Saturday, November 22, 2008

The Auto Makers Are Already Bankrupt

Admitting the obvious is their best chance to restructure.
By Paul Ingrassia

November 21, 2008

The moment of truth in the nation's automotive bailout debate might have come this week. As the CEOs of GM, Ford and Chrysler begged Congress for federal aid, a Detroit radio talk-show host asked whether Michigan, as well as the car companies, should get assistance. The state is being hit by an economic hurricane, he said, just as New Orleans was hit by a natural hurricane

Huh? Will the victimology myth never end? Hurricane Katrina was an act of God. The car crisis is an act of man. For the difference, consult the Bible. Any version will do.

Yesterday, congressional leaders gave the car companies until Dec. 2 to come up with viable business plans and renew their request for aid. Meanwhile, it's worth examining the myths that are shaping this debate.

One is GM's assertion that "bankruptcy is not an option." In truth, GM already has conceded that it's bankrupt -- by publicly stating it's nearly out of cash and needs emergency assistance. The company hasn't made a formal bankruptcy filing, which is no small matter. But it has declared bankruptcy everywhere else. Chrysler, at this week's Senate committee hearing, did the same.

A second myth is that management changes in Detroit would be pointless. GM CEO Rick Wagoner said he wouldn't resign to secure federal aid for his company. This was like Louis XIV saying, "L'État c'est moi." Mr. Wagoner explained that he didn't see "what purpose would be served." Well, the same one served by the presidential election in this country three weeks ago: to bring in somebody new to try some fresh ideas to fix things.

Mr. Wagoner has been GM's chief executive officer for eight years. Even before this year's calamity struck (the company lost $181,000 per minute in the second quarter), the company's U.S. market share, financial results and stock price had plunged precipitously.

At Chrysler, CEO Robert Nardelli has been on the scene just a year. Before that he was at Home Depot, where he took a $210 million departure package when the board wanted him out. There's no reason to begrudge Mr. Nardelli that money. But any plan to save Chrysler will inflict great hardship on dealers, suppliers, workers and managers -- and even if Mr. Nardelli is a great executive talent, he isn't the guy to lead the clarion call for sacrifice, despite his recent offer to work for $1 a year. Symbols are important here, which is why the spectacle of the Detroit CEOs swooping into Washington on corporate jets to ask for money was so jarring.

Ford CEO Alan Mullaly has been on the job just over two years. He seems to be making the right moves -- cutting costs, eliminating the dividend early on, revamping product plans, mortgaging assets to raise money to fund the turnaround, etc. That's why Ford, while not in great shape, is in a materially better position than the other two.

Mr. Mullaly is the Detroit chief executive I'd keep on the job. But that still doesn't mean it's right to hand federal aid to Ford or any of the other companies without requiring a bankruptcy restructuring in return.

Which raises the third myth: Bankruptcy means death. In fact, it means getting a second chance. Detroit's car companies point, correctly, to the cost cuts, labor concessions and other stringent measures that they've enacted in recent years. Ron Gettelfinger, the president of the United Auto Workers union, got his members to accept two-tier wages and big concessions on the health-care and retirement plans.

Nonetheless, far too many valid contractual claims remain on the car companies' revenue streams from dealers, employees, retirees and others for these companies to survive -- even if we get a modest economic recovery soon. The companies remain saddled with cumbersome contracts with the UAW that make work rules and plant procedures a constant challenge. A bankruptcy trustee or receiver could cut through all this quickly and give the companies a fresh start.

Myth number four is that banning executive bonuses or requiring more fuel-efficient cars will save Detroit, and are strings that should come with any federal aid. Executive pay isn't the problem in Detroit; and the companies will have to build more fuel-efficient cars to satisfy the market, not to meet mandates. These would be pseudo-strings designed to appease organized labor and the environmental lobby. Instead of saving Detroit, they'll pave the way for a bigger bailout later on.

Finally, the fifth myth is that a merger of GM and Chrysler will propel both companies to prosperity. Some of the slide-shows making the rounds on Wall Street assume that a merged company would have a 30% market share, slightly less than the two companies now have combined. It isn't true. The elimination of duplicate brands, models and dealers would push a combined market share down to 25% or less. The revenue projections behind a potential merger seem greatly inflated. GM has massive problems of its own to address without taking on those of Chrysler, which needs a profitable, and committed, foreign buyer.

The biggest beneficiaries of a GM-Chrysler merger would be Cerberus, the private-equity firm that owns Chrysler, and the big banks that hold billions of Chrysler bonds that they haven't been able to sell. The bonds were used in Cerberus's purchase of Chrysler from Daimler. The banks expected to sell the bonds to investors, but have been left holding billions in Chrysler debt that they'd dearly love to unload.

Cerberus has offered to forego any profits on a sale of Chrysler, but that's phony. There won't be any profits. Just relieving Cerberus of the need to keep funding Chrysler would provide the private-equity moguls with a bonanza. As for the banks holding Chrysler bonds, didn't we already bail them out? Why should we have to do it again?

Mr. Ingrassia is a former Dow Jones executive and Detroit bureau chief for this newspaper.

Thursday, November 20, 2008

Some Positive Reactions from the Right

By Dennis Prager

November 11, 2008

I spent a good part of the past year speaking and writing against the election of Barack Obama. During the last week of the campaign, my Salem Radio Network colleagues, Hugh Hewitt and Michael Medved, and I spoke on behalf of the McCain-Palin ticket in the Battleground states of Colorado, Minnesota, Ohio, Pennsylvania, and Florida.

One would expect that I would be devastated at Barack Obamas election -- as devastated as liberals were at the reelection of George W. Bush in 2004. I am not -- yet. Here are some reasons why:

1. Republicans won the election of 2004, an election that was more important to the future of America and the world than was this election. Had Sen. John Kerry won in 2004, America would have left Iraq in defeat and Islamists would have won their greatest victory ever. Millions of young Muslims would likely have seen in Islamic jihadism humanitys future and signed up for terror; and Iraq would have degenerated into genocidal chaos.

2. The election of a black president is good for blacks, good for whites, and therefore very good for America.

At least at this moment -- no one can predict the future -- many more blacks feel fully American, and fewer blacks regard white America as racist than ever before. One cannot attain a higher status than the American presidency, and a black man will now occupy that position. As the Hoover Institutions Shelby Steele wrote, this is the first time in history that a majority white nation elected a black as its leader.

Conservatives are not surprised. I have argued for decades that America is the least racist country in the world. By and large, only Americans on the right have believed, or at least had the courage to say, this. Now that fact is obvious to virtually anyone with eyes to see.

3. The Obama victory poses a serious challenge to liberalism and to the doctrine of black victimhood.

If fewer and fewer blacks perceive white Americans as racist, a major reason for black support for liberalism could lose its appeal to blacks. On the other hand, if liberalism continues to portray blacks as victims of white racism, more white Americans will regard liberalism as phony -- or worse, as stirring up racial tensions for political gain.

Most whites are tired of racial tension, tired of being portrayed as racist, tired of their children being taught in college that they are either consciously or unconsciously racist, tired of lowering standards for blacks or anyone else.

So the Obama victory puts liberals in a bind. They either acknowledge the reality of an essentially non-racist America and thereby alienate black and white liberals still committed to this proposition or they continue to play the America is racist card and alienate many whites.

The challenge the Obama victory poses to many blacks is that they will have to abandon ascribing black problems -- such as disproportionate amounts of violent crime and the highest rate of out-of-wedlock births in America -- to racism. Fewer and fewer white Americans will tolerate being blamed for problems within black life.

4. The Obama victory will bring clarity to Americas place in the world.

Now that America is apparently loved again, we shall see how this plays out beyond emotional rhetoric. Will Europe contribute significantly more troops to Afghanistan? Will Germany now allow its NATO troops to shoot at Taliban fighters (thus far they have been allowed to shoot only if shot at)? Will our allies and Russia and China place the needed sanctions on Iran to prevent it from developing a nuclear device? Or is Americas being loved irrelevant to how other countries behave?

5. Conservatives will be able to show how much more decently they act when they are out of power.

The treatment of President George W. Bush by liberals has been despicable, undeserved and unprecedented. We who oppose Barack Obamas policies will, hopefully, act in accordance with conservative values of decency. Hence my simple announcement on the day after the election: I did not vote for him. I did not want him to be president. But as of January 20, 2009, Barack Obama will be my president.

Barack Obama may have a successful presidency or a failed one. If he allows the left wing of the Democratic Party to set his agenda, it will be the latter. In the meantime, however, we can celebrate the aforementioned good of Barack
Obamas election and pray for him and for our beloved country.

Thursday, October 30, 2008

What Independent Voters Want

By: John P Avlon

The Wall Street Journal

October 20, 2008

“They tend to be fiscally conservative and strong on security.”

Independent voters, once a political afterthought, are now the largest and fastest-growing segment of the American electorate.

This shift led to the nomination of two candidates who ran against the polarizing establishments of their own parties, while preaching the need to reach across the red-state/blue-state divide. Now independent voters may determine who is elected president.

