Through the transition and stimulus fight, the one concern I had about President Obama was that he seemed reluctant to use his mandate for change to, well, enact change. After doing some research about his proposed budget, no more. Obama is using his political capital to take on contentious issues that have gone unaddressed for far too long.

The biggest problem with an strong central government is regulatory capture — the idea that policies will ultimately be determined by those with established power and a vested interest in specific policy outcomes. For example, the defense policy in the USA is disproportionately set by the defense lobby and the Congressmen who use defense projects as pork. If you know where to look, you can find out-of-the-way pockets of the economy where lobbyists have carved out niche industries that consist of collecting taxpayer dollars. The Obama budget goes right after two lobbies in this situation, agribusiness and student loan providers. The always smart and usually awesome Matt Yglesias explains why Obama’s student loan reforms are a good idea. Obama is also proposing that we cap farm subsidies at $250,000.

It’s not just that these ideas are good policy. It’s that nobody is clamoring for reform in these areas. Without any big interest groups having his back, Obama is going toe to toe with groups that will fight tooth and nail for their continued free ride. This is the clearest sign yet that Obama is serious about change.

He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number.

In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000 [by a WaMu subsidiary]

The most horrifying practice documented here was the securitization of multiple securities. Normal everyday boring mortgage-backed securities were sliced into bonds based on who got first crack at the money. Somebody bought the right to the first 50% of the non-defaulting payments, and this bond was rated AAA, then the slice of x% was rated AA, and so on down to BBB. Then, in true “how the fuck does anyone get away with this” fashion, tons of BBB bonds from all over the market are themselves combined and securitized, and re-rated, with up to a AAA rating! This meant that institutions that really, really coule not afford any defaults were allowed to buy these securities.

Imagine you’re a slaughterhouse, and you slice up your cow into AAA steak, AA stewing beef, A hamburger, and BBB hot dogs. This is the equivalent of Kraft buying up all of the hot dogs, picking out the “best” parts of them, and re-selling it as steak.

Threats this serious to our (economy, environment) will necessarily require a drastic remedy, and this remedy will be painful. The paradox is that any successful remedy will by definition mean that we never feel the full effect of the threat. As a result, there’s a big strategic opening for those who demagogue against the painful action as overdone and unnecessary. We don’t get to do history over, so opponents of successful global warming or bailout legislation will never be proven wrong. They just get the benefit of opposing gas taxes or expensive financial industry legislation.

This isn’t to say that I think this strategy is good for our country, it’s a pretty nasty byproduct of our legislative system. It also isn’t to say that the current proposed remedies are the best, it’s become pretty clear that any plan that start with “let Henry Paulson mismanage this” should be DOA. But the next time you think to yourself “my Congressman can’t be that misinformed”, odds are, they aren’t.

EDIT (1:25pm): If you’re interested, Corey Rosenbloom does some excellent technical analysis over at Afraid to Trade. Specifically, his latest post on the unfolding of Elliot wave patterns in the S&P500 is very useful for getting an idea of where we’re headed in the next month.

…is not an indicator of future returns. At least, that’s what they always seem to say. Despite the saying, any decent chartist worth his salt will tell you that it is simply not true; the markets move in complex but discernible patterns. I won’t go into details here, but I want to address the potential magnitude of our current economic situation.

As you are undoubtedly aggressively unaware, this country has had its fair share of economic instability in the past century. Observe:

Those of us who grew up in the eighties and nineties have only ever really known a strong, bullish market. But, as much as we’d all like to think that such markets will last forever, they don’t. In the 20th century, there have been three extended periods of stagnant or bearish markets. Coming after the turn of the century, and surrounding WWI, the markets traded sideways for 18 years, from 1905 to 1923. After a few years of growth, the country was plunged into our infamous Great Depression in 1929, and the markets did not fully recover to previous levels until 1954, a full 25 years later. The third, much like the first, was a 17 year period of mostly sideways movement, starting in 1965.

So what? Well, if you haven’t been living under a rock, you have been thoroughly force-fed the idea that we are experiencing a period of severe economic collapse, not unlike that of the Great Depression. If this is true (which, so far, it is), than history tells us we are in for a very long ride. While the talking heads want to think that everything will be A-okay in a couple years, the brutal truth is that we are unlikely to fully recover in the next decade.

In today’s video, Obama lays out a five-point plan for stimulus through infrastructure spending.

All of these proposals are likely to get a large amount of support from the general public, with objections only from deficit hawks. But with the economy being in such dire straits, I find it hard to believe that anybody will be able to provide serious objections to upgrading schools. This leaves us with a popular president with a mandate to deficit spend hundreds of billions of dollars on popular programs. All things considered, that’s not such a bad place for President Obama to be.