bizzXceleration: Performance, Value and Profit

D.C. to America: You Can't Handle the Truth Since the financial crisis began in 2007, policymakers' message to the American people seems to have been adopted from Jack Nicholson's famous line in "A Few Good Men": You can't handle the truth. John Mauldin, president of Millennium Wave Advisors, says there are two good reasons why Ben Bernanke, Presidents Bush and Obama, Treasury Secretaries Paulson and Geithner, and other luminaries haven't leveled with the American people about the state of the economy and steps being taken to address the crisis. And I'm not (just) talking about the AIG bonuses. First, policymakers don't really have the answers. There "really is no playbook" for this downturn, says Mauldin, author of the popular "Thoughts from the Frontline" e-letter. He also worries the financial markets are predicated on academic theory that is faulty, and now policymakers are (effectively) trying to put Humpty Dumpty back together again. Second, while pundits and analysts can afford to be "100% certain – and wrong" about what should be done, Mauldin notes policymakers don't have that luxury since their actions have real world consequences (intended and otherwise). Both points resonate but that still doesn't explain the lack of candor about both the size of the problem and actions being taken to address it. Moreover, there doesn't seem to be anybody in Washington with the leadership skills of Chesley Sullenberger, the hero of USAir Flight 1549, as Henry Blodget notes in the accompanying video.

• A conversation with Sec. Geithner (Rose Interview)

Global Policy Responses

Economic Advisers Warn of No Quick Turnarounds Top administration economic advisers walked a careful line Sunday, saying that despite a few hopeful indicators and President Obama’s call to investors to consider returning to the share markets, that it would “take some time” to turn a corner. Mr. Obama and his senior aides also sought over the weekend to quell Chinese concerns about the long-run security of U.S. Treasury notes, which had brought a rare expression of high-level concern last week from Prime Minister Wen Jiabao. But despite the recent attempts of the president and others to buck up investor confidence, and a week in which American share markets registered their best performance in months, the message Sunday from one of the administration’s top economists, Lawrence H. Summers, director of the National Economic Council, was essentially one of caution. Asked on ABC’s “This Week” whether a bottoming of the economy was in sight, Mr. Summers said, “No one can make that judgment.” Job losses were likely to continue for some time, he suggested, noting: “We’ve got an economy that’s losing 600,000 jobs a month. It’s probably not going to stop imminently.” And queried about whether the unexpected profit reports for this year from Citibank and some other major banks meant that they were “out of the woods,” he replied, “I wish I could say that.” “It’s going to take some time” for the administration’s rescue efforts to gain serious traction, he said. Administration officials remained cautious Sunday about whether a second economic stimulus package might be needed. The impact of the first was only beginning to be felt, they said. Mr. Zandi agreed and called the current stimulus plan “quite well-designed.” But he also put the odds that another would be needed as “quite high.”

When ‘Deficit’ Isn’t a Dirty Word Because important policy decisions hinge on whether deficits matter, this is an opportune moment to take stock of what we know. The good news is that there is little disagreement among economists who have studied the issue. The consensus is that short-run deficits help end recessions, and that whether long-run deficits matter depends entirely on how government spends the borrowed money. If failure to borrow meant forgoing productive investments, bigger long-run deficits would actually be better than smaller ones. When a downturn throws people out of work, they spend less, causing still others to be thrown out of work, and so on, in a downward spiral. Failure to use short-run deficits to stimulate spending amplifies that spiral, causing further declines in tax receipts and even bigger deficits. That this path makes no sense is a settled issue. But what about long-run deficits? To think more clearly about them, we must recognize that carrying debt is costly. The government can pay just the interest on its debt each year, or it can pay interest plus some additional amount to reduce the principal. The yearly payment is clearly greater in the second case, just as a homeowner’s monthly payment is larger with a 10-year mortgage than with a 30-year one. But the total burden of the various repayment options (in technical terms, their “present value”) is exactly the same. It’s a simple trade-off between intensity of burden and duration of burden. No matter which option we choose, money spent to service debt can’t be spent for other things we value. But that doesn’t mean we should always borrow less. The main issue is what we do with the borrowed money. If we simply use the money to buy bigger houses and cars, deficits make us unambiguously worse off in the long run. That’s why the explosive increase in the national debt during the Bush administration was a grave misstep. In contrast, borrowing for well-chosen investments doesn’t make us poorer. Road maintenance is a case in point. Failure to repair roads in a timely way could mean eventually spending two to four times as much for the work. Even ignoring the fact that timely repairs would reduce the substantial vehicle damage from potholes, it would be much cheaper to borrow the money and do maintenance on schedule. It’s also useful to put the nation’s debt burden into perspective. Over the last eight years, Bush administration deficits raised the national debt by almost $5 trillion. Given the current crisis, it’s easy to imagine a similar increase during the next four years. At recent interest rates, servicing $10 trillion of extra debt costs about $400 billion annually — a big amount, to be sure, but less than 3 percent of the economy’s full-employment output. We’ll still be the richest country on the planet even after paying all that interest. 

