks the country is going in the wrong direction. Hence a smart focus on "change."
2. Consistency. Most advertisers try to "communicate". They should be trying to "position" consistently.
3. Relevance. "If you're losing the battle, shift the battlefield." Obama forced his opponents to devote much of their campaign time discussing changes they proposed for the country and showing why they were different from Obama's.

GREEN EDGE | Marathon Waste

Nov. 2, 2008–The NYC Marathon today is going to produce 130 tons of waste. This year the NY Road Runners Club is recycling the gallon jugs used for dispensing water. They didn't used to, and the jugs were thrown out with NYC's waste.

The Road Runners are looking into charging runners a license fee to be auctioned off the way seat-license fees are auctioned off by the Jets. If the runners are willing to pay such a fee, some part of the revenue should be allocated to making the NYC Marathon a model of waste reduction and recycling. Although some Asian (Singapore, Hong Kong) marathons have had environmental themes, marathons in many cities have been slow to embrace environmentally friendly practices.

The NYC Marathon might have its recycling etc. practices third-party certified against an environmental standard. The Rainforest Alliance in NYC has been involved with standard-setting and certification and could help.

STATE AND LOCAL FINANCE | Critical Federal Reforms Needed

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.

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.

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.

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.

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.

PORT AUTHORITY | Chris Ward Speaks Out

Chris Ward, 53, addressed a breakfast group this morning sponsored by the New York Law School and the Murray Goodgold Foundation. Governor David Paterson appointed Ward Executive Director of the Port Authority of New York & New Jersey earlier this year.

Ward served at the Port Authority under Governor Pataki and was then tapped by Mayor Bloomberg to head up the Department of Environment Protection, where his work was generally praised.

He left the City to work for a private company and then became managing director of the General Contractors Association. His appointment by Gov. Paterson to his $286,702/year Port Authority job is considered nonpolitical.

Ward's talk is focused around four questions: (1) What will the urban machine be that drives jobs and wealth creation in the NYC area over the next 30 years? (2) How does the development of port facilities help? (3) How will a regional rail system help? (4) How will the airport system help?

His biggest eye-opener upon taking the job, he says, is that "$29 billion doesn't buy you very much." The Port Authority must therefore prioritize. He is also looking to the Federal Government to support rail freight projects as they have supported passenger travel via the highway system and Amtrak.

He argues, switching the usual project ownerships, that New Jersey's planning for the ARC tunnel will rejuvenate the NYC railyards, while bringing rail freight access to NYC will help take many trucks off New Jersey's highways.


Ward credits Congressman Jerry Nadler for asking good questions about rail freight in the Congress. Nadler, who is in the audience, in turn praises Ward for the direction he is taking the Port Authority.

With a few pointed words, Ward takes issue with the Bush 43 Administration for understaffing the FAA and trying to promote market-based auction systems instead of addressing the capacity problems of airports in the NYC area and elsewhere. "We need a GPS-based system. The market is not going to solve the airport congestion problem."

In a movie released three weeks ago, I.O.U.S.A., I watched several New Yorkers (Doug Durst, Pete Peterson, David Walker and Robert Rubin) take issue with the string of federal budget deficits under Bush 43, after a sring of budget surpluses during the Clinton years. To my mind the doubling of the official federal debt (in round numbers, from $5 trillion to $10 trillion) is only part of the tragedy.

The two other big parts of the debt tragedy are (1) we borrowed the money overseas, avoiding debate at home about the war and putting power in the hands of our creditors, and (2) how little we have to show for the money we have borrowed.

Think what we could have got for $1 trillion of transportation infrastructure for U.S. ports, airports and rail. Look, as Ward tells us we should, what Dubai is buying now in international connectivity. Compare what we got in Iraq for $1 trillion and many thousands of lost lives.

Is the NY SUN about to set again?

Crain's NY online reports that the NY Sun, a revival of a long-defunct paper by the same name, could close by Oct. 1.

Investors reportedly have told editor Seth Lipsky to raise new money or shut the paper down by the end of the month.

