I am very confident that the truth gets out in the long run. But that’s like say that in the long run, markets are efficient. True, but not particularly useful as a guide for action today.

One of the smartest finance guys I know once said “The markets can stay irrational longer than you can stay liquid.” The point is that in a world of bounded rationality and the relentless march of time, truth does not guarantee success.

The genius of the US system is that it has been robust even in the face of dramatic shocks (Civil War, Great Depression, two World Wars, American Idol). It appears likely that Obama will win largely because popular opinion will not revert to the cente-right mean in time for the election.

One way of viewing this situation is that it is a result of the disconnect between the conventional wisdom regarding the Great Depression and the truth of what went down in the early 1930s. The CW is that FDR and the Democratic party saved the nation with the New Deal. Therefore, when confronted with another economic crisis, the immediate reaction is to turn to the party that saved us the last time.

But there are two facts that make this a bad reaction:

1. The New Deal prolonged the Great Depression.
2. The Democratic party of today is not the Democratic party of the 1930s.

There is no way to correct this misunderstandings in the time frame we face in this election. So McCain must find an alternative path to change the outcome. Attacking Obama is the only path that realistically remains. But it is a path that is fraught with risk – even if he wins, it will exacerbate the polarization of the country and make future governance much more difficult.

Quite a dilemma.

L3