Parts to Wholes: the Socionomic Systems Nexus

Well now that we've all had a decent night's sleep, being defined as not sleeping like a baby too..o much hopefully we can step back and get some perspective on this. A couple of analogies occur to me. The underlying cause of all this was the massive voter negative reactions which prompted and supported a palace revolt by the House Republican back-benchers. The best comparison is that the Peasants set out to burn down the castle and destroy the monsters but instead set the forest on fire and are about to see the village go up in flames. Now the question is can we contain the fire, put it out and then we'll deal with the monsters. The political cartoon collage almost captures things perfectly IMHO. The "interesting" thing here, at least for me is the extent to which the most primitive parts of our brains have dominated those reactions (the lizard-brain) and how ill-informed almost all the pundits, legislators and others have been. Including many who should know better. One doesn't expect deep financial expertise out of the general populace but the lack of grasp of people in decision-influencing positions should be a permanent blight on their records. On a par with Winston Churchill's triggering of the British Depression of 1922.

How Bad Was It ?

Yesterday the US equity markets lost about $1.3T in value. Now one can honestly argue that we're due for a major downturn in the markets, which haven't properly priced in the rapidly metastasizing downturn, but the question is how far and how fast ? This certainly hasn't helped. Judging from the reactions prior to the vote of several of my network the conspiracy theories are widespread among more than the peasants as well. So these results shouldn't be surprising. For the record both the Rep. and Dem. leadership and, so far, membership in the Senate stepped up to the plate as did the House Dem. leadership. The Rep. leadership in the House threw major monkey wrench in the works last Thur. when they disrupted a deal that met all the requirements and the principles of both candidates. John McCain's statement that there was no deal and his principles weren't satisfied is, IMHO of course, somewhat disingenuous. Somewhat in the sense that there was a backbenchers revolt. His subsequent statements haven't helped much and show a lack of grasp of the importance and intricacies. Obama, while still speaking as they both must, to the populist anger has done a much better job of attempting to calm people down, explaining the necessity to act and supporting the process. Particularly by concentrating on the forward/backward sausage-making of the legislative process that we're all now getting over-educated in.

If you'll permit the wry observation some of my own early religious training was in economics though I became apostate and went into business while retaining a lot of affection and conviction about the discipline. And learning that the book theories must be balanced and integrated with a lot of real world practicalities. But for those who argue that it's all theory let me tell you your flat wrong. In the long-run economics works as well as the Newtonian physics that describes the orbits of the planets. As we're all going to be learning here shortly. So for all the folks who think economics has no laboratory verification let me warn you we're all about to be lab rats in yet another giant field experiment.

Leadership to Date

Last week began with an awesome and somewhat skilled display of political kabuki as the Senate hearings were kicked off with posturing displays designed to placate the angry, fearful and vengeful electorate. By the end of the week enough progress had been made that a workable bi-partisan package was ready for approval. It was of course blown up but put back together over the weekend. What is slightly amusing is that the heart of the proposal is entirely intact and it was merely wrapped with clauses designed to make it more palatable and saleable. Both the Kabuki and the wrapping were vital to moving it forward because, in the face of profound ignorance, it was necessary to force it thru the approval process. For the record the final vote (Y/N/Pass) was: Dems(140/95/~), Reps(64/133/1),Ind(~/~/~) for a Total of 225/208/1.

Now a lot of blame is being placed on a floor speech by Nancy Pelosi for attacking Rep mis-management. Not sure that her timing wasn't bad but then she hasn't had any sleep in a week either. If you listen to the speech though it struck me more as attempt to save a failing bill but telling her colleagues that they'd address and fix all their long-term substantive concerns when they came back but vote for this bill now. Clearly there were opponents in both parties but this was a Rep. bill, put together by the leadership of both Houses, strongly supported by the Pres., initiated by two of the best public servents we've had and the perfact men for the job (Paulson with his exemplary real-world experience and pragmatism and Benanke with his distinguished background as one of the world's leading macro-economists and a specialist in the Depression). At the end of the day this bill failed because the House R's decided to oppose it and they were given air-cover and leadership by McCain. If you want to see some real straight-talk by a man who know's what he's talking about listen to Sen. Gregg's press conference (R of NH btw). Here's the URL: rtsp://video1.c-span.org/project/economy/econ092808_gregg.rm.  And back that up with Mark Zandi's interview on his recent book. Finally walk, don't run, to read John Mauldin's latest newsletter.(Who's Afraid of a Big, Bad Bailout?) Save your energy, you'll need it later in the bathroom.

Judging the process we apply the criteria we've already set out. Who's acting to lead ? Acting in the public interest ? Spending less time pointing fingers and more acting, constructively and proactively, to support this critical bill ? So you can judge for yourself we've included various press conferences and speeches in the readings. Ironically Pelosi said nothing on the floor that McCain hadn't said in his press conference the week before, during the debate, on Sixty Minutes and in his press conference after the failure. With a major difference. Her speech spent a 1/3 of its' energy on polemics, a 1/3 on futures and another 1/3 on pass it now. His was all about partisanship (or at least 80%). This is not the country first, straight-talk that was supposed to be his hallmark. Either this was a display of massive ignorance of the consequences and how things worked, a brilliant tactical political manuver for which both parties leadership tried to give him credit or both.

My suspicion is that as Obama continues to play the public spirit card, with the necessary popular wrappings to sell it given voter angers, and as more and more of the sausage making becomes visible that he may have just cost himself the election.

On the other hand the ex-post statements of Paulson, the President and Dodd and Gregg continued to sustain a spirit of not laying blame, of understanding the job-threatening difficulties for the House representatives, to appeal to bi-partisanship and to emphasize the criticality. Now if any of this is working for you is the time to speak up. To this point people still weren't and aren't taking this as seriously as it deserves to be taken. Maybe that'll change and we'll get this rescue package passed in a workable form. The punditry is certainly not helping and the dearth of constructive suggestions and total lack of insight is stunning. With the occasional exception like our last post focused on Perlstein's column. Let's hope we end up doing the right thing. The downside risks are more enormous than anyone is admitting. 

Political Kabuki Continued 

Conservatives Viewed Bailout Plan as Last Straw The seeds of the House Republican revolt over the financial industry bailout were sown in an e-mail message circulated Monday night as internal animosity built quickly over the Bush administration’s request for $700 billion to prevent an economic collapse. In a message to members of the conservative Republican Study Committee, leaders of the bloc of more than 100 lawmakers solicited ideas, calling for a “free-market alternative to the Treasury Department’s proposal so that, regardless of how individual R.S.C. members vote on final passage, House conservatives have something to be for.” As the week progressed, it became abundantly clear that one thing conservative Republicans were most certainly not for was the Treasury plan, prompting them to begin searching for an alternative to avoid the perception of strictly being naysayers. By the end of Friday, at least a portion of their alternative seemed likely to be included in the broader proposal as a sweetener for Republicans, although closed-door negotiations continued into the evening on Friday, and the contours of the final package remained in limbo. After years of acceding to the White House on a variety of initiatives despite deep misgivings, House Republicans found the administration’s latest proposal to be too much to swallow. Just as they were trying to reassert themselves as a party of fiscal restraint, President Bush, on his way out the White House door, was asking them to sign off of on a $700 billion bailout built on taxpayer dollars, with very few questions allowed.

“You were being asked to choose between financial meltdown on the one hand and taxpayer bankruptcy and the road to socialism on the other and you were told do it in 24 hours,” Representative Jeb Hensarling of Texas, head of the conservative group, said. “It was just never going to happen.” The resistance caps two years of frustration among House Republicans after losing the majority in 2006. They believe they have suffered serious mistreatment at the hands of the Democrats and that they have been marginalized in legislative negotiations since they, unlike their Senate counterparts, do not have the procedural weapons to force their way to the negotiating table. They also complain that Treasury Secretary Henry M. Paulson Jr. has been too quick to bargain mainly with Democrats, led by the House Speaker, Nancy Pelosi of California, and Representative Barney Frank of Massachusetts, not only on this plan but on the stimulus proposal earlier this year, a subsequent housing bill and other economic measures.

Clock may be ticking for House GOP Time may be running out for House Republicans opposed to the Bush administration's financial bailout plan. Sen. Bob Bennett (R-Utah) warned Saturday of another impending bank failure, and Republican Senate leaders — plus GOP Sens. Pete Domenici, John Sununu and Judd Gregg — laid out doomsday scenarios in a Republican Senate Conference meeting. Sources say that as many as 40 Republican senators are prepared to vote for the emerging bailout deal if bankruptcy and social spending provisions are dropped. And while Senate Minority Leader Mitch McConnell (R-Ky.) is not yet ready to abandon House Republicans — or John McCain — sources say his views may change if there's no deal by Sunday evening. House Republicans are still overwhelming opposed to any package that would authorize Treasury to buy hundreds of billions in devalued mortgage-related assets. This puts Blunt in a difficult spot as he tries to win concessions that will bring his members on board. In the interim, McCain has been calling House Republicans to test support for the rescue plan, one of the lawmakers contacted said. The open question: Would Pelosi — who has said previously that Democrats won't pass the Bush administration bailout by themselves — have enough Democratic votes to move the measure if Senate Republicans are on board but House Republicans aren't? Earlier Saturday, Gregg said he expected the principals to remain in that session until they reached “closure” on a deal. Senate Minority Leader Mitch McConnell said he hoped that a deal would be announced Sunday – with the possibility of votes being taken before the markets open Monday. The latest House GOP posturing comes amid a Republican effort to ensure John McCain is credited with whatever progress is made in the talks. McCain arrived back in Washington just before dawn Saturday, and his campaign said he planned to “resume negotiations with the administration and congressional leaders from both parties to forge a bipartisan solution to our economic crisis.”

Republicans are clearly worried that their presidential candidate’s first effort to engage in the bailout negotiations didn’t come off as well as they might have hoped – that in the public’s mind, a deal was close until McCain parachuted in, a White House meeting collapsed and McCain left for the debate in Mississippi with the various factions farther from a deal than they’d been before. House Republicans are now trying hard to recast those events. What actually happened, they say: By not taking a stand on the modified version of the Treasury Plan that Democrats, Senate Republicans and the White House seemed nearly ready to support, McCain gave House Republican the time they needed to force a better deal for taxpayers and homeowners alike. During a brief session in the Capitol on Friday, McCain reminded a small band of Republican leaders that he had given them a political opening in the landmark legislative fight. According to people present, McCain then told his congressional colleagues, “Now, go get something.”

Candidates Contributions and Reactions

Obama, Not McCain, Shows Steady Hand in Crisis For the first time since 1932 a presidential election is taking place in the midst of a genuine financial crisis. The reaction of the candidates was revealing. John McCain, railing against the ``greed and corruption'' of Wall Street, won the first round of the sound-bite war. He came out with a television commercial on the ``crisis'' early on Monday of last week, and over the next three days gave more than a dozen broadcast interviews. He and running mate Sarah Palin would reform Wall Street and regulate the nefarious fat cats that caused this fiasco. It was a great start. It then went downhill as he stumbled over his record of championing deregulation, claimed the economy was fundamentally strong, and flip-flopped over the government takeover of American International Group Inc. For his part, Barack Obama didn't come across as passionately outraged and wasn't as omnipresent or as specific. More revealing, though, was to whom both candidates turned on that panic-ridden morning of Sept. 15, and how the messages evolved before and after that day. McCain called Martin Feldstein, the well-known Republican economist and Reagan administration adviser, John Taylor of Stanford University, who served in President George W. Bush's Treasury and Carly Fiorina, once the chief executive officer of Hewlett-Packard Co.  Obama called former Federal Reserve Chairman Paul Volcker, and former Treasury Secretaries Robert Rubin and Larry Summers. It was a mismatch. Obama called for the overhaul of the financial-regulatory system and tougher enforcement well before this past week's traumas. Detached observers who watched him last week, especially in a Bloomberg Television interview, were taken by how conversant and comfortable he was on the subject, despite his thin record. Few detached observers came away with that impression watching the Arizona senator. There is a case for McCain: it's if you believe in less regulation, that the government should get out of the way and let the markets work their will. McCain isn't averse to some regulations. He has strongly championed a greater federal role in campaign finance, tobacco and boxing. In each case, he saw a clear villain -- special- interest money, a tobacco product that puts profits ahead of lives, and unscrupulous boxing promoters. There has been little evidence that prior to last week he ever put financial firms in this category. Although he assailed excessive corporate compensation last week, McCain has opposed a tepid House-passed bill that would give corporate shareholders the right to cast a non-binding vote on compensation of top executives. The person he has turned to most for counsel on such matters is his ex-Senate colleague Phil Gramm. Gramm is a political Gordon Gekko, a brainy economist with a Darwinian view of markets and public policy. It's not easy to remember what the financial world looked like 10 days ago much less 10 months ago. Decisions that will be reached after this election will be the most important since the 1930s. Obama, as more than a few Democrats are complaining, hasn't been as quick, sharp -- or demagogic -- as they would like. McCain has been beset by deeper difficulties: an inchoate and inconsistent message that seems to reflect political exigencies more than principled convictions. On the financial crisis, last week belonged to Obama.

• Obama Urges Calm, Says Rescue Plan `Will Get Done' , Obama, McCain campaigns: Starkly different first reactions to bailout bill's failure
• Why the Bailout Bill Failed
• Reactions and Speeches: (McCain’s post-failure reaction, Obama’s campaign speech, Pelosi’s Floor Speech, Sec. Paulson’s, Sen.’s Dodd and Gregg)

Balanced Assessments

Credibility Test for Congress In the greatest crisis to confront the American economic system in three-quarters of a century, it is notable that the leaders of the two elected branches of the federal government have not been calling the signals. George W. Bush, Nancy Pelosi and Harry Reid have not gone AWOL, but they have stepped back to permit deputies with greater expertise and fewer acquired scars to take the lead in figuring out a solution. Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke, Sen. Chris Dodd and Rep. Barney Frank have been at the center of the dialogue, and, as this is written, the burden is on their shoulders to rescue Wall Street and all the enterprises and individuals whose fortunes rest on the functioning of that financial center. We know why George Bush has not attempted to play that role in this crisis. But how do you explain the transfer of authority from Pelosi and Reid to the chairmen of two congressional committees that supervise the operations of financial markets -- Dodd and Frank? The reason, I have to believe, is that public disdain for Congress and its top leaders is as great as the disillusionment with the president. From the high hopes that greeted the Democratic takeover of the Senate and House in November 2006, there has grown, month by month, a sense of disillusionment with the performance of this Congress. Bush has a roughly 30 percent job approval; Congress is at least a dozen points below that.

It's Time To Act: This is a Rescue, Not a Bailout Everyone's chiming in on the financial mess, but we have yet to hear a better idea than that set out by our Treasury secretary and Fed chief. Congress should act on it without further showboating or delay. Watching the same politicians who created this mess grill Mssrs. Paulson and Bernanke yesterday about what they intend to do about it was almost surreal. Where, for example, does Chris Dodd, chairman of the Senate Banking Committee and the leading recipient of Fannie Mae campaign cash, get off acting so self-righteously when he and his panel were asked to move quickly on the administration's $700 billion rescue plan? "I understand speed is important," Dodd huffed, "but I'm far more interested in whether we get this right." Get this right? Who is he kidding? By now, everyone in the U.S. and beyond should know that if Connecticut's senior senator and his Democratic colleagues had "gotten it right" from the start, and if they'd fixed the problem when they had the chance, there wouldn't be a need for the crisis hearings he's now conducting. Hubris and hypocrisy aside, it's important to recognize the legislation for what it is — a rescue, not a bailout, of the financial system. Taxpayers will not be left "holding the bag." The government will buy these mortgage securities at 20 or 30 cents on the dollar and eventually sell them at higher prices. How much higher, and how far into the future, no one knows. But even if the government doesn't make a profit in the end, the loss will be nothing like the trillion dollars that fear mongers and doomsayers throw around.

Bailout Breakdown The fine points of financial reform can wait. For Congress, the immediate task is to avert economic disaster. The stakes could not be higher: The president laid out in far more graphic terms than ever before just what the country is facing. He spoke of "danger" to the entire national economy and the potential loss of "millions" of jobs. It is a scenario not contemplated since 1929. This catastrophe can be avoided, and it will be if government promptly and effectively addresses the immediate cause of financial distress -- the toxic build-up in unmarketable mortgage-backed securities on bank balance sheets. Treasury Secretary Henry M. Paulson Jr. has suggested a program to buy the distressed mortgage-related securities. Alternatives are imaginable, but this is the one on the table, and it is conceptually credible. Treasury could recoup much of the cost as the market recovers; indeed, by jump-starting a market, the plan could draw private capital into distressed securities. Beyond its price tag, there are two legitimate concerns about the plan, both amenable to compromise at the White House talks. The first issue is ensuring that taxpayers do not get fleeced. By its nature, the plan asks government to pay above-market prices; the whole point is that no market exists for most of these securities at the moment. Congress and the Bush administration should create an option for the Treasury to take equity in institutions to ensure more taxpayer protection. The second issue is oversight and accountability. Seeking maximum flexibility, Mr. Paulson asked for all-but-unreviewable power; Congress rightly recoiled. But there are other ways of making sure that the program runs honestly and efficiently without subjecting it to lawsuits or microscopic review by multiple federal agencies. These are the essentials. On other matters -- relief for mortgage holders, regulatory and bankruptcy reform -- there will be plenty of time later for debate, and, if necessary, additional legislation. But for now, the president, Congress and the candidates need to stay focused on what's really important: preventing financial Armageddon.

• Moral Hazard' Preening Is Hazardous, A Gut Check for the Pols

How Main Street Profits From Treasury Plan Capitalism is a delicate balance between production and finance. Today, our seemingly guaranteed living standard is threatened, much like it has been in previous recessions or, some would say, the Depression. Finance has run amok because of over-securitization, poor regulation and the excessively exuberant spirits of investors; the delicate balance has once again been disrupted; production, and with it jobs and our national standard of living, is declining. If this were a textbook recession, policy prescriptions would recommend two aspirin and bed rest -- a healthy dose of interest rate cuts and a fiscal package that mildly expanded the deficit. That, of course, has been the attempted remedy over the past 12 months. But recent events have made it apparent that this downturn differs from recessions past. Today's housing bubble, unlike that of the stock market's before it, was financed with excessive and poorly regulated mortgage debt, and as housing prices began to tumble from the peak, the delinquencies and foreclosures have led to a downward spiral of debt liquidation that in turn led to even lower prices and more foreclosures. And so, instead of mild medication and rest, it became apparent that quadruple bypass surgery is necessary. The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent. Politicians afraid of parallels to legislation that enabled the Iraq war are raising concerns about a rush to judgment, but the need for speed is clear. In this case, there really are weapons of mass destruction -- financial derivatives -- that threaten to destroy our system from within. Move quickly, Washington, with appropriate safeguards. The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic.

• Paulson Plan is a Big Win for Taxpayers

Gut Check Now let me tell you something very simple and very important: You can try to prevent a financial meltdown or you can teach Wall Street a lesson, but you can't do both at the same time. So which will it be? You say you want straight talk -- no spin, no bull, no sugar-coating. Okay, here goes. First, stop fixating on Wall Street executives -- there will be time to deal with them later. Even if you clawed back every dime they made over the past decade, it would come to several billions of dollars. That's a rounding error compared with the size of the financial problem we're facing here. Second, we need to act quickly. The financial situation is now downright scary. Don't look at the stock market -- that's not where the problem is. The problem is in the credit markets, which are quickly freezing. I won't bore you with technical indicators like Libor and Treasury swap spreads, but if you talk to people who work these markets every day, as I have, they report that the money markets are in worse shape than they were last August, or even during the currency crises of 1998.

Banks and big corporations and even money-market funds are hoarding cash, refusing to lend it out for a day or a week or a month. Even the best companies are having trouble floating bonds at reasonable rates. And the shadow banking system -- the market in asset-backed securities that ultimately supplies the capital for most home loans, car loans, college loans -- is almost completely shut down.

People are so nervous, and there is so much distrust, that all it would take is one more hit to trigger the modern-day equivalent of a nationwide bank run. Financial institutions would fail, part of your savings would be wiped out, jobs would be lost and a lot of economic activity would grind to a halt. Such a debacle would cost us a lot more than $700 billion. Third, the latest proposal hammered out between the Treasury and Democratic leaders won't cost anywhere near $700 billion unless we get a 1930s-like Depression, in which case we'll have much bigger problems to worry about. Depending on how the program is managed, and how things turn out with the economy and the housing market, the best guess is that the government could wind up either losing or making a couple of hundred billion dollars. The final tab is simply unknowable -- it depends on how much the government winds up paying for the securities it buys from banks and other financial institutions, and what price it resells them at after the market and the economy recover.

Paulson will have no peer Despite all the constraints Congress supposedly wrapped around him, Treasury Secretary Henry M. Paulson is about to become the most powerful mortgage financier of the modern era -- most likely of any era. Buried beneath the 100-plus pages of detail that Paulson's financial rescue plan has picked up during its 10-day journey from a Bush administration wish list to a bipartisan congressional compromise is the striking fact that the Treasury secretary got almost everything he sought -- an eventual $700 billion and the authority to spend it largely as he sees fit. To be sure, congressional bargainers did make one huge change.And in the process, they created a potential stumbling block as the Treasury tries to stabilize the deeply damaged financial system by acquiring toxic mortgage-backed securities. Under terms of the compromise announced Sunday, any firm selling troubled assets to the government would have to give Washington the right to take an ownership stake in the firm -- a more sweeping requirement than had been expected. While the aim is to let taxpayers profit when the financial system eventually recovers, administration officials worry that generally healthy companies may be discouraged from getting involved -- thereby reducing the effectiveness of the rescue effort. Whether that turns out to be a big problem remains to be seen, however, and for the rest, Paulson's new powers will be almost breathtaking in their scope.

Posted by dblwyo at 10:50 AM | Permalink | Comments (2)

The original plan was to put up a post over the weekend looking beyond the rescue package but as the news ebbed and flowed we got distracted more than a bit. And still headed into today with a relatively benign outlook which turned out to be mis-placed. There's been a change of plan since instead of containing the breakout from Stalingrad we've had an ideologically motivated sit-down strike on the part of the troops who're now sulking in their tents. So rather than our normal longish analytical post along with excerpts, charts, etc. we're going to focus on Steve Perslstein's latest column from the Washington Post which is as short, pithy, direct, accurate and honest a description, in ordinary English, as we've read. We've got a lot more to say but we're simply going to start here and pick up more tomorrow, depending on how tonight's drinking goes. BtW - how's your food, water, ammo, fuel and liquor stocks doing ? After you read Mr. Pearstein's elegantly direct assessment we also suggest you consult John Mauldin's latest newsletter for a more detailed explanation: Who's Afraid of a Big, Bad Bailout?

They Just Don't Get It

Oy vey.

That is the technical economic term that best sums up a day in which the House of Representatives refuses to pass a $700 billion rescue plan pushed by the White House and congressional leaders from both parties, Wachovia is taken over in a deal that will have the government potentially owning 10 percent of Citigroup, a few European banks fail, the Federal Reserve and other central banks are forced to inject an additional $300 billion into the global banking system, the Dow Jones industrial average plunges 777 points, and investors everywhere rush to the safety of gold and short-term Treasury bills. The basic problem here is that too many people don't understand the seriousness of the situation. Americans fail to understand that they are facing the real prospect of a decade of little or no economic growth because of the bursting of a credit bubble that they helped create and that now threatens to bring down the global financial system. Politicians worry less about preventing a financial meltdown than about ideology, partisan posturing and teaching people a lesson. Financiers have yet to own up publicly to their own greed, arrogance and incompetence. And leaders of foreign governments still think that this is an American problem and that they have no need to mount similar rescue efforts in their own countries. In the coming weeks and months, all of these people will come to understand how deep the hole really is and how we're all in it together. They'll come to understand that the giant sucking sound they hear is of a massive deleveraging of the global economy and the global financial system as households and governments, businesses and investment funds adjust to living in a world with less debt and more inflation.