The Sun has had an excellent cultural section, some fascinating obituaries and some excellent reporting in niche areas. It's sad that if the paper folds a lot of good writers will have one less outlet for their work.

But the paper has been getting thinner and thinner. Advertisers are spending more money on targeted ads on the Internet. Classifieds are shrinking. The Sun's target audience is already well supplied with publications. There is only so much anyone can read and an increasing amount of news is available instantly and for free online.

Yankees to Blame for Sluggish Economy, Too

This appeared in the NY Magazine Blog (www.nymag.com), The Sports Section, picking up on a NY Post story and taking it another step. In a half-trillion-dollar economy, the impact of the Yankees isn't a big deal - the permanent NYC-based jobs created by the presence of the MLB are more important. But psychologically - when the Yankees ought to be in the Playoffs without question every year given their gold-plated budget - the team's performance seems to fit with the flat performance of Wall Street.

If you're running out of people to hold accountable for the tanking economy, NYU adjunct professor John Tepper Marlin has a suggestion: Blame the damn Yankees. In a study commissioned by the Post, Marlin found that when the Yankees advance all the way to the World Series, the city stands to make $141 million, factoring in things like revenue earned by sports bars. But just by making the playoffs, the team earns the city $26 million, and with the Yankees poised to miss the postseason for the first time since the strike season of 1994, this previously taken-for-granted cash can't be counted on.

But don't buy that house in Tampa quite yet. The Mets, who are currently two games ahead of the Phillies in the National League East, can make the city some money, too: $21 million for a playoff appearance, and $147 million if they win the National League pennant. (The difference in numbers has to do with the fact that Mets fans are more heavily concentrated in the five boroughs than are Yankees fans.) So no matter your allegiance, let's hear it on the unemployment line: Let's go Mets! Let's go Mets!

CITY WILL $TRIKE OUT IF YANKS MISS PLAYOFFS, NYPost

Cited also in The Yankees Missing the Playoffs Could Cost New York City Millions, FanHouse and Fate Of New York Economy Rests With Yankees, Mets, The Business Sheet. See all stories on this topic.

"Happy Days Are Here Again" Again

On April 6, I noted the McLaughlin Group was guilty of anachronism, playing "Happy Days Are Here Again" in relation to the brokered 1924 Democratic convention:

The problem with McLaughlin's "home video" (as guest Mort Zuckerman described it with a touch of sarcasm) of the 1924 convention is that the background music is the "Happy Days" theme. It couldn't have happened. The music for this song was not written by Milton Ager until 1929. The lyrics by Jack Yellen start: "Happy days are here again, The skies above are clear again, So let's sing a song of cheer again, Happy days are here again."

Now it's August 30, after the Denver Democratic convention gave us the Obama-Biden ticket. I get this nice note from WS in Colorado:

I enjoyed reading your piece about "Happy Days Are Here Again." I'm old enough to remember hearing it when FDR ran against my friend Alf Landon in 1936. I read recently that use of that tune for FDR's campaigning against Hoover was a fluke... selected by accident. FDR, it is reported, didn't like it at all. I'm unable to find the source of that now however. (Like Harry Truman couldn't stand "The Missouri Waltz." Nixon didn't know this when he visited him in Independence and played it on the Steinway that Truman had brought from the White House.)

Steven Neal's book, "Happy Days Are Here Again" confirms the FDR campaign theme song - now used as a theme song for the Democratic Party - was a substitute for "Anchor's Away", originally selected because FDR had been Assistant Secretary of the Navy but then deemed insufficiently stirring for the Chicago conventioneers.

Obama Speech on 45th Anniversary of I Have a Dream Speech

Barack Obama gives his acceptance speech this evening in the 8-9 pm slot Mountain time, i.e., 10-11 pm Eastern. The program starts seriously in the 6-7 pm time slot, 8-9 pm Eastern, with Al Gore and Steveie Wonder .

It will be historic in part because it is the 45th anniversary of Martin Luther King Jr.'s historic "I Have a Dream" speech. He will be the first black man to be the nominee of a major political party.