Fed Plans to Inject Another $1 Trillion to Aid the Economy The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities. Having already reduced the key interest rate it controls nearly to zero, the central bank has increasingly turned to alternatives like buying securities as a way of getting more dollars into the economy, a tactic that amounts to creating vast new sums of money out of thin air. But the moves on Wednesday were its biggest yet, almost doubling all of the Fed’s measures in the last year.The action makes the Fed a buyer of long-term government bonds rather than the short-term debt that it typically buys and sells to help control the money supply. The idea was to encourage more economic activity by lowering interest rates, including those on home loans, and to help the financial system as it struggles under the crushing weight of bad loans and poor investments. As expected, policy makers decided to keep the Fed’s benchmark interest rate on overnight loans in a range between zero and 0.25 percent. But to the surprise of investors and analysts, the committee said it had decided to purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities on top of the $500 billion that the Fed is already in the process of buying. In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months. That would tend to push down longer-term interest rates on all types of loans. All these measures would come in addition to what has already been an unprecedented expansion of lending by the Fed. The central bank also said it would probably expand the scope of a new program to finance consumer and business lending, which gets under way this week. In effect, the central bank has been lending money to a wider and wider array of borrowers, and it has financed that lending by using its authority to create new money at will. Since last September, the Fed’s lending programs have roughly doubled the size of its balance sheet, to about $1.8 trillion, from $900 billion. The actions announced on Wednesday are likely to expand that to well over $3 trillion over the next year. Despite a trickle of encouraging data in the last few weeks, Fed officials were clearly still worried and in no mood to cut back on their emergency efforts. Fed policy makers sharply reduced their economic forecasts in January, predicting that the economy would continue to experience steep contractions for the first half of 2009, that unemployment could approach 9 percent by the end of the year and that there was at least a small risk of a drop in consumer prices like those that Japan experienced for nearly a decade. The Fed rarely buys long-term government bonds. The last occasion was nearly 50 years ago under different economic circumstances when it tried to reduce long-term interest rates while allowing short term rates to rise. Ben S. Bernanke, the Fed chairman, has been extremely cautious in recent weeks about predicting an end to the recession, saying that he hoped to see the start of a recovery later this year but warning that unemployment, a lagging indicator, would probably keep climbing until some time in 2010.

• Treasury's toxic asset plan could cost $1 trillion
  

Fed's Gamble: Buying Long Bonds The Federal Reserve's controversial decision to buy long-term Treasury securities is a step Chairman Ben Bernanke has been contemplating for much of this decade in thinking about how to prevent a return of deflation and depression. He hopes Wednesday's move will push down long-term borrowing rates benchmarked to Treasury bonds, from car loans to mortgage debt to corporate bonds. But it could backfire and fuel fears that the Fed, by using its power to print money to help the government finance soaring budget deficits, is kindling inflation. Those fears could, paradoxically, send Treasury yields higher. The market's initial reaction was mostly positive. Treasury yields dropped sharply, as previous research conducted by Mr. Bernanke suggested would happen. The Bank of England's decision earlier this month to begin purchasing government debt provided comfort that the move would work. Yields on British gilts have declined by roughly half a percentage point after it decided to buy gilts. An explosion of federal borrowing had started to put upward pressure on Treasury yields, said Brian Sack, an economist at Macroeconomic Advisers LLC. "Fed purchases could relieve some of that pressure and have a meaningful impact on yields." But in a hint of potential worries among investors about the Fed flooding the economy with even more money, the dollar dropped against the euro and the yen. The euro landed at $1.34 in late trading, up from $1.30 the day before, the biggest one-day gain since its birth in 1999.

Consumer-Loan Plan Is Off to Slow Start A program aimed at reviving consumer lending is stumbling out of the gate, pressured by distrust on Wall Street between banks and hedge funds as well as worries that the government will keep changing the rules in its rescue efforts. The Federal Reserve and Treasury program, which launches Thursday, allows hedge funds and other investors to borrow from the central bank on favorable terms. Investors in turn use the cash to buy new securities backed by auto loans, credit-card debt and other consumer financing. The credit crisis has cut off lending to consumers hoping to buy cars or borrow on their credit cards because investors, worried about rising defaults, have shunned that debt. The market for the asset-backed securities backed by this debt has shrunk from more than $1 trillion in 2006 to just $3 billion during the first two months of 2009, according to Dealogic.The goal of the program, called the Term Asset-Backed Securities Loan Facility, or TALF, is to make it more attractive to buy this debt and easier for consumers to get loans and spend money. Wall Street firms, after scrambling to get investors on board, generated enough interest for three deals associated with the program. In its early stages, the program has an outer limit of $200 billion, but that could grow to $1 trillion as the program is expanded to new asset classes. The first round of deals will be a tiny fraction of that, likely totaling about $5 billion, and many of the investors won't tap the Fed to fund their purchases of these securities. "Stillborn would be too harsh, but it is off to a pretty rough start," said Michael Ferolli, a J.P. Morgan economist. Officials have tempered their expectations for the launch. But they anticipate that the program will gain traction and were encouraged that three deals were launched to kick off the program.