Forty-three percent of undecided swing voters are independents and 47% are centrists, according to a recent Wall Street Journal/NBC poll. Independent voters have been on the rise while the parties have been playing to a shrinking base. This is a generational change. There are now six states where independents outnumber both Republicans and Democrats -- the swing states of Colorado, Iowa and New Hampshire as well as New Jersey, Connecticut and Massachusetts.

Key battleground states this year such as Pennsylvania, Ohio, Virginia and North Carolina each have more than one million independent voters. In California, Florida and Nevada, the number of independent voters has increased more than 300% in the past 20 years, while Democratic and Republican registration has flatlined.

Back in 1954, only 22% of voters identified themselves as independents, according to the American National Election Survey. Fifty years later the number was nearly double. Now, two out of five Americans can't name anything they like about the Democrats, and 50% say the same about Republicans. What happened?

As the two parties grew more ideologically polarized amid the culture conflicts of the 1960s, centrist voters felt politically homeless. First, there was realignment in the form of Reagan Democrats, and then de-alignment as centrist voters declared their independence from the far-right and the far-left. The modern independent movement kicked into high gear with Ross Perot's 1992 presidential campaign. Promising to balance the budget and reform the corrupt partisan system in Washington, Mr. Perot briefly led in the polls and managed to win 19% of the vote.

Throughout the 1990s, the independent movement kept growing while Democrats and Republicans warred in Washington. Three independent governors were elected: Angus King of Maine, Lowell Weicker of Connecticut and Jesse Ventura of Minnesota. All spread the same essential reform message: independence from special interests guided by a common-sense balance of fiscal conservatism and social liberalism.

The momentum continued this decade with the election of Sen. Joe Lieberman, New York City Mayor Mike Bloomberg, and the independent-in-all-but-name California Gov. Arnold Schwarzenegger.

This is the new mainstream in American politics, and it's growing among younger voters. More than 40% of college undergraduates identify themselves as independents, according to a summer 2008 survey by Harvard University's Institute of Politics (IOP). "Half of young Americans do not identify with traditional party or ideological labels -- they are the new center in American politics," says John Della Volpe of IOP.

This trend extends to 30- to 45-year-old Generation X voters as well, says the author of "X Saves the World," Jeff Gordinier: "Gen Xers tend to be pretty post-ideological and pragmatic, there is less allegiance to any one party or any one way of thinking."

For Americans who've grown accustomed to hundreds of cable channels and unlimited choices on the Internet, politics is the last place people are expected to be satisfied with a choice between Brand A and Brand B.

Professional partisans in Washington try to ignore this shift, perpetuating the myth that the independent movement is a chaotic grab bag. In fact, the movement has a coherent set of underlying beliefs: Independents tend to be fiscally conservative, socially progressive and strong on national security. They believe in putting patriotism over partisanship and the national interest over special interests.

One year ago, while Republicans named terrorism as their No. 1 issue and Democrats pointed to health care, independents were already feeling the squeeze of the economy. They want a return to fiscal responsibility.

A 2007 study of independents by the Washington Post/Kaiser Family Foundation showed they are not swayed by social-conservative issues. Independents were more likely than either Republicans or Democrats to agree that abortion should be legal in most (but not all) cases, and that same-sex couples should be allowed to legally form civil unions, but not to marry.

The top targets of independents' anger are illustrative -- hypocritical politicians, pork-barrel projects and a lack of bipartisan solutions in Washington, according to a 2008 national survey of independents by TargetPoint Consulting. Then there's the Bush administration. Independents believe the current president is the worst in recent history, but there is one area of policy overlap: 66% of independent voters believe that the U.S. has an obligation to establish security in Iraq before withdrawing.

Looking at this profile, it's easy to see why John McCain is outperforming the Republican brand. Mr. McCain's credibility with independents comes from his principled independence and record of forging bipartisan coalitions. Barack Obama's appeal to independents is rooted in his promise to transcend the left/right, black/white debates. He beat Hillary Clinton 2-1 among independents.

Throughout the summer, independents split their support evenly between Messrs. McCain and Obama, with high approval ratings for both candidates. After the Republican convention in September, independents broke for Mr. McCain by a 15-point margin and he surged in swing state polls. But the recent financial crisis increased economic anxiety among moderates and the middle class, making the election a referendum on the Bush administration. Independents swung to Mr. Obama. Colin Powell's endorsement will validate the decision for many independents.

The next president will inherit the oval office at a time of economic turmoil, with a combustible combination of high expectations and an angry electorate. But the next president can unite the country even in difficult times if he understands this truth: Americans are not deeply divided -- our political parties are -- and the explosive growth of independent voters is a direct reaction to this disconnect.

Plummeting Oil Prices – Iran's Options

By: Dr. Nimrod Raphaeli

Middle East Media Research Institute

October 30, 2008


At its two-hour emergency meeting in Vienna on October 24, the Organization of Oil Petroleum Exporting Countries (OPEC) decided to lower crude production by 1.5 million barrels/day (b/d), effective next month.

The reduction in production was OPEC's response to plummeting crude prices, which peaked at $147 a barrel last July but are now hovering in the mid-$60s a barrel, and appear to be trending downward. The lowering of production was a compromise between the price hawks of OPEC, primarily Iran and Venezuela that demanded a reduction of 2.5 million b/d, and the largest oil producer, Saudi Arabia, which has refused to be drawn into a situation that runs contrary to its national and strategic interests.

The Saudi Stand

For weeks, the hawks had been calling for lowering oil production to stabilize prices and perhaps even to establish a floor of $70-$100 a barrel. While the hawks' voice had reached a crescendo prior to OPEC meeting, the Saudis had deliberately kept mum on the subject of production cut.
There are two reasons for their deliberate silence. The minor reason has to do with the Saudis' apparent refusal to be seen as in cahoots with the likes of Iranian President Mahmoud Ahmadinejad and Venezuelan President Hugo Chavez, two revolutionary anti-Americans whose policies are viewed as anathema by the conservative Saudis. The major reason has to do with the Saudis' perception of potential conflict with Iran, its Gulf rival. The Saudis have been concerned for several years now about Iran's growing strategic influence and designs for regional hegemony in the Gulf and in a number of Arab countries, primarily Iraq, Syria and Lebanon.

The sharp decline in oil prices has provided the Saudis with an opportunity to inflict pain on Iran and constrain its political ambitions for regional hegemony by keeping oil production high and oil prices down. In practical terms, the Saudi's subtle weapon against Iran is at least as potent as the U.N. and U.S. sanctions combined. An economically weaker Iran translates into an Iran that is weaker both politically and strategically, and hence less of a threat to the Gulf region.

There is one other reason which has recently emerged as a source of conflict between Shi'ite Iran and a number of Sunni countries in the Middle East, particularly Saudi Arabia but also Egypt, Jordan and the Arab Gulf countries. These countries have been concerned about Iranian efforts to engage in large-scale proselytizing of Sunnis into Shi'ism, which is perceived by the majority of the Sunnis, particularly the Wahhabis in Saudi Arabia, as a false religion whose practitioners are apostates.

Implications of Lower Oil Prices

A recent study by the International Monetary Fund (IMF) has suggested that in order for Iran to balance its budget, the price of crude oil must not fall below $95 a barrel. The equivalent figure for Saudi Arabia is $50 per barrel and for the United Arab Emirates and Qatar even lower. One should keep in mind that Iranian oil sells at a discount compared with the higher quality benchmark West Texas Intermediate.

Countries whose economies rely on the production of natural resources, such as oil, generally establish a stabilization fund for retaining windfall profits, such as when oil went over $140 a barrel, to be used in time of economic shocks, such as a sharp decline in the price of the commodity.

Iran has established such a fund to be managed by its central bank. It would appear, however, that President Ahmadinejad has dipped into the till too often, causing the departure/resignation of two consecutive governors of Iran's central bank in a little over one year. The assets of the Iranian stabilization fund are kept secret; however, a member of the Majlis (parliament) recently revealed that it has a balance of $7 billion, which would just about cover the cost of imported gasoline for one year.

The sharp decline in oil prices will limit Ahamadinejad's ability to keep his election promise to bring money to the dinner tables of Iranians. During the Iranian calendar year of March 2007-2008, Iranian oil revenues were estimated at $80 billion. If prices remain at the present level of $60 per barrel, Iran's revenues in the next calendar year will decline to $64 billion, meaning a budgetary deficit of $7-$30 billion. The U.S. and U.N. sanctions will continue to force Iran to resort to circuitous routes to buy much of its consumer and, even more, dual-use goods at a premium. The Iranian press came out recently with such headlines as "the end of the oil festival," and "the bankruptcy of OPEC."

Iran's Options

Oil revenues comprise 80% of Iran's foreign exchange. If oil prices continue to plummet in the face of the world's worsening economic crisis - a crisis which may be just in its early stages - Iran, unlike the Arab oil-producers with hefty sovereign wealth funds to cushion their national economies, could face politically destabilizing events that could threaten the survival of the regime.