I was in Washington that day in the summer of 1963. I was then working for the Federal Reserve Board as an economist. The crowds were enormous - Washington was a smaller place then.

"This is a monumental moment in our nation's history," Martin Luther King III, the civil rights icon's oldest son, told The Associated Press on Wednesday. "And it becomes obviously an even greater moment in November if he's elected."

Obama was just 2 years old when King addressed a sea of people on the National Mall in Washington on Aug. 28, 1963.

Obama, known for his stirring oratory, has been trying to lower expectations for his acceptance speech.

At the convention's final night, singers Sheryl Crow, Stevie Wonder and will.i.am are scheduled to perform, with Academy Award-winner Jennifer Hudson singing the national anthem.

Former Vice President Al Gore will add his voice to the lineup of Democratic luminaries trying to motivate party members for the fall.

Flashback - King gives I have a dream speech

More than 200,000 people took part in a civil rights rally today at the Lincoln Memorial in Washington, D.C. The rally marked a significant moment in the American Civil Rights Movement. From the steps of the Lincoln Memorial, Martin Luther King, Jr. gave his famous "I have a dream" speech.

Rev. King, head of the Southern Christian Leadership Conference, said: "I still have a dream, a dream deeply rooted in the American dream - one day this nation will rise up and live up to its creed, 'We hold these truths to be self-evident, that all men are created equal,'" said King.

"King's Plea - 'Let Freedom Ring'" Oakland Tribune, August 29, 1963

CO-BRANDING | Sportswear and Deodorant

I picked up a copy of Women’s Wear Daily dated August 14, left by someone who got off the Hampton Jitney earlier than me. On page 2 is a story about the spread of women’s sports apparel into other daily activities. Of women surveyed, 82 percent say they wear their sports kit around the house, 65 percent running errands, 40 percent shopping, 21 percent when having lunch or going to a movie, 10 percent to school. The research was done by Cotton Incorporated’s Lifestyle Monitor (it’s not clear whether the story was written by WWD or was a paid ad or both).

The story got me thinking about co-branding possibilities. Right now we have these:

•  Budweiser and Old Spice, connected by a movie. 
• Axe deodorant (a.k.a. Lynx) and Coke Zero.

How about a sample deodorant stick with every sports outfit?

• TENNIS WITH NIKE IN THE MORNING
• LUNCH WITH AXE AT NOON
• "Wear Nike apparel as long as you want with 24-hour protection from Brand X (sample enclosed FREE)."
• "Only your partners will know how long you played."

Metro Area Incomes Show Impact of Higher Oil Prices

The Bureau of Economic Analysis has released data on 2007 personal income by metro area.

The big story is told in the middle section of the country. Around the Gulf of Mexico, incomes are up - partly because of aid to Katrina-hit areas, but more broadly because of the higher incomes that have accompanied higher oil prices.

These higher oil prices have devastated the Mid-West metro areas around the Great Lakes that live by manufacturing and are linked to the automobile industry or to other products that use energy.

We see a vivid picture of the massive economic shift away from manufacturing and toward energy. The next U.S. President will be the person who can offer hope to the depressed economies of the Mid-West.

Take More Risk to Cover Losses?

Yesterday's NY Times story reports that the NY State Comptroller is worried about two stresses on the state pension fund - more state workers are retiring as the baby boomer cohort gets to their 60s, and the fund took a 6.4 percent loss on its domestic equity investments. The fund fell by $600 million in nominal dollars for an overall 2.6 percent return (after adjustment for payouts), which is well below the 8 percent return that is built into the pension fund's projections. The NY State fiscal year ends March 31, so the equity loss was before the steep drop in June.

The bright spots in the Comptroller's report are high reported returns of 24.8 percent in private equity and a 14.8 percent return in real estate. The Comptroller is asking the State Legislature to let him raise his bets in this area, the riskier "alternative investments" that also include commodities and hedge funds. Comptroller Thomas P. DiNapoli is now allowed to invest 25 percent of the state pension fund assets in these riskier areas - an increase of 10 percentage points was agreed to by the Legislature in 2006.

