I want my, I want my, I want my RTC! (apologies to Dire Straits!). Yesterday, Nicholas Brady, Eugene Ludwig and Paul Volcker published an article in the Wall Street Journal entitled “Resurrect the Resolution Trust Corp.” This article makes the case for the establishment of a new, “temporary” credit crisis resolution mechanism. As Brady, Ludwig, and Volcker note, “There are precedents — such as the Resolution Trust Corporation of the late 1980s and early 1990s, as well as the Home Owners Loan Corporation of the 1930s. This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management.”
Although Nate Silver’s PECOTA model (see FiveThirtyEight) continues to show a 288 to 250 Electoral College advantage for John McCain over Barack Obama, the “trend” begun yesterday continues today; i.e., 2008.PRES.OBAMA is rallying while 2008.PRES.McCAIN is selling off. Specifically, the 2008.PRES.OBAMA Intrade contract now trades at 51.7, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 47.7 (compared with 50.7 and 48.6 respectively as reported on yesterday’s update). The pundits claim that that the slippage is due to McCain’s comments earlier this week to the effect that he believed that the “…fundamentals of the economy are strong”; with financial markets volatility particularly high this week, Mr. Obama apparently turned these comments into a marginal political advantage.
Looking at the state-by-state contracts, it appears (based upon my cutoff price point of 55 for allocating Electoral College votes) that Mr. Obama currently holds a 264-240 lead over Mr. McCain. Since yesterday, Ohio (20 Electoral College votes) has moved into the “swing” state category, whereas Virginia (13 Electoral College votes) has moved back into McCain’s column. This leaves Nevada (5 Electoral College votes), Colorado (9 Electoral College votes), and Ohio (20 Electoral College votes) as the “swing” states du jour.
Addendum: September 18, 2008 Electoral College Vote allocation
Barack Obama (264): California (55), Connecticut (7), Delaware (3), District of Columbia (3), Hawaii (4), Illinois (21), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Washington (11), and Wisconsin (10)
John McCain (240): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Florida (27), Georgia (15), Idaho (4), Indiana (11), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Missouri (11), Montana (3), Nebraska (5), North Carolina (15), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), Virginia (13), West Virginia (5), and Wyoming (3)
I would like to call attention to four videos which I showed in my risk management course this morning at Baylor University (in the order in which they were presented):
All four of these lectures were delivered at Wharton on Tuesday afternoon, September 16 at a Wharton “Teach-In” (see http://www.wharton.upenn.edu/teach_in_09_16_08.cfm). I also recommend viewing a panel discussion from that same day featuring Wharton professors Franklin Allen, Richard Herring, and Susan Wachter entitled “Wall Street’s Day of Reckoning: Turmoil in the Global Market”.
After viewing these videos, I now feel like I have a rough idea of how this (the so-called credit crisis) all came about. It’s really all about (perverse) incentives. I hope we can figure out a way to sunset (that’s a politically correct way of saying “get rid of”) Fannie Mae and Freddie Mac. We also need to think seriously about reforming public policy toward real estate; e.g., by abolishing the tax deductibility of mortgage interest. During the bubble we were encouraging consumers to make highly levered bets on a risky asset class (i.e., residential real estate), and it was funded by the likes of investment banks like Bear Stearns who had only had $1 of their own money and $32 of other people’s (creditors’) money at risk.
Also, according to the Wharton professor Joseph Gyourko, it now appears (after the fact) that the rating agencies probably relied too much upon historical US real estate market price data which showed that prior to the crisis, the national average price for residential real estate had never declined during the course of the postwar (WWII) period. The rating agencies incorrectly inferred from these data that real estate isn’t all that risky, and this helped to feed unrealistic expectations concerning real estate as an asset class (specifically that unlike all other asset classes, real estate “always” goes “up”!).