Kashkari warns Congress not to force lending The official in charge of the Treasury's $700 billion bailout program for the financial sector warned Congress Wednesday that the government should not force banks to make loans that bankers may deem risky. Neel Kashkari, interim assistant secretary for financial stability at Treasury, told a congressional oversight panel that bad lending practices were at the root of the financial crisis and cautioned Congress not to "micromanage" institutions that receive government funds. "However well-intended, government officials are not positioned to make better commercial decisions than lenders in our communities," he said. Kashkari, who was put in the job during the Bush administration, testified amid growing impatience among members of Congress who want to see evidence that the taxpayer money is actually loosening credit markets. Lawmakers on a subcommittee of the House Oversight and Reform Committee voiced frustration with what they said was a continued lack of clarity from the Treasury on how banks were spending money they have received under the Troubled Asset Relief Program.

• A conversation with Timothy Geithner, U.S. Treasury Secretary

U.S. Seizes Key Cogs For Credit UnionsIn the latest move by federal authorities to prop up the nation's banking system, regulators late Friday seized control of the two largest wholesale credit unions in the U.S. after finding that their losses on mortgage-related securities were larger than previously thought.U.S. Central Corporate Federal Credit Union in Lenexa, Kan., and Western Corporate Federal Credit Union in San Dimas, Calif., which have a total $57 billion in assets, were taken into conservatorship by federal regulators.Michael E. Fryzel, chairman of the National Credit Union Administration, the industry's federal regulator, said the seizure was necessary to maintain the integrity of the credit-union system and protect the insurance fund that backs up deposits in thousands of retail credit unions.The affected institutions don't serve the general public. They provide critical financing, check clearing and other tasks for the retail institutions. These wholesale credit unions, known in industry parlance as corporate credit unions, are owned by their retail credit-union members.The vast majority of regular credit unions, the bank-like cooperatives familiar to millions of account holders nationwide, are considered financially sound. Credit unions have more than 90 million members nationwide.U.S. Central and Western Corporate have been grappling for more than a year with large paper losses on a slew of assets, mostly mortgage related. In January, regulators moved to prop up U.S. Central with a $1 billion infusion after it took big write-downs on some of the securities.

• Credit Unions, Bank Failures, and More
• Regulators Seize Two Large Credit Unions: U.S. Central and WesCorp

 

As Stress Grows, ECB Stays in Denial Can Europe act collectively? The Federal Reserve's shock tactic of pumping more than $1 trillion into the U.S. economy through bond purchases -- after a similar move by the Bank of England -- has left the European Central Bank in a bind. In addition, the bank's refinancing rate of 1.5% is one percentage point above comparable rates in the U.S. and U.K. -- despite forecasts that euro-zone inflation will hit zero this year and GDP will decline by as much as 4%. Printing money is anything but a risk-free solution to the deflationary threat. But one immediate consequence of the Fed's action has been to further undermine confidence in the dollar at a time when the euro already looks overvalued. That piles even more pressure on the ECB, which had been hoping that the stimulative impact of a weaker euro would help counter the disinflationary, if not deflationary, pressures it faces. In its defense, the ECB hasn't been idle. Its less-closely followed deposit rate -- which banks receive on cash left overnight with the ECB -- now stands at just 0.5%, well below the overnight interbank rate of 0.9%. The ECB hopes that will encourage banks to lend to one another and, more important, lend on to customers. The trouble is, with confidence shot to pieces, banks might continue to hoard cash regardless of the deposit rate. Two things are restraining the ECB from more radical action. One is philosophical: The ECB has inherited the inflation-fighting mantle of the Bundesbank, an institution committed to not repeating the Weimar Republic's disastrous experience with hyperinflation. Another is the difficulty of building a consensus among the 16 euro-zone members, particularly when Germany feels it will pick up the tab for the reckless behavior of others. That is a particular problem when it comes to quantitative easing, or using the central-bank balance sheet to buy government bonds. When the Fed and the BOE want to pump money into the economy, they simply buy U.S. and U.K. government bonds. But the euro zone doesn't issue its own bonds. Instead, the ECB would have to buy bonds issued by member states, forcing it into a political minefield as it tries to decide whose debt to buy and how much.Would it only buy bonds from Triple-A rated countries, such as Germany and France, whose debt is lowest risk and most liquid? Or would it buy the bonds of downgraded countries, such as Greece and Spain, thereby cutting their borrowing costs? These are tricky questions. But unless the euro zone acts quickly to agree to some ground rules, it risks finding itself unable to act even if it decides that quantitative easing is the only option.