On the economic front, Iran could resort to terminating oil subsidies and restricting the import of non-essential consumer goods to conserve foreign currency. In fact, news from Iran last week suggests that both steps are under consideration.

Iran may also seek to reintroduce a 3% value-added tax (VAT) which it was forced to suspend after shopkeepers in the politically influential bazaars closed shops in protest, arguing that the VAT would further aggravate inflation which reached 29.6% in October.

The price of oil is determined by the twin factors of economics and psychology. Economic factors are shaped by supply and demand and when demand plummets the prices quickly follow suit. But oil prices are also sensitive to psychological factors, such as perceived threats to the sources or routes of oil supply. In the latter case, Iran may seek to generate a crisis that would bring oil speculators back in droves and cause oil prices to spike. In this regard, Iran could put into action one of the following options in an attempt to both divert national discontent outward and make an economic gain at the same time:

First, Iran could escalate the conflict in Iraq to a degree that would deny the market a supply of 1.5-2.0 million b/d of much needed Basra light crude. The Shi'ite cleric Muqtada Al-Sadr, with his Iran-paid Mahdi Army, is a potent troublemaker to carry out such a mission in the service of Iran. Iran could use its many agents in southern Iraq to sabotage the oil pipeline that carries Iraqi oil to Um-Qasr port. In a desperate move, Iran might cause an incident with one of the U.S. naval ships patrolling Iraq's oil platforms.

Second, Iran's Revolutionary Guards could sabotage an oil tanker in the Gulf of Hormuz on some flimsy argument that the tanker has violated Iran's territorial waters. Such act would raise the political tensions to high levels and greatly increase insurance premium to suffocating levels or discourage oil tankers from transporting Gulf oil.

Third, Iran could instigate a conflict between Hizbullah and Israel that could plunge the Middle East into a new round of a military conflict that might also involve Syria (Iran's strategic ally in the area). Armed conflicts in the Middle East quickly translate into higher oil prices, with or without global recession.

Dr. Nimrod Raphaeli is the Editor of The MEMRI Economic Blog,

Sunday, October 26, 2008

Ceding the Center

By David Brooks

The New York Times

October 26, 2008

There are two major political parties in America, but there are at least three major political tendencies. The first is orthodox liberalism, a belief in using government to maximize equality. The second is free-market conservatism, the belief in limiting government to maximize freedom.

But there is a third tendency, which floats between. It is for using limited but energetic government to enhance social mobility. This tendency began with Alexander Hamilton, who created a vibrant national economy so more people could rise and succeed. It matured with Abraham Lincoln and the Civil War Republicans, who created the Land Grant College Act and the Homestead Act to give people the tools to pursue their ambitions. It continued with Theodore Roosevelt, who busted the trusts to give more Americans a square deal.

Members of this tradition have one foot in the conservatism of Edmund Burke. They understand how little we know or can know and how much we should rely on tradition, prudence and habit. They have an awareness of sin, of the importance of traditional virtues and stable institutions. They understand that we are not free-floating individuals but are embedded in thick social organisms.

But members of this tradition also have a foot in the landscape of America, and share its optimism and its Lincolnian faith in personal transformation. Hamilton didn’t seek wealth for its own sake, but as a way to enhance the country’s greatness and serve the unique cause America represents in the world.

Members of this tradition are Americanized Burkeans, or to put it another way, progressive conservatives.

This tendency thrived in American life for a century and a half, but it went into hibernation during the 20th century because it sat crossways to that era’s great debate — the one between socialism and its enemies. But many of us hoped this Hamilton-to-Bull Moose tradition would be reborn in John McCain’s campaign.

McCain shares the progressive conservative instinct. He has shown his sympathy with the striving immigrant and his disgust with the colluding corporatist. He has an untiring reform impulse and a devotion to national service and American exceptionalism.

His campaign seemed the perfect vehicle to explain how this old approach applied to a new century with new problems — a century with widening inequality, declining human capital, a fraying social contract, rising entitlement debt, corporate authoritarian regimes abroad and soft corporatist collusion at home.

In modernizing this old tradition, some of us hoped McCain would take sides in the debate now dividing the G.O.P. Some Republicans believe the G.O.P. went astray by abandoning its tax-cutting, anti-government principles. They want a return to Reagan (or at least the Reagan of their imaginations). But others want to modernize and widen the party and adapt it to new challenges. Some of us hoped that by reforming his party, which has grown so unpopular, McCain could prove that he could reform the country.

But McCain never took sides in this debate and never articulated a governing philosophy, Hamiltonian or any other. In Sunday’s issue of The Times Magazine, Robert Draper describes the shifts in tactics that consumed the McCain campaign. The tactics varied promiscuously, but they were all about how to present McCain, not about how to describe the state of country or the needs of the voter. It was all biography, which was necessary, but it did not clearly point to a new direction for the party or the country.

The Hamiltonian-Bull Moose tendency is the great, moderate strain in American politics. In some sense this whole campaign was a contest to see which party could reach out from its base and occupy that centrist ground. The Democratic Party did that. Senior Democrats like Robert Rubin, Larry Summers and Jason Furman actually created something called The Hamilton Project to lay out a Hamiltonian approach for our day.

McCain and Republicans stayed within their lines. There was a lot of talk about earmarks. There was a good health care plan that was never fully explained. And there was Sarah Palin, who represents the old resentments and the narrow appeal of conventional Republicanism.

As a result, Democrats now control the middle. Self-declared moderates now favor Obama by 59 to 30, according to the New York Times/CBS News poll. Suburban voters favor Obama 50 to 39. Voters over all give him a 21 point lead when it comes to better handling the economy and a 14 point lead on tax policy, according to the Wall Street Journal/NBC News poll.

McCain would be an outstanding president. In government, he has almost always had an instinct for the right cause. He has become an experienced legislative craftsman. He is stalwart against the country’s foes and cooperative with its friends. But he never escaped the straightjacket of a party that is ailing and a conservatism that is behind the times. And that’s what makes the final weeks of this campaign so unspeakably sad.

Wednesday, October 15, 2008

The 1% Panic

By L. Gordon Crovitz

The Wall Street Journal

October 13, 2007

Our financial models were only meant to work 99% of the time.

The Panic of 2008 is a crisis of trust. Investors don't trust the value of bad debts enough to offer market-clearing prices. Banks don't trust one another to stay in business long enough to do business together. And there's definitely no trust that Washington can avoid creating costly new moral hazards as it attempts to bail out the system.

But the most paralyzing loss of trust may be in Wall Street's system itself: How did the smartest people at the best banks running the most sophisticated financial models fail to forecast the collapse of mortgage-related securities? How did this unpredicted collapse devastate the system? And most of all, can we ever again trust the financial models on which value is supposed to be determined?

These questions matter because despite the current crisis, modern finance has delivered enormous benefits, from explaining to investors why they should diversify their investments to the creation of mutual and index funds. Related innovations helped financial institutions speed capital to its best use, fund new businesses and accelerate global prosperity. In other words, financial engineering worked beautifully -- until suddenly it didn't.

So what happened? Financial models take logic and historical data into account, but it's now clear that these elegant models have a serious weakness: They can't cope with illogical and uneconomic factors. Washington's insistence for years on artificial subsidies for mortgages through Freddie Mac, Fannie Mae and other programs led to a loud "Does not compute!" that is still rocking the financial system.

Here's how ill-conceived regulation poisoned the system. Until recently, bank CEOs and regulators slept well at night thanks to a financial model developed in the 1990s called "value at risk" or VaR. It assesses historical variances and covariances among different securities, informing financial institutions of the risks they're taking. By assessing risk factors across all securities, VaR can compare historical levels of risk for given portfolios, usually up to a 99% probability that banks would not lose more than a certain amount of money. In normal times, banks compare the VaR worst case with their capital to make sure their reserves can cover losses.

But VaR can't account for extreme unprecedented events -- the collapse of Barings in 1995 due to a rogue trader in Singapore, or today's government-mandated bad mortgages bundled into securities that are hard to value and unwind. The "1% likely" happened. And because the 1% literally didn't compute, there was no estimate of the stunning losses that have occurred.

Yale mathematician Benoit Mandelbrot pointed out the shortcomings of the VaR model in his "The (Mis)behavior of Markets," published in 2004. He noted that bell curves work for, say, disparities in the height of people. In markets, instead of flat tails of rare events at either end of the bell curve, there are "fat tails" of huge upsides and huge downsides. Markets are more complex than the neat shape of bell curves.

Last year's bestselling nonfiction book had a similar theme. In "The Black Swan," former trader Nassim Nicholas Taleb pointed out that extreme outcomes are actually common, warning that financial engineers -- "scientists," as he calls them -- ignore these unlikely outcomes at their peril. But today's credit panic was not entirely unpredictable. Mr. Taleb was prescient in writing, "The government-sponsored institution Fannie Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: Their large staffs of scientists deemed these events 'unlikely.'"