And they will come around, reluctantly, to the understanding that the only way to get out of these situations is to have governments all around the world borrow gobs of money and effectively nationalize large swaths of the financial system so it can be restructured, recapitalized, reformed and returned to private ownership once the crisis has passed and the economy has gotten back on its feet.

In the next few weeks, the center of attention here in the United States will shift from the Congress and an exhausted Treasury to the Federal Deposit Insurance Corp., which will now have to rescue any number of failing banks, either by taking them over directly or managing their transfer into stronger hands. It will also shift back to the Federal Reserve and other central banks, which will have to step up their efforts to maintain liquidity in money markets and prevent the credit crunch from taking down hedge funds, businesses, and state and local governments.

These will, alas, be only holding actions. Restoring real stability to financial markets will require the kind of systemic approach and extraordinary government interventions that the public has refused to authorize and finance. In better times, the public might have put aside its reluctance in response to the strong and unified recommendation of political and business leaders. But it is a measure of how little trust remains in both Washington and Wall Street that voters are willing to risk a serious hit to their wealth and income rather than follow their lead.

Posted by dblwyo at 09:58 PM | Permalink | Comments (1)

For several years I've been arguing that economic health is critically important to all other policy agendii we want to pursue; and, for several months, that it was the single most critical issue in this campaign. Hopefully, at this point, the number of naysayers is approaching zero on this argument. At the same time the number of scared, angry and obtuse commenters and pundits who have been energized by the crisis of the last two weeks has metastasized. Sadly, but understandably, because of a lack of grasp of the seriousness of the situation, it's sources and possible cures. Instead we're being inundated with populist rhetoric and political posturing. Often by the same people who helped us all get in this mess in the first place. Calming them down is now the first order of business since without some popular support the proposed rescue package will be stillborn and we'll all be in deep kimchi. Fortuantely there are some calmer heads who do have the necessary knowledge, and more fortunately, some of them occupy positions of power on the Hill. To try and contribute to some small smidgeon of understanding we'd like to disabuse you of some of the errors and make you aware of the stakes.

Quick and Dirty Summary

That lack of grasp is our most dangerous problem and it has two roots. First off almost noone understands how this is all working - and hasn't bothered to learn or investigate - and popular anger is out of control. Second, rather like a fish swimming in the ocean, we take the complex system we depend on for survival without grasping it's linkages, fragilities and susceptibility to disruption. We're going to do our best to to move along with more, hopefully, to follow. Too much ground for one post if we try and explain the background.

1. Bailout = Rescue. This is called a bailout and postured as charity for the fat cats. It is nothing of the sort. It is a purchase of assets that yield a flow in income and are likely to be worth more in the future if they weren't sold during the sack of the city but held until things return to more normalcy and less turbulence. $700B is not $700B - by buying at less than book valuation but above distress the goal is to unfreeze the banks and get them lending again. Some of the table stakes are laid out in the first section of readings, including a fact that everybody has lost sight of. All the econ news was really bad, including this morning's major downward revision of GDP growth from 3.3% to 2.8%. 

2. Main Street, Not Wall Street: Everybody is reacting as if this were their problem and not ours when just the opposite is true. The few who got and kept the $M bonuses won't go hungry. Right now companies thruout the country are having trouble meeting daily cash needs for purchases, payroll and other bills because the credit markets have frozen up. They've frozen because banks are afraid to loan money to anybody, especially themselves, for any reason. You care because you're car loan, credit card payments, etc. are at risk. If this worsens you really care because you job, your retirement, your kid's college and your healthcare is too. There's actually plenty of money to loan if the banks weren't afraid they'd lose it. Call this the paradox of caution - when one bank is careful and nobody else changes their behavior o.k. But when the next two banks react by also getting cautious that quickly turns into four, then forty, then four thousand. It's like a benign and life-giving fluid we need to live where some cells suddenly turn cancerous. If caught and treated in time it won't spread. That's what the Fed and the Treasury were trying to do until last week when three major danger spots metastasized into contagion at alarming speed. Not it's systemic and it needs a massive dose of chemotherapy and radiation treatment. That comparison is deliberate btw. No one enjoys such treatment, wishes they had to undergo it but it's the best we have available. Unlike cancer the really sad part is that this is all self-inflicted by widespread irresponsible behaviors. 

3. Economic Collapse is the Risk: even if the total rescue investment were doubled and a deadweight loss we'd still get a positive return. All the rescue does is keep the wheels on the wagon by un-freezing the credit markets. It doesn't make the Housing crisis go away and it still has two years to run to get back to more reasonable values and work off excess inventories. Nor does it stop the recession that's underway from happening. What it does do is stop it from turning into something far...far worse and ending up in a 15-year malaise like the Japanese created for themselves by trying to avoid realities and wave the tide out when it wanted in. Learn to surf the waves, don't go surfing or drown. Those are the choices on offer...period, end-of-story. This being the ocean we swim in it's hard not to play. Drowning is not much fun. Let's see if we can learn to swim - and it doesn't matter how well. Only that you keep your head above water for long enough to reach the shore. Let me give you two cases that concern the bald twins, King Henry and Uncle Ben, as well as the President and apparently darn few others.

 The trick is to ask yourself what the economy looks like over the future with and without a rescue. Now if things really seize up the numbers will be much worse. These two cases are not major downturns (trying to avoid the D word here) but are worse than the downturn we will have to live thru if the credit markets aren't repaired. The Bad case is a moderate recession followed by slower than potential growth while the Malaise case is a more severe downturn finished up with the Japanese disease. In the first case the total losses are $18T while in the second they are $25T. Plus of course the destruction and blighting of all our hopes for the next two decades but that's hard to analyze.

4. Deeper Problems Remain - the Rescue is a quick-fix proposal to keep the wheels rolling and doesn't address nor is it intended to address, the need for regulatory reform, a short-term stimulus package needed to get the economy cranking again. Or the necessary investments in infrastructure, energy, education and new technologies that are required for a prosperous future. All it does is reduce the risks of Malaise, which are otherwise pretty high.

5. Congress Not Acting Well - if you've been listening to any of the hearings you're hearing a lot of yokel like posturing and just plain ignorance on display. How much of that is political kabuki and how much of it is dead serious isn't known. If we're lucky it was 1/3 play-acting and 2/3 posturing for the folks back home so the Congress critters could return and sell the package. If we're unlucky it was 2/3 dead serious and 1/3 demagoguery by politicians without a clue. Given that the leadership managed to craft the details of a legislative proposal that addressed the core of the original proposal, added on the fixes that made it salable and palatable, had the public and full support of the President and were blindsided in a surprise attack with no warning by House Republicans at the last minute in a political maneuver triggered if not directly supported by John McCain and his grand-standing inclines me to the latter for some. On the other hand they climbed back into the pits to fight again. Bravo ! This is important - welcome to the Sausage Factory. This is how politics gets played. All those grand hopes we have for the right economic agenda are going to get wrung thru it.

6. Popular Pressures - by and large the politicians, even the good ones have no choice but to dance the Kabuki dances because the outpouring of popular anger was and is over-whelming. This coming from an electorate that was perfectly happy to ride the gravy train up when it met rising housing prices, a growing economy, easy boat loans, credit for vacations and all the goodies everybody consumed. When this is all said and done we're all going to have to change our behaviors. The real downside risks here are that a major downturn turns us all into a witch-hunting mob and locks us into another decade of angst and general despair like the '70s. Except this is more avoidable and almost entirely self-inflicted. 

7. Twins and Bush - Paulson and Bernanke having been performing well under incredible pressures for almost two years. We couldn't ask for a better pair. The distinguished macro-economist who's spent a lifetime studying this exact problem but also nearly a decade making policy along with a tough, no-nonsense financial executives who understands markets as well as anyone. Almost every other past pairings would not be doing as well. We got lucky. On the other hand they aren't selling it. 

8. Barry and Johnboy - up until four o'clock last night I though the candidates were playing it well asking us all to pull together and standing up for a non-partisan approach which is so critical. Unfortunately John McCain violated every principle he purports to stand for when he attended to critical kiss and sign meeting and withheld his approval from an all but done deal that met every requirement he'd laid out for a proposal he was entirely ignorant of and hadn't been involved in crafting. Leadership in this case calls for standing up and supporting this as the best available solution crafted by the best available minds. Not posturing for your base.

9. WE WILL GET THRU THIS - perhaps the most important point. Despite long hours, much strain, the severity and urgency of the task and being bushwhacked at the last minute by the House Republicans the Dems, all the Senate (so far), the Twins and Bush are keeping their heads and staying conciliatory. Last week when this blew up in hours the markets and the credit markets almost crashed. So far today they're being a lot more sanguine than anybody should expect. Let's hope they're right.

10. IT'S UP TO YOU - at the end of the day this may still remain a great mystery but the slivers of silver lining in all this is we're getting to pre-test our candidates, the machinery and the process. As well as undergo a forced education in economics that was long overdue for everybody. You may not be able to judge the technical merits but you can judge the behavior and cut the Gordian knots of complexity.

• Who's acting in a public spirited manner ?
• Who's supporting collective action in the best interest ?
• Who's stepping up and providing leadership by speaking in support ?
• And who's attacking the other parties at an inappropriate time ?

Set the Table: What Does This Mean ?

Hey, what about my job? The credit crisis is taking its toll on financial firms, leaving many people on Wall Street out of work and many more uncertain about whether they will lose their jobs in the coming months. But the market meltdown is likely to have an even wider effect on the entire job market, which was weakening even before the historic meltdown of the past few weeks. More than 600,000 jobs have already been lost this year, according to the government. And there are currently over 9.4 million people looking for work in the U.S. Given the recent events roiling the economy, the prospects for job seekers are looking dimmer every day. "Everybody is at risk," according to John Challenger, chief executive of global outplacement firm Challenger, Gray & Christmas. Frozen financial markets mean that banks are putting the brakes on lending. With businesses finding it harder to get financing, that could hinder their growth and lead to more layoffs. That, in turn, compels consumers to curtail their spending, slowing economic activity even more...which leads to more layoffs, Challenger explained. It's a "negative spiral," he said. Beyond the finance industry, many companies have already started cutting back in order to cut costs, Eubank said. Since May, General Motors (GM, Fortune 500) laid off 19,000 hourly workers, Starbucks (SBUX, Fortune 500) cut 12,000 jobs and American Airlines (AMR, Fortune 500) announced it was cutting 7,000 jobs, according to Challenger, Gray & Christmas. Other companies have instilled temporary hiring freezes or put their hiring plans on hold altogether. "Employment expectations are down substantially," according to John Dooney, manager of strategic research for The Society for Human Resource Management. Meanwhile, the employers that are hiring are moving slower and being more selective. Instead of three rounds of interviews, there might be twice as many, Paris said. With the unemployment rate now at a five-year high, according to the latest figures from the Labor Department, experts say it may be a while before an economic turnaround takes hold. According to Challenger, "the economy is going to be very slow through 2009."

• Orders For U.S. Durable Goods Drop 4.5%, More Than Forecast, as Sales Slow Orders for U.S. durable goods fell more than twice as much as forecast in August, a sign that slower sales and tighter credit conditions prompted companies to cut spending.
• New-Home Sales in U.S. Plunged 11.5% in August to Lowest Level in 17 Years Sales of new homes in the U.S. fell in August to a 17-year low, signaling the housing market suffered another setback even before the latest turmoil in financial markets.
• U.S. Initial Jobless Claims Soar to Highest in Seven Years on Hurricanes The number of Americans filing first-time claims for unemployment benefits rose last week to the highest since September 2001 as hurricanes kept residents of Texas and Louisiana out of work.
• U.S. Economy Expanded 2.8% in Second Quarter, Less Than Previous Estimate The U.S. economy expanded more slowly than previously estimated in the second quarter, showing consumer spending was weakening before the credit crisis intensified.

Why Should Reponsible People Have to Pay for the Bailout? Anyone questioning whether the government should get involve should take a look at Warren Buffett's interview with CNBC Wednesday morning. The Oracle of Omaha spoke after revealing his planned investment in Goldman Sachs. Here's what he said: "If I didn't think the government was going to act, I would not be doing anything this week. I might be trying to undo things this week. I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal." He added: "Last week we were at the brink of something that would have made anything that's happened in financial history look pale. We were very, very close to a system that was totally dysfunctional and would have not only gummed up the financial markets, but gummed up the economy in a way that would take us years and years to repair. We've got enough problems to deal with anyway. I'm not saying the Paulson plan eliminates those problems. But it was absolutely, and is absolutely necessary, in my view, to really avoid going over the precipice." Those in Congress who want to amend the plan have a responsibility to every American workers and saver to come up with a solution. Just saying they don't like the one on the table isn't enough. Some wise market sources, here and in London, are suggesting that the federal government should take preference stock in rescued institutions when it buys their subprime paper. That way the taxpayers would get good money back, ahead of the common stockholders, if and when these institutions then recovered. It's an idea worth a look. We are facing a massive financial implosion as a result of a huge debt bubble. Three times in modern history a major economy has faced this kind of situation. In America, 1929, and in Japan, 1989, the authorities failed to address the problem quickly and comprehensively. They tried to muddle through and get by using the old rules. The results? Japan has suffered 20 years of stagnation, including several recessions. Jobs and incomes suffered. Homes and shares are still down by maybe two-thirds. The U.S. economy in the 1930s fared even worse. Wall Street fell about 90%, from peak to trough, while the economy suffered a terrible depression lasting a decade. No one won.

Main Street Needs the Treasury Plan In our national debate about Treasury Secretary Hank Paulson's proposed financial rescue package, we are having the wrong conversation. This is not about how to bail out Wall Street. This is about saving the U.S. financial system for the benefit of American businesses, consumers and the economy at large. I believe that Mr. Paulson's plan will accomplish this goal. Congress should include provisions it feels are necessary to ensure oversight and accountability. And it should then pass the legislation as soon as possible. There is no question in my mind that our financial system and our economy are at risk. Right now, the flow of funds that makes our economy run is threatened by a lack of confidence in the value of financial assets, particularly mortgage assets. Financial institutions are extremely hesitant to purchase assets or lend money to one another to fund the system. The inability of investors to price many of these assets has resulted in a blockage of liquidity -- no one is willing to buy or sell anything. Banks must pay more to fund themselves because investors are wary of risks, both real and perceived. Assets decline in value as demand drops. Ratings agencies downgrade banks' debt, further increasing the cost of funding. The banks that are under the most balance-sheet pressure respond by shrinking assets, and conserve capital by reducing lending. The result is less credit to buy homes, cars or other large-ticket items, followed by further declines in home prices, reduced production of goods, shrinking economic activity and rising unemployment. Both small and large businesses are facing shortages of operating funds and increasing capital pressure. At Bank of America, we've seen an increase in commercial clients of other banks coming to us with urgent credit needs, saying that their other banks are cutting off or repricing lines of credit. Without a systemic solution, this problem will get worse. Workers will bear much of the impact. Just as optimism in times of growth encourages an upward trend, pessimism in uncertain times can feed a downward trend. Allowing such a trend to gain strength is our great risk.

Financial Credit Rescue Proposals

A Professor and a Banker Bury Old Dogma on Markets For the last year, as the nation’s economy lurched from crisis to crisis, the chairman of the Federal Reserve, Ben S. Bernanke, had been warning Henry M. Paulson Jr., the Treasury secretary, that the worsening situation might ultimately force a sweeping federal intervention. A longtime student of the Great Depression, Mr. Bernanke was acutely aware of what could happen without a decisive move. Finally, the moment that called for action arrived late Wednesday. Less than 24 hours after the Fed bailed out American International Group, the giant insurer, it was clear the turmoil gripping Wall Street was only growing worse and that ad hoc solutions were not working. Talking into a speaker phone from his ornate office, Mr. Bernanke told Mr. Paulson that it was time to adopt a comprehensive strategy that Congress would have to approve. Mr. Paulson understood. Reluctant in recent days to send Congress a plan that lawmakers had warned had little chance of quick passage, he had worried that a rejection would only further shock the markets. But during two conference calls Wednesday night and Thursday morning, he agreed that they had no choice. “It just happened dramatically,” Mr. Paulson said in an interview on Friday. “There was only one way that we could reassure the markets and deal with a very significant and broad-based freezing of the credit market. There was no political calculus. It was overwhelmingly obvious.” Just like that, Mr. Bernanke, the reserved former Ivy League professor, and Mr. Paulson, the hard-charging former Wall Street deal maker, launched what would be the government’s largest economic rescue operation in modern times, one that rivals the Iraq war in cost and at the same time may redefine Washington’s role in the marketplace for years.

The plan to buy $700 billion in troubled assets with taxpayer money was shaped by two men who did not know each other until two years ago and did not travel in the same circles, but now find themselves brought together by history. If Mr. Bernanke is the intellectual force and Mr. Paulson the action man of this unlikely tandem, they have managed to create a nearly seamless partnership as they rush to stop the financial upheaval and keep the economy afloat. Befitting their roles and personalities, Mr. Paulson has become the public face of their team — he plans to appear on four Sunday talk shows — while the less visible Mr. Bernanke provides the historical underpinnings for their strategy. Along the way, they have cast aside the administration’s long-held views about regulation and government involvement in private business, even reversing decisions over the space of 24 hours and justifying them as practical solutions to dire threats.

• Pres. Bush’s National Address (12 min; accurate, honest, straight-forward, reasonably bi-partisan (didn’t place blame), non-traditional (market interventionist), fair but not great sales job)
• Sen. Obama’s Statement and Press Conference (4/17 min., some necessary blame-waving, “rise” above, four key principles, risk of economic catastrophe)
• Sen. McCain’s Statement (3:30 min, no consensus, plan won’t pass as is, talked to Barry, leadership meeting)

Treasury Secretary Henry Paulson & N.Y.C. Mayor Michael Bloomberg MAYOR BLOOMBERG:  … we're paying the price for the last years where we all wanted something for nothing, where we took risks because we were convinced that we would never have to pay, somebody else would pay on the downside, but we'd keep the profit.  Congress has been unwilling to address the fundamentals of this country--an energy policy that makes sense, infrastructure, health care, all of these kinds of things.  So you want something that overnight we can do, what Hank Paulson's been arguing for a long time. Regulation's a good example.  Our regulation in this country is designed for the world of 50 years ago.  We have separate regulation for different industries, except today those industries all do the same thing.  Also, our regulation isn't consistent with regulation around the world.  And every company, every bank, your job, my job, all our jobs depend on commerce and what happens elsewheres in the world.  And we have to find a ways to, to pull together, in Congress not have all of the different oversight committees, in the executive branch not have all the different agencies, and not just think that we're the only ones that can do this, but pull it all together. Paulson's been talking about it for a long time.  But I think it, Tom, it comes out of this instant gratification.  We all were happy when the stock market was going up, we were all happy when there was all this money sloshing around in the economy, and everybody could get a loan whether they could pay it back or not.  When companies went out and bought other companies and people got great bonuses, it was great.  And nobody wanted to say, "Wait a second, this can't go on forever."  Netcast

• Lawmakers hammering out bailout

Reactions, Posturings and Politicians

Echoes of Iraq in Bush's handling of mortgage 'surge' Fairly or not, some critics say they can't help but see similarities between the Bush administration's hurried approach to the financial market crisis and its headlong plunge into the Iraq war. "You can draw some valid parallels between the prosecution of the war under the Bush regime and the way the financial sector has operated in recent years," said Tom Schlesinger, head of the nonprofit research group Financial Markets Center in Howardsville, Va. "It fails the most basic test of democratic accountability," Schlesinger said. On Tuesday, Washington kicks off the first hearings in which top officials will defend their prescription before lawmakers, who also are compelled by circumstances to take speedy action. Some policy observers point to a "trust us" mentality in the administration's call to obtain sweeping powers that are scant on checks and balances on the executive branch. In addition, the White House is faulted with a failure to raise alarm before the situation spiraled out of control, forcing the mobilization of more troops and untold financial resources.

Administration's rescue plan hits speed bump in Congress The biggest financial bailout in American history hit a speed bump Tuesday on Capitol Hill as members of the Senate began to balk at quick action to pass the measure, saying such a massive proposal requires more careful discussion and consideration. While there was no sense that the plan, authored by Treasury Secretary Henry Paulson, was yet in peril, senators suggested at a hearing with Paulson, Federal Reserve Chairman Ben Bernanke and other top regulatory officials that the measure would not be completed by the end of the week and needed extra provisions. Senate Banking Committee Chairman Christopher Dodd said that the plan "is not going to work" in its current form. Sen. Richard Shelby of Alabama, the panel's top Republican, said the plan "is not going to be just rubber-stamped." Lawmakers grilled the two financial chiefs about the huge package and pressed both of them to include other elements such as aid for homeowners and caps on executive pay. Notes of skepticism crept into the statements of congressional leaders. But many legislators were walking a tightrope -- complaining about the plan while promising to take action. Dodd said the Paulson proposal was "stunning" in its lack of detail. "It would do nothing in my view to let a single family save a home. It would do nothing to stop a CEO from dumping billion dollars of toxic assets on the back of American taxpayers," said Dodd. "It is not just our economy at risk but our Constitution as well," Dodd said, because it would allow Paulson to spend $700 billion "with impunity."

• Paulson’s Testimony on C-Span, Entire Hearing (opening statements are worth listening to; a masterpiece of political theatre, posturing and disingenuousness by one of the principal agents responsible)

Bernanke rides to rescue of Paulson plan The quiet unassuming professor of economics appeared just in time at the crest of the hill and rode to the rescue of the savvy Wall Street tycoon who had his wagons circled in the valley below desperately trying to hold off the opposition. Such was the story line of the extraordinary Senate hearing Tuesday examining the historic $700 billion bailout of financial firms proposed by Treasury Secretary Henry Paulson. Many Congressional hearings are carefully scripted, with both sides prepared well in advance and with the conclusion never in doubt. But other hearings, like this one, contain real drama. The hearing began with Federal Reserve Chairman Ben Bernanke and Paulson forced to listen in stony silence for an hour of withering criticism of the proposal by members of both Republicans and Democrats on the Senate Banking panel. "I haven't had a single phone call in favor of this proposal," announced Sen. Sherrod Brown, Democrat of Ohio. When Sen. Mike Enzi, Republican of Wyoming, vowed that the Paulson proposal would not pass, applause broke out in the audience. Sen. Jim Bunning, Republican of Kentucky, followed up by calling the plan "un-American." When it was the turn for the government officials to speak, Paulson fought back with a tough, take-no-prisoner statement that brought to mind the "the Hammer' nickname that he was given by his colleagues at Goldman Sachs. It didn't play very well with the senators and clearly there was a sense in the room that the plan might be in deeper trouble than expected. But then, Bernanke took the microphone, set aside his prepare remarks, and calmly laid out the benefits of the Paulson proposal in such a way that took the starch out of the opposition. A key point of the critics was that under the plan Treasury must pay more than the market value for the mortgage assets. But Bernanke explained that the mortgage securities have two prices - a "fire-sale price" if the mortgage asset was sold quickly today and a "hold-to-maturity" price if the mortgages were held to maturity. Banks have been paralyzed by this fire-sale price because their precious capital would evaporate overnight. The key to the plan, Bernanke said, was that if Treasury was able to buy the mortgages, it will be able to hold them to maturity. As a result, the fire-sale price could be avoided. This would remove uncertainty, return liquidity, and credit markets should be able to unfreeze, Bernanke said. "This is not an expenditure of $700 billion. This is a purchase of assets. If auctions are done properly...the American taxpayer will get a good value for his or her money and as the economy recovers, most, all, or perhaps more than all, of the value will be recovered over time," Bernanke said. Bernanke warned that the plan was a "pre-condition" for an economic recovery. He said there would be a severe economic downturn with no action. "I believe that if the credit markets are not functioning that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, and the economy will not recover in a healthy way," he said.