U.S. to Toughen Finance Rules The Obama administration, moving with increasing speed, has inked the main contours of its plan to revamp financial-market oversight -- changes that will ripple through the economy, affecting everything from the operations of international banks to consumer protection. The principles include giving the Federal Reserve new powers that include authority to monitor and address broad risks across the economy, say people familiar with the matter. The proposals are expected to include tougher capital requirements for big banks and authority for regulators to take over a large financial firm that is failing. Treasury Secretary Timothy Geithner will soon outline proposed changes in financial regulation. They are expected to include: An enhanced role for the Federal Reserve to monitor and address broad economic risks. Changes to the way banks are overseen to prevent lenders from shopping among regulators for the easiest supervision. More transparency and stricter rules for the way money flows between banks. Tougher capital requirements for big banks. Consolidation of consumer-protection enforcement. Proposed changes to the payment and settlement system could also create a central body to process and monitor trades in derivatives, which are financial contracts whose value varies with the value of some other asset. Creating a derivatives clearinghouse would aim to prevent problems such as those at American International Group Inc., whose near-collapse last fall threatened havoc because no one could get a handle on its vast operation in credit-default swaps, a type of financial insurance. The Obama plan is likely to contain ways to make capital requirements less likely to drift lower during strong years for banks. The result could be to require banks to hold more capital during good times -- capping growth -- so those reserves can be safely drawn down if the economy turns sour -- freeing up more funds for lending.The plan is expected to ask Congress to give regulators the power to take over a financial company whose collapse would threaten financial markets.

Global Strategic Reponses vs Politics

Reform the architecture of regulation(Paulson) In the midst of the market turmoil, the pressing priority for US and global policymakers is to repair the financial system and restore the economy. Just as important, however, will be addressing the serious flaws exposed by this crisis. This process of reflection and reform will be critical to restoring confidence and enabling market-based capitalism to rebuild our economies. We must recognise the real possibility that because the crisis is not behind us, there may be lessons to learn and problems to address that are not now obvious. Yet many lessons are obvious and I take confidence from the commitment of world leaders – in the US, Europe, China and elsewhere – to pursue comprehensive regulatory reform and co-ordinate internationally. First, this will be a big, multi-year undertaking. The crisis has exposed serious flaws in many aspects of our financial system. There will be proposals for more effective regulations in areas ranging from over-the-counter derivatives and short selling, to the practices of financial institutions, investors, mortgage originators and credit rating agencies. We will need to reflect on the long-held premise that sophisticated investors have the wherewithal to look out for themselves and require minimal, if any, supervision. In these areas and others, regulations must be crafted to foster market stability while maintaining the fundamental tenet of capitalism: if investors are to reap the rewards of taking risks they must also bear the negative results of their risk-taking. Yet updating our regulations and market practices will not be enough. We must also fundamentally reform and modernise our regulatory architecture and authorities. While regulators have co-operated in addressing this turmoil, it is clear that their overlapping jurisdictions, gaps in jurisdictions and authorities, uneven capabilities and competition among themselves created the environment in which excesses throughout the markets could thrive. Consequently, to focus only on new regulation would fall short: we must also modernise the regulatory system and authorities in the US. This is not a new issue, but it is a difficult one. If we search for something positive in the carnage created by this financial crisis, it may be that it will provide the impetus for doing what many, including myself, have repeatedly called for: real reform of our regulatory architecture.

• Reforms key for central and eastern Europe
• Capitalism needs a revived Glass-Steagall

No Clear Accord on Stimulus by Top 20 Nations Two weeks before President Obama and the leaders of 19 other industrial nations meet to confront a global economic contraction, top finance officials meeting here Saturday committed to take “whatever action is necessary” to revive consumer demand and regulate global markets. Even so, they still seemed to have divergent views on what actions are required now.  At the end of a lengthy meeting at a luxury resort outside London, the so-called Group of 20 nations, who together represent about 85 percent of the world economy, failed to offer specifics about the size or timing of coordinated economic stimulus, and some major players, including Germany and France, remain deeply reluctant to add to their national debt. They did agree on Saturday to commit more money to help developing countries and the emerging markets of Eastern Europe, where the downturn has spilled into street protests. They also pledged to step up efforts to revive bank lending and regulate hedge funds. But the vagueness of the commitment meant that it will be up to President Obama — and the leaders of China, Russia and European nations, among others — to convince the markets that they have a coordinated strategy as they prepare to meet in London on April 2.

A Continent Adrift The clear and present danger to Europe right now comes from a different direction — the continent’s failure to respond effectively to the financial crisis. Europe has fallen short in terms of both fiscal and monetary policy: it’s facing at least as severe a slump as the United States, yet it’s doing far less to combat the downturn. On the fiscal side, the comparison with the United States is striking. Many economists, myself included, have argued that the Obama administration’s stimulus plan is too small, given the depth of the crisis. But America’s actions dwarf anything the Europeans are doing. The difference in monetary policy is equally striking. The European Central Bank has been far less proactive than the Federal Reserve; it has been slow to cut interest rates (it actually raised rates last July), and it has shied away from any strong measures to unfreeze credit markets. The only thing working in Europe’s favor is the very thing for which it takes the most criticism — the size and generosity of its welfare states, which are cushioning the impact of the economic slump. This is no small matter. Guaranteed health insurance and generous unemployment benefits ensure that, at least so far, there isn’t as much sheer human suffering in Europe as there is in America. And these programs will also help sustain spending in the slump.  But such “automatic stabilizers” are no substitute for positive action. Why is Europe falling short? Poor leadership is part of the story. European banking officials, who completely missed the depth of the crisis, still seem weirdly complacent. And to hear anything in America comparable to the know-nothing diatribes of Germany’s finance minister you have to listen to, well, Republicans. But there’s a deeper problem: Europe’s economic and monetary integration has run too far ahead of its political institutions. The economies of Europe’s many nations are almost as tightly linked as the economies of America’s many states — and most of Europe shares a common currency. But unlike America, Europe doesn’t have the kind of continentwide institutions needed to deal with a continentwide crisis.