DiNapoli is essentially saying that the 8 percent target will be hard to meet in traditional debt and equity investments and is saying that he will need to take more risk.

But there are two problems with raising the allocation again:

1. Alternative investments are notoriously less liquid and are harder to value than listed equities.
2. As yesterday's NY Sun notes, alternative investments "increase opportunities for investment managers to make politically motivated decisions," because lobbying can be fierce over these types of investments, both by managers of alternative investments and beneficiaries of the investments.

In considering the request to raise the allocation, the Legislature might pay heed to investment adviser Daniel R. Solin, who describes as a dumb money move "Taking Extra Risk With Your Investments to Make Up for Recent Losses." He says: "Many investors are tempted to take more risk with their portfolios to make up for their losses. This is a bad idea. The fact that you may have lost money in the current markets does not mean that you are able to take more risk. In fact, it may mean the opposite: Your ability to withstand market losses has diminished." More on Dumb Money Move No. 11.

NYC BUDGET | Cuts to Meet Emergency

In connection with the fiscal emergency announcement by NY State Governor David Paterson, who has called for a $600 million cut in State spending, the following article from ten months ago is worth resurrecting. It is reprinted in full from the NY Sun.

NY State's budget problems are especially acute because the State does not receive property-tax revenues, which act as a fiscal stabilizer for the City. However, NYC will be affected by NY State budget cuts and by the shortfall in investment returns for the NYC pension funds below the required return of 8 percent – which means another hit to the City's budget because the City makes up the shortfall.

City Council To Oppose Any Midyear Budget Cuts
By GRACE RAUH, Staff Reporter of the Sun October 29, 2007

If Mayor Bloomberg proposes midyear budget cuts to soften the blow of lower than expected tax revenues, he may face stiff opposition in the City Council. The chair of the council's Finance Committee, David Weprin, said yesterday that he would object to layoffs or midyear cuts now, but he added that individual agencies should always be looking for ways to be more efficient. "I think we should be looking at ways to save money, but I don't think we should be looking at any kind of panic scenarios," he said. "At this point, I would just sit back and just look for savings, but not look for any midyear budget cuts of layoffs." In September, Mr. Bloomberg sent a memo to top city officials saying the city's budget director, Mark Page, would be in charge of closely scrutinizing all future hires to ensure that the only positions filled were those deemed "critically necessary." The mayor noted that the city's economy depends on the profitability and success of Wall Street and said "recent events in the financial markets are, therefore, a subject of deep concern."

A report in the New York Post yesterday, citing an unnamed source, said Mr. Bloomberg is instructing city agencies to list potential budget cuts and that a public announcement is expected this week.

On Friday, Mr. Page reported to the state's Financial Control Board that tax revenues for the current fiscal year and future ones are less than had been anticipated in June. Tax revenues are down $238 million for the current fiscal year and predicted to be down $577 million in fiscal year 2009 and down $638 million in fiscal year 2010.

A former chief economist in the city comptroller's office until 2006, John Tepper Marlin, said that if he were at City Hall, he would act quickly to address the lower tax revenue projections by holding a press conference today to announce an official hiring freeze.

"There is absolutely no point in waiting. You want to act immediately," he said. Mr. Marlin said he agreed with Mr. Page's projections and added that if anything, "it could be worse." Unlike past mayors, Mr. Bloomberg is not afraid to deliver bad news, he said.

A spokesman for the mayor, Stuart Loeser, wrote in an e-mail message that when Mr. Bloomberg has a budget announcement to make, he will make it.

"We don't announce that we're announcing them and then announce them at a later date," he said.

POLITICAL ADS | Obama v. McCain

July 31, 2008–Blake Fleetwood has posted a sharp take on the last two elections, arguing that Karl Rove succeeded in painting a picture of:

• Al Gore as an egghead with delusions of grandeur (Image: Jerry Lewis as the mad professor) and
• John Kerry as lying about his bravery under fire (Image: Pinocchio).

Both images were travesties but they played their part in bringing Dubya to the White House.