• Bernanke’s Testimony on CSpan

Americans Oppose Bailouts, Say Obama Would Best Handle Financial Emergency Americans oppose government rescues of ailing financial companies by a decisive margin, and blame Wall Street and President George W. Bush for the credit crisis. By a margin of 55 percent to 31 percent, Americans say it's not the government's responsibility to bail out private companies with taxpayer dollars, even if their collapse could damage the economy, according to the latest Bloomberg/Los Angeles Times poll. Poll respondents say Democratic presidential nominee Barack Obama would do a better job handling the financial crisis than Republican John McCain, by a margin of 45 percent to 33 percent. Almost half of voters say the Democrat has better ideas to strengthen the economy than his Republican opponent. Six weeks before the presidential election, almost 80 percent of Americans say the U.S. is going in the wrong direction, the biggest percentage since the poll began asking that question in 1991. After market chaos this month drove Lehman Brothers Holdings Inc. into bankruptcy and prompted federal takeovers of American International Group Inc., Fannie Mae and Freddie Mac, most survey respondents said financial companies shouldn't expect taxpayers to rush to the rescue.

Dems seek to slash bailout as Bush readies speech (AP) Democrats won a key concession from the White House on legislation to bail out the financial industry on Wednesday, then sought to scale back the $700 billion price tag. President Bush readied a prime-time speech to rally public support for his plan to stave off a deepening economic crisis. With the administration's original proposal deeply unpopular in Congress, top House leaders issued an upbeat statement at day's end saying that they had made progress toward revised legislation. "We are committed to continuing to work cooperatively and on a bipartisan basis to safeguard the interests of the American taxpayers," said Speaker Nancy Pelosi, D-Calif., and House Republican leader John Boehner of Ohio. But they offered no timetable on a bailout that the administration said was needed more with each passing day. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke spent most of the day in the Capitol, shuttling between public hearings on the proposal and private meetings with lawmakers. Presidential politics intruded, as well, when Republican John McCain said he intended to return to Washington and called on Bush to convene crisis meetings until an agreement was reached on legislation. At the same time, Democrats were asking the Bush administration to dramatically cut the size of the rescue and then come back to Congress later if they need more. Under that plan, which was still emerging, Congress would approve a fraction of what Bush is asking for — perhaps $150 billion or $200 billion — to allow the government to begin rescuing tottering financial companies. Pelosi has privately suggested the idea to Paulson, according to officials who spoke on condition of anonymity because the negotiations are private. Sen. Chuck Schumer, D-N.Y., pressed Paulson on the idea Tuesday and was told it would be a "grave mistake." Rep. Barney Frank, D-Mass., said Wednesday, "Ultimately $700 billion has to be available but ... they are making progress about how to give people some assurance that it is not going to go to $700 billion in one fell swoop." Frank, who as chairman of the Financial Services Committee has taken a lead in the negotiations, said Paulson also "accepts the fact" that the bill will give the government an ownership stake in the companies whose bad debts are taken over, a Democratic goal.

In time of need, can anyone just reassure us? These last few days remind me of that sinking feeling when you first realize your parents don’t have all the answers. Or the contrast between getting your first big-time job at 21 or 22 - when you think the middle managers and bosses know the ropes. Then you become a middle manager and boss yourself, and you’re clueless. You’re flying by the seat of your pants. Making it up as you go along. You’re a great big fraud, actually. You wonder: Were the rest of them great big frauds too? Almost certainly. I fear the same is true of these mad men I saw all over TV yesterday, telling me, with great passion and certainty, that this bailout is either the only way to avoid Armageddon - or the nation’s surest route to wrack and ruin. Some leaders manage to soothe the nation’s soul even when grief is great and new. Most of us remember Ronald Reagan, after the horrible Challenger disaster, going on TV and reading from a poem about astronauts touching “the face of God.” A perfect presidential moment. Presidential historian Doris Kearns Goodwin writes about the need for trust in leaders. She says Franklin Roosevelt’s famous inaugural line - “The only thing we have to fear is fear itself” - convinced Americans that here was a guy who was on the ball. He could see the distant shore. Fast-forward to 2008. Would-be vice president Joe Biden went on TV and said, “When the stock market crashed, Franklin D. Roosevelt got on the television and didn’t just talk about, you know, the princes of greed.” Oh my God - Joe Biden thinks there were TVs in ’29, when FDR was not yet elected. Sarah Palin can see Russia out her back door. Johh McCain says the economy’s not his strong suit. Obama claims he knows what to do. But he won’t tell us. Both still talk about their respective tax-cut plans when a $700 billion bailout means about $2,300 for every man, woman and child in America. So, will my “tax cut” mean a few hundred knocked off my bailout fee? I regret to say our deer-in-the-headlights President Bush did nothing to calm my nerves last night.

Blame Game Begins as Bailout Proposal Fizzles Congressional Democratic leaders wasted no time pointing the blame at House Republicans and in particular Republican presidential candidate John McCain after a tentative deal on the $700 billion financial sector bailout proposal blew up following an afternoon meeting at the White House.  “I would suggest that anyone in that meeting who tried to understand what John McCain said at that meeting, couldn’t,” Senate Majority Leader Harry Reid of Nevada told reporters Thursday evening. McCain suspended his campaign to return to Washington D.C. to take part in negotiations on the bailout. Barack Obama also returned after President Bush requested he attend today’s meeting. Reid suggested McCain’s return injected politics in to the negotiations. McCain was the last one to speak at the White House meeting, Reid said, and he “didn’t say anything substantive.”

“John McCain did nothing to help, he only hurt the process,” Reid said, further chastising McCain for calling for a delay in Friday’s presidential debate in Mississippi. “We should not let this little effort to avoid participating in the debates sidetrack this most important issue,” Reid said. Growing resistance among House Republicans played a greater role in stalling negotiations, as a faction of GOP lawmakers released principles for a competing bailout proposal as it became increasingly clear that the tentative agreement did not have broad support in the House Republican Conference. One House Republican aide estimated that no more than 45 House Republicans would support the current proposal. Key negotiators expressed surprise at the counter proposal. Reid said he was “stunned” by House Minority Leader John Boehner of Ohio who had previously expressed his support for passing a bipartisan plan.

House Republicans Undercut Bush on Financial-Rescue Plan, Stalling Talks  Republicans splintered over the proposed $700 billion rescue of the U.S. financial system, imperiling an agreement hours after a bipartisan group of negotiators and the White House said one was near. Lawmakers were meeting again today in Washington after some House Republicans, led by Virginia's Eric Cantor, said they wouldn't back a plan based on Treasury Secretary Henry Paulson's approach. A top Senate Republican said he is willing to delay any bailout package, and let markets open next week without a relief package in place. ``We need to get back to the drawing board,'' Alabama Senator Richard Shelby, the top Republican on the Senate Banking Committee, said in an interview. ``We need to consider this in a deliberate, linear fashion.'' The stalemate came after an unprecedented meeting at the White House with President George W. Bush, presidential nominees Republican John McCain and Democrat Barack Obama, congressional leaders and Cabinet officers.The setback unnerved investors, coming after the government closed Washington Mutual Inc., the largest U.S. savings-and-loan institution. Standard & Poor's 500 stock index futures declined 1.3 percent in European trading and the yield on the two-year Treasury note fell 12 basis points to 2.04 percent, just above the Federal Reserve's target rate.

Posted by dblwyo at 09:22 AM | Permalink | Comments (2)

Well it's been a tumultuous couple of weeks and it bodes well to get worse before it gets better. The bad news is that it's not the beginning of the end, it's not even the end of the beginning. The worse news is that this is JUST breakdowns in the market mechanisms and not the real economic downturn that's still emergin. But the worst news is that in our search for the guilty parties we're in the process of repeating the simple solutions and wishful thinking that created the crisis in the first place and nobody is stepping up to the plate to admit it. There are two pieces of really good news however. The first of which is that the folks in charge, who have to be unbelievably stressed, sleep-deprived and over-criticized, are very sharp, extremely knowledgeable and have big brass cojones as well as a pronounced tolerance for idiots complaining about the problems the idiots created. The really good news is that we seem incapable of addressing major problems based on warnings until the pain reaches crisis proportions and then we start trying to do something. The real struggle here is to something right in both short- and long-terms. Now this isn't our normal or preferred Su. morning sort of posting but with everything going on it seemed appropriate. So let's dig in.

Welcome to Metastatic Contagion

Unfortunately it's not clear that many grasp how close to financial Armageddon we came this past week (a more technical discussion is Back to Stalingrad: Containing the Contagion, Moving Forward ?) so we're going to start with scaring you to death, then focus on the collapse of the Frannie Twins and the historical roots, and current finger-pointing before we can get to looking at the paths forward. Two weeks ago saw the takeover of the Frannies, this week saw the bankruptcy of Lehman, the sale of Merill and the "nationalization" of AIG. Obviously creeping socialism. In all the arm-waving people missed the fact that in addition there was a huge worldwide injection by the world's Central Banks of credit to counter-balance all this and it didn't work. US Treasuries collapsed to zero this last week as everybody in the world fled other credit and equity investments for the safest thing they knew of it. When that happens credit stops flowing and the wheels of the economy grind to a halt. This would be kind of like the situation in Dune where Muad Dib threatens to destroy the spice and then does it. If the spice doesn't flow we all die. The chart is probably a little technical but you get the point about the implosion. Let's try and put it in a different context with this little excerpt from the 1995 movie Contagion.

The real problem is that the case by case approach, which worked for Bear Sterns, appeared to work for Frannie and then all of a sudden - and we mean in 24 hours sudden - it didn't. Stop and think about that. The world that's had a constant and stable institutional framework since the regulatory innovations of the 1930s almost blew up in everybody's faces. Fortunately the guys in the control didn't expect this exact thing but were prepared for some such crisis and managed keep the wheels on our little red wagons. Metastasis is such a dry and academic word. When we say systemic we mean that all of a sudden everything's breaking down all at once. The contagion map from the movie is a pretty good depiction of what happens when the sandpile of slowly accumulating stupidities reaches the point of collapse.

After the break there's a large collection of readings that start with background on specific instances and background - the vidclip on Does market hinge on AIG? is the best simple discussion we've found. Then there's a section on the broader implications for the economy, i.e. your lives and livelihoods and the future ripples of these problems. Next is some historical background on the Frannie Twins and how we got into this mess. This is really important btw - we all rode this gravy train up because we all benefited by letting these guys run amok despite years and years of warnings and attempts to do something about it. In this case even the Bush administration was clearly on the sides of the angels and was stopped by the lobbying prowess of agencies run amok. Worse many of the politicians now pointing fingers at others were the central legislative policy makers responsible for letting them escape adult supervision. So as all the blame-waving goes on remember that. In fact one of the saddest, funniest and most disgusting excerpts is the story on Th. night's emergency briefing to Congress on the crisis where they were shocked, just shocked to hear how serious it is. Despite being 18 months into a situation they'd been warned about, literally, for years if not decades. Finally there's two sections on strategies to start addressing these problems and the political reactions therein. It seems for example that Congress's noses are out of joint because Bernanke and Paulson didn't kowtow to them properly when taking out AIG. Stop and think about that - if your congress critters had had their ways we'd still be debating this and the markets would have collapsed with the economy lined up right behind it.

Let's Make the Same Mistakes All Over Again

Our last post, building on long-running themes, focused on three major crisis facing us (911 and the WOT, Energy and the economy) and traced their roots back to wishful thinking. populist panderings and  delusions. We're in the process in this crisis of repeating all those errors in reverse with a lot of wrong-headed labels being thrown around and looking for blamees instead of focusing on fixing the problem. For example the word socialism is getting a heavy workout along with the argument that this is socialism for the rich and victimization for the rest of us. There are so many things wrong with that one doesn't know where to begin. When the school is burning down first let the students out don't stop to check them for proper religious atire at the expense of their lives. Second nobody's getting bailed out here - the stockholders of BSC for example got wiped out as did those of Lehman and AIG. The evil Hank Greenberg,who did lay the foundations for his company's demise, lost $14B in one day. And there are thousands of jobs gone and families at risk as the result of all this. Nor are the rest of these moves bailouts either. We're buying bad assets at mils ( = $.0001) on the dollar hopefully and even if all we get is pennies it's still a return. Not to mention - who cares ? If we keep the economy from collapsing we're all well repaid. Criticizing the dancing bear for bad dancing ignores the miracle that he's dancing at all. NOT a good idea.

Thirdly we all benefit from these shennanigans - the economy was held together these last years by housing related spending which was based on mortgage securities. If your house went up in value, if you made money off of your pension plan, if you kept your job, if you got a raise you benefited from this one way or another. If you want to see and read some reflections on how to go about reforming regulation and some general principles download, read and share Notes and Reflections on Regulatory Reform:, something we put together back around '01 when the Enron/Wcom, et.al. blowups happened after earlier regulatory reform errors.

 Cutting the Gordian Knot

What we need now is to support the guys on the front lines while they put out the fire and for our political leadership to something sensible this time instead of something that makes us feel good. We may greatly enjoy watching the witches being burned for causing the plague but that effort would be better spent in treating people and finding a cure. Let me give you a simple test here.

As we've been saying the economy will be the most important issue in this election, trumping though not excluding, national security and foreign affairs. It is the sine qua non, that without which there is no other, of all the issues facing us. Get it right and we can afford to deal with the ME and Energy and Russia and Education and Healthcare and....Get it wrong and we'll all be freezing in the dark while slowly starving to death.

Now this is extremely complicated and hard to sort out. We do our best but it's almost impossible to compress it down let alone to simplicities. And so many people want to find so many simple but wrong-headed solutions, burn the witches, feel better and ignore the contagion. So here's the test.

Support the candidate, leadership and solutions that are constructive on balance. Don't support somebody who spends their time on complaining, laying blame, giving you simple solutions and not admitting this is a painful, complex mess. And support the person who's showing the most willingness to work with whomever can help, across whatever lines.

Now that's a simple decision-making rule that give you sharp sword to cut thru the know of all these technicalities, complexities, deceptions and self-serving declarations.

1. We are in a mess.

2. It can be fixed but not simple, easily or quickly.

3. The pain will go on for sometime and get worse before it gets better.

4. Pain now is the smaller price for avoiding huge pain later.

5. We can afford these fixes and don't care because the alternatives cost many times as much.

There, how's that for boiled down ? 

The Hurricane Arrives

Americans Are Certain Lehman Is Bad News, Just Not Sure It's Bad for Them Linda Burke, 57, a customer service consultant with AT&T Inc. in Atlanta, said she figured her retirement savings would take a hit and added that she was angry, though she wasn't sure at whom. ``If I knew more,'' she said, ``I could find someone to blame.'' Lehman's bankruptcy filing, the biggest in U.S. history, followed Merrill Lynch & Co.'s decision over the weekend to sell itself to Bank of America Corp. Last week, the U.S. government took over Fannie Mae and Freddie Mac, the mortgage finance companies. Six months before that was the forced sale, backed by the government, of Bear Stearns Cos. to JPMorgan Chase & Co. The reshaping of the U.S. financial industry is bewildering to ``folks who don't live and breathe this stuff,'' said Jim Behrens, president of Ralls County State Bank in New London, Missouri. Now ``people are paying attention.'' And they'll feel the ripple effects from what's happening on Wall Street, if they haven't already, said Bill Cockrum, a professor of finance and entrepreneurship at the U.C.L.A. Anderson School of Management in Los Angeles. Because of the credit crunch, ``banks are becoming more conservative,'' he said. ``For the man on the street, that means money and favorable terms are harder to get.''

• Interactive Timeline: How a Market Crisis Unfolded
• A Year of Losses

Why AIG matters Credit ratings companies Standard & Poor's, Moody's Investors Service and Fitch Ratings all downgraded AIG shares after the close of trading Monday, leaving the insurer scrambling to find capital and stave off insolvency. While that move sent shudders through the markets once more on Tuesday, an outsider could be forgiven for asking why an insurance company is so critical to the financial markets. The problem is that AIG has been selling insurance against the very calamity that is now engulfing the markets. Some of that insurance took the form of credit-default swaps on mortgage-based securities, a transaction in which AIG basically guaranteed the income stream from the mortgage securities. (That isn't the company's only exposure, but it is an important one.) In the event of a substantial default, AIG is obligated to pay the buyers of the swaps. "If AIG is not resolved (Tuesday) morning, then when do we stop this?" Paul Mendelsohn, chief investment strategist at Windham Financial Services, told MarketWatch.com. "The assets they would have to shed are mind-boggling. We can't let this thing fail. They take everything with it."

• Does market hinge on AIG?

AIG Bailout: $85B in Loans, 80% AIG Taxpayer Owned Here are 4 items regarding the AIG bailout that are worth thinking about: 1) AIG is the world's biggest insurer. AN uncontrolled bankruptcy would have dramatically exacerbated the current recession -- possibly turning it into a depression; 2) The NY based firm was also a huge Credit Default Swap insurer/underwriter. The tems of CDS require collateral to be posted, depending upon such factors as credit rating and credit spreads;As home prices fell, spreads widened, and companies went down, AIG's collateral requirements went up significantly. 3) Hence, this is more of a liquidity problem than an actual insolvency. This is the first bailout that adhered to Walter Bagehot's dictum "Central Banks should lend freely at a penalty rate;"  4) Moral Hazard, successfully avoided in the Lehman Brothers bankruptcy, was put aside given the massive size of AIG -- if any firm was TBTF -- too big to fail --  it is AIG. Here's a few excerpts from major media -- WSJ:

That the government would prop up AIG financially offers a stark indication of the breadth of the insurer's role in the global economy. If it were to have trouble meeting its obligations, the potential domino effect could reach around the world.For one thing, banks and mutual funds are major holders off AIG's debt and could take a hit if the insurer were to default. In addition, AIG was a major seller of "credit-default swaps," essentially, insurance against default on assets tied to corporate debt and mortgage securities. Weakness at AIG could force financial institutions in the U.S., Europe and Asia that bought these swaps to take write-downs or losses. AIG's millions of insurance policyholders appear to be considerably less at risk. That's because of how the company is structured and regulated. Its insurance policies are issued by separate subsidiaries of AIG, highly regulated units that have assets available to pay claims. In the U.S., those assets can't be shifted out of the subsidiaries without regulatory approval, and insurance is also regulated strictly abroad.

• The Importance of A.I.G.
• The Impact on Investors

How Wall Street Sold Out America - If you're having a little trouble coping with what seems to be the complete unraveling of the world's financial system, you needn't feel bad about yourself. It's horribly confusing, not to say terrifying; even people like us, with a combined 65 years of writing about business, have never seen anything like what's going on. Some of the smartest, savviest people we know — like the folks running the U.S. Treasury and the Federal Reserve Board — find themselves reacting to problems rather than getting ahead of them. It's terra incognita, a place no one expected to visit. If you're having a little trouble coping with what seems to be the complete unraveling of the world's financial system, you needn't feel bad about yourself. It's horribly confusing, not to say terrifying; even people like us, with a combined 65 years of writing about business, have never seen anything like what's going on. Some of the smartest, savviest people we know — like the folks running the U.S. Treasury and the Federal Reserve Board — find themselves reacting to problems rather than getting ahead of them. It's terra incognita, a place no one expected to visit. Now, though, we're seeing the downside of this financial internationalization. Many of the mortgages and mortgage securities owned or guaranteed by Fannie Mae and Freddie Mac were bought by foreign central banks, which wanted to own dollar-based securities that carried slightly higher interest rates than boring old U.S. Treasury securities. A big reason the Fed and Treasury felt compelled to bail out Fannie and Freddie was the fear that if they didn't, foreigners wouldn't continue funding our trade and federal-budget deficits. There's no question that the crisis has gone so deep that it cannot be halted by one stroke. Banks and other financial companies around the globe are struggling to pull themselves out of this mess. Rebuilding will take time, vast amounts of money and constant attention. Sooner or later, the hundreds of billions (or trillions) of dollars that the Fed and other central bankers are throwing into the markets will stabilize things. Sooner or later, housing prices will stop falling because no financial trend continues forever. The next President will have to cast away partisan predispositions and add the just-right measure of regulation and oversight to the mix. As Treasury Secretary (and former Goldman Sachs chief executive) Paulson recently said, "Raw capitalism is dead." Whatever the politicians do, we as a society are going to be poorer than we were. We've lost credibility with foreigners; they will be less likely than before to lend us endless amounts of cheap money. Will that ultimately lead to higher borrowing costs? It's hard to see how it won't. Coping in this new world will require adjustments by millions of Americans. We all will have to start living within our means — or preferably below them. If you don't overborrow or overspend, you're far less vulnerable to whatever problems the financial system may have. And remember one other thing: the four most dangerous words in the world for your financial health are "This time, it's different." It's never different. It's always the same, but with bigger numbers.

The Consequences

What does the 500 point meltdown mean for business? What yesterday's 500 point implosion means, is Wall Street is slowly coming around to the notion that the US is in the midst of a nasty recession. (Finally!)  Because yesterday was merely the realization of losses that had already occurred. This is first and foremost a consumer recession. And a very nasty one at that. This does impact business, but not directly and not right away. Obviously any business that sells directly to the consumer is hurt. Thousands of storesare closing this year, and if you sell anything related to housing or autos you're hip deep in it. But plenty of businesses sell to other business, so they are only impacted via the daisy chain of relationships, and at some point there is a business that is touching the consumer. Banks have tightened credit and in some cases have raised rates, but again this primarily hits the consumer.   Most businesses are too scared to be aggressively expanding their business, and inventory is shrinking, so most don't need to be borrowing. If I was a business owner, I would worry about taxes and inflation. Prices are out of control, and if you can't raise your prices your margins are being pinched.

Economy to Vex Next President The next U.S. president will be confronted with slow growth, high unemployment and an economy teetering toward recession, say 51 private economists surveyed by The Wall Street Journal. If they are correct, pumping up the economy will the first challenge facing either Democrat Barack Obama or Republican John McCain. That is likely to place tax cuts and government spending high on Washington's agenda, and push back costly measures such as reforming health care and fighting global warming. The Wall Street Journal's latest monthly survey paints a gloomy picture of the outlook through the first half of 2009. The economy is on course to post four straight quarters of annualized economic growth below 2%, the longest stretch of subpar growth since the 2001 recession. The respondents saw a 60% chance of an outright recession, expect the economy to shed 19,000 jobs a month for a year, and say the jobless rate, which jumped in August to 6.1%, will keep rising, to 6.4% by midyear, passing the 6.3% seen after the last recession. The worst stretch will be the next few months, the economists say, coming as elections shift into high gear. Annualized growth in the gross domestic product is projected at 0.7% in the fourth quarter. A few months ago, forecasters thought the economy would be growing at a much faster clip by then. By inauguration day, Jan. 20, the situation won't have improved much, they say. Growth in the first quarter is projected at a 1.3% annual rate.

Some History on Frannie

New Agency Proposed to Oversee Freddie Mac and Fannie Mae The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago. Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry. The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios. The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates. ''There is a general recognition that the supervisory system for housing-related government-sponsored enterprises neither has the tools, nor the stature, to deal effectively with the current size, complexity and importance of these enterprises,'' Treasury Secretary John W. Snow told the House Financial Services Committee in an appearance with Housing Secretary Mel Martinez, who also backed the plan.

