Thanks, Tea Party!

I'm very happy to see Harry Reid win re-election in Nevada and Chris Coons get to the Senate from Delaware. Colorado remains incredibly close, and it's possible that Michael Bennet, who seems to be a good reform-minded Democratic Senator, will pull out the victory there. That's two or three Senate seats which the Tea Party gave to Democrats by nominating bad candidates.

If popular centrist Mike Castle had been the Republican candidate from Delaware, he almost certainly would've won. Instead, the Tea Party nominated everybody's favorite non-witch against masturbation, Christine O'Donnell. Harry Reid won in Nevada despite 14% unemployment, facing off against the Tea Party's Sharron Angle. (The candidate I feared was Danny Tarkanian, who was low-key enough to just plod his way to victory and then become a very bad Senator.) And if Republicans had gone for establishment pick Jane Norton instead of Tea Party favorite Ken Buck in Colorado, they wouldn't have had to deal with Buck's shameful treatment of a rape victim when he was District Attorney, which threw the race back into play. Now Josh Marshall is saying that Bennet will probably win, since the remaining votes are from areas where he's strong.

I can see how the Tea Party helps Republicans maintain party discipline, keeping any Republicans from supporting things like health care reform for fear of losing their primaries. But sometimes they nominate candidates who aren't housebroken when there's an alternative who would have won. Those of us who admire Michael Bennet, laughed at Christine O'Donnell, and are happy to see Harry Reid return to the Senate have the Tea Party to thank.

Don't Leave Us, Nancy!

Regular readers will know that I'm with Paul Waldman on this: I'll be much more optimistic if Nancy Pelosi is still in charge of the House Democrats after this election. I don't know why she wouldn't be, but I keep hearing that there's some uncertainty about this so maybe it's worth commenting on.

I haven't heard any serious rumblings about people within the caucus wanting her to go, for good reason -- she's led them more or less flawlessly ever since she took power the dark days of mid-November 2004 when it looked like everything was going to hell. From defeating Social Security privatization, to using Jack Murtha to turn the Democrats into a firmly antiwar party over the objections of Hoyer and Emanuel, to leading us through two elections where we made big gains in the House, to the amazing amount of stuff we got through the House this year, she could very well be the most impressive American politician of my lifetime.

Voting Day!

I don't have any predictions -- other folks are better at that. I'd urge you to vote, but since you're reading this blog, you're probably doing that already. I'd tell some kind of story about what I'm doing at the polls, but I'm here in Singapore with my absentee ballot hopefully in the hands of the Travis County election people.

While the outlook is obviously gloomy, it's important not to lose perspective. Assuming that the expected scenarios come to pass, and Democrats hold the Senate while clearly losing the House, things will still be better politically than they were for most of the last ten years. It's not like the Republican Party can just run off and start more disastrous wars. On the downside, GOP attack politics will be really messy and we won't be able to make any serious legislative progress on substantive issues like climate change and the bad economy. That last part is what's really depressing. Hopefully Obama can use the powers of the executive branch to just fix some of this stuff.

I expect that we come out of this with a playable hand. Maybe we end up playing it badly and disaster unfolds over the next several years. Maybe we play it well and we're in shape to clear out 2010's Sharron Angle types when 2016 rolls around for full control of Washington again, this time without as many Byrds and Dodds making process objections when we want to pass legislation. Republicans have overreached before in doing their bizarre Congressional publicity stunts -- impeachment, Terri Schiavo -- so it remains to see whether GOP Congressional leaders will make smart tactical choices too. There's lots of action ahead of us, folks.

And if any of you happen to be in Singapore on Friday, there's going to be a party at my place. We don't know yet whether it'll be a drunken depressed party or a drunken mildly relieved party, but either way it's on.

Talk To Your Parents About Marijuana Before It's Too Late

With things looking up for Jerry Brown and Barbara Boxer, the big thing I'm hoping for out of California but feeling unlikely to get is marijuana legalization.

Nicholas Kristof, again putting his op-ed spot at the NYT to good use, notes that nationwide marijuana legalization would improve the nation's finances by $17 billion through taxing pot and not wasting police resources on a non-problem. It's the kind of article that I wish I'd discussed with my parents before they voted, because I don't really know what their views on this issue are. Mom has already voted early -- she's going to be volunteering as an election worker. So I just sent the article to Dad in hopes that he'll vote for prop 19 if he hasn't cast his ballot yet.

A Giant Black Friday Sale On Money

Banker friend Ó Coileáin has useful things to say on why we should borrow more money and ignore the mouth noises made by people who own Treasury bonds:

There's two states in which government borrowing dominates private borrowing:

1) Interest rates are high. If I can get 8% or 10% on treasuries and the government looks reasonably healthy, why invest privately for a small percentage pickup? I have lots of space to make up margin by funding cheaply, particularly if I'm a bank. In the real economy, lots of stuff fails to happen because it can't generate a safe 8-10%. Think of this as a "high time value of money" world.

2) Flight to quality. If everything else in the world is so scary that you don't want to touch it, you buy treasuries and wait. Rates get cut to zero, but you don't care because you're worried about blowing up from risk. Here, lots of real economy stuff fails to happen because investors are too spooked to fund. Think of this as a "high risk premium" world.

There's a big difference in investor attitudes between (1) and (2). In (1), inflation may be high but you're still making a nice outsized return supposing that default is unlikely. You buy treasuries because they yield a lot. Investors are happy. In (2), nobody owns treasuries because they want to, they own them because the rest of the world is worse. Probably you've been badly burned recently and are skittish about doing anything levered or risky despite the tiny return on your treasuries. Investors are unhappy.

There's also a difference from a "return to normalcy" perspective. If the world stabilizes back to 5% or so long term interest rates if the time value of money is high, treasury investors make money: interest rates down, value of bonds up. In the high risk premium world, rates are low and stabilization means treasury investors lose money: interest rates up, value of bonds down. That is, in the second scenario bond investors are actually short economic recovery.

The key point here for me was Bill Gross of PIMCO saying a few months ago that treasuries are the "least dirty shirt." It's not that he wants to own treasury bonds, more that he doesn't want to own anything else. There are risks to government bonds, but they're less bad than the alternatives if you're spooked.

The usual suspects (Delong, Krugman) say "hey, we can borrow for 10 years at 2.63%! Let's do that!" And they're right as far as that goes -- and the people who argue that markets can turn on a dime usually don't have much analysis to support the conclusion. What's truer: interest rates are probably only as low as they are because bond markets are spooked out of their minds. Markets will likely become un-spooked only slowly; there could also be a shock to confidence in treasuries relative to other things, but what that might look like is unclear.

I think this actually makes the case for short-term deficits better -- it's like a giant Black Friday sale on money and we should take advantage before it goes away! This, of course, is exactly what current treasury buyers are afraid of, since we're talking about actions that will raise inflation and interest rates, restore normalcy, and thus lose them money if they only own treasuries. They do know this; they're just too spooked to go buy something else. So we hear the cries of unhappy bond investors essentially begging the government not to take advantage of them. Happy bond investors in scenario (1) don't complain, they cheer recovery; unhappy bond investors whine loudly in an effort to dodge what they clearly have coming.

Point being, revealed preference is what you do, not what you say -- for all the screams of bond investors wanting to avoid inflation, they're still buying at 2.63% for ten years and until they actually stop it's just jawboning. Economically, I think we would do well to extend maturities (kind of the opposite of QE2 unless it's never reversed) and just generally let bond investors have it with a small dose of inflation. After all, bond investors have seen a thirty-year rally in treasuries: they deserve to be disappointed for once.