Likewise, the financial engineers at once high-flying hedge fund Long-Term Capital Management thought they had taken all risks into account, but the Russian financial crisis of 1998 blew their model. Last week the former general counsel of LTCM, James Rickards, reflected on how an incomplete VaR model undermined his firm. "Since we have scaled the system to unprecedented size, we should expect catastrophes of unprecedented size as well," he wrote in the Washington Post. "We're in the middle of one such catastrophe, and complexity theory says it will get much worse."

Global markets and new financial instruments are indeed complex. This complexity led to a fragility that made government meddling in markets more dangerous than ever before -- creating the 1% likely disaster. The good news for VaR and similar models is that the free market alone would not have allowed the bubble of subsidized mortgages, but the bad news is that it's far from clear that Congress has learned from the current crisis to pursue policy goals in ways that don't distort the fundamentals of markets.

Now the regulators trying to fix the damage in the financial system must also try to avoid more 1% likely crises. Transparent steps that restore market efficiency are better than complex, ad hoc policies that postpone market solutions. These programs should be judged on whether they make the financial models function better or function not at all. As we've learned, there's not much room in between.

Wednesday, October 8, 2008

In Praise of Bernanke

By David Leonhardt

The New York Times

Economix Blog

October 8, 2008

The Federal Reserve’s rate cut — part of a
coordinated international effort— has put Ben Bernanke front and center for yet another day. Over the past couple of years, Mr. Bernanke, the Fed chairman, has come in for a fair bit of criticism. Some of it has been justified, I think.

But it’s also worth taking a moment to consider how well prepared he is for his current task. He spent his career
studying the lessons of the Great Depression and, to a lesser extent, Japan’s 1990’s slump. (And his fellow economists have enormous regard for him and his work.) He now finds himself having to put those lessons into practice. His qualifications by no means guarantee that he’ll succeed. But it’s hard to imagine anyone who is more qualified to try to minimize the damage from the current crisis. I thought of this after getting the following e-mail from the economist Bruce Bartlett:

Perhaps I am the only one who thinks so, but I think the Fed has been absolutely heroic throughout this whole crisis. It’s done a lot of things that it didn’t want to do, maybe gone over the line a bit, and set some precedents it would rather not have established. But Ben Bernanke understands the risks involved because he is a student of the Great Depression and knows how close to the precipice we are.

Sometimes you just have to throw out the rule book and do what you have to do to keep the whole system from collapsing and I think that is what he is doing. I think when this is all over people will recognize that Bernanke was Horatio at the bridge.

The reason I say this is because I have been studying the origins of the Great Depression and know how fundamental monetary policy was to that event, how horribly the Fed screwed-up, and how momentum affected the course of events. The whole calamity could have been prevented very easily in 1929, but it was a lot harder to fix in 1930, harder still in 1931, and very hard in 1932. It’s like a car rolling down hill. At the very beginning it takes little effort to stop. But once it gets going, look out below.

Bernanke is trying desperately to make sure that momentum doesn’t get going. He also understands that if the consequences of his actions are an inflation spike down the road that is far preferable to a deflationary spiral that could spin out of control and lead us into the abyss.

Sunday, September 28, 2008

Maybe Someone Does Have a Clue


The Wall Street Journal

September 25, 2008

Internet billionaire Mark Cuban recently suggested that some enterprising author write a book about the market turbulence called "No One Has a Clue What Is Going On and the Whole World Is Guessing."

Maybe the author should just keep the tape recorder on Stephen Schwarzman. The chairman of Blackstone Group was part of a roundtable of roughly 30 finance luminaries at the Waldorf-Astoria on Tuesday afternoon, hosted by the Yale School of Management and co-sponsored by The Wall Street Journal, and he kicked off the audience-participation segment with a nearly all-in-one-breath summary of the causes and effects of the credit crisis:

"It's a perfect storm. It started with Congress encouraging lending to lower-income people. You went from subprime loans being 2% of total loans in 2002 to 30% of total loans in 2006. That kind of enormous increase swept into the net people who shouldn't have been borrowing.

Those loans were packaged into CDOs rated AAA, which led the investment-banking firms [buying them] to do little to no due diligence, and the securities were distributed throughout the world, where they started defaulting.

When they started defaulting, out of bad luck or bad judgment, we implemented fair-value accounting....You had wildly different marks for this kind of security, which led to massive write-offs by the commercial-banking and investment-banking system.

In the face of those needed to raise new equity...which came from sovereign-wealth funds, in part, which then caused political resistance to sovereign-wealth funds, who predictably have withdrawn from putting money into the system....It seemed pretty obvious that would happen. We now find ourselves with a liquidity crisis where fundamentally the cost of money for financial intermediaries [such as investment banks] is significantly in excess of their cost of lending it. So several institutions found themselves in a structurally impossible position. ...Goldman reverted to a banking charter for a lower cost of funds, which today is still not low enough for the business.

"So that's the story of how we got there."

Give Me That Old-Time Religion

By Daniel Henninger

The Wall Street Journal

September 25, 2008

Responsibility! Accountability! Discipline! Oversight! Rules!

The canyons of Wall Street are ringing with Democratic politicians and liberal pundits crying out for the renewal of ancient values and a return to basics. The political right wants market failures to be punished with Old Testament ruin.
So we're all agreed: Standards of behavior matter.

All that remains is to see if this week's left-right consensus on standards can be extended to any corner of American life beyond "CEO pay" and other sitting ducks.

Once we're done imposing Spartan discipline on the dining rooms of Wall Street, how about some of the same for the halls and classrooms of the average inner-city high school? A nation in panic at the sight of banks imploding has yawned for years while the public-school system melted down.

A handful of Supreme Court decisions going back 40 years relaxed standards of oversight for dress codes, comportment, speech and expulsion, and the average school principal or teacher threw in the towel on daily discipline. Not my job.
Many school administrators can relate to the frontline mortgage-lending officers, some of them old-school bankers who used to help young borrowers understand the difference between the real world and probable ruin. That's what high-school principals used to do. No more.

Suddenly, local lenders were toiling (if they survived) in the easier liar-loan world fostered by Congress, Fannie and Freddie and guys with great tans in Los Angeles. The old public-school system, once a tight ship in countless towns, knew that game. The schools learned to shove another class of semi-educated bodies into the street every June and call them "graduates" the same way lenders called zero-down-payment borrowers "homeowners."
This column isn't a rant about the ruined schools. It's about spotting a ray of hope amid the past week's rubble in the financial markets. Something positive has been in the air this election, and all the calls now for a return to financial rectitude is part of it.

On Monday, Barack Obama gave a tough speech on cleaning up Washington. The details may be blather, but the cleanse-the-temple tone was out of a Jerry Falwell sermon circa 1980. He appealed to "our core values" and denounced an "ethic of irresponsibility." Both John McCain and Sen. Obama are selling repentance in politics.

Two months ago, one of the campaign's most important events took place at Saddleback Evangelical Christian Church, the Rev. Rick Warren presiding.Before that in April, Hillary Clinton and Mr. Obama did a "Compassion Forum" at Messiah College in Grantham, Pa. Sen. Clinton talked about feeling the Holy Spirit "on many occasions." Mr. Obama was still wearing sackcloth for "cling to religion."
This election may be won by whichever man looks better riding an economic surfboard the next month, but the campaign's undercurrents are pushing the basics back to the surface.

Yes, politicians will bend to any new wind that blows through, but this past week of financial turmoil has shown there's a strong whiff in the air for the values of the greatest generation. This was the 20% generation. In the post-war years, young couples knew they'd somehow have to save 20% of the down payment on a home mortgage. That's thrift, an archaic word I think is still in most dictionaries.

Push this idea far enough, and you're talking the world of "Ozzie and Harriet" (ABC-TV 1952-1966) versus "Sex and the City" (HBO, 1998-2004). Push further and you arrive at happy Sarah Palin and that family of hers. What Sarah represents produces pushback from the smart-set women on "The View" and big-city comedians and newspaper columnists, all trying to knock Little Miss Muffet off her too-perfect tuffet.

This, in short, is the culture wars -- endless and unwinnable. Until this week. This week revealed that when real money is on the line, even the left starts screaming for old-fashioned standards. Thus rose a shout for regulatory "oversight" of markets, and they don't mean some vague, Googlie "don't be evil." They want tough, punishing rules.

This won't wash. You can't claim, as holier-than-thou politics is now, that sending an army of regulatory storm-troopers into Wall Street will ensure integrity in mere bankers who themselves come from a broader, anything-goes culture.

There's a reason Barack Obama is delivering secular sermons in places like Green Bay, Wis. Green Bay's beef with a culture of corner-cutting predated Bear Stearns. Wall Street hasn't been the only font of wretched excess. More than opportunism has landed this presidential campaign in places that represent standards, like Saddleback in California and Messiah in Pennsylvania. People want standards again because they work -- in business, in schools, in daily life.

In my ear, I can hear one of the four candidates giving a speech connecting Wall Street to the nation's Main Streets. Standards, responsibility, accountability, rules? You bet. Bring 'em all back.I wonder which one of them would give it.