White House warns of GSE risks The notion that the U.S. government would bail out Fannie Mae and Freddie Mac if they ran into financial trouble "creates a source of systemic risk for our financial system," a top White House economic adviser warned Thursday. Fannie Mae and Freddie Mac, government-sponsored enterprises created by Congress to help fund home mortgages, enjoy special privileges, such as lines of credit with the Treasury Department. Those special privileges "feed market perceptions that GSE debt has the backing of the U.S. government," said Gregory Mankiw, chairman of the administration's Council of Economic Advisers. "This notion is inaccurate." Read Mankiw's remarks. Fannie Mae spokesman Chuck Greener disagreed with the administration's assertions about the implicit government guarantee. "This is a question that has been asked and answered many times before, and in our view, has been refuted definitively by policymakers and economic experts," he said.

Sponsoring Recklessness Fannie and Freddie are the duck-billed platypuses of the financial world. They’re profit-driven corporations, owned by shareholders and, in theory, beholden only to them. But they’re also so-called “government-sponsored enterprises,” set up by the state with the explicit mission of fostering homeownership, by buying and selling home mortgages. The G.S.E.s are curious, because there’s no obvious reason for them to exist in the form they do: instead of creating private companies to do all these jobs, the government could just do them itself. In fact, that’s how Fannie Mae got started, back in 1938: originally, it was a government agency endowed with the authority to buy mortgages, in the hope that this would expand the supply of credit to homeowners. It wasn’t until 1968 that Fannie was privatized. (Freddie Mac was created two years later, and was private from the start.) The main reason for the change was surprisingly mundane: accounting. At the time, Lyndon Johnson was concerned about the effect of the Vietnam War on the federal budget. Making Fannie Mae private moved its liabilities off the government’s books, even if, as the recent crisis made clear, the U.S. was still responsible for those debts. It was a bit like what Enron did thirty years later, when it used “special-purpose entities” to move liabilities off its balance sheet. (Regulators might have reined the companies in, but, thanks in part to ardent lobbying by Fannie and Freddie, Congress failed to provide them with sufficient power to do so.) The result of all this was that the companies reaped the rewards of the private sector while enjoying the security of the public sector. Seemingly insulated from all harm, they became reckless. They constructed a giant pyramid of debt on a very small base of capital (eighty-one billion dollars, by the most recent publicly available figures), and by May, 2008, either owned or guaranteed more than five trillion dollars in mortgages. As a result, even though just a small percentage of Fannie’s and Freddie’s mortgages are delinquent, the potential losses are huge. That’s why, in recent weeks, investors finally lost faith in them.

Where Was Sen. Dodd? Taxpayers face a tab of as much as $200 billion for a government takeover of Fannie Mae and Freddie Mac, the formerly semi-autonomous mortgage finance clearinghouses. And Sen. Christopher Dodd, the Democratic chairman of the Senate Banking Committee, has the gall to ask in a Bloomberg Television interview: "I have a lot of questions about where was the administration over the last eight years." We will save the senator some trouble. Here is what we saw firsthand at the White House from late 2002 through 2007: Starting in 2002, White House and Treasury Department economic policy staffers, with support from then-Chief of Staff Andy Card, began to press for meaningful reforms of Fannie, Freddie and other government-sponsored enterprises (GSEs). The crux of their concern was this: Investors believed that the GSEs were government-backed, so shouldn't the GSEs also be subject to meaningful government supervision? During this period, Sen. Richard Shelby led a small group of legislators favoring reform, including fellow Republican Sens. John Sununu, Chuck Hagel and Elizabeth Dole. Meanwhile, Dodd -- who along with Democratic Sens. John Kerry, Barack Obama and Hillary Clinton were the top four recipients of Fannie and Freddie campaign contributions from 1988 to 2008 -- actively opposed such measures and further weakened existing regulation. How did Fannie and Freddie counter such efforts? They flooded Washington with lobbying dollars, doled out tens of thousands in political contributions and put offices in key congressional districts. Not surprisingly, these efforts worked. Leaders in Congress did not just balk at proposals to rein in Fannie and Freddie. They mocked the proposals as unserious and unnecessary. Rep. Barney Frank (D-Mass.) said the following on Sept. 11, 2003: "We see entities that are fundamentally sound financially. . . . And even if there were a problem, the federal government doesn't bail them out." Sen. Thomas Carper (D-Del.), later that year: "If it ain't broke, don't fix it." As recently as last summer, when housing prices had clearly peaked and the mortgage market had started to seize up, Dodd called on Bush to "immediately reconsider his ill-advised" reform proposals. Frank, now chairman of the House Financial Services Committee, said that the president's suggestion for a strong, independent regulator of Fannie and Freddie was "inane." Sen. Dodd wonders what the Bush administration did to address the risks of Fannie and Freddie. Now, he knows. The real question is: Where was he?

Political Reactions

McCain Calls Wall Street Reckless, Obama Criticizes McCain Economic Policy Republican presidential nominee John McCain lashed out at ``reckless'' investments by Wall Street as his Democratic rival, Barack Obama, tied the crisis in U.S. financial markets to policies McCain supports. McCain struck a strongly populist tone, blaming greed and corruption for putting American workers and the economy at risk. ``Too many people on Wall Street have been recklessly wagering instead of making the sound investments we expected of them,'' McCain told a crowd today in Tampa, Florida. ``If I am president, we are not going to tolerate that anymore.'' In Golden, Colorado, Obama said McCain's ``newfound support for regulation'' belied a record of backing deregulation and support for the economic philosophy of President George W. Bush's administration. ``Make no mistake: My opponent is running for four more years of policies that will throw the economy further out of balance,'' Obama said. Both candidates are using the financial woes to play up their campaign themes. McCain stresses his ``maverick'' tag and says that he will take on the establishment; Obama says he is the agent of change and paints McCain, who has spent 26 years in Washington, as part of the status quo. While McCain focused his attention on Wall Street traders and corporate officers, Obama but the blame on lax regulation and spent much of his speech tying McCain to the crisis. A day after McCain promised to ``clean up Wall Street'' and ``replace the outdated, patchwork quilt of regulatory oversight,'' Obama referred to a March Wall Street Journal interview in which McCain said, ``I'm always for less regulation.'' The Illinois senator again criticized McCain for saying yesterday that ``the fundamentals of our economy are strong'' as Lehman Brothers failed and stocks plummeted. Obama also noted that he started calling for stiffer rules more than a year ago.

• Obama Says Wall Street Regulation Must `Catch Up' With Changes in Markets
• McCain Says Government Shouldn't Bail Out AIG, Backs Commission on Crisis

McCain Condemns `Lax' Rules, Fed Bailouts as Obama Backs Bush Economy Plan John McCain condemned ``lax'' regulation and urged the Federal Reserve to ``get out of the business of bailouts,'' as his Democratic presidential rival Barack Obama supported Bush administration plans to resolve the worst U.S. financial crisis since the Great Depression. While backing efforts by the Fed and the U.S. Treasury to ease turmoil on Wall Street, Obama said he will hold off on crafting his own plan. Obama, who consulted today with top economic advisers, including billionaire investor Warren Buffett, is urging Democrats and Republicans to work out a proposal that protects working Americans. ``We can't only have a plan for Wall Street,'' Obama said following his meeting today in Coral Gables, Florida. ``We must also help Main Street.'' Obama gained in the polls this week as the global financial crisis cost investors more than $3 trillion in market value and the focus of the presidential campaign shifted to the economy. McCain, speaking today in Green Bay, Wisconsin, criticized regulators who, he said, have been ``egregiously lax'' in protecting the American public. `The Federal Reserve should get back to its core business of responsibly managing our money supply and inflation,'' he said. That would lead to a strong dollar, to reduced energy and food prices ``and get this economy moving again,'' he said.

Congressional Leaders Stunned by Warnings It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first. Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.“When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York. As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.” Mr. Schumer added, “History was sort of hanging over it, like this was a moment.” When Mr. Schumer described the meeting as “somber,” Mr. Dodd cut in. “Somber doesn’t begin to justify the words,” he said. “We have never heard language like this.” “What you heard last evening,” he added, “is one of those rare moments, certainly rare in my experience here, is Democrats and Republicans deciding we need to work together quickly.”

Assessments and Re-Engineerings

Comment on Crisis: Necessary Steps  With the DOW off over 500 points yesterday, Lehman in bankruptcy, the Fed rescuing A.I.G. tonight, the viability of WaMu and others institutions in doubt, Fannie and Freddie placed in conservatorship, a major money market fund halting redemptions, it might seem like the credit crisis is spiraling out of control. And there are definitely more problems to come. Many banks will fail - especially small and regional banks with excessive concentrations in construction & development (C&D) and commercial real estate (CRE) loans. And the recession is getting worse with rising unemployment, declining personal consumption expenditures, declining industrial production and falling business investment. Economies of many other countries are in or close to recession. The Fed even cautioned on slowing U.S. exports today for the first time. Foreign stock markets are crashing: the Russian stock market was halted today after declining 17%. The Shanghai composite index is off about 2/3 from the peak.The situation appears grim. This crisis might have first become visible to Wall Street and the Federal Government in August 2007, but this crisis has been unavoidable for several years. If action had been taken in 2004 or 2005 to curtail the loose lending practices, the problem wouldn’t be so severe, but the crisis would have still occurred. The damage had already been done. Unfortunately the U.S. failed to prevent this crisis, and now we have no choice but to pay the price for the cleanup. The good news is the U.S. is finally taking the necessary steps towards eventually resolving the crisis. Clearly we are closer to the eventual bottom today, than say in 2005 when very few people believed a housing bust and credit crunch were on the horizon. Unfortunately the bottom still isn’t in sight. There will be more grim news, perhaps for another year or more. And there is definitely some possibility of a systemic financial collapse (see Professor Roubini’s excellent discussion of the downside risks). But unlike observers that believe this only marks the end of the beginning, I believe there is a chance that these events mark the beginning of the end of the crisis.

Crisis Endgame The story so far: the real shock after the feds failed to bail out Lehman Brothers wasn’t the plunge in the Dow, it was the reaction of the credit markets. Basically, lenders went on strike: U.S. government debt, which is still perceived as the safest of all investments — if the government goes bust, what is anything else worth? — was snapped up even though it paid essentially nothing, while would-be private borrowers were frozen out. Thus, banks are normally able to borrow from each other at rates just slightly above the interest rate on U.S. Treasury bills. But Thursday morning, the average interest rate on three-month interbank borrowing was 3.2 percent, while the interest rate on the corresponding Treasuries was 0.05 percent. No, that’s not a misprint. This flight to safety has cut off credit to many businesses, including major players in the financial industry — and that, in turn, is setting us up for more big failures and further panic. It’s also depressing business spending, a bad thing as signs gather that the economic slump is deepening. And the Federal Reserve, which normally takes the lead in fighting recessions, can’t do much this time because the standard tools of monetary policy have lost their grip. And there’s a lesson there for those ready to hear it: government takeovers may be the only way to get the financial system working again. Some people have been making that argument for some time. Most recently, Paul Volcker, the former Fed chairman, and two other veterans of past financial crises published an op-ed in The Wall Street Journal declaring that the only way to avoid “the mother of all credit contractions” is to create a new government agency to “buy up the troubled paper” — that is, to have taxpayers take over the bad assets created by the bursting of the housing and credit bubbles. Coming from Mr. Volcker, that proposal has serious credibility.

U.S. Poised for Bigger Role  Federal officials are looking at how to tighten regulation of the credit-card industry and whether to double prospective loans to bail out the auto industry to $50 billion. In the coming years, they will examine how to regulate greenhouse-gas emissions from industries across the economy and how to remake the mortgage giants so they no longer can run up enough debt to threaten the economy. The latter could involve creating yet another government entity to carve up Freddie's and Fannie's assets and sell them to investors. The year-old financial crisis has bolstered the role of the government in markets. Beyond staging outright rescues, the Federal Reserve is scrutinizing the capital and liquidity positions of investment banks, reconsidering rules for vast but obscure parts of money markets and derivatives markets, and acting as backstop to a huge swath of Wall Street's day-to-day trading. Treasury officials are pushing banks to build new markets, such as so-called covered bonds, which are popular as mortgage financing in Europe. The struggle between market forces and government control is as old as the country. Alexander Hamilton and Thomas Jefferson squared off over the role of the government in promoting early industry. For two decades after Ronald Reagan's election in 1980, markets were clearly in the ascendancy. Even the savings-and-loan collapse of the 1980s, in which the government spent $125 billion seizing failed S&L's and selling off their loans, didn't shake the widespread conviction that market forces should be lightly restrained, if at all.

• Jesse Eisinger on Deregulation and Credit Crisis

The Post-Lehman World The current financial turmoil marks the end of the era of wide-open global capitalism. Today’s gigantic government acquisitions signal a new political era, with more federal activism and tighter regulations. This observation is then followed by a string of ethereal gottas and shoulds. We gotta have smart regulation that offers security but doesn’t stifle innovation. We gotta have rules that inhibit reckless gambling without squelching sensible risk-taking. We should limit excesses during booms and head off liquidations when things go bad. It all sounds great (like buying a house with no money down), but do you mind if I do a little due diligence? In the first place, the idea that our problems stem from light regulation and could be solved by more regulation doesn’t fit all the facts. The current financial crisis is centered around highly regulated investment banks, while lightly regulated hedge funds are not doing so badly. Two of the biggest miscreants were Fannie Mae and Freddie Mac, which, in theory, “were probably the world’s most heavily supervised financial institutions,” according to Jonathan Kay of The Financial Times. In other words, maybe there is something more going on here than just a bunch of laissez-faire regulators asleep at the wheel. But even if it is true that we need more federal activism, I’m a little curious about what we’re going to need to make the system work. Surely, we’re going to need lawmakers who understand what caused the current meltdown and who can design rules to make sure it doesn’t happen again. And yet there’s no consensus about what caused this bubble. Some people blame the Fed’s monetary policies, but some say the Fed had only a marginal effect. Some argue a flood of foreign investment allowed us to live beyond our means, while others say bad accounting regulations after Enron created a chain reaction of losses. We don’t even have a clear explanation about the past, yet we’re also going to need regulators who understand the present and can diagnose the future. This doesn’t mean there’s nothing to be done. Martin Wolf suggests countercyclical capital requirements. Everybody seems to be for some updated version of the Resolution Trust Corporation, though disposing of complex debt securities has got to be more difficult than disposing of commercial real estate. It’s just that there’s a big difference between dreaming of some ideal regulatory regime and actually putting one into practice. Everybody says we’re about to enter a new political era, rich in global financial regulation. The herd might just be wrong once again.

Resurrect the Resolution Trust Corp. We are in the midst of the worst financial turmoil since the Great Depression. Absent bold action, matters could well get worse. Neither the markets nor the ordinary diet of regulatory orders, bank examinations, rating downgrades and investigations can do the job. Extraordinary emergency actions by the Federal Reserve and the Treasury to date, while necessary, are also insufficient to resolve the crisis. Fannie Mae and Freddie Mac, the giants in the mortgage market, are overextended and now under new government protection. They are not in sufficiently robust shape to meet all the market's needs.The fact is that the financial system needs basic, long-term reform, but right now the system is clogged with enormous amounts of toxic real-estate paper that will not repay according to its terms. This paper, in turn, is unable to support huge quantities of structured financial instruments, levered as much as 30 times. Until there is a new mechanism in place to remove this decaying tissue from the system, the infection will spread, confidence will deteriorate further, and we will have to live through the mother of all credit contractions. This contraction will undercut the financial system, and with it, the broader economy that so far has held up reasonably well.There is something we can do to resolve the problem. We should move decisively to create a new, temporary resolution mechanism. 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. Such a stabilizing mechanism would accomplish four much-needed tasks:

Resolution Trust Plan Is Floated Staring down the worst financial crisis in decades, U.S. lawmakers are strongly considering whether they need to dust off a 1980s-era plan to help save the banking industry and stabilize the economy more broadly. Both Democrats and Republicans have shown interest over the past two days in the idea of creating a government corporation to help deal with the toxic assets that have already brought down financial behemoths Bear Stearns Cos. and Lehman Bros., and forced the government to take over Fannie Mae and Freddie Mac.

Notes and Reflections on Regulatory Reform: Earlier this year (2001/2003), particularly in spring to summer, there looked to be a major sea change developing in the general market regulatory regimes. However the push for improved regulation has died down or been subsumed by other pressures. As well as what appears to be some very clever political maneuvering. Part of the decreased interest lies in everybody being overwhelmed by the magnitudes and quantities of the shocks and malfeasance. People appear to simply be too tired to continue to pursue things. Another part of it has to do with the still-born attempts are ‘re-regulation’. For example the Oxley-Sarbanes bill, the SEC reform, the Accounting Standards board, and Spitzer’s efforts. Most of these are rapidly amounting to little or less. However the roots of the changes in regulation go back much farther. Most of the major efforts, e.g. Telecom, Energy, Accounting, the split between banking and finance, that have ‘failed’ so miserably this last two years can be traced back to legislative efforts in the early to mid-90s. And many of the legislators now clamoring for new reforms were part of the charge then. And so benefited. Much of the impetus for further de-regulation are rooted in a belief in the efficacy of pure markets that were and are part and parcel of the ideology of the ‘anti-government’ revolts of the 80s. Yet another example of pendulum swings. As more and more taxes were collected and appeared to do less and less the need to reduce the size of government was increased. As a result we’ve hamstrung fiscal policy. But then, at the time, some cutbacks were required. We tested to it’s limits the concept that blind government spending would lead to major changes contrary to the way things actually worked. As the pendulum has swung back however we’ve potentially thrown the baby out with the bath water because certain kinds of regulation are essential, e.g. legal systems and private property. And very few modern markets and industries are in fact purely competitive; rather their structures are such as to require some regulation, e.g. monopolies and/or oligopolies. And there is also the issue of public welfare thru standards, e.g. pollution, etc. Having thrown the baby out with the bathwater we have two sets of economic problems. First, in the short-run the level of trust and credibility in large enterprises is extremely low. As a result the willingness of the market, i.e. the majority of investors, to get back in is going to depend on the quality of their earnings; and if they continue to think the books will be cooked they will continue to be reluctant. Second, we’ve now tested the limits of regulatory regimes on the other side and found them wanting. So the question is what level of regulation is required for different situations and what’s the best mechanism for achieving our goals.

Same ‘ol, Same ‘ol

Bernanke's Relations With Congress Become Rocky in Wake of AIG Deal For one day at least in this politically-charged election season, Democrats and Republicans on Capitol Hill appear to have buried the hatchet. Right into Ben Bernanke. In the wake of the Federal Reserve's bailout of insurance giant American International Group Inc., Mr. Bernanke's standing with Congress seems rockier than at has been in his two-and-a-half year tenure as Fed chairman. "Why does one person have the right to grant $85 billion in a bailout without the scrutiny and transparency the American people deserve," asked House Speaker Nancy Pelosi (D., Calif) a reference to the loan the Fed gave AIG with the Treasury's blessing. Until recently, that would have seemed like a lonely rant as lawmakers heaped praise on Mr. Bernanke for his aggressive and creative response to the housing and credit crunch, even after the Fed's bailout of Bear Stearns in March. The talk in Washington over the summer was of giving the Fed unprecedented power over the entire financial system. House Financial Services Committee Chairman Barney Frank (D., Mass.) suggested Wednesday he was concerned that the Fed and Treasury were intervening in markets without restraint. While noting that he considers Mr. Bernanke a "responsible and thoughtful person," Mr. Frank related a conversation held Tuesday in which Mr. Bernanke allegedly said "I have $800 billion" when Mr. Frank asked him if he had $85 billion available to help AIG. (The figure refers to the size of the Fed's balance sheet, its holdings of U.S. Treasury securities plus its growing holdings of loans the Fed financial firms and securities it has taken from Wall Street in exchange for more-desirable Treasury securities.) "No one in a democracy, unelected, should have $800 billion to spend as he sees fit," said Mr. Frank. "You look out at the landscape and what do you see but, oh, here over the horizon comes the loan arranger and his faithful companion Paulson. And they give some money here. They don't give some money there. They're good guys, but that's not the way to run a democracy." Meanwhile, Rep. Jeb Hensarling (R., Texas) leader of the conservative Republican Study Committee, is gathering signatures for a letter to Mr. Bernanke and Treasury Secretary Henry Paulson stating that recent government bailout "have set a dangerous and unmistakable precedent for the federal government." "Federal investment in such large amounts of private company stock has the appearance of a socialist and not a free market approach to managing our economy," the letter says. Asked Thursday if Mr. Bernanke has too much power, House Minority Leader John Boehner (R., Ohio) responded, "I don't think he has too much power. The question is, does the Federal Reserve have too much power?" Rep Jim Bunning (R., Ky.), a perennial Fed critic, has introduced legislation to strip the Fed of the ability to bail out companies like AIG. In a statement announcing his legislation, Mr. Bunning compared the Fed to Hugo Chavez. The complaints may mask frustration on the part of members of Congress who have to go to great lengths to get their colleagues and the president to approve loans to troubled companies. Congress has been haggling for weeks over whether to extend billion of dollars in low-cost loans to the struggling automobile sector. Some in Congress would like to push through another stimulus package, too, but little if any progress has been made.

Memo to Obama and McCain It's too late in the game for the presidential candidates to simply join the chorus about cleaning up the mess on Wall Street. To have any credibility at all, John McCain and Barack Obama have to go beyond promises of "reform" and "change" - which have become empty words through sheer repetition - and propose something concrete. They have specific plans for health care and tax cuts, so why not real proposals for financial market reform? One obvious idea is a new version of the Resolution Trust Corp. to take over risky mortgage assets and enable otherwise healthy banks to live another day. Former Fed chairman Paul Volcker, an Obama adviser, and Democratic lawmakers have floated the notion of a federal agency like the one that helped clean up the S&L mess in 1989. It would not be a stretch for the Democratic nominee to get behind this idea. Obama has been talking about his plans for financial regulatory reform since March, but still hasn't said what he will actually do. Now McCain is jumping in and promising to end the "patchwork" or "alphabet soup" of financial regulators. One of them should just make a commitment to actually doing what every other major industrialized country has done - merge all financial regulators into a single agency, like the UK's Financial Services Authority or Germany's BaFin. Now is the perfect time to push through this kind of measure. Financial institutions are in the greatest disarray since the Depression and the market is in the process of eliminating investment banks that have neither the huge deposit base nor the strong capital foundation of a commercial bank, but which nonetheless are willing to accumulate risks both on and off the balance sheet.

Obama and McCain Just Don't Get It To borrow a line, it's not that I think Barack Obama and John McCain don't care about what's happening on Wall Street. I think they just don't get it. Or, maybe they do get it but are unwilling to talk about what's really a complicated problem that calls for a solution requiring everyone to pitch in. Instead both candidates have offered "blame game" rhetoric on the stump and little more in the form of written policy. Listen to the Democrat talk about Wall Street, and you'll hear what the Republican thinks and be told that the crisis is the Republican's fault. Listen to the Republican talk, and you'll hear him call the economy "fundamentally sound," blame Wall Street's woes on "unbridled corruption and greed" and propose the formation of a commission. Sorry, guys, but how about a plan? For all of the issues facing the next president, the collapse of the American financial industry is moving up the priority list. Want southern Texas to rebuild after Hurricane Ike? It will take U.S. banking muscle, through loans and credit, to get it done. You might want American International Group Inc. to be a working insurance company, too. Want to send more troops to Iraq or, perhaps, pull them out? Both plans will cost money that the government will have to borrow on credit that may or may not be there at all if it's forced to prop up insurance and mortgage companies. All roads lead to Wall Street -- even Pennsylvania Avenue. It's one thing to not have a plan and quite another to have one that shows a lack of understanding of the financial mess and how we arrived here. But before we look at what the candidates have been saying, let's get one thing straight: Though a lack of regulation did have a central role in the financial crisis, it's not a complete explanation, and a response to that factor will not be the whole solution. Deregulation didn't push homeowners to take on mortgages they couldn't afford. It didn't push ratings agencies to sign off on the junk. The government can't make business decisions for businesses. That's not how it works. Wall Street needs the ability to take risks. Business ownership is risk. Obama, after a weak stump attack against "predatory lenders" early in the campaign, has, in the last few weeks, spelled out more than McCain has. He's talked about strengthening capital requirements on mortgage securities and derivatives, rigorously managing liquidity risk, and investigating ratings agencies and their potential conflicts of interest with companies they rate. The bad news is that, as weak as Obama's plan is, it's better than McCain's. Aside from his idea to create a 9/11-style commission to find out what went wrong and propose changes, McCain wants a safety-and-soundness regulator for every financial institution.

