Have a Cigar

by Eric Martin

Our distinguished conservative punditry give us two ways to explain the recent economic crisis.  First, Dr. Helen unearths a conspiracy that, ostensibly, includes such disparate figures as Barack Obama, Nancy Pelosi, George Bush, Dick Cheney, Henry Paulson, Ben Bernanke, John Boehner, the Wall St. Journal and the MSM:

Is your head spinning from all the doom and gloom being blasted from the media and Congress day and night about impending financial disaster? Mine is, and frankly, I sometimes wonder how much of the financial picture is accurate and how much is manufactured in order to get a Democrat elected. One has to ponder about the timing of all of this bad news.

Why the crescendo of economic collapse right before the election? Why didn’t the media and congress act just as concerned some time ago or wait until sometime after the election to go into crisis mode? The timing of the current financial crisis seems too planned and calculating to be just a coincidence. Polls show that people’s number one concern right now is the economy and that for the most part, voters believe Democrats are somewhat more likely to help with the economy. Could it be that the liberal media and those in Congress, knowing that, is blaring the bad economic news from the rooftops in order to manipulate voters into voting for a Democrat? If so, it won’t be the first time.

And if it weren't for you meddling conservative pundits, they would have got away with it too.  In the alternative, Kathryn Jean Lopez, editor of the website of the premiere American conservative magazine, offers this chronologically-challenged effect and cause cause and effect:

Does the selloff on Wall Street have anything to do with the increasing likelihood that Obama will be our next president?

Note that the two trends — the financial meltdown, despite passage of the bailout, and the solidification of Obama’s lead — are coinciding. At a minimum, the market’s behavior is not a vote of confidence in an Obama presidency.

So, for those following along with conservative attempts to explain real world phenomena using the Liberagayislamofasciblametron XG, the story goes something like this: Members of both political parties, including both presidential candidates, as well as media outlets as diverse as the New York Times and Fox News, are conspiring to give Obama and other Congressional Democrats the win by agreeing (via super secret hand shake and blink code) to hype and exaggerate economic non-crises.  The bipartisan propaganda blitz regarding these non-crises is causing the stock market to plummet, yet the stock market is really plummeting because Obama's poll numbers started increasing after it plummeted.  Causing it to plummet in the first place.

Heh.  Indeed.

(both versions of alternative reality via Matt)

Comments

[stefan]

The results for the 2000 and 2004 election suggest there is a connection, about 2-3% between Gore/Kerry and Bush:

Political economists interested in discerning the effects of election outcomes on the economy have been hampered by the problem that economic outcomes also influence elections. We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during election day. Analyzing high frequency financial fluctuations on November 2 and 3 in 2004, we find that markets anticipated higher equity prices, interest rates and oil prices and a stronger dollar under a Bush presidency than under Kerry. A similar Republican-Democrat differential was also observed for the 2000 Bush-Gore contest. Prediction market based analyses of all Presidential elections since 1880 also reveal a similar pattern of partisan impacts, suggesting that electing a Republican President raises equity valuations by 2-3 percent, and that since Reagan, Republican Presidents have tended to raise bond yields.

See Erik Snowberg, Justin Wolfers, Eric Zitzewitz, Partisan Impacts on the Economy:
Evidence from Prediction Markets
and Close Elections

http://ftp.iza.org/dp1996.pdf

[Mudge]

Of course they'd presume conspiracy..they spent much of the last election manufacturing orange terrorism alerts and releasing details of new threats. They must be stunned at the complexity and audacity of the Democratic stunt. I'm sure they never thought of bringing the world's financial system to its knees as an election year ploy. They are jealous.

As to K-Lo...I guess losing money in the market to lower one's income is a method of avoiding taxes in anticipation of the advent of the Obama presidency. It's nice, however, to get this nosedive out of the way on Bush's watch, so Obama gets all the credit for the inevitable rise when the financial world stabilizes.

[LT Nixon]

As to K-Lo...I guess losing money in the market to lower one's income is a method of avoiding taxes in anticipation of the advent of the Obama presidency.

I prefer losing all my money in gambling debt to avoid paying taxes. I think it's still a writeoff.

[KCinDC]

Stefan, then the question is why the market thinks electing a Democrat will hurt stocks when the historical experience is that the market does better during Democratic administrations than Republican ones.

[Carleton Wu]

I am too lazy to look for Lopez saying it, but wasn't the conservative line back in Bush's first term that he'd inherited a bad economy & wasn't responsible for the first two years of slowdown & recession (ie he started getting credit when the downturn ended in 2003)?
And now, Obama starts getting credit for the disasterous Bush economy before he's even elected. And we all remember how Reagan caused the Clinton boom.