Using Blake's flashlight we can read the first McCain and Obama ads as similar snapshots:

• McCain announces in the "Celeb" ad that Obama is the biggest celebrity in the world, up there with Britney Spears and Paris Hilton. Message? Obama's popularity is not based on anything but appearance and that being opposed to new offshore drilling means he is responsible for higher oil prices. Image: Obama as empty-headed star.

• The Obama "We Believe" campaign ad starts with an image of McCain with Bush and Cheney, then goes to Obama's uplifting "we believe" followed by enthusiastic applause. Image: A vibrant challenger, facing up to the nation's economic problems, subverted priorities.

McCain's proposed "drill and nuke" solution to the energy crisis is not likely to have any effect on balancing energy supply with needs during the next eight years. A real solution to the energy crisis requires changing the incentives and behavior of the American people, which is Obama’s focus. That's why the Sierra Club has endorsed Obama.

Misery Index Climbs

Wall Street indexes rise and fall but the economic misery index goes on forever as a single-number summary of what is happening on Main Street. I therefore think it is well worth watching as a measure of how the economy is doing. The index (simply the sum of unemployment and inflation rates) rose in June to 10.5, the highest level in 15 years, i.e., since January 1993, the month President Bill Clinton was inaugurated and President G.H.W. Bush left office. Under Clinton the index improved but it has recently climbed back to what it was when he took over.

Misery Index in the Last Month in Office of Recent Presidents:
Carter: 19.3
Reagan: 10.1
Bush 41: 10.6
Clinton: 7.9
Bush 43 (as of June 2008): 10.5

More (Huffington Post)

DOWN DOWS | Cognitive Dissonance 2

July 11, 2008–On Nov. 8 last year, in DOWN DOWS | Cognitive Dissonance  and then on  Nov. 8 in  Huffington Post, I noted that Bob Janjuah of the Royal Bank of Scotland had raised the upper end of his estimate of cumulative subprime write downs. His estimate was $500 billion at a time when losses of just $50 billion were acknowledged by institutions. Now Janjuah looks like an optimist:

1. Bridgewater Associates, the world's second-largest hedge fund, has estimated likely asset writedowns at $1.6 trillion, i.e., a 6 percent overvaluation of $26.6 trillion of risky credit-based U.S. assets (mortgages, credit receivables and credit-card receivables). Some bankruptcies are predicted.

2. David Rosenberg, Merrill's Chief North American Economist, argues in a July slide show that more bad news is in store:
- A recession? We're in it. Just a question of how bad it gets and for how long.
- Asset values? Not yet priced low enough to reflect the recession.
- Housing prices? Could fall another 20 percent.
He therefore believes that while stagflation is the problem today, tomorrow it will be deflation and Fed policy must therefore remain accommodative.

Recent declines in the Dow are closing the disconnect I noted on Nov. 8 between the debt and equity markets. But the months ahead will be challenging for private investors and government officials at all levels.

Why Are NYC Housing Prices Holding Up?

There has been some weakness in the New York City housing market, but Manhattan's housing prices have remained surprisingly strong. The conventional wisdom is:
- The decline in the value of the dollar makes U.S. properties look very cheap to foreigners.
- Foreigners are looking for quality and Manhattan is the apex of quality.
- Aggressive lending policies were much more prevalent in Florida and California (along with Nevada and Arizona) than in the Northeastern United States.
- NYC coops maintained their credit standards even when mortgage lenders did not.

Here's another possible explanation: New York City is the densest city in the United States, with the best transit system, and a transit system is becoming more valuable. Higher gas prices are making the automobile commute look wasteful. After World War II, the rest of the United States plunged into the creation of highways, purchase of cars and the auto-dependent suburbanization of big cities. NYC already had its subways and commuter trains in place. With the rise of the price of gasoline, the suburban model is being reexamined. For middle-class people under pressure of higher prices, NYC is becoming steadily more attractive.