Posted by dblwyo at 04:04 AM | Permalink | Comments (1)

I was of several minds about whether or not to tackle this and put it off but in my mind real respect for the victims of 911 is to do something about it. Not have another maudlin remembrance and go back and re-create the disaster all over again for the same reasons. So in that spirit we're going to start with 911 and re-treat it as the wake-up call it was and then point out that much of the substance of he 911 commission report has yet to be enacted, let alone implemented. But it's not just the changes in security, defense and foreign policy that the Commission called for that are in dire straits as the result of the same fundamental flaws. And are coming home to roost (look up ROC on Wikipedia for how big these birds are going to be). So in addition to talking a bit about continuing failures related to 911 we're going to tackle, briefly, two other major breakdowns that result from the same policy-making dysfunctions. One of the things I like about political cartoons is that whether you agree or disagree they're a good indicator of the feelings, attitudes and spread of same. The opening cartoon is sadly funny but not right on in my book. In fact it's got a couple of major flaws.

Were you ever in a small town, neighborhood, city what have you that had a "Deadman's Corner" ? You know the place where the preponderance of accidents seemed to happen. Now there was always some reasonable explanation for each accident: drugged out teenagers, bad storm, road repairs, whatever. But somehow that one corner always got 60+% of the serious accidents. And nobody bothered to ask why - that is what design flaw was causing the accidents to happen in the same spot. That's called a "systemic risk" - that is there's a flaw in the fundamental operation of the whole system - after all drunks, teenagers, storms and repairs are part of life. And there wasn't a rash of accidents all up and down the rest of the highway - just CRASH CORNER ! Well we're in the process of re-creating and re-experience a slew of crashes in several different areas and all due to the same systemic flaws. Which to my mind is perfectly captured by the next political cartoon - the only one I've found that is truly respectful of the 911 dead because it doesn't deny the source of the problem. Our own unwillingness to face reality.

2nd Failure Source: Institutional Breakdown 

Now after the break we back up that assertion with a series of readings excerpts on National Security, the collapse of the Frannie twins (btw - in case you don't follow the news last weekend the two biggest financial institutions were taken over by the government. And this weekend Lehman Brothers is headed for bankruptcy, Merrill has been bought by Bank of America, Washington Mutual and AIG insurance aren't in much better shape), and on energy policy. In each case we find the second major systemic flaw - and the same one. Now in each of the readings sections we've not only listed some key excerpts in these areas but also the pointer to a prior post of ours that provides background context. So for 911 and Security policy there's a prior collection, for the Frannie breakdown a couple of our economic/market posts from this weekend that may be a little technogeeky but.... and our post on a national energy policy for that. Now if you click on the Twin Towers picture where you actually go is a 2004 panel discussion at the Kennedy School on the aftermath of 911 and it's not a pretty picture. Just in case that doesn't work the pointer is repeated below along with an easy to use, read and understand version of the 911 report in graphics form by Slate. Which is unfortunately no longer free online - you have to buy a copy.

Some Teaser Points

Notice we didn't characterize the second major fundamental breakdown. Rather we're hoping you'll reach a similar conclusion to ours in your own words and thoughts by watching the KSG vidclip (the whole thing is 90 min but the first 30 min are the panel). The first two pointers after the break btw are to two earlier posts of ours laying out all the machinery in detail that will give you a very complete and thorough diagnostic toolkit. As well as some approaches to fixing it. But let me see if we can get your dandruff up with a few summary points.

1. 911 was the result of a sustained period of ignoring the world as it is and treating terrorism as a police problem instead of a security problem but has it's real roots in the self-righteous emasculation of the intelligence agencies by the Church Commission in the '70s. In other words we created terrible long-term problems for ourselves by making short-term feel good decisions that had terrible long-term consequences. Wow, deja vu' all over again Pogo. By the way, in passing, the two Senators who took the lead on breaking some of the post-'04 legislative logjams were named Liebermann and McCain.

2. Our problems with the insolvency of Frannie aren't like nobody wasn't trying to fix the problem. In fact, as you'll read, George Bush, Alan Greenspan and a host of others tried to start a major re-structuring of the Bloated Twins but were stopped dead by their lobbying clout with Congress. Guess who the four largest recipients of their political contributions was....read it for yourself. 

3. Energy policy is a great irony. Was just chatting with my neighbor and telling him that back in my days as a resource economist every single proposal on the table right now was on the table then. And btw we actually have, believe it or not, a National Energy Policy and it's a pretty good one. Just not implemented. Guess what - it too was one of the earliest policy initiatives of President Bush and couldn't make it thru the Congressional barriers and special interests lobbying (that's another hint btw). Here's another with an example: Having Fun, Doing Good, Making Sausage: Goodtime Charlie's War

Now we're not holding up a brief for any party or politician here. At the end of the Clinton Administration Larry Summers took a serious pass at the Frannie Twins too. And got as far as Uncle Alan and George W. And for the same reasons. Like we pointed out in the last post policy makers and politicians often have a much better idea of what needs to be done than we know, or give them credit for. They just can't sell it no matter how hard they try.Oil and Other System Shocks: Beyond Iraq & Georgia

At least until the dire consequences that you've been warned about are so serious and painful that you're willing to do the hard stuff. You see the third major barrier is us - we're the ones that refuse to buy in and instead go with the snake oil salesmen. As the record proves over and over again.

So if you're truly interested in change don't buy the snake oil - take the real medicine, eat right, loose weight and exercise. Or face the penalities. 

Key Postings on Crash Corner

• Rational Voters, Public Choice, Economics and Futures
• Inside the Sausage Factory: the 4P's of Political Reality

Intelligence and National Security

• National Security(Readings): Let the Debate Begin

INTELLIGENCE: Who Doesn't Dare, Loses British special operations operatives have a motto; "who dares, wins." An example of how this doesn't work can be found in the American CIA (Central Intelligence Agency). Over the last three decades, the  CIA has come under a lot of criticism for not being able to do their job. They have done that by not taking chances. The most spectacular recent example was the failure to spot the terrorist operation that led to the September 11, 2001 attacks. While much blame was justifiably heaped on the FBI, it was the CIA that had first detected the plotters, and was already under orders to stop al Qaeda attempts to make more attacks on the United States. All this began a decade earlier, when al Qaeda damaged New York City's World Trade Center in 1993 bombing. The 2001 attacks did not come out of nowhere. But the CIA had problems at the top (where decisions about what leads to pursue, how, and to what extent all this is shared with the FBI), and at the bottom (and the inability to infiltrate al Qaeda.) At the same time, other intelligence agencies, like Britain's MI-6 and the Israeli Mossad are much better at gathering information at ground level. They, like most nations, recognize that intelligence operations can get dirty. It's all a matter of how important the intelligence is. The British attitude is that, if you need to do this, do it right. So Britain does have agents with a "license to kill" and, more importantly, laws protecting these men and women from any later prosecution for dirty deeds they were asked to do for Queen and Country. But in the United States, the CIA was held to a higher moral standard, and still expected to get the job done. This approach did not work. The CIA lost its soul, it's heart, and most of its guts, in the late 1970s. Lots of brains are left, with big budgets to buy all manner of neat technology. But the bosses live fear of grandstanding politicians and headline hungry journalists. While the British, the Israelis, and most other nations, have managed to capture and retain the ability to do street level intelligence, the CIA has not. It now serves mainly to draw fire, while other organizations get the job done.

• Kennedy School Discussion of post-911 Failures and Breakdowns 
• The 9/11 Report: A Graphic Adaptation by Sid Jacobson and Ernie Colón

Church Committee on Intelligence Activities The Church Committee is the common term referring to the United States Senate Select Committee to Study Governmental Operations with Respect to Intelligence Activities, a U.S. Senate committee chaired by Senator Frank Church (D-ID) in 1975. A precursor to the U.S. Senate Select Committee on Intelligence, the committee investigated intelligence gathering for illegality by the CIA and FBI after certain activities had been revealed by the Watergate affair.  Early on, critics such as Bing Crosby and Paul Harvey accused the committee of treasonous activity. The 1975 assassination of Richard Welch, a CIA station chief in Greece, intensified the public backlash against its mission. The Committee's work has more recently been criticized after the September 11th attacks, for leading to legislation reducing the ability of the CIA to gather human intelligence. In response to such criticism, the chief counsel of the committee, Frederick A.O. Schwarz Jr., retorted with a book co-authored by Aziz Z. Huq, denouncing the Bush administration's use of 9/11 to make "monarchist claims" that are "unprecedented on this side of the North Atlantic". In September 2006, the University of Kentucky hosted a forum called "Who's Watching the Spies? Intelligence Activities and the Rights of Americans," bringing together two Democratic committee members, former presidential candidate Walter F. Mondale and former U.S. Senator Walter "Dee" Huddleston of Kentucky, and Schwarz to discuss the committee's work, its historical impact, and how it pertains to today's society.

Congressional Oversight and the Crippling of the CIA One utterly predictable response to the terrorist attacks on New York and Washington were calls by members of the House and Senate Intelligence Committees to “shake-up” the Central Intelligence Agency. Some committee members want to see CIA Director George Tenet replaced, others are demanding radical changes in both the analytical and operational divisions of the agency. It would be shortsighted for the intelligence committees to place the blame for this latest intelligence failure exclusively on the CIA’s management. If the committees are interested in genuine reform, they would do well to begin by acknowledging their own culpability in crippling the agency. Under both Democratic and Republican chairmen, the intelligence committees have transformed the CIA into the functional equivalent of the Department of Agriculture, preventing the agency from acting in a shrewd and, as is sometimes necessary, ruthless manner. Any “reform” is doomed to fail if Congress continues to play its role as a partner, if not outright “owner,” in the management of the CIA. The story of how the executive branch lost its control over the CIA is well known, but deserves a retelling, since it is often presented incompletely. In the aftermath of Vietnam, Watergate, and revelations of CIA assassination plots and domestic spying, Congress moved in the mid-1970s to “reassert” its role in shaping American foreign policy, including the most controversial tool of that policy, covert action. Secrecy was seen as antithetical to the American way, and there was widespread agreement that “rogue” agencies such as the CIA were a threat to liberty. Proponents of congressional intelligence oversight argued that openness and accountability were the cornerstone of a legitimate foreign policy, and it was believed that Congress, due to its diversity of opinion, possessed greater wisdom than the executive branch. Spurred on by the sensational revelations of the Church Committee hearings in the Senate and the Pike Committee in the House, both bodies established permanent intelligence committees. The damage done to the CIA by this congressional oversight regime is quite extensive. The committees increased the number of CIA officials subject to Senate confirmation, condemned the agency for its contacts with unscrupulous characters, prohibited any further contact with these bad characters, insisted that the United States not engage or assist in any coup which may harm a foreign leader, and overwhelmed the agency with interminable requests for briefings (some 600 alone in 1996). The committees exercised line by line authority over the CIA’s budget and established an Inspector General’s office within the agency, requiring this official to share his information with them, causing the agency to refrain from operations with the slightest potential for controversy. The CIA was also a victim of the renowned congressional practice of pork barrel politics. The intelligence committees forced the agency to accept high priced technology that just happened to be manufactured in a committee member’s district. On some occasions, members of Congress threatened to leak information in order to derail covert operations they found personally repugnant. Leaks are a recurring problem, as some member of Congress, or some staff member, demonstrated in the aftermath of the September 11th attack. President Bush’s criticism of members of Congress was fully justified, despite the protests from Capitol Hill. Leaks have occurred repeatedly since the mid-1970s, and in very few cases has the offending party been disciplined. One of the Founding Fathers of the new oversight regime, former Representative Leo Ryan, held that leaks were an important tool in checking the “secret government.” In the wake of the September 11th terror attack, some legislators are now proclaiming their commitment to unleashing the CIA and rebuilding its human “assets.” Just a short while ago these same legislators were leading the charge to curtail the agency. One such convert is the chairman of the Senate Foreign Relations Committee, Joseph Biden.

Frannie, Markets and Rackulation Breakdowns

• The End is Nigh ? (Update2): Frannie, Leh, WamU, AIG and Wild, Wild Markets
• Continuing Confusions & Crisis: Teetering Giants to Credit to Housing

Beyond the Fannie, Freddie rescue The rescue of Fannie Mae and Freddie Mac, after more than a decade of using the two mortgage lenders as political footballs, shows just how broke Washington is and how hard it will be to fix. The rescue itself was not a mistake -- it was programmed from the day Congress wrote a blank check for the implicit guarantee of the government-sponsored enterprises and then proceeded to ignore the unconscionable buildup of risk in these thinly capitalized institutions. Now that check has been presented for payment and we still don't know the final cost. Republicans and Democrats have been battling over Fannie Mae and Freddie Mac for more than a decade. Fannie Mae, in particular, was a lightning rod after it became a Democratic sinecure under Franklin Raines, director of the Office of Management and Budget in the Clinton administration. Raines was eventually forced out of Fannie Mae in 2004 amid charges that he manipulated Fannie's books to increase his bonus. Before and after Raines, Republicans tried to torpedo Fannie Mae. But even the dedicated efforts of former Louisiana congressman Richard Baker, who headed the House Capital Markets subcommittee for the 12 years the Republicans controlled Congress, could not counter the massive lobbying effort from Fannie and Freddie to preserve their privileged position. The inability of either Congress or the administration to get any traction on GSE reform absent an earthshaking crisis shows the power of vested interests in determining policy. And despite the emphasis now from both candidates on change and reform, it's hard to see how that's going to change. While some reform of Fannie Mae and Freddie Mac is now inevitable after the government takeover, it will remain difficult to achieve any sort of meaningful reform of the financial regulatory system as a whole. Even such an obvious measure as merging the SEC and the Commodity Futures Trading Commission - so that oversight of securities and futures are under the same roof as in every other major financial market - has been blocked by powerful congressional committees who jealously guard their prerogatives. So the gridlock that brought you the Fannie-Freddie debacle is set to produce other crises. Whichever candidate wins in this close presidential race is not likely to have the sweeping mandate that will enable him to overcome these obstacles to genuine reform in the financial sphere.

Fannie Mae, Freddie Mac Takeover Costs Congressmen Who Were Invested, Update: Fannie Mae and Freddie Mac Invest in Lawmakers

Negative Energy = Negenergy Policy

• In Search of a Nat'l Energy Policy: Check the Mirror Pogo

Energy bill: Drowning in Washington An energy summit is taking place Friday on Capitol Hill and all 100 senators - including the presidential candidates - are invited to attend. But with all the partisan sniping on The Hill, it's hard to tell if a comprehensive energy bill will be signed into law anytime soon. There have been numerous attempts to get a bill passed to change America's energy policy in the face of high gas prices and an over-reliance on overseas energy sources - and all have succumbed to partisan politics. Democrats and Republicans are still working on multiple bills, but none of them are close to being signed into law. Now, with an adjournment goal of Sept. 26, the Senate is facing crunch time.The purpose of Friday's summit, according to the Senate Committee on Energy & Natural Resources, is to be a forum for discussion to "facilitate the development of comprehensive legislation to address America's many energy challenges." But it's not a workshop for cranking out an energy bill.

‘Technology is the ticket’ for energy, Bush says (MSNBC 2005 !!!) Confronting growing concerns over high energy prices, President Bush on Wednesday unveiled controversial plans to spur construction of new nuclear power plants, provide incentives to buy diesel vehicles and most novel of all: use some old military bases for oil refineries. "A secure energy future for America must include nuclear power ... and expanding oil refineries," Bush added, saying that technology is making the nuclear and oil industries safer and cleaner. "Technology is the ticket, is this nation's ticket to greater energy independence," he told the audience, citing as an example the smaller rigs needed today to drill in a place like the Arctic National Wildlife Refuge, a federal area that Congress is considering opening. The president spelled out the plans in a speech at a small business conference, saying he ordered federal agencies to "simplify the permitting process for such construction" at retired bases.

Posted by dblwyo at 08:50 PM | Permalink | Comments (0)

Consider this part of our "stories" series of posts - a never-ending story perhaps ? We promise not to stretch it to far but the metaphor is doing some good. Stories we tell ourselves are the values, beliefs, rules and guidelines we rely on to navigate this challenging world. Whether they're conscious or not, whether you learned them the hard way, absorbed them in childhood everybody has a set of guidelines they follow for good or bad. Simply by living you must decide and by deciding you reveal your values. Now this is a thesis we've pursued here abstractly and concretely, at the level of society and at the level of the individual. 

Values and the Candidates 

Earlier we'd pointed to the Q&A at Saddleback Church (Welcome to Saddleback: the Candidates, Pastor Rick and Some Real Answers) as being interesting, informative and a valuable public service. Certainly learned more about both candidates than I'd known before, especially Johnboy. And the questions were thoughtful and insightful - the ones on leadership and personal values in particular. Only two commentators though really got to the true heart of the importance. One was an observation that the values a leader brings to the table are critically important. The other, by Dan Henninger of the WSJ, was an astute observation on why Pastor Rick started with those questions. And why it was probably unthinkable for something similar to have been done to Truman, Eisenhower....Reagan and even the first Bush. His argument was that we had a commons shared sense of core values and precepts that were so widely shared that it was unnecessary to explore them. In that I think he was correct.

But he stopped short of exploring the other side of the coin. Those core values developed as the result of shared experiences and were massively challenged in the '60s and early '70s when they were no longer as apparently valid in helping us cope with a changing world. Yet in revolting against the Establishment the babies got thrown out with the dirty bathwater and as a result we provoked a backlash from folks looking for old verities. And nothing much has replace them - instead we've had a multi-decade struggle with one thing after another being put forward, tested and generally rejected. So where do we go from here ?

We just finished putting up posts on the speeches at each of the two conventions, using our own set of mainly policy and substance filters, so our evaluations are fairly clear at this point. One thing we will point back to in McCain's speech was the heartfelt and deep-seated transformation from good-timin fighter jock to grounded, serious and spiritual man that his stay in the Hanoi Hilton made him. He was actually more complete and candid on that stage than during the interview. HIs values, their sources and prices are pretty clear and tested. Barry's appear to be more subtle and complex.

There are clearly vast differences between the two candidates in some of their values, though we think that their goals and standards are similar and, as we've argued at length with chapter and verse, they're a lot closer to seeing the same problems and wanting to proceed to the same solutions than any headline will tell you. In fact, and this is a very important sidebar, the substances of their proposals are so close IOHO that they are the smallest set of differences we've seen in four decades. Literally. Which is yet another way of coming full circle back to the values question because if they want to proceed in similar directions then how we get there becomes an important differentiator. As somebody astutely commented (Noonan ?) Johnboy is almost a throwback to the values of the Greatest Generation and IMHO we need more of that. At the same time, as we said at the beginning, this is more complex and nuanced world with escalating challenges to the left of us, to the right and in front and us with no choice but to ride on.

Values and the World 

Let me quote from an enormously wiser person than myself...William James in the Preface to "The Will To Believe":

"If religious hypothesis about the universe be in order all, then the active faiths of individuals in them, freely expressing themselves in life, are the experimental tests by which they are verified, and the only means by which their truth or falsehood can be wrought out.

Religious history proves that one hypothesis after another has worked ill, has crumbled at contact with a widening knowledge of the world and has lapsed from the minds of men. Some articles of faith, however, have maintained themselves through every vicissitude, and possess even more vitality to-day than ever before....Meanwhile the freest competition of the various faiths with one another, and their open application to life by their several champions, are the most favorable conditions under which the survival of the fittest can proceed.

Religious fermentation is always a symptom of the intellectual vigor of a society; and it is only when they forget that they are hypothesis and put on rationalistic and authoritative pretensions that our faiths do harm. The most interesting and valuable things about a man are his ideals and over-beliefs. The same is true of nations and historic epochs; and the excesses of which the particular individuals and epochs are guilty are compensated in the total, and become profitable to mankind in the long run".

You may have to read that over a time or two...James takes little adjusting too. But he cuts right at the heart of things with brilliant but warm and human insights that are also practical and workable. His optimism that we'd resolve the questions he wrestled has been badly disappointed. If anything the wrestling is more vigorous, widespread and discombobulated than ever. Yet perhaps not. And James is not the first person in history to wrestle in that arena nor the last. In fact in the rest of this post we want to take voyage with several spiritual guides who provide their own learnings and suggestions.

From Griffindor to Tatoonie and Beyond 

We start in the Griffindor common room with J.K. Rowling's Harvard commencement address, one of the best we've ever heard and Jamesian in being based on hard and difficult experience, if not in language. We stay at Harvard but move cross campus and back in time to hear Billy Graham talk about moral principles and ethical values in the modern world. We could have returned to Pastor Rick, who also spoke at Harvard and had very similar things to say but we pointed you at his works in our Saddleback post. Then we move forward in time and travel to NYC in location but spiritually to a remote location in Nova Scotia to partake of Bill Moyers interview of Pema Chodrun, a Buddhist Nun. Our final voyage is millenia into the uncertain future to listen as Charlie Rose interviews George Lucas on his art, his motives, his observations on life and the importance of myth and culture and why it's missing in modern life so far. We conclude with some pointers to very ancient wisdom.

As we take these various trips to different sources of values we hope you'll find that despite many surface differences all of these folks are wrestling with the same quandries that James raises, providing their own "hypothesis" as to answers and offerring up their own lives and experiences as the testbed for the results and consequences. 

Welcome to Griffindor Commons

J.K. Rowling delivered the Class of '07 Commencement Address at Harvard and made a noble attempt to share her own best lessons from a life that had many hard ones in it. If you're not familiar with her history her early life was anything but smooth sailing but by pluck, perseverance, hard...hard work, discipline and talent she won on thru. And delivered a great entertainment that, IOHO, is also a great teaching manual on the principles one should conduct ones life on in a difficult world. Not to pre-empt Ms. Rowling too much but she starts with applauding the value of Failure as a way to truly find your ground (as Johnboy certainly shows us) and the ultimate value of Imagination - the ability to imagine something other than what's in front of your nose - to help steer toward the future. Clicking on the photo should take you to Part 1 of 3 of the address on YouTube. Each takes about 7 min. and it's time well spent IOHO.

Cross Campus to the Kennedy School 

Billy Graham has talked all over the world and spoken twice at the Kennedy school as well as at TED. His first Harvard talk was on "Religion, Morality and Poltiics" in 1982 while the second was on "Is God Relevant in the 21st Century ?" in 1999. Again clicking on the photo will take you to the '99 talk though it's from '82 due to technical issues with "clipping" the later one. He also spoke at TED on a similar topic and compressed it down to the normal 18 min limits ! His Harvard talk takes about 30 min for the speech and 90 for the Q&A but we think you'll enjoy it, learn something and find it helpful and challenging. Billy tackles head on what we think is the critical point of our times - Science may tell us How but has nothing to say about Life's greatest challenges: Evil, Suffering and Death. To wrestle with the Why one has to turn elsewhere. He starts by pointing out that coping with a rapidly changing world is nothing new in history and looks back to King David's reign and the shift to Iron technology. He makes his case in our opinion and draws many valuable lessons.