Tuesday, September 16, 2008

Old-School Banks Emerge Atop New World of Finance

By: Carrick Mollenkamp and Mark Whitehouse

The Wall Street Journal

September 16, 2008

More than 200 years after it was born at the base of a buttonwood tree, Wall Street as we have known it is ceasing to exist.

The rapid demise of 158-year-old investment bank Lehman Brothers Hodlings
Inc., together with the takeover of 94-year-old Merrill Lynch & Co., represent a watershed in the banking industry's biggest restructuring since the Great Depression.

For decades, the world of banking was divided largely into two kinds of businesses. Commercial banks took deposits and made loans, eking out a decent return under the burden of heavy regulations designed to protect depositors. Standalone securities firms such as Lehman, Merrill and the now-defunct Bear Stearns Cos. took no deposits and were lightly regulated, freeing them to take big risks and make fat profits at the cost of occasional losses. More recently, some of the biggest institutions, such as
UBS AG and Citigroup Inc., combined the two.

Now, as many securities firms are consumed in the wake of a disastrous foray into financial wizardry, the balance of power is shifting. On the wane are the heavy borrowing and complex securities that financiers embraced in recent years. On the rise is a more old-fashioned business of chasing customer deposits and building branch networks, conducted with the backing of federal insurance programs to keep depositors from pulling out en masse.

Of the five major independent investment banks that existed a year ago, only two --
Goldman Sachs Group Inc. and Morgan Stanley -- remain standing. Two others, Merrill and Bear Stearns, have been acquired by big deposit-taking institutions, Bank of America Corp. and J.P. Morgan Chase & Co. Other giant commercial-banking players, such as Wells Fargo & Co. in the U.S., as well as Germany's Deutsche Bank AG and Spain's Banco Santander SA, have emerged as some of the most powerful players in an industry that is likely to be safer but less lucrative for shareholders.

Banks are heading "back to basics -- to, if you like, the core purpose of the system with less bells and whistles," says Douglas Flint, finance chief at
HSBC Holdings PLC and co-chair of the Counterparty Risk Management Policy Group, a task force of finance executives working on a framework to prevent systemic financial shocks. "There is a recognition that when the dust settles...the construct of the industry will be different."

Evidence of the new importance of bread-and-butter banking is appearing around the globe. Deutsche Bank, which had been focused on building its global investment-banking business, last week agreed to pay nearly €3 billion ($4.3 billion) in a two-stage deal to acquire the 850 domestic branches of Deutsche Postbank AG, the retail banking arm of the German postal system. Santander, which also wooed Postbank, paid £1.26 billion ($2.26 billion) in July for troubled U.K. mortgage lender Alliance & Leicester.

The shift reflects a broader reassessment of how best to do the essential business of banking, which plays a crucial role in the economy by turning their short-term liabilities -- savers' cash and deposits -- into longer-term investments such as mortgages and corporate loans. In recent years, commercial banks moved a lot of that business off their heavily regulated balance sheets and into the realm of securities firms.

The investment banks packaged the loans into an array of ever more complex securities, which they kept on their books or sold to a broad range of investors -- including hedge funds and bank-affiliated funds known as conduits and structured-investment vehicles, or SIVs. To fund their activities, the securities firms and investors borrowed heavily in the commercial-paper market and the so-called repo market, where borrowers put up securities as collateral for short-term loans.

This alternative banking system proved profitable, in part because participants weren't required to meet commercial banks' more rigid reserve requirements against potential losses. But these banks' strategies backfired with the onset of the credit crunch last summer, as heavy losses on mortgage and other investments in some cases proved too much for their thin capital bases, and the markets on which they relied for funding dried up.

A federal bankruptcy-court filing by Lehman on Monday in New York highlights the quick spiral. As of May 31, Lehman depended on repo loans for $188 billion in borrowings. But as the value of the securities Lehman had put up as collateral for the loans fell amid the broader market turmoil, its lenders started demanding extra collateral.

Because the amount it could borrow against its securities kept falling, Lehman was forced to dip ever deeper into its cash reserves, prompting ratings firms to consider cutting its credit ratings, according to the filing. Lehman's efforts this month to raise money by selling an investment-management firm proved too late.

As repo loans and other market-based funding on which investment banks rely becomes more expensive, the question becomes whether independent broker-dealers, unattached to big banks with ample deposits, will survive. "In the coming months, we expect a significant overhaul of all the brokers' business models," wrote Matt King, a credit strategist at Citigroup in London, in a recent report.

The new financial order also highlights the lasting impact of the elimination of the Glass-Steagall Act, a Depression-era law that prevented U.S. commercial banks from doing investment-banking business. The repeal of Glass-Steagall, in 1999, allowed commercial banks to break into the securities business and ultimately gain the heft to compete with the likes of Bear Stearns and Merrill.

This universal banking model has proved hard to manage, with the likes of Citigroup and UBS knitting together a vast empire of operating units. Even so, these and other big deposit-taking banks that are required by regulators to maintain bigger cushions against losses, such as Bank of America, have so far survived the credit crunch better than some of the stand-alone securities firms.

Thanks in large part to government programs that insure them, deposits have been a rare bright spot during the credit crunch. In the U.S., savings and small time deposits -- two important classes of customer money -- stood at $6.9 trillion at the end of August, up 7.6 % from a year earlier, according to the Federal Reserve. In the euro area, total deposits stood at €6.3 trillion as of the end of July, up 12.8% from a year earlier, according to the European Central Bank.
Meanwhile, the U.S. market for the IOUs known as asset-backed commercial paper, a key source of short-term funding for the bank and brokerage industry, has shrunk by more than a third since the crisis began last year, to $780 billion as of Sept. 10.

Sticking to the basic banking model hasn't worked for everyone. Smaller banks in the U.S. and Europe have suffered, in part because they lack the scale and diversification to absorb heavy losses generated by growing defaults on mortgage and corporate loans.
To be sure, some stand-alone investment banks, such as
Goldman Sachs Inc., are well funded. And some innovations and markets will rebound when the credit crunch fades. Consumer debts such as mortgages, credit-card balances and student loans will still be packaged into securities.

But such securitization, analysts say, will likely happen in smaller volumes and in more conservative forms, such as so-called covered bonds. Many of the instruments central to the current crisis were created and sold by banks with no stake in their performance. In contrast, covered bonds have payments that are bank-guaranteed regardless of how poorly the packaged loans perform. Covered bonds are the main source of mortgage-loan funding for banks in Europe, where a $2.75 trillion market has long thrived. Some analysts predict a U.S. market could grow to $1 trillion over the next few years.

"Securitization will play a lesser role for the well-capitalized, highly rated banks," says Ganesh Rajendra, a researcher at Deutsche Bank in London. "But it will still help them manage their capital and risks in many cases."

Internationally, banks that haven't been disabled by write-downs are moving aggressively to buy deposit-rich lenders. Deutsche Bank, which declined the opportunity to bid for Postbank a few years ago, chose to outbid Santander last week in part because it didn't want to see the large retail operation fall into the hands of a foreign rival.

Monday, September 15, 2008

Russia Stock Market Fall Is Said to Imperil Oil Boom


The New York Times

September 12, 2008

Rattled by falling oil prices and the war in Georgia, Russia's stock market has slumped so severely that it now threatens the country’s oil-fueled boom of recent years, economists say.

The benchmark RTS index has lost 46 percent of its value since its peak in May, representing a paper loss of about $700 billion for Russian companies. Much of that decline has come since the war in Georgia and the subsequent war of words with the United States and Europe that unsettled foreign investors, who began withdrawing capital.

On Friday the RTS, which peaked in May at 2,487, rebounded slightly, rising 3.36 percent to close at 1,342. The country’s other main stock exchange, the MICEX, was rose 6 percent on Friday, after weeks of heavy losses.

While initially seen as a problem confined to the Russian stock market, which is volatile in the best of times, the drop in share prices is now spilling over to the real economy. Companies that had pledged shares as collateral for loans, for example, are now facing margin calls, bankers in Moscow say.

“It’s a classic squeeze,” said Roland Nash, chief strategist for Renaissance Capital in Moscow.

The underlying problem for the Russian stock market is that about 80 percent of the shares are in companies exporting commodities with a history of boom-bust cycles. Additionally, the risk premium for investing in Russia has risen with the war.

It is unclear which problem caused more damage. In one indication that Russian politics lubricated the market slide here, however, investors have pulled nearly $5 billion this year from emerging market funds with a heavy Russia weighting, according to EPFR Global, a company that tracks fund flows. By comparison, investments in Middle East and African funds, which are also seen as dependent on commodity prices, have risen this year.

The decline has elicited a response from officials here that economists described as panicky, including a number of plans that would have seemed inconceivable a few months ago.

For next year, Russian officials are projecting federal revenue growth of 1.8 percent, compared with an estimated 13.8 percent this year. Just in the last week, the value of Russia’s hard currency reserves has dropped $8.9 billion. The ruble is down 6 percent since the war in Georgia.