Outlook for the NYC Economy

The New York City Independent Budget Office predicts there will be 33,000 fewer NYC bankers and financiers by mid-2009. These losses come on top of what Bloomberg news estimates as 83,000 financial-company layoffs worldwide since July 2007. NYC alone has lost about 10,000 financial-service job losses August 2007, 3.5 percent, according to the BLS. Bear Stearns is laying off 9,159 people, two-thirds of its pre-demise total. Citigroup is layoff 15,900 workers worldwide, a 4 percent reduction. A table of cuts from the NY Post is here. Comment by CityEconomist: Wall Street may seem remote from those who don't work there, but spending and taxes by Wall Streeters are crucial for the NYC economy. The dependence on Wall Street has periodically been bemoaned, but as Wall Street productivity increased, revenues and income (including bonuses) per Wall Street worker have been rising steadily with other industries not replacing these jobs and manufacturing jobs that have also been declining. Fortunately, health-care jobs were reliably growing and now we have more tourism and restaurant jobs. But many of these jobs do not pay well. So do not ask for whom on Wall Street the bell tolls - it tolls for everyone with a stake in New York City and that's a large number of people.

Subprime Loan Maps

Subprime Loan Maps. Here's a useful new service from the Federal Reserve Bank of New York. The Fed is now offering dynamic interactive maps showing conditions and density of owner-occupied subprime mortgage loans for all U.S. states, counties and zip codes. The maps are based on data for subprime mortgage loans, based on the grade assigned to the security. The underlying data start December 2007. A dozen separate functions are available, such as loans per 1000 housing units, foreclosures per 1000 housing units, REOs per 1000 housing units. Comment by CityEconomist: This is part of what the U.S. Conference of Mayors asked the Mortgage Bankers Association for at their recent Detroit meeting, i.e., a way to estimate what the impact of foreclosures might be in every neighborhood.

New York City's Economic Outlook

How Bad Will NYC's Economy Get? AM New York. "There have been four distinct downturns since the 1970s and the one that seems most similar to this one is the S&L crisis in 1987," said Rae Rosen, assistant vice president and economist at the Federal Reserve Bank of New York. That meltdown began with the jarring stock market crash in October 1987, and lasted into the early 1990s, spreading from Wall Street to Main Street, and crippling the city's real-estate market. The 1980s meltdown was known as a "white-collar recession," because it broke the trend of economic cycles that used to rise and fall on manufacturing. The pattern today is very much along those lines. The city lost 350,000 jobs during that period, far more than the number predicted to disappear this time. However, in a note of concern, the city's economy is far more reliant today on the fate of Wall Street, where most of the cuts are happening – so far. Wall Street employment makes up about 5 percent of the workforce but about 25 percent of all wages earned; that figure was only 9 percent in the early 90s. Comment by CityEconomist: The October 1987 stock-market crash affected New York City more than the nation, which didn’t go into recession until 1989. The low point for NYC jobs was October 1992 (the month I was first appointed Chief Economist in the Office of the NYC Comptroller in what turned out to be a 13-year stint covering three full electoral cycles and two partial ones). Using annual data, NYC's economy didn’t turn around until 1993.

Free Biking in Paris

Free Biking in Paris. May is Bike Month NYC, according to Transportation Alternatives, so it's a good time to report on a trip up and down the Seine with my wife Alice using the Velib' ("Velo-libre" or "free bike") system. This is the less-than-a-year-old brainchild of the socialist Mayor of Paris, Bertrand Delanoe. Paris has more than 230 miles of well-marked cycling lanes and the Velib' has been a big success with more than 20 million trips as of this month, or 70,000 trips per day. At this pace, by the first anniversary on the day after Bastille Day, July 15, the Velib' will have attracted an amazing 25 million trips. To add our two more trips to the counter, we first buy a Velib' map, sold at any newsstand. The Google map of Paris has its green arrow pointed exactly to where we decide to join the Seine from the north. We decide to start with the bicycle route on the north (right) bank of the Seine headed east, ride this until the Seine-side bicycle path ends (it goes north), then cross over the Seine and take the bicycle path west on the south (left) bank to the Branly Museum. Our trip has some lessons for New York City and other cities! A friend of mine from Lyons says the free-bike movement started there but Amsterdam had the white bikes years ago and may have been first. The problem in Amsterdam is that the bikes got stolen and were just repainted. Harder to do with the easily identifiable Paris bikes, and anyway they get your credit card and the locks are pretty secure. Washington, DC is experimenting with a much smaller program than the one in Paris. To continue, click here (map and photos included).