Mindful Steps to Good Ground

As part of his series on Faith and Reason Bill Moyers interviewd a NJ housewife turned Buddhist nun, Pema Chodron. You'll not only start with gaining some new understandings of Buddhism if your acquaintance is limited, Moyers certainly did. But you'll find that Pema is down-to-earth, practical, worldly, experienced and a grandmother among other things. If by this point you've noticed that our guest speakers are wrestling with similar challenges from different directions it should come as no surprise that Pema does as well. In her work making Buddhist insights and scriptures relevant to the modern world though she helps us find workable steps to actually implementing the goals and ideals. In fact that might be the key distinction one finds in Buddhism, what they call the "Eight Mindful Steps to Happiness" are really a practical set of guidelines and "workbooks" for accepting and managing Evil, Sufferring and Death. Clicking on the photo takes you the profile page where you can watch the video. A multi-part upload is also on YouTube as well if you have trouble.

A Galaxy Far, Far Away

George Lucas has established himself, more specifically his work, as central parts of modern culture. In this hour long interview with Rose you get the walk thru the whole trip from his early student days where he started as an anthropology major before stumbling into film to his efforts to push the technological boundaries to the cultural analysis built into all of his work. "American Graffiti" for example was, among other things, a portrait of American life and teen culture and the trials of growing up. But it was in Star Wars that he both surpassed himself and deliberately set out to create a new mythology. As he says we tell ourselves stories to help us learn about the world, to tell us who we are and to pass on the hard-learned lessons of the past to the next generation. And we've quite doing that and lost something vital to our society, it's health and well-being and it's future prospects. In almost those words too ! :) But there's a lot to listen to and hear in this interview so listen carefully. One of our favorite set of observations is his comments on the relationship between Science and the Humanities. See if you pick it up and agree. 

A Few Final Thoughts

By this time we hope you've stopped and listened to each of our guest speakers and found entertainment, information and even, dare we say it, wisdom. And see a glimmer of truth in our main point which is, as James said, that our values are the most interesting and valuable thing about us. And as he implied, and we have IOHO, lost sight of and are being forced, willy-nilly, to re-focus on. Both of our candidates are highly principled people who have come to those principles by hard thought and tough experiences, some more than others admittedly. And while they appear to arrive at similar rules of conduct their approaches are vastly different. Yet neither they nor our guest speakers are the first to wrestle with these problems. Nor even the first to come up with similar definitions of the problems and approaches.

The Ancient Persians, according to Herodotus, taught their young to do three things in a proper education for a gentleman. "To Ride Well, To Shoot Straight and to Speak the Truth". In its' day, time and place that was the ancient version of a modern liberal arts education. Strangely enough you can find echoes in today's curriculums and in the standard curriculum taught in English public schools. Bu the roots are even more ancient and direct.

During the Middle Ages, drawing directly on Graeco-Roman sources the extent version of the liberal arts education was the Trivium and the Quadrivium designed to answer Lucas' Challenge. Which is How to do it (Science and Engineering), What to Do (Social Sciences, Professional Education) and Why (Humanities and Arts). Or you can journey to the other side of the world to China and find the educational curriculum of the gentlemen-scholars who ruled the Chinese Emprie for millenia and had it's roots in the Confucian Classics actually presented the same thing, though in different guises. There are many works that have come down to us of the Chinese Classics but two colletions are central: the Five Books and the Five Classics. And taken all together they too are concerned with "riding well, shooting straight and speaking the truth".

For a final point let us turn to another great master who's relevance is becoming clearer every day, Rudyard Kipling who knew life in all it's nooks, crannies and ugliness and still "carried on". And that English schoolboy classic If that becomes more insightful every day:

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don't deal in lies,
Or being hated, don't give way to hating,
And yet don't look too good, nor talk too wise:

If you can dream -- and not make dreams your master;
If you can think -- and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two imposters just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build 'em up with worn-out tools;

.... 

 

Posted by dblwyo at 09:57 PM | Permalink | Comments (1)

Well now that we're past the Republican convention it's time to try our first pass summary and interpretations. Like the Democratic conventions there were many things that surprised me, only this time not as positively on the whole. There are at least three clusters of things being woven together at any convention. First, there's the political business  to be done. In Denver the challenge was to bring everybody together, bridge the Billary gap and get everybody energized and marching together. McCain had a similar and longer-standing challenge with the far right so-called base (it wouldn't be the base if it hadn't been pandered to for years by a politics of divisiveness; nor would the Republicans have lost their grip on the center as they have). Second the candidate and the key speech makers have to establish the themes, key messages, elements of substance and lines of policy and strategy on which they're going to attempt to close to the finish. In 2004 the Dims convention was dismal at this, represented by the long, disjointed, dis-organized and incoherent speech of the candidate. It went downhill from their. This time both candidates, conventions and parties did enormously better. The Democrats did superbly IMHO while the Republicans did so so at best for reasons we'll get into. If you want to check out my summary take from the D's try this: Politics and Policy: Convention to Consequences.

The third thing, building on the line of policy and strategy development is that the candidates have to establish enough substance to their policies to move from arm-waving to serious issues. It's in this area that the D convention was enormously surprising to me - first how well the basic themes were introduced and coordinated in one giant weaving across all the speakers, Hillary but not Bill excepted. But no matter, by the end she was under control, her partisans were in the tent and she and her bitterness became irrelevant. Especially after Gov. Palin spoke and proved that breaking the glass ceiling don't require chips on both shoulders and knee-spikes. Now in the prior post we referred you to our YouTube playlist for the D's with the comment that you really need to listen yourself. That playlist selected the key speeches that I thought were and are worth your time; they're all excellent. The RCon speeches are now also in a YouTube playlist courtesy of C-Span. This time though I can't recommend listening to them all, and that gets to the heart of the matter.

Reflections and Observations

In no particular order but as they occur to me here are some observations, buttressed by the readings you'll find after the break, which are divided into two groups. Political analysis (with several David Brooks columns - one of which is the single worst I've ever seen him write using very clever sophomoric humor to parody Barry's speech and the rest of which meet his usual exceptional standards of writing, insight and wisdom. One can take his terrible Barry column as a bad day and confirmation of my argument that the substance of the speech was outstanding; and therefore scary to a conservative). 

1. The three best speeches were Palin's, Johnboy's and Joe's. Palin's in fact was funny as the dickens and well worth your time to listen to as the collection of one-liners delivered with humor and without malice are a refreshing change all around. They're also dead on zingers that will eventually have to be answered. The attacks on Palin prior to the speech were, IMHO, greatly out of line and are going to backfire. The people making them are too narrow in their grasp of what they rest of America is like. There's a whole post here on cultural differences from somebody who grew up in the West and lives in the Northeast but trust me - a women who can clean her catch and dress her kill while still being charming, cute, intelligent and forceful is a tribute to our society. Not an indictment of it - and the left-wingers who've reversed five decades of feminist rhetoric when confronted with a women who really does do it all do nothing but embarrass and indict themselves. Fortunately Joe Biden and Barry are class acts and stood up in her defense. A new chapter in Hofstadter's book on fanatics is being written for the posthumous new edition.

2. Similarly Johnboy and the the other speakers showed a great deal of class in praising their opponents as opposed to the last twelve years of demonization. A refreshing change, long overdue and getting to the heart of what we need to do to move forward (Pastor Rick's points about tolerance and civic responsibilities). They struck me as very sincere but in point of fact who cares - as long as they act that way that works for me. Outstanding. We're lucky in general to have these people - all four of them. And the Rips in particular are lucky to have Johnboy without whom they would be deservedly in the wildnerness.

3. Personally I couldn't listen to many of the other speeches - political hackmanship with no style, grace or foward-looking substance. Giuliani and Romney in particular made backward looking partisan speeches, which we know they don't really believe in from their own candidacies (though in Mitt's case who knows what he believes in). But they spoke to the heart of the traditional Rip, as opposed to Reps, concerns. This was Newt the Grinch's partisan polemics at it's propagandistic worst. And is fully captured in the ideologies embedded in the Rip platform. The gap between what Johnboy's been saying and the ideological purity of that platform and those speeches is wider than the gap between John and reality or Barry. In fact on many of his key points he, Gov. Barracuda and Joe L. sounded remarkably like their opponents.

4. Particularly when they started talking about representing America, not a party. And critiquing the Ripoffs for eight years of corruption and malfeasance. Below in the readings you'll find several pieces related to that, including the one on Jack the Ripper's (many puns intended) most recent sentencing hearings at which he expressed great remorse. Meanwhile of course penning his memoirs blaming it all on everybody else - talk about your self-centered, self-serving, cynical opportunist ! 

Brief Policy Observations

You won't find much if any of that in the commentariat's discussions - hence the need to listen for yourselves. But what's maybe an hour - you'll spend more time than that making up your next grocery list. As you listen bear in mind what we've been saying about the layers of meaning - conventions are the time to inroduce policy directions and themes, not detailed proposals. But if you listen reasonably, but not too much so, carefully you'll hear a lot to like and agree with in Johnboy's speech. In fact the differences between him and Barry on key issues is pretty narrow. He started with different priorities and was really light, i.e. non-existent, on the economy. And not as comprehensive, organized and substantive as Barry. (Barry's speech was a policy wonk like me's ideal political speech). Nonetheless...

1. Johnboy started with foreign policy, building off a very candid and revealing discussion of his personal history, as you'd expect. But when you parse it out the differences between him and Barry on Iraq are now, as the result of the Surge and COIN tactical innovations, very narrow. Both are for withdrawl with a permanent long-term presence, both want to move on and so forth. In case you didn't know btw Pakistan is in the process of putting Bhutto's widower into the Presidency so that he can restore the kleptocracy that brought down the last civilian governments. Anyway Barry and Johnboy are just about on the same page with regard to Russia and Johnboy went out of his way to emphasis the importance he places on "softpower" and diplomacy. (Iraq Resartus (Readings): Stability, Progress and Will,Brave New World: Non-Flatness, History and Challenges)

2. While John was more than a little disingenuous on many of the policy issues regarding his opponent - in fact in most of the places where he accused Barry of something it not only wasn't true but was contradicted. But again you have to listen to both speeches.

• Energy - actually both are for a balanced national energy policy aiming at long-term independence using offshore drilling, alternative source, coal and nuclear as well as the green stuff. You can tick down our list of a balanced energy strategy and find they both hit every point with reasonably proper weightings. They both even used the same $700B can't be exported quote ! (In Search of a Nat'l Energy Policy: Check the Mirror Pogo)
  
• Education - more agreement in not despite John's accusations to the contrary. In fact nearly identical upto and including Barry's use of the line that bad teachers need to find another line of work which John then turned around and re-used.(Readings(Education): the Single Most Important Domestic Policy Issue)
• Healthcare - you won't belive how close the both are to the same policy and how close that closet policy is to what the majority of knowledable experts and economists think it should be. Fortunately there's a great blog post we've listed that walks you thru that.

3. Economy - well one of Barry's great strenghts, both in terms of putting it first, listing out all the components and coming up with a resonable set of recommendations. Johnboy was very weak here overall and passed over it too lightly. This will be and is the central issue in this election. BtW - in case you missed it Fannie and Freddie (Frannie) are having a major rescue mounted this weekend before their collapse takes Western Civilization into a new dark age (not really kidding in any way about this - see the link the readings). (A Little Off-Topic: the Credit Crisis, the Economy & You) Barry proposed major re-thinkings of our regulatory infrastructure which is vital. He also linked his efforts to grow the economy to long-term energy and other innovation investments.

Strangely enough their recommendations for how to deal with trade adjustments and globalization were identical. That is we can't escape a global economy but we can help people find new jobs - in fact Johnboy's detailed program (his most) wouldn't have sounded too out of place from Robert Reich a few years back. Amazing. And correct. In fact, wheter you believe it or not, they both support market economies, institutional reform and helping the winners compensate the losers while investing in future jobs thru innovation, technology and education. (Standing Corrected: Education 2nd Avoiding Economic Collapse 1rst, Readings (Economy): It Really is the Economy, Stupid Frog)

This is, collectively, the most rational discussion of economic policy by politicians in a major, in fact THE,forum I've heard in my lifetime. 

Politics

Biden says Palin family is off limits to critics Republican presidential nominee John McCain began his final drive for the White House on Thursday with a boost from running mate Sarah Palin while Democratic opponent Joe Biden declared her family "off limits" and suggested that some news media coverage of her had been sexist.Palin and her husband, Todd, announced this week that their 17-year-old unmarried daughter was pregnant and would be marrying her boyfriend, saying they were making a private matter public because of Internet rumors. Biden said the Democratic campaign was not attacking Palin over her family. "It is off limits to talk about her family," Biden said in an interview with "Fox and Friends" on Fox News Channel. "Every family has difficulty as they're raising their children. I think the way she's handled it has been absolutely exemplary." Asked if some of the criticism aimed at Palin has been sexist, Biden said: "Yes, by you guys in the media. ... When I heard that media response, you know, this coming from some of the right-wing guys, saying that, 'Well, how can you be a mother and a vice president at the same time?' ... I mean, millions of women in America are going through exactly what she (is going) through. And guess what? They can handle it." Meanwhile, McCain's wife, Cindy, said she doesn't agree with Palin's opposition to abortion in cases of rape and incest. She also parts ways with Palin on sex education.

• Palin wows GOP, puts Dems on notice, Media swoon over Palin's fiery speech, A Knockout - Morrissey
• Sarah Palin can have it all

John McCain's idealistic dilemma  The great riddle of John McCain has always been that he is a man more about ideals than ideas. Wars must be won. Country comes first. And who else could transform all the moral ambiguities of America’s bloody Vietnam experience into a symbol for service? Enticed by his maverick style, Washington’s neoconservatives often see in McCain a blank slate on which to write their ideas. But in 2005, on the gut issue of torture, his ideals famously rebelled against the same White House interrogation policies that the Weekly Standard’s intellects had rationalized. McCain’s idealism is his great strength — but it can also be a weakness when he becomes cocky, even abusive, about his image and lets judgment slip into anger. In 2000, his message of reform and service caught fire with voters, fat with economic success but hungry for inspiration after the scandals of Bill Clinton. Today, he faces a very different landscape: troubled markets that put a premium on smarts, not idealism, and an opponent, Barack Obama, whose historic candidacy threatens to steal the music that was all McCain’s eight years ago. Alone then on his campaign bus in South Carolina — when all the fury of the Republican right was just crashing down — McCain turned to this reporter, whom he knew as a fellow Vietnam veteran, and broke into laughter. “David,” he said, “We have unleashed the dogs of war!” With real wars now in Iraq and Afghanistan, nothing is so carefree. And the most important battle for this campaign is within McCain himself. His life story — that of the rebel without a cause who found one in a Hanoi prison — will be central to McCain’s speech Thursday night to the national convention in St. Paul, Minn. And he may well use the occasion to chide his fellow Republicans for losing their compass.

David Brooks: What the Palin Pick Says John McCain is not a normal conservative. He has instincts, but few abstract convictions about the proper size of government. He’s a traditionalist, but is not energized by the social conservative agenda. As Rush Limbaugh understands, but the Democrats apparently do not, a McCain administration would not be like a Bush administration. The main axis in McCain’s worldview is not left-right. It’s public service versus narrow self-interest. Many people are conditioned by their life experiences to see this choice of a running mate through the prism of identity politics, but that’s the wrong frame. Sarah Barracuda was picked because she lit up every pattern in McCain’s brain, because she seems so much like himself. So my worries about Palin are not (primarily) about her lack of experience. She seems like a marvelous person. My worry about Palin is that she shares McCain’s primary weakness — that she has a tendency to substitute a moral philosophy for a political philosophy. There are some issues where the most important job is to rally the armies of decency against the armies of corruption: Confronting Putin, tackling earmarks and reforming the process of government. But most issues are not confrontations between virtue and vice. Most problems — the ones Barack Obama is sure to focus on like health care reform and economic anxiety — are the product of complex conditions. They require trade-offs and policy expertise. They are not solvable through the mere assertion of sterling character. But if you are going to lead a vast administration as president, it really helps to have a clearly defined governing philosophy, a conscious sense of what government should and shouldn’t do, a set of communicable priorities. If McCain is elected, he will face conditions tailor-made to foster disorder. He will be leading a divided and philosophically exhausted party. There simply aren’t enough Republican experts left to staff an administration, so he will have to throw together a hodgepodge with independents and Democrats. He will confront Democratic majorities that will be enraged and recriminatory. On top of these conditions, he will have his own freewheeling qualities: a restless, thrill-seeking personality, a tendency to personalize issues, a tendency to lead life as a string of virtuous crusades. He really needs someone to impose a policy structure on his moral intuitions. He needs a very senior person who can organize a vast administration and insist that he tame his lone-pilot tendencies and work through the established corridors — the National Security Council, the Domestic Policy Council. He needs a near-equal who can turn his instincts, which are great, into a doctrine that everybody else can predict and understand.

'Broken man' Abramoff gets 4 years in prison Broken and disgraced, lobbyist Jack Abramoff will spend four years in prison for his role in a corruption scandal that upended Washington politics and contributed to the Republicans' loss of Congress in 2006. The once powerful Washington insider, at times choking back tears during his sentencing hearing Thursday, appeared crestfallen as a judge handed down a longer sentence than prosecutors had sought. Over the past three years, Abramoff has come to symbolize corruption and the secret deals cut between lobbyists and politicians in back rooms or on golf courses or private jets. The scandal shook Pennsylvania Avenue from the White House to Capitol Hill. "I come before you as a broken man," Abramoff said at his sentencing before U.S. District Judge Ellen Segal Huvelle. "I'm not the same man who happily and arrogantly engaged in a lifestyle of political and business corruption." He added later that, "My name is the butt of a joke, the source of a laugh and the title of a scandal." Already two years into a prison term from a separate case in Florida, Abramoff, 49, will have spent about six years in prison by the time he is released, far longer than he and his attorneys expected for a man who became the key FBI witness in his own corruption case. With Abramoff's help, the Justice Department has won corruption convictions against former Rep. Bob Ney, R-Ohio, former Deputy Interior Secretary J. Steven Griles and several top Capitol Hill aides. Defense lawyers predicted more convictions would follow.

Masters of Sleaze Down in the depths of the netherworld, where Tammany Hall grafters and Chicago ward heelers gather amid spittoons and brass railings, a reverential silence now spreads across the communion. The sleazemasters of old look back into the land of the mortals and they see greatness in the form of Jack Abramoff. Only a genius like Abramoff could make money lobbying against an Indian tribe's casino and then turn around and make money defending that tribe against himself. Only a giant like Abramoff would have the guts to use one tribe's casino money to finance a Focus on the Family crusade against gambling in order to shut down a rival tribe's casino. Yet it's important to remember this: A genius like Abramoff doesn't spring fully formed on his own. Just as Michelangelo emerged in the ferment of Renaissance Italy, so did Abramoff emerge from his own circle of creativity and encouragement. Back in 1995, when Republicans took over Congress, a new cadre of daring and original thinkers arose. These bold innovators had a key insight: that you no longer had to choose between being an activist and a lobbyist. You could be both. You could harness the power of K Street to promote the goals of Goldwater, Reagan and Gingrich. And best of all, you could get rich while doing it! As time went by, the spectacular devolution of morals accelerated. Many of the young innovators were behaving like people who, having read Barry Goldwater's "Conscience of a Conservative," embraced the conservative part while discarding the conscience part. Abramoff's and Scanlon's Indian-gaming scandal will go down as the movement's crowning achievement, more shameless than anything the others would do, but still the culmination of the trends building since 1995. It perfectly embodied their creed and philosophy: "I'd love us to get our mitts on that moolah!!" as Abramoff wrote to Reed.

A Glimpse of the New Political parties usually reform in the wilderness. They suffer some crushing defeat, the old guard is discredited and the pain compels turnover and change. John McCain is trying to reform the Republican Party before a presidential defeat, with the old guard still around, and with a party base that still hasn’t accepted the need to transform. The central drama of this week’s convention was the struggle by reform Republicans to break through the gravitational pull of old habits and create something new. The convention thus sat on a knife-edge. And then Palin walked onstage. And what was most impressive was her speech’s freshness. Her words flowed directly from her life experience, her poise and mannerisms from her town and its conversations. She left behind most of the standard tropes of Republican rhetoric (compare her text to the others) and skated over abortion and the social issues. There wasn’t even any tired, old Reagan nostalgia. Instead, her language resonated more of supermarket aisle than the megachurch pulpit. More than the men on the tickets, she embodies the spirit of the moment: impatient, fed up, tough-minded, but ironical. Even in attack, she projected the cheerfulness of someone confident about the future. In those 40 minutes, the forces of reform Republicanism took control, at least for a time. Republicans started talking about Palin, Bobby Jindal and a brighter future for their party. In his own speech on Thursday, McCain showed that he is not naturally the smoothest of speakers. He did not have an over-arching story to describe how the world has changed in the 21st century and how government must adapt.But he described traditional conservatism-plus: low taxes and free markets with some activism built on top; compensating workers for lost wages when plants close; a grand national project for energy independence. Through it all, he communicated his burning indignation at the way Washington has operated over the last 12 years. He communicated his intense passion to lift government to a plane the country deserves. His policies are still not quite there yet, but McCain has the heart of an insurgent. John Sidney McCain III: Serving a Cause and a Desire to Succeed

•  A Speech to the Delegates

Policy

A new social contract for America Malaise has made a comeback. How else to describe the results of a recent Rockefeller Foundation/Time magazine poll in which 49 percent of 18 to 29-year-olds surveyed said that America was a better place to live in the 1990s and will continue to decline. Nine in 10 of all respondents agreed that just getting by is as hard as or harder than ever before.At the root of such pessimism is the failure of the nation's social contract – the policies and institutions that support Americans as they pursue their economic and personal goals – to keep pace with the dizzying changes of the past two decades. We've seen an explosion in information technology. The end of the cold war has unleashed massive amounts of human capital. Trade in goods and services is fully globalized. Medical advances are spurring gains in life expectancy. The return on higher education, measured by the difference in mean wages for those with and without advanced degrees, has grown 100 percent since 1974. And the traditional nuclear family is increasingly uncommon. The programs designed to help Americans navigate the economy were conceived for a static, relatively closed economy in which higher education was valued but not essential, retirement was significantly shorter, and two-parent, single-income families predominated. In other words, the current social contract is as antiquated as the typewriter it was written on. It is no surprise, then, that Americans are awash in insecurity. To bring the social contract up to speed with the 21st-century economy, we need bold policies that satisfy one or more of the "Four F's:"

Frannie From Pan to Fire: Rescue Me...Us...the System ? Our fear is that once we move beyond the perennial Pollyannas and into more realistic territory there's still a limited grasp of what a breakdown in Frannie, let alone the whole system, would mean for the economy. Shucks...:) We're not even sure we get it and we've been flapping our gums for months. Certainly if the XLF keeps getting run up like this though our fears of a major breakdown are very far afield from the common understanding. In other words there's still a lot of piping to pay for and Bill and Paul are telling us the bill's coming due. There's a lot of words being bandied about that this is yet another example of socialist intervention in the markets. Instead they screwed up, let them fail. Well this is disingenuous at best and also ignorant both of how one thing leads to another and what underpins markets. Here are some things to think about that'll help you correct that. As the chart makes clear a Frannie failure would turn a nightmare Housing market into a catastrophic collapse and be a systemic threat to the entire financial system. BSC was a Sunday park stroll as compared to the Mongols' visit to Baghdad in comparison. But that's not the worst of it - because the full faith and credit of the US government was involved and exploited the credit-worthiness of the US Treasury was and is at stake and the Chinese have fired more than one public warning shot.