“The government and central bank need to do all they can to ensure inflow of additional financial resources into the financial market,” President Dmitri A. Medvedev
said Thursday. “This is absolutely obvious, and this must be done for sure.”

The finance minister, Aleksei L. Kudrin, who had opposed investing any of Russia’s $573 billion in hard currency reserves in the domestic market during a milder correction a year ago, this week approved of the idea. Mr. Kudrin added Thursday that the government might also tap money in the state pension fund to invest in equities.

In a stop-gap measure, the Central Bank has injected more than $11 billion into the Russian banking system and is intervening to halt the daily decline in the ruble’s exchange rate with the dollar. Investors, however, remained skeptical.

“Going forward, one of the big issues that people have with the Russian market is too much state ownership, too much manipulation,” Rory MacFarquhar, an economist for Goldman Sachs
in Moscow, said in a telephone interview. “Nobody is going to believe that is not politicized.”

Sunday, September 7, 2008

Stage Set for Pivotal Realignment in '08

By Susan Page


September 5, 2008

Sweeping demographic changes in the American electorate are undercutting old assumptions about swing voters and battleground states and making the 60-day general-election campaign that starts this morning even less predictable than usual.

The nation is becoming more racially and ethnically diverse, a diversity that has spread across the country. Aging Baby Boomers remain the biggest generational group in the electorate, but second in size are the Millennials — 18- to 31-year-olds who have distinctive attitudes toward race and politics. In the space of a generation, Americans have seen dramatic changes in the roles of women, the structure of families and the nature of the workplace. There has been a revolution in the technology that delivers information and knits communities.

Presidential nominees John McCain and Barack Obama personify that changing nation in striking ways. In age, race and life experience — even in use of innovative technology in the campaign — they mirror a nation in transition.

Some analysts are predicting that the 2008 election — like the one in 1980 that brought the election of Ronald Reagan as president and set the nation on a more conservative course — looms as a landmark contest in which the country is receptive to change.

"This is a pivotal moment in the sense that the politics is catching up to the demographic changes," says William Frey, a Brookings Institution scholar who analyzes population trends.

Democratic pollster Geoffrey Garin calls Democrat Obama — who's 47, biracial and multiethnic — "the face of the new generation" who has mobilized millions of younger voters this year.

But Garin notes that some, especially older white voters, find Obama's message and background — he is a first-term Illinois senator who spent nearly as long as a community organizer as he has in Congress — unpersuasive and even discomfiting.

In contrast, Republican McCain, a 72-year-old white man and decorated Navy veteran, has represented Arizona in the Senate for a quarter-century.

Their messages contrast, too: McCain attacks Obama for inexperience ("Is he ready to lead?" GOP ads ask) while Obama promises change from what he says are eight years of failed leadership by Republicans.
In some ways, cultural trends have helped both candidates. Obama's hope of becoming the first African-American president has been boosted by younger voters who seem less polarized about race than their elders; his candidacy probably wouldn't have been realistic a quarter-century ago. Changing attitudes about age have helped McCain, who would be the oldest president elected to a first term.
"We no longer say someone is too old or too young" for a job, says Bernadette Budde, a political analyst with the Business Industry Political Action Committee. "We have a culture that believes Tony Bennett and Miley Cyrus have equal amounts to contribute to the world of song."

Both candidates have balanced the demographic makeup of their tickets with their choices of running mates.

McCain picked Alaska Gov. Sarah Palin, a working mother 28 years his junior whose husband is part Alaska Native. Obama picked Delaware Sen. Joe Biden, a white man and six-term senator who is 18 years older than him.

Even so, national campaigns are usually all about the top of the ticket. Will the McCain-Obama election be a turning point in American politics?

Some analysts say yes.

The 2008 race will "prove in part to be a decisive political contest between the old America and the new America. Between the thing we were, and the thing we have been becoming for 40 years or so," Peggy Noonan, a former speechwriter for Reagan, wrote in The Wall Street Journal in June. "I suspect the political playing out of a long-ongoing cultural and societal shift is part of the dynamic this year."
Democratic pollster Celinda Lake sees Obama and Palin as examples of the sorts of candidates who increasingly will emerge in American politics. "This is really the first campaign of the 21st century," she says.

Demographic destiny

Major demographic changes have shaped and reshaped American politics throughout the nation's history.

Andrew Jackson's election in 1828, which forged the modern Democratic Party, reflected the rise of a broader and more raucous democracy as the frontier pushed west and states began to drop restrictions that meant only property owners could vote.
A century later, in 1932, Franklin Roosevelt tapped support from the growing ranks of Irish-American, Italian-American and other ethnic voters as part of a liberal political alliance that would hold the White House for 28 of the next 36 years.

That FDR coalition, which began to crack in 1968, collapsed with Reagan's election in 1980.

The California governor was helped in the campaign by population shifts into the South and West, and to the suburbs from big cities. The South, which had been part of Roosevelt's territory, became a GOP stronghold as white voters abandoned the Democratic Party.
Reagan's conservative alliance has held the White House for 20 of the past 28 years.

There are parallels between this year's election and the one that launched Reagan's presidency a quarter-century ago. In 1980, as now, voters were anxious about the economy and gas prices.

A foreign-policy quandary — then, the Iranian hostage crisis; now, the Iraq war — contributed to their unease. Support for the incumbent party, then the Democrats, was undercut by voters' desire for change.
This time, McCain represents an incumbent Republican Party, but he emphasizes his own desire for change and distances himself from President Bush. Like President Carter did in 1980, McCain attacks his opponent as a risky choice who offers what he calls "the wrong kind of change."

In another similarity to 1980, key groups in the electorate are up for grabs. Reagan attracted white working-class voters in the Midwest, many of them union members, who traditionally had voted Democratic. Since then, those "Reagan Democrats" have become part of the Republican base.

This time, Hispanics, the nation's fastest-growing ethnic group — as a percentage of the population their presence has more than doubled since 1980 — are fiercely contested.

Bush did better than previous Republicans among Latinos in 2004 but Obama now holds a 43-percentage-point advantage among them, according to a survey taken in June and July by the non-partisan Pew Hispanic Center.

Younger voters make up another key group. Obama's appeal among them has created one of the widest generation gaps since political polling became routine a half-century ago.

Voters under 30 are Obama's strongest age group, the USA TODAY/Gallup Poll shows. Voters 65 and older are McCain's strongest age group.

'Pretty good for Democrats'

"Every growing demographic is trending Democratic and every shrinking demographic is trending Republican, from young people to Hispanics to you-name-it," says James Carville, an architect of President Clinton's 1992 victory. "The underlying shifts in demographics portend pretty good for Democrats in the future."
Minnesota Gov. Tim Pawlenty agrees that Republicans need to do more to reach out to new groups of voters.

"The country is changing demographically; it's changing technologically; it's changing economically; it's changing culturally," Pawlenty says. "Republicans need to, not change their values or their principles, but we do need to do a better job of applying them to the emerging issues and challenges and circumstances of our time," he says.

In 1980, 14% of the nation's population was non-white. Now, one in four Americans are in minority groups.

By the middle of the century, racial and ethnic minorities are projected to make up a majority of the U.S. population.
What's not clear is whether those demographic and other shifts have gone far enough to determine November's election.

Indeed, they have created a backlash among some voters.
In a national survey of women sponsored by the advocacy group EMILY's List, one-fifth of those 63 and older called the nation's increasing racial diversity a negative trend.

A similar number felt the same way about the Internet.
In a campaign memo for Hillary Rodham Clinton's presidential bid, posted online last month by The Atlantic and not disputed by Clinton officials, strategist Mark Penn scoffed at the idea that the nation was ready for someone with Obama's background to be president.
"Save it for 2050," he wrote.

'Destabilizing these states'

The changes in who we are, where we live, what we do and how we view the world have altered the political leanings of states once considered solidly in one camp or the other.

The calculations by each candidate of what states he can count on and which ones he can contest are more complicated than they were even four years ago.

"The level of demographic change does have an impact," says Ruy Teixeira, editor of The Future of Red, Blue and Purple America, being published this month.

"These changes are destabilizing these states," Teixeira says. "Just because states voted one way a couple of elections ago doesn't mean they're going to stay that way."

The last several elections have been marked by constancy: From the 2000 election to the 2004 election, 47 of the 50 states were consistently Republican or Democratic. Only Iowa, New Hampshire and New Mexico switched their electorate votes from one party to the other.

This time, however, the Obama campaign is trying to make significant changes in the Democrats' map.

Some states that Democratic candidates traditionally target, including West Virginia and Arkansas, are getting relatively short shrift, but the campaign has run TV ads in 14 states that backed Bush in 2004.

"One of our goals is to wake up on Nov. 4 with as many paths to 270 electoral votes as possible," Obama campaign manager David Plouffe says, referring to the number needed to win the election.

The Obama campaign has tried to build a "bigger battleground," in part by analyzing demographic changes in states that have a large number of African-American voters or have seen an influx of young people or college graduates.

