Political polarization correlates with rising inequality

Thomas E. Mann, arguing that U.S. political dysfunction is more extreme than political scientists are willing to acknowledge, asserts (and demonstrates) that paralyzing party polarization is asymmetric:

That mismatch between parties and governing institutions is exacerbated by the fact that the polarization is asymmetric. Republicans have become a radical insurgency—ideologically extreme, contemptuous of the inherited policy regime, scornful of compromise, unpersuaded by conventional understanding of facts, evidence, and science; and dismissive of the legitimacy of its political opposition. The evidence of this asymmetry is overwhelming.

The time frame for this accelerating dysfunction is approxmately 1980 - present:

And Norm Ornstein and I in It’s Even Worse Than It Looks document how the asymmetry developed from Newt Gingrich in the 1980s to the present. Asymmetric polarization has found its way to the public: Republican Party voters are more skewed to their ideological pole than Democratic Party voters are to theirs.

Serendipity: continuing my slow plow through Thomas Piketty's Capital in the Twenty-First Century this morning,  I came across the foundational fact base:

A plea to Warren Buffett and his ilk

There's nothing new here, but it kills me to read comments like this* from Obamaite billionaires:

Warren Buffett, America’s second-richest man, is one of Obama’s most high-profile supporters, but he has declared that he will not support Super PACs, saying, “I don’t want to see democracy go in that direction.”

Scrutinizing Warren's warranty for Goldman

Good for James B. Stewart for pushing back against Warren Buffett's defense of Goldman's conduct in the Abacus CDO deal that prompted the SEC to sue Goldman for fraud.  Buffet, Stewart recounts, affirms that there was nothing wrong in Goldman's failing to disclose the identity of the short investor, Paulson, to those going long on the portfolio of mortgage bonds that comprised the synthetic CDO.

"The essence of the alleged fraud," Stewart reminds readers, is not that Goldman did not disclose Paulson's identity, nor that there was a short seller, but "that Goldman let the short seller choose some of the underlying subprime mortgages, failed to disclose that, and instead promoted the idea that an independent third party chose those securities."  He then joins the panoply of observers who have sought a metaphor to illuminate the moral essense of this kind of dealmaking, and comes up with a good one:

With the Kentucky Derby in mind, let's consider a horse-racing analogy. There are just two horses and two bettors. The promoter offers you the opportunity to bet on one horse. Someone else is betting on the other. He doesn't tell you that the other bettor chose the two horses in the race, and picked one horse with no chance of winning. Instead, he says the horses were picked by an independent racing federation. You bet and lose. Would you feel that was fair?

If I may venture an emendation: it's as if Goldman allowed "the other bettor" not to choose two horses but to assemble one horse, Frankenstein-style, picking more than half of its genes at the outset from an available pool (admittedly of a specified, dicey quality) and signing off on every gene eventually included -- all with an eye to creating a horse misbegotten enough to be almost certain to break all its limbs should the race terrain grow at all rocky  (the race will be across unknown terrain) . The promoter seeks bettors on the other side, emphasizing that an expert genetic designer of horses created this specimen, and thus suggesting that it is  sturdiest horse that could be created from the agreed-upon gene pool.  (I've compiled various other informed perspectives on the ethics of the deal here.)

Three circles of economic hell after a Big Three bankruptcy

As auto industry Armegeddon approaches, many are crying "let 'em eat coke." Let the Big Three go through bankruptcy hell and rise from the ashes, cleansed of their legacy labor costs, like the steel industry. Or keep on truckin' through bankruptcy, like the airlines.

Today, three separate sources brought home to me, in very different ways, the likely cataclysmic effects of auto industry failure.

1. On the Times op-ed page, former energy secretary Spencer Abraham argues that the airline and steel industry analogies are flawed. Bankrutpcy for an automaker will mean liquidation because

To purchase a car is to make a multiyear commitment: the buyer must have confidence that the manufacturer will survive to provide parts and service under warranty. With a declaration of bankruptcy, that confidence evaporates. Eighty percent of consumers would not even consider buying a car or truck from a bankrupt manufacturer, one recent survey indicates. So once a bankruptcy proceeding got started, the company’s revenue would plummet, leading it to hemorrhage cash to cover its high fixed costs.

No revenue means no DIP financing and no rebirth. Abraham ticks off the knock-on effects: a "cascade" of bankruptcies among parts makers, a squeeze on surviving automakers as suppliers fear to extend credit, liquidation of the Big 3, three million jobs gone in the first year, new burdens on government healthcare and pension guarantee services, enormous credit strains on banks holding auto loans.

2. Also into today's Times, Zachery Kouwe and Louise Story lay out the multiple levels of the financial sector's exposure to auto industry debt: $100 billion that the automakers owe directly to banks and bondholders; another $47 billion in loans to Big 3 affiliates backed by auto leases and loans; billions loaned to Cerberus in its leveraged buyout of Chrysler; untold billions more to parts suppliers, dealerships, and of course increasingly distressed consumers.

3. Finally, in today's FT, Wolfgang Munchau reminds us that in the wake of a big 3 bankruptcy credit default swaps would once again prove themselves, in Warren Buffet's phrase, financial weapons of mass destruction:

Naturally, [a carmaker bankruptcy] would be bad for the US car industry itself. But it might be even worse for the banks, especially those that got involved with credit default swaps – probably the most dangerous financial products ever invented. CDSs are unregulated shadow insurance products that investors buy to protect themselves against default of corporate and sovereign bonds. Protection against a default by General Motors was among the most sought-after contracts.

Some have called for a "managed bankruptcy." Looks to me like a managed bailout, with all stakeholders giving up something in advance, would be a lot less risky.

Bush Buffeted

Okay, the context seems a bit spliced, but it does look as if Warren Buffett, after expressing his support for Obama today, called George Bush an idiot:

Commenting on the US economy, the 77-year-old investor who is known as the "Sage of Omaha," stressed that fiscal, monetary and trade policies were of great importance.

"I think that the US has followed and is following policies which will cause the US dollar to weaken over a long period of time," he said.

After voicing support for Obama, Buffett nonetheless noted the US economy had managed to do "awfully well" despite a depression, two world wars and many financial crises.

"They say in the stock market ... buy stock in a business that's so good that an idiot can run it because sooner or later one will," he added.

"Well, the United States is a little like that. We can take a little mis-management from time to time," Buffett said.

Buffett has been warning for years about the long-term dangers of the U.S. current account deficit. He's also spoken out against tax cuts that excessively favor the wealthy. Looks to me like he just pinned the tale on the donkey.