How not to rescue the Big Three Car owners know the tough call: When do you stop putting money into a rickety auto? Congress faces a similar decision this month. Should it put money into a failing US car industry? The answer would be simple if Midwest swing states weren't up for grabs in the presidential election.  To persuade US lawmakers to pass an emergency loan for them within weeks, executives from General Motors, Ford, and Chrysler were out in force at the party conventions in St. Paul, Minn., and Denver to plead that the industry is "deserving" of government credit. Deserving? Years of mismanagement, high executive salaries, and overly generous worker benefits have indeed hurt the Big Three. Last month, their new car sales were down by double digits compared with a year ago. The decline has left them with low credit ratings, making it difficult to borrow. But guess what. Despite a slowing US economy, Toyota and Honda saw only single-digit losses in their August sales. Nissan's sales were up. Those companies know how to run successful auto manufacturing plants in the US and aren't asking for help. They can sell good cars at reasonable prices with labor compensation packages at $40 to $50 an hour per American worker. GM is still stuck with "legacy costs," or past agreements that leave it paying $70 an hour, and has to heavily discount prices on auto sales. But many foreign carmakers are already there, or going there, with nimble, innovative, and smarter responses to a shifting market and to congressional fuel-economy mandates. They didn't make the big mistake of focusing on trucks and SUVs as Detroit did and then asking for a loan that may end up simply becoming a bailout.Detroit is no more deserving than many other US industries – textiles, furniture, toys – that have failed to compete well against foreign companies. But if Congress does decide to risk money on the US automakers – and overcome President Bush's opposition – it ought to at least demand big changes from the Big Three and their unions. Congress shouldn't rescue an auto industry and its unions that aren't doing enough to rescue themselves. The federal government is already trying to save one public-private partnership, Fannie Mae and Freddie Mac. It doesn't need to become a credit master to another faltering industry.

How to Exit Iraq JOHN McCAIN spoke of his hopes for Iraq’s future last night. When we traveled around Basra recently escorted by Iraqi Army soldiers and a handful of coalition advisers, we glimpsed a model of post-American Iraq that he and Barack Obama would do well to consider. This world, defined principally by more capable Iraqi security forces taking the lead with coalition support and an increasingly confident Iraqi government, defies the simplistic “all in” or “all out” way that Iraq is debated in Washington. With the Bush administration now working out an agreement on having American troops out by 2012, understanding how this withdrawal will proceed is vital. Basra is as an example of what an exit strategy might look like — and of the dangers of getting it wrong. After the 2003 invasion, control over southern Iraq was handed over to British forces. Without adequate troops to protect the population, security in Basra deteriorated, the British withdrew and Shiite militias took control. In late March of this year, Prime Minister Nuri Kamal al-Maliki launched an offensive in Basra to clear the city of militias, but the Iraqi Army quickly got bogged down. American special operations forces and combat advisers reinforced Iraqi units, providing crucial air and fire support and detailed intelligence, surveillance and reconnaissance. As a result, Iraqi security forces turned the tide and now control the city. The lesson of Basra is clear: a rapid withdrawal risks a resurgence of violence, but a responsible drawdown and a reorientation of the mission away from combat and toward advising Iraqi forces stand a good chance of advancing our interests in Iraq at acceptable cost. Under this model, embedded military advisers would provide just enough help to give Iraqis what they need on the battlefield, but not so much that it stymies their development and perpetuates a view of Western occupation. Yet this transition is risky. Security gains could come undone if Iraqis fail to strike political deals on elections, oil revenues and disputed territories. Sectarian conflict could also reignite if the Shiite-dominated government fails to accommodate the predominantly Sunni “Sons of Iraq,” the 100,000 security volunteers, many former insurgents, who have taken up arms against Al Qaeda. The biggest challenge America will face is our rapidly diminishing leverage. Iraq’s government is increasingly asserting sovereignty, demanding a new bilateral security relationship with the United States with more constraints on how American forces operate — and limits on how long they can stay. Mr. Maliki and his advisers have inflated confidence in the ability of the Iraqi forces to maintain security that has reduced our influence.

Cram School Confidential: Korean Students Becoming World's Best I saw a lot of amazing things on my recent trip to Seoul, Korea. In addition to interviewing President Lee at the Blue House and touring the DMZ, I also got to experience another culture.One of the most incredible phenomenons is hagwons, or cram schools. Hagwons are so successful in helping Korean students perform better on standardized tests, they've multiplied to become a booming cottage industry that rivals the nation's public school system. "There are hagwons for everything," a Seoul-based mom told me. "There are hagwons for arranging hagwons, and hagwons to enhance appreciation for arts for kids, too, so anything goes here." Unlike in America, though, where parents choose between paying for private school or using the public system, the majority of Korean kids attend both. The result: 12- to 14-hour days are typical for Korean schoolchildren. But there's a high price to pay for all this academic success, as you'll see in this accompanying video.

The Things Campaigns Do to You "The most promising way to move forward in all three dimensions – coverage, cost, and long-run fiscal situation – is to replace the employer exclusion with a tax credit, a step that has been proposed many times before (e.g., Butler 1991 and Pauly and Hoff 2002). Firms would still be allowed to deduct the cost of their contributions to employee premiums, just as they can deduct wages and other expenses today for the purpose of calculating taxable income. But workers would now have to include employer contributions to health insurance in their earnings for the purpose of calculating taxes (precisely which taxes is discussed below). In exchange for, workers who purchased qualifying insurance would get a refundable tax credit. Qualifying insurance would be along the lines proposed by the President in his standard deduction for health insurance, including limits on out-of-pocket payments, coverage of a general range of medical care, and guaranteed renewability by the provider (Treasury 2008)." This is a pretty fair description of the McCain health care plan. The funny thing is, this is not be found in McCain campaign literature or on his senate website, but rather in a paper written by Jason Furman, Obama's Economic Policy Director, who now is arguing about the perils of this very plan. Now Furman would probably be right to respond that the McCain plan doesn't go far enough to facilitate risk pooling in the individual market and maybe that the tax credits are insufficient. But the general thrust of the McCain plan is one that he championed before he became an Obama staffer, now his job is to criticize that very plan.

Posted by dblwyo at 02:58 PM | Permalink | Comments (0)

There's more to the major policy issues confronting the candidates, and us, than economic and domestic challenges, obviously. As we've been reminded recently by our friendly neighborhood bear. Yet there's far more going on than "just" Iraq, or the Middle East or Georgia. Though each of them is individually important, critical (as in possibility of a Simpson-like red zone incident) individually and collectively. Nonetheless there's a lot more going on in the world than than just these small isolated events. Just kidding in a way and not in others. After the break you'll find a slew of readings worth your skimming that we've selected to provide the same kind of cross-sectional and decent quality sampling across international problems that the prior post tried to for politics and domestic issues. They range from key stories in the developed countries, including the surprise resignation of yet another Japanese prime minister - an indicator of Japan's continuing failure to find the leadership it needs to adapt to the changes in the world. Or the story about the growing political strength in Germany of the Far Left and their political alliances - can you imagine a re-tread Communist forming the next German government ? That's not the only challenge - both China and India are rapidly reaching short- and medium-term cusp points in their development paths that will create major systemic stability problems for them. And are already reflected in severe tremors. Some of the other news is from the Middle East and Iraq. In the latter, despite the lack of MSM coverage lots of the news continues to be outstanding, such as the handover of Anbar province to Iraqi control - or the fact that Iraqi bonds are now rated less risky than state government bonds in the US Midwest !!! The other news includes a nice little summary of Iran's multi-dimensional breakdowns coupled with Syria's increasing feistiness and renewed maneuvering.

Oil Shock to Crisis to Systemic Threats

Those last two in particular illustrate a key point we'd like to make - things don't happen in isolation. Syria has more room to manuver and manipulate because Russia's less likely to pressure it and is increasing arms sales. Similarly while Iran is imploding it's getting more dangerous and less subject to international pressures now that Russia has over-turned the last twenty years of progress in re-architecting the international system. But we're not just picking on Russia or those particular examples - rather we're using them to point out that not only is it one damm thing after another but they are all inter-related and feed off one another. Have you ever thought what it might be like to be in the situation room in the White House and have five of these a day come whistling at you ? Any one of which could blow up to a major crisis with little or no warning. We can say that but it's hard to grasp.

Fortunately our friends at Harvard's Kennedy School have done us all a great public service by hosting a public policy war game that was developed  by several think tanks that looks at a relatively "minor" disruption in oil supplies and what happens. There's a whole bunch of things you can learn from watching this and we can't recommend it highly enough. An incomplete list would include:

1) What it's like to be in the hot seat during one of these crisis. This "game" is constructed exactly like war games that are used to analyzed policy issues all the time and this particular one includes extremely high powered people who've sat in the real chairs. What you see is what we're all gonna get.

2) The discussion of oil supply disruptions and how it spreads across the global economy is accurate.

3) The complicated linkages to other geo-political, diplomatic and national security problems illustrates as well as anything we've seen in the public domain how these things all play off one another and establish scary feedback loops.

4) The scenarios depicted are actually somewhat optimistic since they are pre-Georgia, i.e. Russian cooperation is presumed in looking for resolutions.

5) The discussions of a National Energy Policy, the constraints, the possible alternatives and how long it would take to put those alternatives in place is also quite accurate. We won't detail them on the grounds it's better for you to be snuck up on but trust us - it's all entirely in line with our previous sketch of the situation (In Search of a Nat'l Energy Policy: Check the Mirror Pogo).

6) The discussions of how to position the President's responses mirrors everything I've ever read, the people I've talked and my own more limited experiences in much smaller settings. The distance between what the actors know is the short- and long-term best response and what they can sell is honest, excruciating and debilitating. As Larry Summers points out - one of the things you should learn and we'll give away - if you think we can become independent of foreign oil inside 2-3 decades you're nuts. No matter what we do. In other words we're now in a cleft stick where we're reaping the results of ignoring a rational energy policy for thirty years.(Inside the Sausage Factory: the 4P's of Political Reality).

We really hope you can find the time to watch the simulation - total time is about two hours but you'll learn more in those two hours about oil, the energy crisis, the real problems with policy-making and a whole host of other things. If you have trouble getting to the KSG multi-media center try clicking here. And if you're interested in a downloadable PDF report that provides some background briefings the report is here. Click and dload as you would.

The one other observation, comment and suggestion we're going to make is what we really hope you take away is this: every single story below could turn into one of these little games. For real. 

Developed Countries

How Britain Will Dominate Europe Britain is less than one half the size of France and only about two-thirds the size of Germany but, by the year 2060, it will have more people living in it than both countries, according to a new report by the research arm of the European Union, Eurostat. Germany, home to the largest population in Europe since its reunification in 1989, will see its population decline from some 82 million today to 70 million in 2060, according to the study. Britain, as a result of higher immigration and more babies, will see its population rise to 77 million from 50 million over the same period. Other countries such as Ireland, Cyprus and Spain are expected to see sharp increases as well. The projections are part of a broader analysis of European populations which also concludes that, if current demographic trends hold, the natural growth in population in the continent as a whole will end in just seven years time, when the number of deaths overtakes the number of births. Thanks to immigration the E.U.'s population will continue to grow to 520 million by 2035 before falling back to 506 million by 2060. (The U.S. population, according to another recent study, will increase over the same period from about 300 million today to 468 million in 2060, most of that increase coming as a result of immigration.) The Eurostat study's most serious implications are for an aging population and the ability of European societies to pay for pensions for their elderly after they stop working. Today, there are three working-age Europeans for every one over 65. By 2060, that number will have fallen to one in two. The lifting of restrictions on immigration for able workers could also helpIn Britain, however, the projections have triggered calls for tighter immigration controls. The steepest population declines are expected in eastern Europe, where countries such as Bulgaria and Poland could lose up to one quarter of their populations, according to the study.

Fukuda Resigns as Japan's Prime Minister After Less Than a Year in Office Yasuo Fukuda resigned as Japan's prime minister after less than a year in office marked by political gridlock, plunging approval ratings and disarray within the ruling Liberal Democratic Party. He follows predecessor Shinzo Abe, who quit last September, in resigning since the LDP lost control of the less-powerful upper house in July 2007 to the Democratic Party of Japan. Both Fukuda and Abe proved unable to work with the opposition or win popular support for road taxes and increased health care for the nation's aging population. The new prime minister, most likely the next LDP president, will need to revive an economy that contracted in the second quarter, bringing Japan to the brink of its first recession in six years. ``This is an act of suicide for the Liberal Democratic Party,'' said Yasunori Sone, a professor of politics at Keio University in Tokyo. ``The public will probably want new elections to be held, instead of an LDP leadership vote.''  Fukuda's resignation comes two years after ex-Prime Minister Junichiro Koizumi tried to privatize the postal service and vowed to destroy his ruling party after encountering opposition to the plan. The political gridlock that followed his departure led to the first leadership vacancy at the Bank of Japan in more than eight decades and helped drive down Japan's Nikkei 225 Stock Average about 20 percent since Koizumi left office.

``The 53-year-old LDP is reaching the end of its political shelf life,'' said Masayuki Fukuoka, a professor of political science at Hakuoh University north of Tokyo. ``Koizumi promised to change Japan by destroying the LDP, and that's what we're seeing -- an eviscerated party on its last legs.'' The short terms of Abe and Fukuda contrasted that of Koizumi, who left office after five-and-half years, the third- longest tenure since World War II. When he was elected, Japan was in deflation and fighting recession. Koizumi cut government spending and pushed banks to write off bad loans. He broke with tradition by naming cabinet members without consulting party leaders. When lawmakers in 2005 rejected legislation to sell the state-run postal system, Koizumi dissolved the lower house and expelled 37 party members who voted against the plan. He won a new election five weeks later. 

I Am Ready to Be Japan's Next Prime Minister: William Pesek Here's a pub quiz expatriates in Tokyo pull out around the time the third bottle of sake arrives: Quick, name Japan's last five prime ministers. Americans put on the spot in a comparable way need to reach back to 1977 and Jimmy Carter. Brits need to think back to James Callaghan in 1976, Germans to Walter Scheel in 1974 and Chinese to Deng Xiaoping -- also in the 1970s. Japanese only need to remember Keizo Obuchi in 1998. At the moment, Japan has had as many leaders since then as Italy. Once a replacement is chosen for Yasuo Fukuda, who quit yesterday after less than a year in the job, Japanese will only need to look back to 2000 to name their last five leaders. What does it say about a Group of Seven economy that presents investors with a revolving door of hapless leaders?

'I Fear for Germany'  Erich Honecker's heirs are making a remarkable comeback in Germany. The Left Party, an amalgam of the successors to the former East German Communist Party and disgruntled Social Democrats, is now the country's third-strongest political force. With about 15% public support, it is quickly closing the gap with the Social Democrats, whose popularity is at a historic low of 20%, according to a Forsa poll published last week. With general elections scheduled for next year, it's even possible that the Communists may be able to return to power a mere 20 years after the fall of the Berlin Wall. Such a development would undermine nothing less than Germany's standing as a market economy and Western ally. It is the Social Democrats who may pave the way for the Communists' relaunch. Currently in an uneasy grand coalition with the Christian Democrats, the Social Democrats might be tempted to lead the next government by joining forces with the Green Party and the Left. Such a three-way coalition, were it to occur, already has enough votes in parliament to elect a Social Democratic Chancellor; it could possibly gain a majority next year. While the Social Democrats have been cooperating with the Left in regional parliaments in East Germany, doing so in West Germany, let alone at the national level, has been taboo. Social Democratic leader Kurt Beck said last month that this won't change -- at least not for now. While ruling out cooperating with the Left next year, he added that "No one can know today what will exist in 2020."

EU Leaders Put Off Moves to Pressure Moscow  The European Union pledged Monday to help Georgia recover from Russia's continuing military intervention, but fears over Europe's dependence on Russia for energy and of splitting the EU prevented moves to pressure Moscow. Russian officials including President Dmitry Medvedev, made similar demands in the run-up to Monday's summit, warning the EU would have to decide as it responds to events in Georgia what kind of relationship it wants with Moscow. EU leaders agreed in their final statement to send Mr. Sarkozy and EU officials to Moscow Sept. 8 to assess Russian intentions. After that, the bloc will draw up a full response ahead of an EU-Russia summit in November, effectively giving Moscow two months' grace before any potential EU action.Still, the summit's final statement did little to penalize Moscow beyond suspending meetings on a new trade-and-investment agreement until Russia has pulled its troops back in accordance with the cease-fire deal Mr. Sarkozy brokered last month. Russia says it is already abiding by the deal. 'Stop! Or We'll Say Stop Again!'

Korea, China, India, Africa

LEADERSHIP: The Big Switch In South Korea South Korea and the U.S. have negotiated the details of how South Korea will take over command of wartime military operations in South Korea. Since 1950, the U.S., in the name of the UN, has been in charge. This will change in 2012, as South Korea becomes master of its own house, militarily, for the first time since 1950. As part of that switch, South Korea had to acquire additional communications capabilities, software and officers (both staff and command) that  enable them to run the entire operation. To that end, the U.S. and South Korea are running a series of wargames, where the South Koreans can practice being in charge. Everything went better than expected, but many problems were encountered. South Koreans information systems, including databases that did not work well with their American counterparts. In addition to the wargames, there are also political games. Procedures are being worked out to coordinate how the two nations will handle the escalation that would lead to a war. Even if the North Koreans execute the dreaded surprise attack, the two nations have to be on the same page when it comes to mobilizing and moving additional military and diplomatic resources towards the war effort. The South Koreans have to have an idea of what additional forces the U.S. could, or would, provide, and when. The U.S. has to be kept informed of South Korean strategy, because what the South Korean generals do is a matter of life or death for the American forces involved.

China ponders the lessons of the Japanese 'miracle' Albert Keidel at the Carnegie Endowment for International Peace in Washington says that when Japan was at China's current level of gross domestic product of just over $2,000 per capita, and headed for $10,000, it had growth rates of 8 to 10 percent. So did South Korea and Taiwan. Economists have observed that the later a country begins its catching-up, the more rapidly it modernizes. So Keidel expects China to grow more swiftly than its three neighbors did at the same stage of development. The result, he says, is that China will match the United States for economic size by 2035 and be twice as big by midcentury. "Because its success in recent decades has not been export-led but driven by domestic demand, its rapid growth can continue well into the 21st century, unfettered by world market limitations," Keidel wrote in a recent paper. "Nor do other problems China faces jeopardize long-term growth prospects." One such problem is that rapid industrialization of a country of 1.3 billion people is generating so much pollution that it risks choking off growth.But we have been here before. The Organization for Economic Cooperation and Development, Keidel notes, called Japan in the late 1960s "one of the most polluted countries in the world." Japan, however, started to tackle its pollution, giving its environmental agency de facto cabinet status in 1971. China, now following suit, did the same earlier this year. Another American scholar, Derek Scissors of the Heritage Foundation, draws a much gloomier lesson from Japan's experience. The population boom that has powered Chinese growth will give way over the next decade to a rapid aging of the society, which will usher in weaker economic growth, as it did in Japan, he says. The number of Chinese in the industrious 15-24 age cohort grew by 20 million from 2000 to 2005, but the increase in 2010 will be just 1 million, according to UN projections. It will then drop sharply, as a consequence of China's one-child policy, and the country's overall working population will shrink after 2015. After four decades of a young population and rapid export-led growth, Japan was also projected by many to challenge the United States for global economic pre-eminence, Scissors noted. "Instead, Japan is now approaching 20 years of starkly inferior performance, coincident with an aging population and much lower birth rates than those seen at the outset of that earlier 'miracle,"' he said.

Faiths Clash, Displacing Thousands in East India At least 3,000 people, most of them Christians, are living in government-run relief camps after days of Christian-versus-Hindu violence in eastern India, government officials said. The government said that many people were also living in the jungle without any shelter or security because of the tensions, which erupted in violence after a Hindu leader was killed Saturday. At least 10 people, most of them Christians, have been killed since. Christian community leaders say that at least 1,000 homes of Christians have been set on fire since Monday, rendering more than 5,000 people homeless. Many of those living in the jungle were without food or water, said the Rev. Dibakar Parichha, a priest at the Roman Catholic church in Phulbani, a town in Orissa State. Father Parichha said that about 90 places of worship, including small churches and prayer halls, had been burned down. Local officials said the figure was about 20. The violence has occurred in Kandhamal, a district in Orissa State that has a history of communal and ethnic clashes. The latest conflict started Saturday night, when unidentified armed men stormed a Hindu school in Kandhamal and killed the Hindu leader Laxmanananda Saraswati and four of his followers. The police suspected that Maoist rebels were responsible. But Hindus blamed Christians. In the retaliatory violence, 500 houses were burned. All nine towns in the district are under a curfew, and the police have license to shoot. At least two people have been killed in violent reprisals in other districts of Orissa, including a woman who died when an orphanage was burned down.

Tata Clash Stalls Building Of Car Plant Tata Motors is suspending production of the world's cheapest car and plans to move manufacturing in the face of violent protests. The maker of the world's cheapest car warned it is suspending plant construction and planning to move manufacturing elsewhere in the face of violent protests from farmers and local politicians. While the outcome is still unclear, the declaration by Tata Motors Ltd. -- part of India's flagship industrial conglomerate and an international symbol of the nation's modern engineering prowess -- is the starkest sign yet of how rapid industrialization is clashing with those who are skeptical of modernization and suspicious of the reach of big business into rural India. It is a conflict being played out across the nation as India strives to boost manufacturing to supplement slowing growth in its larger services industry. But Tata's predicament has been the most closely watched, because the $2,500 Nano mini-car has been touted around the world as revolutionary and Tata is known as one of India's most powerful, yet socially responsible, employers. As a result, Tata's problems could send a discouraging message to big international companies interested in operating in India.

Riches of Africa Nigerian traders can be found in most corners of Africa. But until recently, formal cross-border investments by Nigerian businesses have been a rarity. That is changing. Awash with petrodollars and foreign capital, Nigeria’s banks are rapidly extending their reach. Aliko Dangote’s multi-billion dollar plans to expand his cement empire are on a different scale, however. This has made him something of a pioneer as well as an ambassador for a growing trend. He has been restructuring management, bringing in foreign expertise to drive his group’s cement production across the continent to 50m tonnes by 2012. He is investing in new plants in east, west and southern Africa. Experience in Nigeria must count among the toughest for any industrialist. In some respects it also adds an extra hurdle, concedes Mr Dangote. “In the majority of these African countries, they’ve been used to Europeans or Chinese going in there,” he says. As a Nigerian it has proved difficult at times to be taken as seriously. “Always they will be looking at you at a distance, saying, ‘Hey, these Nigerians, we don’t know what they’re up to.’” At the same time, he is confronting dilemmas familiar to any multinational. “We are dealing with 10 different African governments and some of them change their laws midway.” The decisive moment for his company came a decade ago, he says, when he moved from trading basic commodities to processing them, following an inspiring trip to Brazil. It was then that he began building flour mills, a pasta factory and a sugar refinery, which became the principal supplier to Nigerian beverage groups. Until then, other than family seed capital, the Dangote group had “never taken out a loan”. The timing of his subsequent multibillion dollar investments in cement production, now his fastest growing business, was bold. Nigeria, with its ailing power grid, sharp bankers and political instability, is a tough environment for manufacturers. It was far from clear that industry on the scale envisaged by the Dangote group would be commercially viable.

Middle East

Syria: Who Needs Annapolis? It was the biggest gathering of radical Palestinian factions since the signing of the Oslo Peace Accord in 1993, with Hamas, Islamic Jihad and Popular Front for the Liberation of Palestine-General Command attending along with the Lebanese Hizballah organization — an all-star cast of organizations branded as terrorist by the U.S.  Beneath portraits of Syrian President Bashar al Assad and his late father, Hafez, one speaker after another called for an end to peace negotiations with Israel, demanded a lifting of the Israeli siege of Gaza, and urged Palestinians and Arabs to unite against Israel. "Zionists are bastards, and will always be bastards," said Hamas chief Khaled Meshal. "They will never be legitimate." With melted snow dripping into the conference hall, decorated in burlap sacking to evoke the inside of a bedouin tent, the setting could hardly have born less resemblence to the Naval Academy in Annapolis, Maryland, scene of the U.S. sponsored Middle East peace conference last November. That, of course, was the point. By hosting this belligerent, anti-Annapolis conference, the Assad regime seemed to be symbolically turning its back on the U.S.-led peace effort. For over a year, Damascus had been calling for a resumption of peace negotiations with Israel, not least at the Annapolis meeting itself. But though a brief thaw in U.S.-Syrian relations ensued, the resumption of hard-line posturing seems to suggest that Syria wanted more than the Bush Administration was willing to deliver. Syria's main beef with Israel is the occupation of the Golan Heights (captured by Israel in 1967), but the Assad regime has long been concerned that the U.S. is trying to isolate or even topple it. Still, it's not clear that that Syria's rejection of Annapolis means it seeks confrontation with Israel. Despite the presence of Meshal and a few other leaders, a look at the graying conference attendees — mostly third-tier political cadres sporting corduroy suits, leather trench coats, and other 70s fashion statements — suggests that the best minds of the resistance are busy elsewhere.