Trade Barriers Could Imperil Global Economy At least 17 of the 20 major nations that vowed at a November summit to avoid protectionist steps that could spark a global trade war have violated that promise, with countries from Russia to the United States to China enacting measures aimed at limiting the flow of imported goods, according to a World Bank report unveiled yesterday. The report underscores a "worrying" trend toward protectionism as countries rush to shield their ailing domestic industries during the global economic crisis. It comes one day after Mexico vowed to slap new restrictions on 90 U.S. products. That action is being taken in retaliation against Washington for canceling a program that allowed Mexican truck drivers the right to transport goods across the United States, illustrating the tit-for-tat responses that experts fear could grow in coming months. The report comes ahead of an April 2 summit in London in which the heads of state from those 20 industrialized and developing economies will seek to shape a coordinated response to the economic crisis. Their inability to keep their November promises is another indication of how difficult it will be to implement any agreement reached next month on a global scale. Protectionist measures may also sharply worsen the collapse of global trade, which the World Bank said is facing its steepest decline in 80 years as global demand dries up.

Editorial: A survival plan for global capitalism  J.K. Galbraith wrote that 1929 stood alongside 1066, 1776, 1914, 1945 and 1989 in its importance. The world today was shaped by the efforts of governments to overcome the economic meltdown of the 1930s – and the consequences of their failures. Even if this economic crisis is not as bad as the Great Depression, it will have epoch-moulding consequences. This week the Financial Times starts a series on the Future of Capitalism. Much, however, depends on the success of next month’s meeting of the Group of 20 in London and how successful governments are at ending this worldwide crisis. The intellectual impact of the crisis has already been colossal. The “Greenspanist” doctrine in monetary policy is in retreat. It no longer seems clear that it is easier for central banks to clean up after asset price bubbles burst than to prick them when they are small. Monetary authorities will need to be more concerned both about financial stability and global imbalances which allowed a few countries to build up vast surpluses while a few others ran yawning deficits. Finance has already changed irrevocably. The grand investment banks which once strode alone have either collapsed, or joined the flock of retail banks. Governments are now borrowers, lenders, investors and insurers of last resort for much of the financial system. The future of finance will be determined by their efforts to disentangle themselves from the thickets of guarantees they have been forced to make. The depth of the crisis will determine how easily they manage it. The fiscal cost of this episode is unclear. In some countries, it may be state-busting. Some nations will need to cope with extraordinary fiscal tightenings in the coming years. The domestic impact of government spending – and its geopolitical ramifications – could yet be colossal. Again, much depends on how soon the downturn ends. There is one certainty. While recessions are inevitable, deep depressions or slumps – or whatever you call them – are neither necessary nor welcome. They destroy wealth, sap happiness and crush old certainties. What is more, increasing poverty is a grave threat to world stability and democracy. Revolutions often start as bread riots, and economically-stagnant countries make belligerent neighbours. Growth must be restarted.

• Now is the time for a less selfish capitalism
• Adam Smith’s market never stood alone
• Read the big four to know capital’s fate

Why saving the world economy should be affordable Can we afford this crisis? Will governments destroy their solvency, as they use their balance sheets to rescue over-indebted private sectors? The debate, as it has so often been, is between the US and Germany. Thus, in a speech last week, Tim Geithner, US Treasury secretary, noted that, “The IMF has called for countries to put in place fiscal stimulus of 2 per cent of aggregate GDP each year by 2009-10. This is a reasonable benchmark to guide each of our individual efforts. We think the G20 should ask the IMF to report on countries’ stimulus efforts scaled against the relative shortfall in growth rates.” Needless to say, no such firm pledge was forthcoming, with Germany particularly resistant. Nevertheless, a great deal of fiscal stimulus has occurred. This is what readers of recent research on the aftermath of financial crises by Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard would expect. These authors concluded from studying 13 big financial crises that the average rise in real public debt in the three years following a banking crisis was 86 per cent. In some of these cases, the increase was more than 150 per cent*. So, is there good reason to expect huge increases in public sector indebtedness across the globe, not least in triple A rated sovereign borrowers ? The answer is: yes. If so, does this guarantee defaults of some kind? The answer is: no. In a recent paper, the staff of the International Monetary Fund suggest why these are the right answers.

• Why the G20 must focus on sustaining demand

Sound and Fury: Denial, Revenge, Repairs ?

