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pike mence

There are many symmetries between politics and finance, but one in particular has been starkly illustrated in recent months, one whose potential consequences are a bitter mix of the amusing and the terrifying.

The thing about banks failing is that they don’t. When a “normal” company fails, it’s simple, obvious, unavoidable—bills come due, there ain’t enough on hand to pay, and no way to get more. That’s bankruptcy—the equity holders are SOL and the creditors have a couple different ways to deal with what’s left, often a choice between “reorganizing” the failed company into one that could succeed going forward, or simply scrapping it for parts and taking home whatever cash that generates.

Banks don’t do that. Instead, absent outside supervision and intervention, they can often remain liquid—capable of servicing their debts, making full and timely payments to depositors and other creditors—long after they’ve stopped being “solvent,” in possession of assets whose ‘true’ worth* exceeds the bank’s debts. This is, in part, a function of the opacity of banks, and in additional part a function of the various ways that banks have been insulated from some kinds of market pressures, deposit insurance being a primary (though far from sole) node in the network of institutions and policies buffering banks from market pressures. Essentially, banks, uniquely, can pay the bills every month, keeping lights on, workers fed, creditors happy, while nursing a corrosive secret.**

This is what happened to savings and loans in the late 1970s and early 1980s, precipitating the eponymous crisis. But that crisis came years after most S&L’s ‘truly’ became worthless, which in-and-of-itself made the inevitable crisis substantially worse. This is because of something whose name in the finance literature is actually kind of cool and should have been the name of an ‘80s metal band—“gambling on resurrection.”

So let’s say you are in charge of bank (mazal tov). Let’s also say you, personally, own a big chunk of the bank, 10%. And let’s say it’s Tuesday and the bank is worth $100 million, so those shares are worth $10 million. And before you get really excited about having $10 million this hypothetical is going to quickly advance to Wednesday when the Fed decides to quadruple interest rates and you were incautious about maturity risk so now the bank is worth negative $50 million dollars. CFO Fred comes and and tells you, gingerly, that you’re insolvent.

Here’s the thing, though—for the weird reasons we discussed above (among others), the fact of your insolvency has no immediate consequences. You can keep paying all your bills for at least a little while. And from the outside, the fact of your insolvency is totally invisible—nobody knows, unless you tell them! And, most importantly, your 10% stake in the bank? It’s not worth negative $5 million dollars; it’s just worth nothing, zero dollars. That’s what the “limited liability” part of “limited liability corporation” is all about.

So do you call up the FDIC and tell them they should come immediately and close your bank? Pffft, if you were the type to do that, you’d be working for UNICEF or in the Peace Corps or some other hippie-dippie goodie-two-shoes line of “work.” Instead, you immediately realize you have a much better option, which is to plow all the bank’s money you can into comically risky shenanigans. Why? Let’s say these CRSs*** only have a 5% chance of paying off—but if they do they’ll go up in value by a factor of 50. That means if you put $3 million of the bank’s money into them, you have a 95% chance of it just evaporating and the bank being worth negative $53 million—but roll a 20 and it’s suddenly worth $150 million, and the bank is back to being worth $100 million!

A 95% chance of making the bank’s already tubercular condition even worse sounds bad—and it is! But remember, your shares are worth exactly zero dollars whether the bank is worth negative $50 million or negative $53 million or negative $530 million. Your personal material position is completely unaffected by the bet going bad, but is drastically improved by it going well. You have no downside.

This, too, is what happened in the S&L crisis—the insufficient vigilance (and in some ways the actual facilitation) of regulators allowed insolvent S&Ls to keep making crazier and crazier bets. These crazy bets had only upside for the banks and their various shareholders and managers. But they had huge downside for society as a whole, because it meant that lots of “good” money, deposits and investable capital, was being tied to boulders and fired from trebuchets after bad money. What makes gambling on resurrection so toxic is that you’re doing it with other people’s money.

This brings us to Mike Pence, who, though you probably haven’t heard of him, is having an interesting year. It’s not a coincidence that his last name is also the word you see following Donald Trump’s on signs sometimes; he is, in fact, the Republican nominee for Vice-President. What a year for Mike.