IRAN: Depressing News The governments growing closeness with leftist Venezuelan president Hugo Chavez had led to hundreds of Iranian intelligence and special warfare (terrorism) operatives being dispatched to South America. But with Venezuela as a safe, and hospitable, base, Iranian death squads are again up and running in South America. Last year, the government said that it had 3,000 uranium enrichment centrifuges operating. That was enough to produce enough enriched uranium in a year for a nuclear bomb. Previously, Iran had only 328 centrifuges operating in a research facility. Now, Iran says it has 5,000 centrifuges, although UN IAEA inspectors believe that the Iranians are exaggerating, and have only 4,000 functioning, with several thousand more being prepared for operation. The World Health Organization (WHO) believes Iran has an above average number of people (about 20 percent of the population) suffering from depression. WHO also believes that Iran has at least a million drug addicts (mainly opium and heroin). The government has long believed that the number of addicts was over two million. The governments solution for decades of double digit inflation is to issue new currency, that is worth 10,000 times what the current one does (thus the current 10,000 rial note would be replaced by one worth one rial). Three decades, 70 Iranian rials were worth one dollar. Now it takes nearly 10,000 rials. The government mismanagement of the economy is resulting in growing labor unrest. Workers at many government owned companies have not been paid for months, because the government runs so many companies that don't make a profit. Having these workers go on strike does not bother the government much, but increasingly the workers have realized that and taken to organizing noisy public demonstrations against the government. Using the government paramilitary forces (in civilian clothes) to attack the workers does not always work (the paramilitaries are defeated). That, however, has revealed another worrying syndrome; growing disenchantment with Islam. The secret police reports on "the public mood" reveal a growing dislike for Islam itself. Not just in the cities, but in the countryside.

COUNTER-TERRORISM: Walking Away From Islam Hamas has an image problem, and it's getting worse. It's gotten so bad that the 30 year old son (Mosab Yousef) of one of the Hamas founders (Hassan Yousef) has not only renounced Hamas, but has become a Christian. Mosab is fed up with the terrorism/"destroy Israel" approach the Arab world has embraced over the last sixty years. Mosad notes, as have many other Arabs, that this has not worked. The conversion angle is something Moslems are trying to keep quiet. Mosab Yousef's father pleaded with his son to keep quiet about the conversion (which took place 18 months ago). The elder Yousef knows that this is not an isolated incident. Many young Moslems are abandoning Islam. Most do so quietly. In Iran, the clerics that run the country are shocked at secret police reports about a growing number of young Iranians who have, in effect, abandoned Islam. This sort of thing is happening all over the Moslem world, but especially in Arab countries. The people who switch to Islamic radicalism get all the headlines, not the larger numbers who just walk away from Islam are largely ignored. In the Palestinian territories, there is also a growth in the number of Sunni Moslems who are switching to the Shia version (as championed by Iran). But many other Moslems are openly distancing themselves from the conservative forms of Islam (like the well funded Saudi Wahhabism). One reason this trend is kept quiet is because Islamic militants are inclined to kill such traitors, if the switch is done too openly.

Iraq 

Iraq Bonds Safer Than Ohio Bank Debt Stung by Subprime Losses, Yields Show Iraq's bonds are delivering the biggest returns in emerging markets as oil export revenue bolsters government finances and violence declines. The country's $2.7 billion of 5.8 percent bonds due 2028 gained 45 percent since August 2007, according to Merrill Lynch & Co. indexes. Investors demand 4.84 percentage points more in yield to own the debt instead of Treasuries, down from 7.26 percentage points a year ago. The spread is narrower than for notes of Ohio banks National City Corp. and KeyCorp, suggesting Baghdad may be safer for bond investors than Cleveland. Oil exports will climb as high as $86 billion this year, more than double the $30 billion annual average from 2005 to 2007, helping the country post a $52.3 billion budget surplus, according to the U.S. Government Accounting Office. A reduction in bloodshed has allowed the Bush administration to consider a ``general timeline horizon'' for troop reductions.

Victory in Anbar As significant as Okinawa and the Chosin Reservoir. Two years ago, on September 11, 2006, the Washington Post stirred an election-year uproar with this chilling dispatch: "The chief of intelligence for the Marine Corps in Iraq recently filed an unusual secret report concluding that the prospects for securing that country's western Anbar province are dim and that there is almost nothing the U.S. military can do to improve the political and social situation there . . ." But there was something we could do: Pursue a different counterinsurgency strategy and commit more troops. And on Monday, U.S. forces formally handed control of a now largely peaceful Anbar to the Iraqi military. "We are in the last 10 yards of this terrible fight. The goal is very near," said Major-General John Kelly, commander of U.S. forces in Anbar, in a ceremony with U.S., Iraqi and tribal officials. Very few in the American media even noticed this remarkable victory. Yes, the stunning progress in Anbar owes a great deal to the Awakening Councils of Sunni tribesmen who broke with al Qaeda terrorists and allied with U.S. forces. But those Sunni leaders would never have had the confidence to risk their lives in that way without knowing the U.S. wasn't going to cut and run. The U.S. committed some 4,000 additional troops to Anbar as part of the 2007 "surge," along with thousands more Iraqi troops.

Posted by dblwyo at 11:54 PM | Permalink | Comments (0)

Let's catch up a little bit on the political and policy news. After the break we've clustered some readings excerpts that look at the Democratic Convention, some other political news and some major policy issues. Make no mistake the Democrats had a remarkable convention. Actually it was going to be remarkable in one way or another for several reasons. Fortunately for all of us it turned out remarkably positive on many fronts. Headed into the convention there were major problems in bringing the Hillary supporters back into the party, in establishing the credability of Barry with the voters as a guy who, if he clearly wasn't one of them, understood their problems, in moving from the cerebal and ethereal to the practical, pragamatic and substantive and in energizing the party and larger public.

On the whole there was no commentator who felt that  any one of those could be accomplished, at least well. And certainly not all of them And early in the convention, especially after Hillary's speech - as the excerpts show - it looked like the problems were getting worse with Hillary damming with faint praise and setting herself up to catch the standard after it fell and position for 2012 ! The level of bitterness was apparantly severe or worse. Instead, starting with Michelle Obama's speech there was a carefull crafted convention that moved from strength to strength. The Clintons and their supporters were brought into the fold - Bill made a great speech if not a heartfelt one and one always has to wonder at the sincerity. And Teddy main a real old-fashioned barn-burner which was a tribute to his courage and dedication as well as the shibboleths of the Democratic past.

But the real keys were what had to be extraordinarily well-crafted, coordinated and delivered speeches by Michelle, Joe Biden and Barry. Early on the key strategic themes were established and worked and worked. Until we get to Barry's speech. Now a political speech, especially at a convention, is largely supposed to be emotive. And this one was but it was also substantive. If you compare Barry's speech to our prior assessment of key policy priorities he literally ticked them off right down our list. In what we think is the right priority order and with the sub-points being pretty much the right ones, whether it was the economy, energy, domestic policy or foreign policy. We'll try and dig into in more detail but his only real problem is that the initiatives he's proposing aren't affordable without increased deficits. On the other hand, and holding his feet to the fire on those isn't a fair test at a convention, one can still legitimately argue for the ROI. The return on investment - these are all the right major strategic initiatives and if we want to fix those problems it makes sense to borrow the funds to make the capital investment for the sake of future, long-term growth and social well-being.

So take a gander. Better yet listen to the speeches. As it happens C-Span not only has them all online but put them over on YouTube and I put together a playlist for you. 

Democratic Convention

A Good Start on 2012  My bottom line reaction to Hillary Clinton's speech Tuesday night: Good, but not quite very good, for Barack Obama in 2008. Even better, if things should turn out like they might, for Hillary Clinton in 2012. Clinton's speech was carefully tailored, like the very attractive orange pants suit she wore. It was tailored to her need to speak directly to those who supported her, especially those unreconciled to Obama's nomination. It was laden with references to feminist advances—the Seneca Falls conference of 1848 got hearty applause, the passage of the Nineteenth Amendment was duly noted, Harriet Tubman was cited as advice to all (keep going). She saluted thereby her own persistence through the primaries and noted that America does not like a quitter. So much for those Obamaites who kept urging her to get out of the race. In contrast, the argument for supporting Barack Obama was far more abstract. Clinton voters supported her because she could help those unfortunate souls out there (the requisite lugubrious stories follow). Barack Obama would help those unfortunate souls, and John McCain wouldn't, not at all. He'd just be four more years of George W. Bush. Ergo, logic requires you to support Barack Obama. But Clinton's affect was chilly, or at least seemed so to me… What was missing was much in the way of description of Barack Obama. What kind of man is he? One who supports the same positions she does. Hillary's Grand Strategy - VDH

High Anxiety in the Mile High City I’ve been to a lot of conventions, and there’s always something gratifyingly weird that happens. Dan Quayle acting like a Dancing Hamster. Teresa Heinz Kerry reprising Blanche DuBois. Dick Morris getting nabbed triangulating between a hooker and toes.  But this Democratic convention has a vibe so weird and jittery, so at odds with the early thrilling, fairy dust feel of the Obama revolution, that I had to consult Mike Murphy, the peppery Republican strategist and former McCain guru. “What is that feeling in the air?” I asked him. “Submerged hate,” he promptly replied. There were a lot of bitter Clinton associates, fund-raisers and supporters wandering the halls, spewing vindictiveness, complaining of slights, scheming about Hillary’s roll call and plotting trouble, with some in the Clinton coterie dissing Obama by planning early departures, before the nominee even speaks. At a press conference with New York reporters on Monday, Hillary looked as if she were straining at the bit to announce her 2012 exploratory committee. “Remember, 18 million people voted for me, 18 million people, give or take, voted for Barack,” she said, while making a faux pro-Obama point. She keeps acting as if her delegates are out of her control, when she’s been privately egging on people to keep her dream alive as long as possible, no matter what the cost to Obama.

Obama's speech seen by 38 million-plus viewers More people watched Obama speak from a packed stadium in Denver on Thursday than watched the Olympics opening ceremony in Beijing, the final "American Idol" or the Academy Awards this year, Nielsen Media Research said Friday. (Four playoff football games, including the Super Bowl between the Giants and Patriots, were seen by more than 40 million people.) His TV audience nearly doubled the amount of people who watched John Kerry accept the Democratic nomination to run against President Bush four years ago. Kerry's speech was seen by a little more than 20 million people; Bush's acceptance speech to GOP delegates had 27.6 million viewers. Through four days, the Democratic convention was seen in an average of 22.5 million households. No other convention — Republican or Democratic — had been seen in as many homes since Nielsen began keeping these records for the Kennedy-Nixon campaign in 1960. There weren't enough television sets in American homes to have possibly beaten this record in years before that.

74% of Democrats Say Convention Has Unified Them Three out of four Democrats (74%) say the party's ongoing national convention has unified them as they roll out now in full force to put their nominee, Barack Obama, in the White House. Just 14% think the convention has not unified them.  Fifty-two percent (52%) of voters overall agree that the convention has unified Democrats, while only 30% disagree, according to a new Rasmussen Reports national telephone survey. Fifty-nine percent (59%) also believe that Hillary Clinton's speech Tuesday night endorsing Obama helps the candidate's chances of being elected president. More importantly, after weeks of media reports about division in the party between the Clinton and Obama forces, 84% of Democrats say Clinton's speech helps Obama. Less than half (45%) of all voters, however, believe Clinton really wants Obama to become president, and 36% think she does not. Again, Democrats have a lot more confidence in the former first lady: 68% say she wants Obama to win, while only 17% say she doesn't. But the speech clearly impressed voters with the sincerity of her support for the first African-American nominee of a major political party since the percentage of those who believe she wants him to win has increased noticeably. In a survey taken the night before Clinton's speech, 56% of Democrats and just 37% of voters overall believed Clinton wanted Obama to win. Perhaps most importantly, 64% of Democratic women now believe Clinton wants Obama to be elected president, versus 19% who do not think that is the case. Prior to the speech, only 47% of Democratic women thought Clinton wanted Obama to win.

 Johnson’s Dream, Obama’s Speech AS I watch Barack Obama’s speech to the Democratic convention tonight, I will be remembering another speech: the one that made Martin Luther King cry. And I will be thinking: Mr. Obama’s speech — and in a way his whole candidacy — might not have been possible had that other speech not been given. That speech was President Lyndon Johnson’s address to Congress in 1965 announcing that he was about to introduce a voting rights act, and in some respects Mr. Obama’s candidacy is the climax — at least thus far — of a movement based not only on the sacrifices and heroism of the Rev. Dr. King and generations of black fighters for civil rights but also on the political genius of Lyndon Baines Johnson, who as it happens was born 100 years ago yesterday. These men and women felt Johnson truly wanted to help poor people and particularly people of color, and that he was held back only by his ambition: his desire to be president, and because he was a senator from a Southern state. But when, in 1957, ambition and compassion were finally pointing in the same direction — when he realized that he would never become president unless he removed the “magnolia scent” of the South — he set out to pass a civil rights bill, he did it with a passion that showed how deeply he believed in what he was doing. It has taken me scores of pages in my books to try to describe that heroism, and all of them inadequate. But it also took Lyndon Johnson, whom the black leader James Farmer, sitting in the Oval Office, heard “cajoling, threatening, everything else, whatever was necessary” to get the 1965 bill passed and who, with his legislative genius and savage will, broke, piece by piece, in 1957 and 1964 and 1965, the long unbreakable power of the Southern bloc. “Abraham Lincoln struck off the chains of black Americans,” I have written, “but it was Lyndon Johnson who led them into voting booths, closed democracy’s sacred curtain behind them, placed their hands upon the lever that gave them a hold on their own destiny, made them, at last and forever, a true part of American political life.”

 Big Picture Politics

John McCain: No surrender The gnarled maverick outpolls his party and might even beat Barack Obama. But what sort of president would he be? Biography matters in a presidential election, and this year the candidates offer two quite different kinds of story. Mr Obama’s appeal depends on what he symbolises: the uplifting notion that the son of a Kenyan father and a Kansan mother can, through talent and hard work, rise to the highest post in the land. Mr McCain’s appeal rests on what he has done. Mr McCain says he enjoys being the underdog, which is just as well. If this year’s presidential election is a dogfight, any Republican candidate starts with his ammunition all but spent and both wings on fire. The economy is in the doldrums. House prices are sliding. Petrol costs two and a half times as much as it did when George Bush came to power. Americans are sick of the war in Iraq, sick of their president and hungry for change. As the nominee of the incumbent party, Mr McCain should have no chance at all. Yet most polls showed him in a statistical dead-heat with Mr Obama going into their two conventions. That partly reflects voters’ reservations about Mr Obama. Some worry about his inexperience or his unsavoury friends. Some are unsure what all that rhetoric about hope and change really means. Some, alas, are unwilling to vote for a black man. But part of the credit for the way Mr McCain outperforms his party must go to Mr McCain himself. Bring back the real McCain

The Final Days No matter how careful the orchestration, though, a rivalry seared in the brutal lowlands of South Carolina circles around to this moment. Eight years after their epic Republican primary battle of 2000, the first-place finisher desperately needs the second-place finisher to win in order to validate his own legacy. And the runner-up now finds himself saddled with the baggage of a man he never much liked to begin with, forced to live with a record he personally considers deeply lacking and portrayed as if he were a clone of his longtime adversary. As John Weaver, McCain’s former chief strategist told me, “I’m sure McCain is thinking, Is Bush going to beat me twice?” Anxious denizens of Bushworld worry that McCain will beat himself and in the process take down their best chance for deliverance when it comes to the verdict of history. And the president himself, according to friends and prominent Republicans, privately rails about what he considers McCain’s undisciplined approach to the campaign and grouses about McCain’s efforts to distance himself from the administration. A new McCain ad this month declared, “We’re worse off than we were four years ago.” That’s the sort of stinging indictment a candidate usually issues when the other party is in the White House. The president understands the treacherous political environment facing Republicans and agrees that McCain cannot run as another George Bush, advisers say, but he also seems to think that the senator risks going too far because he needs the party base that still supports Bush and remains unenthusiastic about McCain.

Bush, Cheney, Schwarzenegger won't attend GOP President Bush, Vice President Dick Cheney and California Gov. Arnold Schwarzenegger are all skipping the Republican National Convention. Bush and Cheney are focusing on Hurricane Gustav, which is rapidly approaching the Gulf Coast. Schwarzenegger is staying home to deal with a standoff with California legislators over the state budget. All three had been scheduled to speak Monday night at the convention. Presidential candidate John McCain was flying to Mississippi to be briefed on the hurricane, but was expected to return to the convention city later.

Key Policy Issues 

Obama Should Focus On Education Reform When I sat down with Mr. Ford at The Wall Street Journal's offices recently, I looked forward to hearing what he would say about the direction of his party and its liberal presidential nominee. I wanted to know what he thought of the party's leftward tilt on taxes, trade, energy and education. Mr. Ford's answer: that his party was able to win control of Congress two years ago by running moderate Democratic candidates in Republican districts. That, he says, is what it needs to do to stay in power. "If you look at the congressmen who won in 2006, the 'red to blue' as they call them as a group, not those who may have succeeded Democrats and are holding safe Democratic seats," Mr. Ford said, "and you consider the special election races this year, in the last couple of months in Mississippi, Louisiana and Illinois, what you will see clearly in the ascendancy in the party is a moderate, mainstream, Democratic approach to taxes, to fiscal policy, to spending as a whole, to national security, foreign policy. "I would contend that the Democratic majority is due to a moderate, mainstream, conservative philosophy -- conservative, a lot of people interpret that the wrong way, but just a moderate mainstream philosophy in the party being on the ascendancy, as opposed to [a philosophy that is] sometimes further to the left, some may call liberal." Mr. Ford stresses that education is among "the types of things Democrats are going to have to focus on . . . Not because we want to win elections, but because the country needs it. "Without a serious, broad-based competitiveness plan for the country that organizes around energy and education, the country will continue to falter. The next 10 to 15 years, we'll be fine. But if you look past that 15 year horizon, we cannot expect to be the No. 1 center for innovation, for technology, for job creation, the No. 1 economic center, indefinitely." What Mr. Ford sees in Mr. Obama is the potential to break the logjam on education and other issues that has prevented fundamental reforms from passing in Washington. "I think the country could invest in him and may be willing to align itself with his vision, if he has a broad enough vision to change the country 10, 20, 30 years down the road.

Paul Krugman: Feeling No Pain My first reaction to Bill Clinton’s convention speech was sheer professional jealousy: nobody, but nobody, has his ability to translate economic wonkery into plain, forceful English. In effect, Mr. Clinton provided an executive summary of the new Census report on income, poverty and health insurance — but he did it so eloquently, so seamlessly, that there was no sense that he was giving his audience a lecture. My second reaction was that in Mr. Clinton’s speech — as in the speeches by Hillary Clinton and Joe Biden (this column was filed before Barack Obama spoke on Thursday night) — one heard the fundamental difference between the two parties. Democrats say and, as far as I can tell, really believe that working Americans are getting a raw deal; Republicans, despite occasional attempts to sound sympathetic, basically believe that people have nothing to complain about. As it happens, the numbers support the Democrats. That Census report gives a snapshot of the economic status of American families in 2007 — that is, before the financial crisis started dragging the economy down and the unemployment rate up. It’s a given that 2008 will look much worse, so last year was as good as it will get in the Bush years. Yet working-age Americans had significantly lower median income in 2007 than they did in 2000. (The elderly, whose income is supported by Social Security — the program the Bush administration tried to kill — saw modest gains.) Meanwhile, poverty was up, and health insurance — especially the employment-based insurance on which most middle-class Americans depend — was down. But Republicans, very much including John McCain and his advisers, don’t believe there’s a problem.

• What Happens to Income and Poverty in 2008?

Sense and Reality on Energy High oil prices have helped to bring down the American economy and to devastate Detroit. Politicians are talking about energy policy, although they seem to be talking past each other. So it is now, and so it was in 1974, after the price shock that arrived after the Arab oil exporters started an embargo in retaliation for America’s support of Israel in the Yom Kippur War, and learned that they could sell oil for a lot more than they had thought. From the perspective of 2008, what is most remarkable is that in 1975, the country had a president who actually wanted to confront the issue. The answers he proposed seem highly relevant now, even if the steps needed are much larger than would have been necessary if action had been taken back then. The president, Gerald R. Ford, proposed to deal with the damage from rising oil prices by ... raising oil prices. That sounded radical then, and it sounds radical now. It also makes economic sense.Can you imagine hearing the following statements from either Senator John McCain or Senator Barack Obama? “To provide the critical stability for our domestic energy production in the face of world price uncertainty, I will request legislation to authorize and require tariffs, import quotas or price floors to protect our energy prices at levels which will achieve energy independence.” “Increasing energy supplies is not enough. We must take additional steps to cut long-term consumption.” “Obviously, voluntary conservation continues to be essential, but tougher programs are needed, and needed now. ”Those are excerpts from President Ford’s State of the Union address in 1975. He wanted more oil drilling, and more use of nuclear power and coal, but he also wanted to hold down consumption. The man who had been a Michigan representative for a quarter of a century wanted to force Detroit to raise the fuel efficiency of cars. He wanted Congress to impose taxes to assure that the price of gasoline did not fall, and to pass a windfall profits tax to assure that the oil companies did not become too rich. Instead of that, the campaign so far this year has featured partisan wrangling: Drill more. Conserve more. Tax the oil companies. Subsidize their exploration.

The State of New Orleans: An Update THE third anniversary of Hurricane Katrina lands squarely between the Democratic and Republican conventions. Some might lament that this reflects the public abyss into which New Orleans has fallen. But it also serves as a reminder to urge the next president to bring fresh attention to the city’s recovery. Yes, New Orleans is regaining economic health. The city has recovered most of its population and jobs, giving it a foundation to support rebuilding. It has also reopened 87 public schools, including many new charter schools, as the state strives to overhaul the city’s public education system. Yet serious challenges remain. A deficient system of levees leaves most of New Orleans facing the same risk of flooding from a major storm as it did before Hurricane Katrina. There are still not enough basic public services — like hospitals and child-care centers. Public transit remains a huge problem as the number of riders has gone up by 40 percent in the past year, while only seven more buses have been put into service. Although the population is increasing and the unemployment rate is very low (partly because of a shortage of workers for jobs related to construction and tourism), growth has stalled somewhat, as the city and region have added relatively few new households or jobs in the past year. The ability to attract more workers is hindered by the high cost of rental housing, now almost 50 percent higher than it was before the storm. To increase the supply of affordable homes and reinvigorate blighted neighborhoods, the city must contend with more than 65,000 homes that are vacant or abandoned. There is no question that there has been progress in New Orleans. Nonprofit groups, business leaders and some politicians are working hard to repair the city’s buildings and improve the criminal-justice and health-care systems. But as Tropical Storm Gustav threatened the city this week, residents had only to look at the inadequate levees and rotting houses to see how much remains to be done, how important Washington’s attention is, and how easily three years of halting progress could be washed away. Rebuilding New Orleans Status Chart

Posted by dblwyo at 10:00 PM | Permalink | Comments (0)