Outside Edge: The book that’s in and out of fashion Who is Ayn Rand? The answer is critical to understanding Atlas Shrugged, the libertarian blockbuster written by this Russian-American author. A book of big ideas first published in 1957, it is selling strongly again. Its depiction of a US enervated by interventionism has struck a chord as Washington spends billions on bailing out banks and businesses. The literary device that underpins a plot Wagner would have considered over-elaborate is the question: “Who is John Galt?” It is uttered by despairing Americans whose country is collapsing into chaos. Socialist politicians, venal scientists and corrupt businessmen are all to blame. Galt, it transpires, is a brilliant engineer who has organised a “strike” of the US’s most talented businessmen. These are the “Atlases” who shrug off the world supported on their under-appreciated shoulders. This precipitates anarchy and the remaking of society along libertarian lines. So who is, or rather was, Ayn Rand? The book is back in fashion. The Ayn Rand Institute in California says twice as many copies were sold in the US in 2008 as in 2007, and three times as many in the first seven weeks of 2009 alone. It is popular with business people, usually portrayed as creeps by novelists. They are mostly heroes in Atlas Shrugged, whose publisher, Penguin, is a sister company to the Financial Times. The premise that free trade should rule relationships in place of guilt and coercion appeals to them. Left-leaning liberals mostly hate the book. European sales are apparently modest. There is little place for the weak or for compassion in Rand’s world. But few critics have picked up on the trail of evidence that implicates the author, who died in 1982, in the current economic cataclysm. Rand popularised the libertarian economic ideas that found political expression through Margaret Thatcher, former UK prime minister, and Ronald Reagan, former US president and a Rand fan. Alan Greenspan, who as US Federal Reserve chairman pumped up credit in the wake of “dotbomb” and fuelled the subprime crisis, was also an admirer. Many commentators blame the laisser faire ideology that Rand and others espoused for triggering the credit crunch. State intervention has been a response to disaster rather than triggering it in the way depicted in Atlas Shrugged. An answer to “Who is Ayn Rand?” is therefore: “One of the accused.”

House Passes Bonus Tax Bill The House passed legislation Thursday that would significantly curb Wall Street bonuses this year, as lawmakers from both parties echoed popular outrage over big payouts to employees of American International Group Inc. after the ailing insurance giant took billions of dollars in taxpayer money. The House measure was approved on a 328-93 vote and would impose a 90% surtax on bonuses granted to employees who earn more than $250,000 at companies that have received at least $5 billion from the government's financial rescue program. The bonus tax, if approved by the Senate and signed into law, would be retroactive to Dec. 31, 2008. Wall Street firms last year paid more than $18.4 billion in bonuses in New York City, according to the New York state comptroller, and pay experts estimated that thousands of employees would likely be affected. While the attacks on Wall Street bonuses were seen in Washington this week as good politics, many financial analysts -- and some Obama administration officials -- worried the rush to pass the measures may prove to be bad policy and undermine the government's financial rescue plans. President Barack Obama issued a statement that aides said was intentionally lukewarm. In it, he said the House vote "rightly reflects the outrage that so many feel" over the bonuses, but it didn't mention the substance of the bill. In an appearance later on "The Tonight Show with Jay Leno," Mr. Obama said he understands the frustration. "Everybody's angry," he said. "But I think that the best way to handle this is to make sure that you close the door before the horse gets out of the barn. And what happened here was the money's already gone out, and people are scrambling to try to find ways to get back at them." But privately, there's concern within the Obama administration that the angry political atmosphere now surrounding the federal bailout program will scare away private participants the government needs to help bolster the financial system. Treasury Secretary Timothy Geithner's financial rescue plan is heavily reliant on hedge funds and private-equity funds, for example, to buy up the toxic assets at the heart of the financial crisis. Mr. Geithner is expected to soon unveil details of the so-called Public-Private Investment Fund, which will rely on private capital to buy bad loans and other assets. Members of the administration question whether the appearance of unpredictability by Congress gives potential investors the idea the government program is too risky. Already, many banks are wary of participating in the government's voluntary $250 billion capital-injection program. More than 200 banks have withdrawn their applications to receive government cash.

• Political Backlash May Spread
• 'Outrage' Overflows on Capitol Hill
• $2.5 Billion in Merrill Bonuses Would Elude Tax

Obama’s Real Test When you hear a sitting U.S. senator call for bankers to commit suicide, you know that the anger level in the country is reaching a “Bonfire of the Vanities,” get-out-the-pitchforks danger level. It is dangerous for so many reasons, but most of all because this real anger about A.I.G. could overwhelm the still really difficult but critically important things we must do in the next few weeks to defuse this financial crisis. Let me be specific: If you didn’t like reading about A.I.G. brokers getting millions in bonuses after their company — 80 percent of which is owned by U.S. taxpayers — racked up the biggest quarterly loss in the history of the Milky Way Galaxy, you’re really not going to like the bank bailout plan to be rolled out soon by the Obama team. That plan will begin by using up the $250 billion or so left in TARP funds to start removing the toxic assets from the banks. But ultimately, to get the scale of bank repair we need, it will likely require some $750 billion more. The plan makes sense, and, if done right, it might even make profits for U.S. taxpayers. But in this climate of anger, it will take every bit of political capital in Barack Obama’s piggy bank — as well as Michelle’s, Sasha’s and Malia’s — to sell it to Congress and the public. The job can’t be his alone. Everyone who has a stake in stabilizing and reforming the system is going to have to suck it up. And that starts with the brokers at A.I.G. who got the $165 million in bonuses. They need to voluntarily return them. Everyone today is taking a haircut of some kind or another, and A.I.G. brokers surely can be no exception. We do not want the U.S. government abrogating contracts — the rule of law is why everyone around the world wants to invest in our economy. But taxpayers should not sit quietly as bonuses are paid to people who were running an insurance scheme that would have made Bernie Madoff smile. The best way out is for the A.I.G. bankers to take one for the country and give up their bonuses.