Equally interestingly, Pence is the Governor of Indiana, where he’s been having a hard time of it. Around the time Trump was searching for someone to get his coffee someone to be a heartbeat away from the Presidency, Mike Pence’s prospects in Indiana were dimming. Despite his party-line credentials and mutant-persecuting looks, his various SNAFUs had submerged his approval ratings, and polls showed his re-election at risk. All this in a state overwhelmingly likely to vote for Trump in November.

So what’s a guy facing an increasingly likely embarrassing end to his political career to do? Why not hitch your train to Trump’s? Well, he’s an unprincipled lunatic and narcissist utterly lacking the qualifications and temperament higher office requires, and you’d have to very visibly defend his conduct and record for months, which seems like something somebody with live political ambitions wouldn’t want on their own resume.

But Pence didn’t really have live political ambitions anymore; getting booted from the Governorship would’ve left him not just powerless, but a powerless loser. If Pence’s downside was zero if he didn’t run for veep, it couldn’t be any worsened by having his name next to Donald Trump’s (or alternatively, Franz von Papen’s) in history textbooks. But if he wins, he’d get to be in charge of “domestic and foreign policy”—everything short of #MAGA.

And indeed, if you read that story about how Trump settled on Pence (settled being an especially apropos term here), you’ll notice a pretty tight inverse correlation between one’s future political prospects and one’s willingness to flirt changing one’s first name to “Trump hyphen.” And indeed, if you take a look at the folks who’ve found themselves in firmly in Trump’s gravity well, you’ll notice among other types—party hacks, white nationalists, and people with the surname “Trump”—a very particular group of both former and current officeholders who, despite holding or having held high office and having at some point had the potential for even higher ones, currently hold no real cards and have no real political hope. This includes Pence, obviously, but also Chris Christie, Rudy Giuliani, and Newt Gingrich, among others.

This may not seem overly concerning at first glance, but, especially in the context of current officeholders, it should be. Politics is, if nothing else, a coordination game, if not always one as stark as it could be. To the extent that, at various moments along the course of this campaign, at least some Republican voters were unsure about casting their ballots for Trump, that particular threat to his chances seems to have evaporated. And to some extent that evaporation was likely  hastened or catalyzed by Trump being able to hold out not just former but current Republican officeholders, including the governors of two states, one of whom was a candidate for president in his own right this cycle, as a signal of partisan acceptability. One really can point to folks like Pence and Christie (especially the former, whose struggles in his home state are much less visible and telegenic to the national electorate than the latter’s) as noticeably improving Trump’s chances.

In this way, putting all one’s chips on Trump—whether it was being a big early endorser, being a cable news surrogate with a household name, or by joining his ticket—is the political parallel to the comically risky shenanigans underwater banks bet big on when they’re gambling on resurrection. And in the same way that those big bets cost nothing to the gambler, but generate large externalities for the system as a whole, politicians with negative equity backing Trump helped legitimize and amplify everything awful Trump represents, exacerbating the damage done to our polity and civic institutions.

This is also a problem without any simple or obvious solutions. Subjecting politicians to more of the equivalent of market pressure has obvious drawbacks, but less obviously but even more importantly has difficult implementation problems. Even if we could reconstitute all fifty states as parliaments who could execute motions of no-confidence leading to snap elections, the decline in voter turnout in non-Presidential-cycle elections should leave us skeptical that this would lead to democratic outcomes. On the other hand, having a team of FDIC-esque bureaucrats who supervise politicians and put cities and states into receivership when their leaders’ political balance sheets go negative is, uh, problematic. In the end, though, it is likely that this problem is just a symptom of the underlying dysfunction that led to the Trump nomination in the first place—and therefore a sign of all the downstream ways otherwise-everyday aspects of political institutions can suddenly become perverse when core institutions and norms melt down.

*Figuring how much a bank is worth is, in fact, a maddening and unanswerable riddle [https://www.bloomberg.com/view/articles/2014-10-15/bank-of-america-made-168-million-last-quarter-more-or-less].

**Of course, this has the flip side of encouraging bank runs, panicked reactions to bad news that can result in sudden shifts of market and consumer attitudes towards banks. Nipping runs in the bud is part of why those buffering institutions and policies exist.