Im wondering what could be told to these people that they couldn't rationalize as being true.

[Ugh]

I prefer losing all my money in gambling debt to avoid paying taxes. I think it's still a writeoff.

Nope.

[Bellwetherman]

Dr. Helen is a forensic psychologist. I hope she doesn't make a living at it.

[stefan]

KCinDC:

the market selling off before Democrats get elected and then doing well under Democrats isn't inconsistent at all. Say earnings don't move at all: then a prior selloff implies higher subsequent returns.

Historically, however, the selloffs before Democratic Presidents get elected are too small to explain subsequent higher stock market returns under these Presidents.

[Ugh]

There's a reason why John Cole labels the Corner as "K-Lo's House of Crazy"

[tomeck]

So has the reason for everything bad that happens officially changed from "Clinton's Fault" to "Obama's Fault"? I wish they'd put out press releases on things like this. The fact that they didn't must be Obama's fault too.

[joel hanes]

I'm wondering what could be told to these people that they couldn't rationalize as being true.

- Barack Obama is a better candidate for President.

- Saddam had no WMDs in 2002 and was not connected to 9/11, nor was there any Al Queda in Iraq before we invaded.

- There is no achievable outcome in Iraq that could accurately be called "winning".

- The same was true of Viet Nam.

- George W. Bush has knowingly committed multiple impeachable offenses while in office.

- As has Richard Bruce Cheney.

- As did Reagan.

- Fidel Castro and Cuban Communism have not posed any particular threat to the US since before 1970.

- Reagan purposely funded terrorists.

- Sometimes, raising taxes is good governance.

- Diplomatic engagement with one's enemies, even those who are truly evil, sometimes produces better outcomes than bombing their countries.

- George W. Bush is a military deserter.

- Democratic Presidents are better for the economy.

- Compassionate policies toward the less fortunate can produce a better outcome for all parties; mean and selfish policies reduce the size of the pie, and end up penalizing all parties.

[ThatLeftTurnInABQ]

The stock market selloff makes much more sense once you understand that Obama is going to appoint William Ayers as Secretary of the Treasury.

You don't need a weatherman to know which way the yield curve is blowing.

[russell]

The timing of the current financial crisis seems too planned and calculating to be just a coincidence

Another deep insight from the church lady school of political analysis.

"Could it be....... Satan?"

Thanks -

[ThatLeftTurnInABQ]

I never thought that I'd live to see the day when the easiest way to describe what is going on in the financial markets is by quoting Bob Dylan songs, but knock me down if Ben Bernanke and Hank Paulson haven't had this conversation at least once:

"There must be some way out of here," said the joker to the thief,
"There's too much confusion, I can't get no relief.
Businessmen, they drink my wine, plowmen dig my earth,
None of them along the line know what any of it is worth."

[cleek]

I never thought that I'd live to see the day when the easiest way to describe what is going on in the financial markets is by quoting Bob Dylan songs

freakonomics is there.

[ThatLeftTurnInABQ]

freakonomics is there.

Thanks, cleek. Don't know how I missed that one.

BTW, did you notice that "All Along the Watchtower" was submitted by commentor "Lawrence S."

I hope that moniker is just a coincidence, or we may be in more trouble than I thought...

:->

[ThatLeftTurnInABQ]

Also, if Roubini ever starts annoucing the upcoming Powerball numbers on RGE Monitor, you might want to make haste down to the local 7-11.

Roubini in an interview yesterday:

the money the Fed is giving to the banks and to the primary dealers is not being re-lent to the other financial institutions in the shadow banking system. So the transmission of monetary policy is locked. Fixing that might require the Fed to start extending the PDCF [Primary Dealer Credit Facility], that is the facility that provides liquidity to non-banks, also to other financial institutions like finance companies, leasing companies, and you name it, in a way to provide liquidity to those financial institutions that directly lend to the corporate sector.

And if all that doesn't work, the Fed might be forced to directly liquefy the corporate sector by using its emergency powers to directly lend to the corporate sector, essentially buying commercial paper, providing cash.

So what happens? The Fed/Treasury announce today that we the American people are now in the business of buying commerical paper.

