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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 [].

**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.


I wrote something long on Medium, so you should probably Instapaper it and plan to read it on a future flight or something.

Jonathan Chait has a theory of how Bloomberg could win. I’m less interested in engaging with that, though I have my quibbles. Instead, I’d like to focus on something that tends to be elided during election season – what moral duty Michael Bloomberg has to the American people in making the decision to run.

Making a decision to run for a major party’s nomination is generally a pretty clear-cut decision, ethically speaking. One runs if one thinks one is the best option that party has for both winning the Presidency and the best option the nation has in a potential President. This is why there is probably some inherent madness to the act of running, but doing so through the normal channels is inherently straightforward in this regard (though that ignores the ethical questions relating to campaign conduct; that’s a whole different issue).

Running as a potentially-credible independent or third-party candidate, however, is substantially thornier. Doing so is inherently disruptive to the political process; moreover, there is an unavoidable ideological gamble involved. Such a candidate, in an admittedly oversimplified model, is drawing most of their support from the major party candidates; the crux is that they are very likely drawing more support from one candidate than from the other. The paradox is that the candidate from which they are drawing support is almost assuredly the candidate which they are closer to ideologically. While this point is disputable, it certainly seems credible to speculate that, absent Ralph Nader, Al Gore wins in 2000; given the events of just the first W term, one doesn’t need much imagination to see how that could’ve drastically reshaped the last fifteen years.

This issue is exacerbated at times when “normal” politics isn’t working well. Certainly Bush I and Bill Clinton would have governed different in the early ’90s, but neither of them were likely to immediately drastically destabilize America’s political, social, or economic systems.

That is decidedly not the case in 2016. There is, as of this writing, a very real chance that the Republican Party may nominate a candidate with a very high chance of immediately drastically destabilizing America’s political, social, or economic systems if elected.

Everything else that makes the comparison ludicrous aside, this is the fundamental asymmetry between Trump and Sanders. Bernie Sanders is a career politician. He is a left-wing (by American standards) career politician, but a career politician nonetheless. He did a bang-up job as the mayor of a real city, played nice in the House of Representatives for nearly two decades, and was a committee chairman in the United States Senate. His platform, if enacted, would be bad (at least in partial equilibrium) for the wallets of the Mike Bloombergs of the country, and the validation of his tone and rhetoric that nomination and election would bring would be bad for the egos of the Mike Bloombergs of the country. But Bernie Sanders wouldn’t break the country. Donald Trump would. Given the overwhelming likelihood of a GOP Congress in 2017, a Sanders presidency would be further restrained, but a Trump Presidency would face, at best, unpredictable restraint.

So the question for Mike Bloomberg cannot simply be “what are my chances of winning the Presidency?” The question must also be, “if I do not win the Presidency, do I make the election of Donald Trump more likely?” Given the possibility that he may draw at least as many Democratic-inclined voters as Republican-inclined voters if he runs, and given the fact that, should he throw the election to the GOP-donimated House if he denies either major-party nominee 270 electoral votes, the answer to that second question is very likely “yes.”

I am extremely certain that not only does Mike Bloomberg not read this blog, but that nobody of even remotely comparable wealth and prestige who could directly influence his decision reads this blog, either. Nevertheless, I’m going to address my conclusion directly to him:

Michael Bloomberg, you need to think long and hard about the consequences of the decision you are considering; not just about how and why you might seek the Presidency, but what could happen if you fail. I understand that the possibility of a Sanders Presidency seems worse than unpalatable to you, but there are far, far worse things than a left-wing Democrat in office with a Republican Congress to restrain them. If you run for President, and Donald Trump is elected, when history looks back on the dark era sure to follow, you will be first and foremost among those who receive the blame.

U.S. Senator Ted Cruz (R-TX) speaks to members of the Texas Federation of Republican Women in San Antonio, Texas October 19, 2013. REUTERS/Joe Mitchell (UNITED STATES - Tags: POLITICS HEADSHOT) - RTX14H7R

For months now, observers have been wondering why the Republican Party has been failing to rally around one seemingly-obvious candidate in particular. Young, new to the United States Senate, he is smart, well-spoken, represents a large and diverse state, and would be the first Latino nominee of a major party. Despite some bumpiness in his tenure, his positions on most issues are conventional, and he is likely to have similar priorities to a Republican Congress. Even though he’s rubbed some of his colleagues the wrong way, the media has been pretty unified over the last few months in wondering:

“Why won’t the Republican elite rally around Ted Cruz?”