MYANMAR | Connection to GOP Convention

The junta in Myanmar has been taking its sweet time about getting help to the victims of the cyclone. Humanitarians they are not. A big surprise was that the Arizona PR firm head that Senator McCain appointed to run the GOP Convention did substantial work for this bunch – Doug Goodyear. Now we find that lobbyists are all around McCain - he has or had at least 118 of them working on his campaign, according to Progressive Media USA Research. Click on the link below for details. The individuals identified in the linked chart all current or former lobbyists who serve as fundraisers for McCain's campaign or senior aides or advisers. To date, three lobbyists have resigned their role due to conflicts of interests: Eric Robert Burgeson, Douglas B. Davenport, Thomas Loeffler. The list doesn't include Goodyear. More.

Iraq Crusade a Recruiting Sergeant for Bin Laden

The Iraq Crusade Is a Recruiting Sergeant for Bin Laden. Soon after President Bush swore his support of Israel before the Knesset, Senator McCain questioned whether Senator Obama fully appreciates the threat from Iran. Bush and McCain are double-teaming Obama, defining themselves as hawks, with the implication that Obama is an appeasing dove. Sorry, but this picture doesn't fit the actual history of the Iraq war. The right contrast to make is not that Bush and McCain are hawks and Obama is a dove. The right contrast is that they are cuckoos and he is an owl. More (posted on Huffington Post).

LAND VALUES, NYC | Bill Vickrey Lives

Prof. Bill Vickrey

The Federal Reserve Bank of New York has performed a service in showing that CoStar data can be used to generate estimates of land value over time and across an area.

The study (in the April/May 2008 issue of Current Issues in Economics and Finance, 14:3) is built around a computation by three Fed staff members (Andrew Haughwout, James Orr and David Bedoll) of average land values per square foot in New York City, excluding Staten Island, and ten New Jersey counties.

The average land value rises sharply from $47/sf in 1999 to $89/sf in 2001, then falls back after 9/11 because of questions about NYC’s future as a place to live or work.

Recovery set in quickly in 2003, with land values rising to $104/sf and soaring to $366/sf in 2006. As theory would predict, prices are highest in mid-Manhattan and fall off as a property is more distant from the center.

The report is interesting on many levels:
- The care that CoStar shows in collecting and verifying data makes it a useful new source of information on commercial property values.
- Property values increase five-fold increase in property from the post-9/11 dip in 2002, a remarkable achievement for which Mayor Bloomberg deserves significant credit – property values are an excellent hedonic index of the desirability of living or working in a particular city. One would like to have comparable data from other cities to see NYC’s relative performance.
- The data show how changes in overall building values primarily reflect changes in the underlying land, since buildings themselves depreciate over time. As more data of this type become available, it will become easier to show that taxes on land (“site”) value are fairer and more efficient than taxes on buildings. Land values do not depreciate in value like buildings and increases in these values are, in the thinking of Henry George, “unearned rent” relating to population growth and are therefore especially appropriate as a tax target.
- Over time, site values can be expected to grow steadily and are therefore a good basis for a tax system.
- Site value taxation was at the heart of recommendations for New York City presented at economic hearings before NYC Comptroller Liz Holtzman in 1993 by Columbia Professor William Vickrey, who was awarded the Nobel Prize in Economics in 1996 for his work on auctions and congestion pricing. Unfortunately, he died between the announcement of the award and its presentation in December, and Prof. Lowell Harriss went to Stockholm instead to accept it on Vickrey's behalf.

Vickrey’s ideas faced practical implementation problems 15 years ago. Today, the obstacles are more political than practical. If New York City evolves toward a rational system, it will follow more of Vickrey’s recommendations. It was part of his genius to know that technology would in due course catch up to his brain. The New York Fed has helped move this process along.