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.