Obama Urges Steadiness Amid Crisis  President Barack Obama reacted coolly to a House bill that would use the tax system to try and confiscate nearly all the bonuses paid to American International Group Inc. employees. It's important, he said, not to "lurch from thing to thing" in trying to address the nation's big problems. "Look, I understand Congress' frustrations," he said on "The Tonight Show with Jay Leno." But he suggested that legislators were being more vindictive than constructive. "Everybody's angry... but I think that the best way to handle this is to make sure that you close the door before the horse gets out of the barn. And what happened here was the money's already gone out, and people are scrambling to try to find ways to get back at them," he said. From there, he went on to pitch his long-stated proposals to change the tax code by increasing taxes on all upper-income Americans, specifically families earning more than $250,000 a year and individuals earning more than $200,000 annually. "The important thing over the next several months is making sure that we don't lurch from thing to thing, so we try to make steady progress, build a foundation toward long-term economic growth," he said. "That's what I think the American people expect." Mr. Leno was even more negative to the House plan, saying it "kind of scared me." "If the government decides they don't like a guy, all of the sudden hey we're going to tax you, and, boom, and it passes, that's seems a little scary," he said. "It was frightening to me as an American that Congress or whoever could decide I don't like that group, let's pass a law and tax them 90 percent." Mr. Obama traveled to California, a state hard hit by the recession, where unemployment tops 10%, to promote his budget plan and priorities, to tout the impact of the economic stimulus law, and to hear concerns of everyday people. During his trip, the president has sought to lower the expectations of his adoring fans, saying it will take time to accomplish their goals. At a town hall meeting in Los Angeles earlier Thursday, he warned an audience anxious over cuts to schools that it will cost money to pay for high-quality education.

• President Obama Makes History by Appearing on 'Tonight Show'

The AIG Backlash: Has Congress Flipped Out? Barely a day goes by on Capitol Hill without some politician expressing a good measure of righteous indignation. It's less common for virtually every member of Congress, Democrat and Republican alike, to have the same target for his or her carefully calibrated anger. But when all that talk actually gets channeled into immediate action, then you know that something really historic is happening in Washington - and that Congress (and the public) may well come to regret it. The unprecedented productivity on Capitol Hill this week stems from the continuing, unanimous outrage over the $165 million in bonuses handed out by AIG, which the government has funneled more than a hundred billion dollars into since last summer. The plethora of legally questionable bills caps a messy week of finger pointing as all of Washington tries to harness public anger, score political points and figure out how AIG managed to grant the bonuses even after all the legislation Congress has passed to limit compensation to executives of the companies taxpayers have spent trillions of dollars bailing out. The GOP blamed Democratic ineptitude in the rush to pass too many bailouts; Democrats and Republicans alike said the Treasury Secretary Geithner has been asleep at the wheel; and the Obama Administration tried to refocus attention on the consensus point that Wall Street greed is the opposite of good. "In the end, this is a symptom of a larger problem - a bubble and bust economy that valued reckless speculation over responsibility and hard work," President Obama said in a statement. "That is what we must ultimately repair to build a lasting and widespread prosperity." But the AIG bonus scandal could make that repair job even harder than it already is. Growing doubts about the Administration's revitalization plan have now mushroomed into a full-blown credibility crisis. After all, how can Obama ask for upwards of another $750 billion for another bank bailout (as he has in his 2010 budget) and $100 billion to help the world economies, when it appears the Administration has had little control over how the banks have been spending the money thus far?

Sources and Causes: Look in the Mirror

Fluke? Credit crisis was a heist The folks in power in Washington and on Wall Street want to pretend that the current global financial crisis -- you know, the one that reduced household net worth in the United States by $11.2 trillion in 2008, according to the Federal Reserve -- was an accident caused by some unfortunate confluence of greed and asleep-at-the-switch regulators. What we're now living through, though, is the result of a conscious, planned looting of the world economy. Its roots stretch back decades. And it wouldn't have been possible without the contrivances of the bought-and-paid-for folks who sit in Congress. Of course, just because the plan blew up on the looters, taking off a financial finger here and a portfolio hand there, you shouldn't have any illusion that they've retired. In fact, in the "solutions" now being proposed -- by Congress -- to fix the global and U.S. financial systems, you can see the looters at work as hard as ever. The smoke screen -- the official explanation of the global crash -- was on full display at a March 5 hearing led by Sens. Chris Dodd, D-Conn., and Richard Shelby, R-Ala., respectively the chairman and ranking minority member of the Senate Banking Committee, into the $170 billion morass that is American International Group Served up on the grill were Eric Dinallo, the supervisor of insurance for New York state, and Scott Polakoff, the acting director of the federal Office of Thrift Supervision. Neither Dinallo nor Polakoff had a convincing explanation for why their agencies hadn't done more to stop the meltdown at AIG, which has so far cost taxpayers $170 billion. At times, they certainly seemed like they were trying to weasel out of responsibility, exactly as Shelby suggested. By trotting out these sacrificial victims in this show trial, our representatives in Washington hope you won't ask the hard questions, the questions that show that they bear far more responsibility for this crisis and for the destruction of trillions of dollars in global assets than any state insurance commissioner or Washington bureaucrat. What questions? How about these: (….).What should worry you now -- if you can spare a neuron or two from worrying about the economy, your job, your retirement savings, your mortgage and the meltdown of the global financial system -- is that the looters aren't in retreat. If anything, they're getting more brazen. The next round of looting is likely to come in the name of reform. Already, Shelby has called for federal regulation of the insurance industry. For years, the industry itself has been arguing for this, seeking to replace all those pesky state agencies and their differing rules with one federal standard. That's great if the federal standards are tougher than the toughest state standards and the federal regulators are tougher than the best state regulators. On recent evidence, I'm not counting on that. Are you?

