Screwed and angry

The Thinker by Rodin

If you want to know why Barack Obama is surging in the polls, it would be tempting to say that it is due to our current economic problems. That is it, of course, but it imparts little in the way of understanding. Obama is gaining in the polls, not so much because Americans are lining up behind his vision of hope, but because we are angry at being mislead and very scared about our future. I believe that on November 4th we are going to witness political vengeance on a scale we have not seen in at least a generation.

Why? Is it the falling worth of our stock portfolios? That is part of the calculus but just a minor factor. If you are like me though you realize that even great financial calamities eventually straighten themselves out. The Dow Jones Industrial Average peaked at 380,330 in 1929. Three years later during the worst of the Great Depression it hit its nadir at 42,040, losing close to ninety percent of its value. Of course in 1929 when it was at 380,330 its value was grossly inflated. The same was true with our portfolios for the last few years. We are only now discovering their true value, and it is humbling. Investors in 1929 needed a lot of patience. An event of the magnitude of The Great Depression required decades for a full recovery. Yet recover we did and by 1955 the DJIA was back where it was in 1929. As shaky as these times are, I am convinced this economic crisis will not reach its scale. My point is that if you are a long-term investor you are going to do fine. It may take ten years to recover but it will not take twenty five. Arguably, if you intend to hold on to stocks for the long term this is a good time to buy.

It is the less financially fortunate people who are principally pushing up Obama’s poll numbers, as well as changing dynamics in Senate and House races nationwide. All sorts of incumbent Republicans are in danger. Take for example this poll by Survey USA showing the U.S. Senate race in the bright red state of Georgia essentially tied. Two weeks ago, the Democratic challenger Jim Martin was 17 points behind Republican incumbent Saxby Chambliss. Now Martin is just two points behind. In the last two weeks, did Jim Martin show himself to be a better campaigner? While he got a bit more financial support, it is not hard to understand the real reason for the dramatic change in the polls: Black Monday. Only now is the pain of ordinary Americans becoming acute. When any pain becomes acute, the reflex is to move toward doing something differently. That explains Jim Martin’s rise in the polls.

It is becoming acute because ordinary Americans are probably not like me. For one thing, I am 51 and they are likely younger than me. This means that they are also likely overleveraged. They paid more for the same size house than I did, which means their house payments are probably a quarter to a half more than mine for the same house, but being younger they also likely earn less than I do. Now the value of their house has plummeted, perhaps down twenty five percent. In many if not most cases, these disgruntled voters now have negative net worth on their house but are still making payments for houses that cost a lot more. Their employment is more chancy, if they are not already among the recently laid off. To make matters worse, their 401(k)’s, their supposed nest egg for retirement, is down by at least the same amount, with no bottom in sight for the market. They are wondering if they will ever be able to afford to retire.

There are tens of millions of people like this. They are the ones who are going to take out their anger at the ballot box. They do not necessarily buy into the Democratic Party platform. They may be pro-life instead of pro-choice. They may be Christian conservatives and phobic about losing their gun rights. Yet for many of these people, their predispositions no longer matter. They are seeing their hopes for a better life disappear in front of their eyes. Not only are they paying for more for their house than they are worth, they no longer have any equity in their house. Consequently, cannot take out home equity loans to fix it up or to pay for their children’s college education. Their financial lives are now very chancy. Self reliance instead of being an elixir tastes like a bitter pill.

It is not just the middle class feeling like they are rapidly descending into the lower middle class. It is also the lower middle class and the poor who are also being squeezed so tight that if they were an orange, there would not be a drop of juice left. They have already been living paycheck to paycheck. Now they are finding times when they do not have enough food to eat. However, there is not necessarily enough food at the local food bank. Unsurprisingly, when times get tough they turn to government aid. One measure is the increase in the number of households using food stamps.

Their hope in Obama is a wan hope. It is a hope borne in part in desperation because there is no one else to turn to. All they know is that many of them voted in lockstep with our president and the Republicans in Congress only to find out that they were being led right off a cliff. They are rightfully angry because they feel they have been, and in fact are being used. It doesn’t take much looking around to figure out what happened. Wealth moved from them to those higher up the food chain. Meanwhile, risk was pushed down. Risk in owning stocks went down because the tax on capital gains and dividends went down. Yet taxes stayed about the same. What modest tax decreases that occurred at the federal level were replaced at the state and local level. From their perspective, the ownership society became the gamble it all economy. They had little other choice. They were just trying to survive.

While others with deeper pockets like me will get by with some grumbling, they are taking it on the chin now. There is nothing that looks like hope on the horizon. There is a slim hope that by shuffling the deck, they might get a better hand. Hence, they are placing their hope in a man named Barack Obama. They placed their trust in a philosophy that told them all they had to do was follow the path of free markets and self-reliance and all would turn golden. Instead, their trust was violated and their pockets were picked. No wonder Congressional phones were ringing off the hook from disgruntled voters unwilling to give Wall Street financiers a bailout. Clearly, no one in Congress was riding to their rescue.

Will the Democrats do a better job than the Republicans once in office? It would be hard to do a worse job but overall Democrats have not been stellar guardians of the public trust either, they just have tended historically to do a somewhat better overall job. Voters will have to be patient during 2009. Before real growth can recur, a lot of garbage needs to be hauled away.

Voters do seem to painfully understand one thing: regulation is good. Regulation does increase the size and cost of government, but when it works, it evens the playing field and ensures a level of transparency, which promotes fairness. It turns out that regulation is a lot like insurance, a painful necessity in life. (Wall Street’s financial wizards also saw the value of insurance, and tried to insure all their potential losses in the unregulated credit swap market. It looks like this lack of regulation and oversight was the root cause of the current financial calamity.)

We need more regulation and oversight of the financial industry. It is really that simple. If you learn nothing more from our disastrous experiment in laissez faire economics these last eight years, retain this: the government will be the nation’s de-facto insurer of last resort. We have to pay its premium, expensive as it may be, or we risk more of the economic calamity we are currently undergoing.

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