"Virginia, North Carolina, Montana, Alaska — only Sen. Obama could be competitive" in those states as a Democrat, Plouffe said. (He spoke before McCain picked Palin, presumably bolstering the GOP's hold on her home state.)

McCain campaign manager Rick Davis outlines a much more traditional electoral map and scoffs at the idea that Obama can contest states such as North Dakota, Montana and Georgia, where the Democrat is now airing TV ads.

The McCain camp predicts the contest will come down to familiar cliffhanger states such as Florida and Ohio.

Still, McCain's appeal to Hispanics could be crucial, Pawlenty says.
"That could tip the election nationally in a close election," he says. "And that could be the difference as to whether he's president of the United States or not."

Both campaigns are focusing on the emerging Mountain West battlegrounds of Colorado, Nevada and New Mexico.

An influx of young people and other newcomers to Colorado has made the Centennial State a particular bellwether this time, even though it's gone Republican in nine of the past 10 elections.
Meanwhile, economic troubles in Michigan and Pennsylvania, particularly in manufacturing, have roiled their economies and their politics. Both are prime targets for the GOP even though they have voted for the Democrat in every presidential election since 1992.
"The white working class is a declining demographic, but they're still a lot of people, a lot of voters," Teixeira says.

Those voters, particularly older ones, weren't a receptive group for Obama in the primaries.

The GOP also hopes to win Wisconsin and New Hampshire, states that went for Democrat John Kerry in 2004 but where McCain's reformist message could resonate.

"Other elections were more predictable, where you could narrow down the number of states in which you campaign, and you could decide groups to write off — but you can't do that anymore," Budde says.

"I don't think this election fits in a mold."

The Maverick Ticket

By William Safire

The New York Times

September 7, 2008

Samuel Augustus Maverick, Texas rancher of the 1840s, is proudly sitting up in his grave. His name, which has become an eponymous American word, was cited repeatedly at last week’s unexpectedly enthusiastic Republican convention.

“I’ve been called a maverick,” John McCain told his rounded-up party. “Sometimes it’s meant as a compliment; sometimes it’s not.” True enough: old Sam Maverick’s friends said he refused to brand his cattle because it was cruel to animals; competing ranchers said it let him round up and claim all the unbranded cattle in the neighborhood. In an era that has sophisticates displaying designers’ initials, the Americanism maverick now means “one who bears no man’s brand,” or in McCain’s evocation of Thoreau’s metaphor, “marches to the beat of his own drum.”

The Op-Ed page editors yanked this former speechwriter back into harness to assess convention speeches, so here goes:

At the Democrats’ gathering in Denver, the best burst of unremarked writing was the loving introduction of Senator Joe Biden by his son: powerful testimony to the lifelong fidelity of a father after family tragedy. The TV camera’s reaction shot of Michelle Obama wiping authentic tears from her eyes and cheeks was to me the convention’s most moving image.

As opined in this space last week, Barack Obama’s speech the final night brought hosannas from the faithful, but — encumbered by its pretentious stadium setting — did not meet his high rhetorical standard. About the only member of the punditariat who agreed that this season’s emperor of oratory was short on clothes that night was David Broder of The Washington Post, who had the unfair advantage of being objective.

Then came the maverick ticket with its takeover of the change game. Senator Joe Lieberman, avoiding Obama’s error of playing to the multitude of partisans present, looked straight at the camera and spoke effectively to fellow Democrats and independents at home about McCain’s coalition-building work in the Senate. Joe faces heavy punishment for his courage from a vindictive Democratic leader, Senator Harry Reid. Best delivery by a Republican male was by Senator Lindsey Graham, who focused on the wisdom of the “surge” McCain advocated. (Obama was later forced by Fox’s persistent Bill O’Reilly to admit, at long last, that the surge “succeeded.”)

Then the St. Paul convention was hit by Hurricane Sarah and her admirable family. The cliché is that — faced by part of a party long troubled by McCain’s different drumming — the governor of Alaska was able to “energize the base” of social conservatives. The more salient fact is that her skillful speech and joyful demeanor was even more impressive than Obama’s introduction to the Democratic Party four years ago. The establishment-shaking candidate was a happy warrior in the glare of major-league scrutiny. Most of the huge, uncommitted audience at home enjoyed this strong woman’s national audition; the first test of McCain’s gamble paid off.

Though her “lipstick” ad lib got the laugh (and may have offended pit-bull fanciers), she forcefully delivered a Sorensenesque line that crystallized the choice this year’s voters face: “There are those who use change to promote their careers. And then, there are those, like John McCain, who use their careers to promote change.”

The McCain acceptance speech reads better than it was read. The straight talker never has been a smooth orator, but his homely, unprofessional speaking style has a way of underscoring his depth of character. The key word in this campaign is “trust,” and with McCain, what you see is what you get.

One purpose of a speech accepting nomination is to press a candidate’s key strength. That called for McCain to set aside his longtime reluctance to recount publicly his wartime suffering. He was careful not to claim to be owed anything by his country; on the contrary, many viewers learned for the first time of how he was “blessed because I served in the company of heroes,” and was affected for the better by his searing wartime experience, which made him readier to command in the future.
The other purpose was to turn the tables on the early campaign “narrative.” Experience is a useful opening political argument — but it looks backward. “Experience Counts” was Richard Nixon’s static slogan in 1960, but “let’s get the country moving again” — John Kennedy’s winning phrase — looked ahead. That’s the outlook McCain chose to adopt in his speech, which was strong on tomorrow’s education needs.

In willingly taking up the two-edged sword of maverickism; in spelling out his frequent fights against the sclerotic, cozy two-party establishment; in zinging that “big-spending, do-nothing, me-first-country-second Washington crowd”; in choosing an exciting new running mate even as Obama was splashing about in the news media adulation of his smoothly delivered acceptance extravaganza, McCain stiffly stole the clothes of change.

That last paragraph befits a speechwriter’s peroration, not the soberly sage, almost bipartisan analysis I originally intended. Note the incidental pop at “media adulation,” a red flag to the arugula-munching “panjandrums of the opinion media,” in Arthur Schlesinger Jr.’s phrase, gleefully waved by Sarah Palin and most other Republican convention speakers. McCain, who reveled in media-darlingism eight years ago, did not participate in such shooting at literate fish in a barrel.

As one whose only claim to coinage fame is in Spiro Agnew’s 1970 nattering nabobs of negativism, I have an attack dog in that fight (though not a maligned pit bull).

But here’s a question: In light of public opinion of most opinion journalists being down around that of Congress, is it smart politics to bash the news media?

Because Agnew, and later Nixon, ultimately were forced to resign, conventional wisdom now holds that their blast at “elitism” backfired; but it probably played a part in Nixon’s 49-state re-election landslide in 1972. By curtailing the “instant analysis” and having elected opposition leaders on TV to answer presidential addresses, the press back then took much of the punch out of the administration attack.

However, by slamming back furiously today, some of those mainstreaming or blogging in the news media just might be helping to make their critics’ point. We can hope that the winners in tomorrow’s alliteration wars will be the pleasant Pollyannas of positivism.

A Servant’s Heart

By Peggy Noonan

The Wall Street Journal

September 6, 2008

Sarah Palin killed. And more than killed.

Much has been said about her speech, but a few points. "The difference between a hockey mom and a pitbull? Lipstick" is pure American and goes straight into Bartlett's. This is the authentic sound of the American mama, of every mother you know at school who joins the board, reads the books, heads the committee, and gets the show on the road. These women make large portions of America work.

She has the power of the normal. Hillary Clinton is grim, stentorian, was born to politics and its connivances. Nancy Pelosi, another mother of five, often seems dazed and ad hoc. But this state governor and mother of a big family is a woman in a good mood. There is something so normal about her, so "You've met this person before and you like her," that she broke through in a new way, as a character vividly herself, and vividly genuine.

Her flaws accentuated her virtues. Now and then this happens in politics, but it's rare. An example: The very averageness of her voice, the not-wonderfulness of it, highlighted her normality: most people don't have great voices. That normality in turn highlighted the courage she showed in being there, on that stage for the first time in her life and under trying circumstances. Her averageness accentuated her specialness. Her commonality highlighted her uniqueness.

She seemed wholly different from, and in fact seemed a refutation to, all the men of Washington at their great desks who make rules others have to live by but they don't have to live by themselves, who mandate work rules from which they exempt Congress, for instance. They don't live by the rules they espouse. She has lived her expressed values. She said yes to a Down Syndrome child. This too is powerful

What she did in terms of the campaign itself was important. No one has ever really laid a glove on Obama before, not in this campaign and maybe not in his life. But Palin really damaged him. She took him square on, fearlessly, by which I mean in part that she showed no awkwardness connected to race, or racial history. A small town mayor is kind of like a community organizer only you have actual responsibilities. He wrote two memoirs but never authored a major bill. They've hauled the Styrofoam pillars back to the Hollywood lot.

This was powerful coming from Baberaham Lincoln, as she's been called.