Ha ha ha, just kidding, nobody’s been asking that. Instead, they’ve been asking that about Marco Rubio, get it, he also meets that description. The problem with Rubio, though, is that he’s irrevocably tied to being on the wrong side of what has becoming the defining issue in the primary for nakedly cynical reasons and more generally that he’s an empty suit and even more generally that voters don’t seem to actually, you know, like him or want to vote for him.

But Ted Cruz doesn’t have that problem! He won Iowa! He placed third in New Hampshire despite it being an exceptionally weak state for him, behind the overwhelming winner and the guy who had banked 100% of everything on ekeing out second place, but ahead of Rubio and Jeb! He’s right there! What’s going on?

Ha ha ha, just kidding, we all know what’s going on. The problem with Ted Cruz is that literally ever person who has spent more than a few seconds in his physical presence apparently loathes him. Major publications are practically building out entire verticals devoted solely to aggregating quotes from public figures about the fingernails-on-the-chalkboard-of-the-soul experience that is interacting with Ted Cruz. And, yeah, he definitely hijacked the Senate that one time to shut down the government, putting his interests ahead of the party.

But you know what? It worked! It demonstrated an ability to understand and interact with a complex network of institutions to achieve his goals. It showed savvy. It was entrepenuerial. And unlike Marco Rubio’s immigration SNAFU, it showed he had, and has, his fingers much more squarely on the pulse of key portions of the GOP primary electorate.

Let me be clear – a Ted Cruz presidency would be terrible. And, as the Republican nominee, he would probably lose. He is very conservative! He would probably rub a lot of voters the wrong way because, truly, being a successful politician who nonetheless rubs people the wrong way, deeply, in their bones, is Ted Cruz’s unique gift in life.

But he is decidedly not Donald Trump. Donald Trump is scary. Donald Trump is accountable to nobody. Donald Trump is a monster. A Ted Cruz candidacy would most likely be a Goldwater- or McGovern-esque loss; a Donald Trump’s candidacy has an equal chance of either accelerating centrifugal forces in the Republican Party and coalition past the point of no return, or of being something much, much worse for the future of American democracy itself.

Any long-term thinking on the part of the Republican elite should, at this point, realize that the collective odds of Bush, Kasich, and Rubio securing the nomination are slim; the contest, at this point, may very quickly become an effective two-man race if Trump and Cruz 1-2 South Carolina and Nevada. The long-term viability of the Republican Party is, frankly, in doubt no matter what happens this year, but it is in much better shape if it loses in a large but ultimately controlled and predictable way than if it puts all its chips on…whatever it is we will one day call Trumpism. The GOP and its elite, to put it bluntly, should prefer to “Lose with Cruz” (now there’s a campaign slogan) than to grab the toupeed tiger by the tail and ride it into the dark unknown.

The fact that this decision seems gobsmackingly obvious from anyone outside the group of, at most, a few thousand people who constitute the core of the GOP elite, yet so repulsive to those few thousand people themselves, is a little scary in what is says about the inability of high-level political actors to put the political ahead of the personal. Shoot, just before the Rubio bubble had its brief moment, just before the Rubio bubble had its brief moment, just be[whack], there was a crazy spate of stories about how the Republican elite might actually prefer Trump to Cruz because Cruz is a galaxy-class asshole. How those stories will play out now that Trump is winning primaries and Rubio may have dispelled himself once and for all remains to be seen. But it would be a collective gamble of reckless, amoral, cynical, myopic abandon unlike any in recent American history for a major party’s elites to even acquiesce to the nomination of someone like Trump; it would be staggering if a perfectly viable and much more predictable and conventional, if not exactly promising, alternative were discarded simply because the person inhabiting that alternative has all the charisma of microwaved fish.

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