[Carleton Wu]

stefan,
Problems with the paper:
1)The fluctuations they're examining are tiny, and there's no reason to think that they can be generalized to long-term economic trends. I don't mean that there's no strong reason- there is no reason whatsoever.
Democratic Presidents' markets have outperformed Republican Presidents' markets post-WW2. This is a fact, which is different than an completely unsupported theory that election-day fluctuations translate into long-term economic results.
Furthermore, they extrapolate these small changes into large changes over the course of a presidents term- perhaps they were unaware that markets tend to 'price in' known (or suspected) long-term effects? If a Bush victory in 2004 makes the market 3% more valuable in 2008, the market will not gradually gain that value over the 4 year period- it will accumulate it immediately, insofar as the markets believe that this is the case. (And insofar as they don't, their thesis is disproved).
2)The S&P started Nov 2, 2000 at 1,421.22 and closed Nov 3, 2000 at 1,426.69, a change of just over 5 points (about .3%). Start on Nov 2, 2000 was 1,130.51 and close Nov 3, 2000 was 1,143.20 (around 1%).
One wonders why they chose the particular time windows that they did, since the correlations outside of those time windows appear to be insignificant. Instead of using those open-close values, in 2000 they actually cherry-pick the highest and lowest values during the day and call them the *lower* bound on the 'Bush effect'!
3)Likewise, their choice not to use the Iowa markets from 2000 is suspect- there is a difference between having a rational justification for something and selection bias; I suspect that they would have used this series if the correlation had done what they wanted. They certainly were willing to use Iowa later in the paper, when it *did* support their conclusions (in the longer time-series).
Their collection of data sources for the 1880-present data is amazing- one wonders why they don't present any alternative measures (eg gallup comparisons after 1976) rather than switching arbitrarily between data sources. 5 data sources for 6 elections (1988-2004) isn't a data series, it's a joke.
If they want to switch data sources arbitrarily (and thus damage any credibility they might have), at a minimum they should show that the sources are, in fact, correlated when they overlap. Otherwise, I strongly suspect that they've cherry-picked from the large universe of possible sources to produce their result.
4)The Republican and Democratic parties have changed a large number of policy positions in the past 120 years; is there a rational reason for thinking that the election of Garfield in 1880 would have a similar effect on markets as the election of Reagan in 1984? Why does their time series stop in 1880- ran out of possible data sources that could give them a positive correlation? Or just the sense of absurdity that came from comparing Lincoln to Bush?
5)Their chart of Bush-Gore 2000 'correlations' frequently has the market shifting *ahead* of the events that they claim caused the shift, or in the wrong direction. In fact, some of these events seem to contradict their thesis- after the 2:15am call of Florida for Bush, the markets go *down*. After this call is rescinded at 4:00am, the markets go *up*.
And yet they use this peak at 2:15 as a predictor of the positive effect of Bush for no explicable reason.

In summary- a big basket of cherries doth not a persuasive case make.

[Sebastian]

A conservative pundit has one of the best explanations of what happened here with an additional and good analogy here .

Carleton Wu: "Democratic Presidents' markets have outperformed Republican Presidents' markets post-WW2. This is a fact, which is different than an completely unsupported theory that election-day fluctuations translate into long-term economic results."

Actually this is a misuse of statistics. You have a data set of 11 (way too small) in which if you remove 1 outlier whose term was bracketed immediately on both sides by recession (Clinton) the whole thing vanishes into statistical insignificance. Furthermore this statistical usage presupposes that the factor Democrat/Republican makes coherent economic sense for the purposes used across the whole time series when in fact the economic policies of the necessary outlier (Clinton) have very little in common with the group he is attributed to for the sake of the statistic.

Interestingly a divided government (Congress vs. President) didn't typically do too badly until about 1 month ago.

Now you are correct that stefan's citation appears to engage in pretty serious cherry picking of its own. Which is fine to point out.

[socratic_me]

Colbert Report covered this last night in http://www.colbertnation.com/the-colbert-report-videos/186528/october-01-2008/the-word---future-perfect>The Word: Future Perfect.

[Carleton Wu]

Actually this is a misuse of statistics.

I didnt say it was statistically significant, just that it was factually true. One doesn't need statistics to evaluate factual information, only to decide how reliable extrapolations based on that factual information are.

[Sebastian]

"I didnt say it was statistically significant, just that it was factually true. One doesn't need statistics to evaluate factual information, only to decide how reliable extrapolations based on that factual information are."

Seems like super-careful parsing but ok.

I would say that quoting without comment from statistics that aren't statistically significant tends to be misleading especially when you are doing so in the context of knocking down statistics.

But I'm probably being pedantic at this point so I'll try to stop. :)

[Gary Farber]

We're living in the world of The Onion: U.S. debt grows too big for National Debt Clock.