By the end, Democrats knew they had been dinged, and badly. After the speech they descended on cable news en masse with the dart-eyed, moist-browed look of the operative who doesn't believe his talking points. They seemed like they were thinking, "I've seen this movie before and it doesn't end well." Actually they haven't seen it before in that Palin is something new, but they have seen it before in terms of what she said.

Which gets me to the most important element of the speech, and that is the startlingness of the content. It was not modern conservatism, or split the difference Conservative-ish-ism. It was not a conservatism that assumes the America of 2008 is very different from the America of 1980.

It was the old-time conservatism. Government is too big, Obama will "grow it", Congress spends too much and he'll spend "more." It was for low taxes, for small business, for the private sector, for less regulation, for governing with "a servant's heart"; it was pro-small town values, and implicitly but strongly pro-life.

This was so old it seemed new, and startling. The speech was, in its way, a call so tender it made grown-ups weep on the floor. The things she spoke of were the beating heart of the old America. But as I watched I thought, I know where the people in that room are, I know their heart, for it is my heart. But this election is a wild card, because America is a wild card. It is not as it was in '80. I know where the Republican base is, but we do not know where this country that never stops changing is.

It all left me wondering if this campaign is about to take on a new shape, with the old time conservatism on one side, and a smoother, evolved form of the old style liberalism on the other.

It doesn't get more dramatic, or dramatically drawn, than that.

I don't like the new media war. I don't like what it has the potential to do to the election, and the country.

The media overstepped. The Republican party resented it. GOP strategists saw a unifying force rising: anger in the base. They too had seen this movie before. They slammed the media. The media shot back: "You're attacking us for doing our job!"

How did the media overstep? By offending people by going so immediately and so personally into issues surrounding Mrs. Palin's family. They did not overstep by digging, by deep reporting, by investigating Palin's professional record.

Campbell Brown of CNN did nothing wrong for instance in pressing a campaign spokesman on Palin's foreign policy credentials. She was unjustly criticized for following an appropriate and necessary line of inquiry. But endless front page stories connected to Mrs. Palin's 17-year-old daughter? Cable news shows that had people insinuating Palin, whom America had not yet even met, was a bad mother, and that used her daughter's circumstances to examine Republican views on abstinence education? That was ugly.

In the end it made Palin the underdog, and gave her the perfect platform for the perfect dive she made Wednesday night.

We have had these old press fights in the past – they were a source of constant tension when I was a child, when Barry Goldwater came forward as a conservative and the press scorned him as a flake, and later when Ronald Reagan came up and the press dismissed him as Bonzo.

But this latest fight commences on a new and wilder battlefield. The old combatants were old school gentlemen, Eric Sevareid and Walter Cronkite; the new combatants are half-crazy cable anchors, the lower lurkers of the Internet, and the anonymous posters on the comment thread on the radical website.

This new war on new turf is not good, and carries the potential of great harm. Everyone really ought to stop, breathe deep, and think.
I am worried they won't. A friend IM'd the day after Palin's speech, and I told him of an inexplicable sense of foreboding. He surprised me by saying he shared it. "Calling all underworlds reporting for duty!," he wrote. "The bed is about to fly around the room, the puke is about to come out." He meant: this campaign is going to engage unseen powers and forces. He meant: this campaign, this beautiful golden thing with two admirable men at the top and two admirable vice presidential candidates, is going to turn dark.

It is starting to look to me like a nation-defining election. And in this it seems almost old-fashioned. 1992 for instance didn't seem or feel nation-defining, not as I remember it, nor did 2000. 1964 did, and '80 did, but they both ended in landslides. Landslide is not what I'm seeing here.

Where are the Democrats going to go? I suspect to foreign policy. In politics it used to be called Tolstoy: war and peace. McCain-Palin will mean more war, Obama-Biden will mean peace.

This campaign is about to become: epic.

John McCain also made a speech. It was flat.

Palin Pitches Sam's Club Tent

By Gerald F. Seib

The Wall Street Journal

September 3, 2008

Republican reformers have been crying out for the party to do more for the ranks of "Sam's Club Republicans" -- that is, working-class GOP voters more comfortable in a big-box store than a country club.

With Gov. Sarah Palin of Alaska as John McCain's running mate, the party now has a new national leader whose personal story resonates precisely with those Sam's Club Republicans.

The question for the reform movement now is whether Gov. Palin and the party can develop an economic message with equal appeal to the party's blue-collar contingent, which has been responsible for much of the party's growth in the last two decades. And on that front, reformers think the party has some work to do.

"On paper, and I'm sure this is partly why the McCain people picked her, she is the prototypical figure for working-class Republicans," says Ross Douthat, author of a new book entitled, "Grand New Party: How Republicans Can Win the Working Class and Save the American Dream."

But, he says, she is "unformed" on economic policy, adding: "I don't think they've really hit on a middle-class-friendly economic agenda."

Regardless of how it plays out, the Palin pick was designed in part to reinforce the image of Republican presidential nominee John McCain as a maverick agent of change who is willing to shake up the party. And it was designed in part to put forth a vice presidential nominee whose profile -- mother, hunting enthusiast with a blue-collar husband -- would appeal to blue-collar Republicans, moderate Democrats and independents the party badly needs to woo this year.

Those happen to be the same goals of reformers within the party who have been clamoring for an updated message. They argue that the party has benefited enormously in the last generation by luring in millions of middle-class and blue-collar Americans who embraced the party's culturally conservative message.

But, the reformers argue, the party's economic message hasn't been adjusted to appeal to these nontraditional Republicans. Now, they say, the party has to speak more directly to them, particularly as Democratic nominee Barack Obama hones a campaign message -- built around a middle-class tax cut -- that is designed to address deep-seated middle-class economic anxieties.

"You can win them over, most of them, on social issues," says Minnesota Gov. Tim Pawlenty, who coined the term "Sam's Club Republicans" several years ago. "But there's a perception that Republicans are rich, stereotypical people who don't care about modest-income folks. It's not true, but I don't think we've done a very good job of translating our ideals and principles into proposals they can understand."

To some extent, Republicans may be the victims of their own policy successes in the last generation -- successes that reformers fear have made the party complacent and entrenched in old policy appeals.

Starting with Ronald Reagan's election as president in 1980, Republicans began campaigning successfully on a formula emphasizing tough military and national-security views, cutting marginal tax rates, reforming the welfare bureaucracy, fighting crime and resisting affirmative action.

But many of the goals embodied in that formula have been achieved in the last generation, even as Republicans keep stressing them, Mr. Douthat argues. Meanwhile, he worries that Republicans may be losing their advantage with the very set of new voters they drew in along the way. "This year," he argues, "Obama owns the middle-class tax-cut issue.

To combat that, Mr. Douthat and other reformers argue for Republicans to adopt a broad and aggressive "family-friendly tax reform." Such a change would be designed to appeal to working-class families by offering a significantly enlarged child tax credit, giving a direct tax break specifically to parents in the middle and lower income brackets.

Taxes on investments also would be kept low, and the top marginal tax rate would be reduced a bit as well. To make up lost revenue -- and keep deficits under control -- the change would eliminate or reduce the deduction now given for state and local taxes, and apply that lower top rate to a larger universe of taxpayers.

For his part, Gov. Pawlenty argues for an updated Republican message to appeal to Sam's Club Republicans on four fronts:

Health care: Gov. Pawlenty contends that, in a new economy, Republicans should do a better job of convincing working-class voters that their approach of having government help workers carry their own private health insurance from job to job is preferable to relying on either employers or a government program.

Energy: Sen. McCain hit on a winning theme with working-class voters on energy this summer by arguing for a suspension of the federal gas tax and pushing for more oil drilling off America's coasts, Gov. Pawlenty argues. That message hit the right note on a "pound-the-table issue" for middle-class voters.

Education: Republicans need to convince blue-collar families that they can build a better education system, because they are coming to realize that in the new global economy "you'd better have an education that leads you to a skill." That means, he argues, that Republicans should stress such policies as performance pay for teachers, school choice, education boot camps to pull up disadvantaged children and development of online courses.

Fiscal discipline: Above all, he argues, people go to Sam's Club because they don't have a lot of money to spend and want "accountability for value." The want the same from government. So, he argues, Republicans have to do more to show financially strapped voters in the middle class they are the party of fiscal discipline, rather than budget deficits.

Douglas Holtz-Eakin, the policy director for Sen. McCain's presidential campaign, agrees. The Republican image right now "suffers from spending money hand over fist, and the perception a lot of that was just lining the pockets of folks who had close political connections," he says.

The looming question is how much Gov. Palin can help articulate a message on these fronts. Her record on economic policy is sparse. She cut property taxes as a mayor and appealed to populist sensitivities by selling a private jet used by the previous governor. And as governor she has claimed to have resisted "earmarks," those congressional appropriations that fund specific projects with federal tax dollars, though news reports from the time indicate she pushed for earmarked funds for her city while a mayor.

That's a mixed picture -- and one she's likely to try to clear up Wednesday night in her own closely watched speech at the convention here.