Obama's historic victory

The Economist has this on Obama's historic victory.
AMERICA has been painfully conditioned by its past two presidential elections. It was bitterly divided into red and blue states with only a handful in the middle, decided by a handful of votes. On the night of Tuesday November 4th Barack Obama, the Democratic presidential candidate, scrambled the assumptions that have governed American politics for half a generation. An intriguing and—to many—inspiring politician, he will take office in January from the most unpopular president in modern time.
When Mr Obama gave a speech that made him famous, in 2004, decrying “blue states” and “red states”, it seemed unlikely that he would be the one to bridge the divide. But the scale of his victory in this election is substantial: he won at least 333 electoral-college votes and will probably do well in the popular vote, too.
New Hampshire, beloved of John McCain for his primary victories there in 2000 and 2008, went for Mr Obama. Then fell Pennsylvania, a big state where Mr McCain had tried his last strategy. He had hoped to raise economic and personal worries about Mr Obama, then to snatch the state from the Democrats and hold down losses elsewhere. It did not work. Ohio has voted with every Republican candidate to win the White House since Lincoln. When that state went for Mr Obama, the election was, in effect, over. Other formerly Republican states such as Iowa and New Mexico went tumbling Mr Obama’s way. Eventually Florida fell for Mr Obama, too, giving him a substantial victory.
The economy seems to have been crucial to his win. George Bush won re-election in 2004 by emphasising “God, gays and guns”. Hillary Clinton racked up big wins against Mr Obama among the economically distressed but socially conservative “Reagan Democrats”, including many in Ohio and Pennsylvania, painting Mr Obama as an out-of-touch elitist. On election day this week, however, Mr Obama was able to attract such supporters. However much Republicans tried to scare voters about Mr Obama’s old relationship with his anti-American preacher and a passing association with a 1960s terrorist, voters were more concerned about their wallets. They also punished the incumbent party heavily, despite the self-styled “maverick” status of its standard-bearer, Mr McCain.
Mr Obama will have a friendly Congress. The Democrats have padded their majority in the House of Representatives. More symbolically, many Republican brand names were defeated in the Senate: Elizabeth Dole in North Carolina, John Sununu in New Hampshire and Jim Gilmore in Virginia. It seems most unlikely, however, that the Democrats will manage to get 60 seats in the Senate, the number needed to break Republican filibusters. Mitch McConnell, the Senate’s Republican minority leader, just held on to his seat in a tough race in Kentucky.
Mr Obama survived a myriad of onslaughts, notably on his lack of experience and on his elitist and “celebrity” status. But he ran a calm and disciplined campaign, and most importantly managed to assure voters that he would be a safer leader in a time of financial and economic anxieties. Mr McCain, in contrast, fumbled when he mishandled his response to the economic turmoil of the past few weeks. Mr Obama also succeeded in persuading young people and black people to vote. Along with those sceptical working-class whites, and the traditional Democratic bases on the east and west coasts, Mr Obama constructed a comfortable winning coalition.
America has not shifted greatly to the left. Mr Obama, especially with his big Democratic majority in Congress, will have to manage expectations carefully. Democrats will want big pushes to the left. But Mr Obama knows that Bill Clinton lost his congressional majority after two years because he overreached in that direction.
But all that is to come. On Tuesday night celebrations were expected in Chicago, and elsewhere, as America prepared to welcome the first black president-elect of a country born with the ugly birthmark of slavery. It is a remarkable, and historic, achievement.

Below is a National Debt Graph courtesy of zfacts.com.


Zfacts.com points out that the "gross national debt compared to GDP (how rich we are) reached its lowest level since 1931 as Reagan took office in 1981. It skyrocketed for 12 years through Bush I. Clinton reversed it at a peak of 67%. Bush II crossed that line on Sept. 22 and hit 69% on Sept 30. That's the highest it's been since 1955 (53 years ago)."

Democrats have done a better job at reducing the national debt when compared to Republicans.

The US tax payer is indeed getting a lousy deal for his $125 bn capital injection

Willem Buiter agrees with Uwe Reinhardt's article that suggests that the US tax payer is getting a terrible return on the $125bn worth of capital that was injected on his behalf by US Treasury Secretary Paulson into the nine largest US banks. I agree with both of them. Paulson's bailout gift is blatantly unfair to tax payers and the action creates a moral hazard problem that could destablize the US financial system someday in the future.

The US tax payer is indeed getting a lousy deal for his $125 bn capital injection
Uwe Reinhardt is absolutely correct. The US tax payer is getting a terrible return on the $125bn worth of capital that was injected on his behalf by US Treasury Secretary Paulson into the nine largest US banks. This is surprising to me, because the complete or partial nationalisations of a number of US financial behemoths earlier in the year represented rather better value for money for the tax payer.
The nationalisation of Fannie, Freddie, AIG and pieces of the nine largest US banks (with more to come) was necessary to prevent a complete collapse of the house of cards we used to know as the American financial system.
Unfortunately, Treasury Secretary Hank Paulson’s injection of $125 billion into the nine banks (out of a total capital injection budget provisionally set at $250bn (but bound to rise to probably around twice that amount), carved out of the $700 bn made available (in tranches) by the 2008 Economic Stability Emergency Act, was almost a free gift to these banks. In this it was different from the case of AIG, where the Fed and the Treasury imposed rather tough terms on the shareholders and obtained pretty favourable terms for the US tax payer generally. It was also unlike the case of Fannie and Freddie, where the old shareholders are likely not to recover anything.
In the case of the Fortunate Nine, the injection of capital is through (non-voting) preference shares yielding a ridiculously low interest rate (5 percent as opposed to the 10 percent obtained by Warren Buffett for his capital injectcion into Goldman Sachs). Without voting shares, the government has no voice in the running of these banks. It also has no seats on their boards. By contrast, in the Netherlands, the injection of €10bn worth of subordinated debt into ING bank comes with a price tag that includes two government directors on the board and a government veto over all strategic decisions by the bank.
In addition, in the the case of the Fortunate Nine, there are no attractively valued warrants (options to convert, at some future time, the preference shares into ordinary shares at a set price or at a price determined by some known formula). Quite the opposite, the preference shares purchased by the US state, can be repurchased after three years, at the banks’ discretion, on terms that are highly attractive to the banks. The US tax payer is not only getting a lousy deal compared to private US investors like Buffett, (s)he is also doing much worse than the British tax payer in the UK version of Paulson’s capital injection (£37 bn so far out of provisional budget of £50bn). The UK preference shares have a 12 percent yield and come with government-appointed board members.
Even in the cases of AIG, Fannie and Freddie, unsecured senior creditors did not have to take an up-front haircut. Worse than that, even holders of junior debt and subordinated debt could come out of this exercise whole. There were no up-front haircuts, charges or mandatory debt-to-equity conversions.
That, I would argue, is scandalous, both from a fairness perspective and from the point of view of the moral hazard this creates, by boosting the incentives for future reckless lending to elephantesquely large financial enterprises. Unless not only the existing shareholders of the banks benefiting from these capital injections but also the holders of the banks’ unsecured debt (junior and senior) and all other creditors of the bank (with the possible exception of retail depositors up to some appropriate limit) are made to pay a painful penalty for investing in excessively risky if not outright dodgy ventures, we are laying the foundations of the next systemic crisis, even as we are struggling to escape from the current one.