***These used were later rebranded as CDOs when banking got more corporate.

Because it’s New Hampshire Primary Day and because I haven’t blogged in a while – time to apply a facile analogy to party politics! For a limited time only, clickbait post title included, no additional charge.

If there is a thing that distinguishes the amorphous categories of “tech” companies from other companies, it’s that the structure of expected returns relative to time is different from non-“tech” companies. Unlike more conventional, competitive companies with consistent margins reliant on either extensive or intensive growth to grow in value, tech companies leverage scale to hopefully strike at a focal position in an existing or emerging network with a combination of quality and timing that allows them to seize that position, a position from which monumental rents can be generated.

This creates a disjuncture between a tech company’s present and future. By many conventional metrics, most tech company’s presents look a lot like a conventional company’s death throes. Tech companies generally spend most of their early life bleeding fantastic sums of money, in the hope that if their gamble pays off, they will reap future sums orders of magnitude larger. In that sense, the better analogy for the tech company is a political one than an economic one; tech companies are like Roman generals who ventured all-or-nothing gambles on seizing the capital, with death or imperial power as binary outcomes.

The Democratic Party, today, is in something analogous to that position. There seems to be a consensus that, should demographic voting patterns not substantially shift, the Democratic Party will have a hammerlock on governing the United States within the next decade or two, as its core coalition quickly approaching majority status in the electorate.

At the same time, the Democratic Party of the present looks for all the world like a failing political party. They face structural obstacles to achieving majority status in either house of Congress; they have a minority position on the Supreme Court, though this is a more complex and mixed situation; and  hold unified control of only seven states to Republicans’ 25. Given the power this gives to Republicans to gerrymander, it is entirely possible for many facets of this dismal state to persist even if demographic harvests prove as bountiful as predicted for the Democrats.

Indeed, the only plus side is that, on the most federalized level, those demographic tailwinds have already lead to a deceptively definitive structural advantage in presidential elections; barring the discombobulation a credible third-party or independent candidate would wreak, Republicans would need to win either an unprecedented share of the nonwhite vote or an unprecedented share of the white vote in order to crack 2016, neither of which seems terribly likely at present.

Therefore, the Democratic Party stands in an odd situation; presently, its goal is to cling to the Presidency and a few key states for dear life, whereas in the future it hopes to assert a position of unprecedented dominance that could only be toppled by some combination of vast leftward movement on the part of the Republican Party (an equal ideological, if not political, windfall for ideologically-motivated activists) and an unforeseeable reshaping of the political landscape.

This disjuncture has both manifestation and exacerbation in the present Clinton/Sanders divide. It is clear that the frankly stunning demographic divides within the Democratic Party signal that a politics and platform substantially to the left of the status quo is the future of the Democratic Party; just as the Democrats expect to reap the windfall of future demographics, the left expects to reap the windfall of seizing the Democratic Party as it comes into its dominance.

But that future is not yet here, and the high odds that a Democrat will sit in the Oval Office next year are the inverse of the odds of Democratic control of either house of Congress. Therefore, no matter who the nominee is, the actual job of the next Democratic POTUS will be twofold – on the one hand, succeed in getting four budgets and as many appointees and judges through a hostile Congress as possible; and on the other hand, give back as little of the legislative and regulatory gains of the Obama administration as possible. That many within the Democratic Party itself are coming to see those gains as inadequate only exacerbates the tensions that come from high expectations of near-future political transformations clashing with a present politics largely predicated on holding patterns and defense.

This is an inadequate guide to who the Democrats should nominate; while Sanders’ politics are the future of the Democratic Party, it’s clear that 74-year-old Sanders himself, and old white men in general, are certainly not; Democrats looking solely at filling the job of President for the next four years have to balance ideology, willingness-to-compromise, and, yes, electability in making what is frankly a non-obvious decision. But of course politics is rarely about careful consideration of filling a job, and Democratic voters are casting ballots, today and for months to come, for reasons well beyond a calculating and decidedly uninspirational assessment of loss minimization. In the past, revolutions were followed by bitter infighting about its meaning, implications, and future; the oddity of the Democratic Party today is that the order has been inverted. The 2016 primary, more than anything, is a fight over not just who controls the future, but when the future will happen.

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