Want to be President?

In the USA Today, Susan Page wonders:

Why exactly would anybody want this job?

The candidate who wins the White House on Nov. 4 will face the most calamitous economy for any new president since Franklin Roosevelt took over amid the Depression in 1933. He'll assume command of the biggest wartime deployment of U.S. troops since Richard Nixon was sworn in during the Vietnam War in 1969.

The bigger the obstacles that you have to overcome; the greater the rewards are when you succeed. Additionally, America faces a critical choice in this election. Choose one way, and America may very well choose poverty, choose another way and America may very well choose prosperity. Both parties believe that their way brings prosperity, while the other party's way brings poverty. Hence, both parties should feel that winning this election is critical. I hope America chooses wisely.

Bad Management

Some have argued that the free market is to blame for the financial crisis because greedy corporate managers have acted irresponsibly, and taken on risk that exposed their companies to huge losses. My response is that is all true except for the part where the blame is placed on the free market. Our government and not the free market is responsible for fostering the climate where these corporate managers could act irresponsibly without the fear of being punished by the free market. Our government did this by insulating corporate managers from the fear that if they acted irresponsibly their company would be taken over and they would be fired for their irresponsible incompetence:

If managers are misusing a corporation’s assets, there will be profit opportunities for the alert investor who figures it out, buys up a controlling share of stock, and replaces the managers with better ones. This is a hostile takeover....

The takeover is a key tool in what Henry Manne, the great economist and former dean of the George Mason University Law School, long ago dubbed the market for corporate control....

...the federal and state governments have done all they could to prevent corporate takeovers. In 1968 the federal government enacted a law forcing anyone who acquires a specified amount of a corporation’s shares (today it’s 5 percent) to disclose his intentions to the Securities and Exchange Commission. Obviously, if someone announces that he intends a takeover, the stock price will rise, wiping out the profit in the takeover. That was the point.

...managers who feared losing their jobs lobbied Congress and the president. It was special-interest, protectionist legislation all the way....

In the 1980s the states and state courts enacted even harsher anti-takeover measures. The result? “The number of hostile tender offers dropped precipitously and with it the most effective device for policing top managers of large, publicly held companies,” Manne writes.

The article that I linked to was written in 2002. I believe that further corporate managers protection laws were enacted after that article was written in 2002.

Obama, Iraq and the economy.

Mikey Kaus wonders:

One of McCain's problems is that voters aren't paying much attention to Iraq--because it looks from our distant vantage point like the war is finally on a glide path to an honorable U.S. drawdown of troops. How much damage could Obama do?

To answer his question, in Iraq, very little. In the American economy, a tremendous amount, unfortunately.

Please vote Republican

America's is on the edge of one of its worst economic crisis in the last 78 years. And, the party (the Democrats) that is largely responsible for crisis is on the verge of even greater control of the American economy.

Deflation fears or not

Greg Mankiw is perplexed by the return offered by the 5 year inflation adjusted bonds:

One might have thought that widespread fear in financial markets would cause a flight to quality, driving the price of safe assets up and their yields down.... If one wants to flee risky assets and invest safely, for many investors [5-year inflation-adjusted government bonds] are a pretty good place to be. But their yields, rather than falling, have been rising sharply of late. It's a puzzle.

This is a little bit beyond my technical capabilities, but it is not all that perplexing to me. In fact, it is one more data point that the current financial crisis is potentially very threatening to the American economy. These bonds are indexed to inflation, and would quickly lose value in a deflationary period. Investors are avoiding these bonds because they are expecting a deflationary period in the very near future. The fear is based upon an expectation that the credit crunch will cause a contraction in the money supply leading to deflation.

Update: I looked at the 5 Year Treasury note versus the 5 Year Treasury Inflation Indexed note. The 5 Year Treasury note is falling and trading at 2.87. The 5 Year Treasury Inflation Indexed note is rising and trading at 1.92. Based upon this information, it is clear that investors are still willing to pay a premium for protection from inflation (i.e., they still expect inflation). However, the amount of the premium that they are willing to pay for protection from inflation is decreasing.

So, it is clear that I was wrong (or overstated the case) to say they expect deflation. Instead, it would be more accurate to say that the rise in the yield of the 5 Year Treasury Inflation Index note is a result in a decrease of the expected inflation rate.

If at any point the 5 Year Treasury Inflation Index note rises higher than the 5 Year Treasury note, then at that point it could be said that the investors are demanding a premium for the deflation that they expect.