Who's to blame? Look in the mirror It's open season on men in gray flannel suits this month, as citizens irate about the loss of $11 trillion in home and stock values have found a set of greedy, reckless insurers, bankers, politicians and TV personalities on whom they can vent their frustrations. Three "booyahs" for the baddies. Blaming someone else for your troubles is as American as handguns, yet it's fair to wonder whether some of the madness is misdirected. For below the surface of the anger on talk radio, the finger wagging in Congress, the Cramer baiting on TV and subpoena waving in statehouses lies the uncomfortable fact that most U.S. consumers were culpable in the borrowing binge that underlay the credit crisis. Much like drug abusers who complain about their nasty, cheating dealers, most Americans were users who were used. And now we're in rehab, secretly wishing for another shot at cheap, abundant credit while at the same time trying to deal with the idea that it's probably never coming back. In this context, the rash of rancor that has raked our culture in recent months is just a stop on the psychological spectrum that Elisabeth Kübler-Ross wrote about in her 1969 book, "On Death and Dying." She described five stages of grief -- denial, anger, bargaining, depression and acceptance -- that some experts believe Americans are enduring now, both individually and as a group. Do you recognize your own emotions somewhere along that path? Social anthropologist Jim Williams has been chronicling this journey for the past decade for his clients in the institutional-investment community, and he believes that acceptance -- the final resting stop for healing and peace -- is a long way away.His analysis is more than just a pedantic way for an academic to sort through the ethereal qualities of the physical world. Because if policymakers can understand that citizens' yearning for heads to roll comes from somewhere deep inside the subconscious, rather than from mere bloodthirstiness, then they can draft more a more effective, farsighted set of laws and rules to prevent another financial crisis from occurring.

Rescuing the economy from the worst financial crisis in 75 years just got harder. Thank those bonuses at American International Group.The uproar over six- and seven-figure payouts by a company propped up with $173 billion of government cash complicates President Barack Obama's already formidable task: To bolster the political courage of voter-fearing lawmakers to spend unfathomable sums of taxpayer money in order to avoid a decade of stagnation or a repeat of the Great Depression.

Rescuing the Economy Just Got Harder Federal Reserve Chairman Ben Bernanke, the nation's most prominent student of the Depression, was asked by a television interviewer the other day: What keeps you up at night? His answer wasn't Citigroup or inflation. "The biggest risk is that we don't have the political will," he said. "That we don't have the commitment to solve this problem, and that we let it just continue. In which case, we can't count on recovery."His point, though he can't put it so bluntly, is that it's going to take hundreds of billions of dollars more to rebuild the foundations of the banking system and restart the economy. It's going to mean letting some people profit from buying smelly mortgage assets on the cheap and paying others far more than the average office worker to manage huge portfolios that fall into government hands. And, to make the whole system safer, it's going to require changes to regulation of finance in ways that powerful interests will resist.Yet the public mood toward spending more taxpayer money -- and toward bankers and their government overseers -- appears even more hostile than it did last fall when the House of Representatives initially rejected the Bush administration's $700 billion bailout plea. Back then, voters didn't know what the plan was. Today, they know -- or at least think they do -- and they don't like it.Perhaps. But Ruy Teixeira, a sociologist who studies working-class attitudes, sees the AIG eruption as a manifestation of "the anger that people feel toward those who have been at the commanding heights of the economy for the last 20 years." Such sentiments led the House to vote 328-93 to impose a 90% tax on bonuses paid by firms that have received more than $5 billion from the TARP. And they prompted Jamie Dimon, chief executive of J.P. Morgan Chase, to bemoan "the constant vilification of corporate America."No one with the charisma of the late 19th century's Williams Jennings Bryan or late 20th century's Ross Perot has emerged to lead the angry mob -- yet.Mr. Obama himself may find a way to use the aroused public to build support for his "never again" plan for the financial system and his broader agenda to, as Mr. Teixeira describes it, "sand down the excesses of capitalism." "I don't want to quell anger," the president said this past week. "I think people are right to be angry. I'm angry. What I want us to do, though, is channel our anger in a constructive way."