By Thomas L Friedman
The New York Times
December 13, 2008
If there is anything I’ve learned as a reporter, it’s that when you get away from “the thing itself” — the core truth about a situation — you get into trouble. Barack Obama will have to make three mammoth decisions after he takes the oath of office — on cars, Kabul and banks — and we have to hope that he bases those decisions on the things themselves, the core truths about each. Because many people will be trying to throw fairy dust in his eyes.
The first issue will be whether to bail out Detroit. What is the core truth about Detroit? Auto executives will tell you that it’s the credit crisis, health care, retirement costs and unions. Sure, those are real. But the core truth is that for way too long Detroit made too many cars that too many people did not want to buy. As even General Motors conceded in its apology ad last week: “At times we violated your trust by letting our quality fall below industry standards and our designs become lackluster.” Walk through any college campus today. You don’t see a lot of Buicks.
Over the years, Detroit bosses kept repeating: “We have to make the cars people want.” That’s why they’re in trouble. Their job is to make the cars people don’t know they want but will buy like crazy when they see them. I would have been happy with my Sony Walkman had Apple not invented the iPod. Now I can’t live without my iPod. I didn’t know I wanted it, but Apple did. Same with my Toyota hybrid.
The auto consultant John Casesa once noted that Detroit’s management has gone from visionaries to operators to caretakers. I would say that they have now gone from caretakers to undertakers. If they are ready to bring in some visionaries and totally restructure — inside or outside of bankruptcy — so they can make money selling cars that people will want to buy, then I say help them. I’d hate to see the Detroit auto industry go under. But if all we are doing is prolonging auto undertakers, then we have to let nature take its course.
After Detroit, Mr. Obama will be asked to bail out Afghanistan. Watch out. The tide has turned against us there because too many Afghans don’t want to buy our politics, or, more precisely, the politics of our ally, the corrupt government of President Hamid Karzai. That is “the thing itself.”
The main reason our Iraq bailout — a k a “the surge” — has had a positive effect is because Iraqis voted with their own guns and their own lives, taking on both Al Qaeda and pro-Iranian Shiite militants. Iraq has avoided bankruptcy for the moment — a total meltdown — because enough Iraqis wanted what we were selling: freedom from extremists. That is the thing itself, and right now I’m not seeing enough of that thing in Afghanistan. Beware of a Kabul bailout.
But maybe the most flagrant area where we continue to avoid looking at “the thing itself” is with our banks. What we are dealing with there is the effect of a credit bubble that began in the late-1980s with the advent of global securitization — the chopping up and bundling into bonds of everything from home mortgages to student loans to airplane leases, and then selling them around the world.
When you take this much leverage and this much globalization and this much complexity and start it in America, and then blow it up, you have a nuclear financial explosion. The deflating of this credit bubble is so wealth-destroying that even the most prudent banks have been ravaged by it.
What to do? The smartest people I know in banking are praying that Obama’s Treasury Department will tackle “the thing itself.” That is, do a real analysis of what the major banks are worth in a worst-case scenario. Then determine, if, on that basis, they have viable, survivable equity-to-asset ratios.
Those that do should get more government investment. Those that are close should be forced to find new investors and merge. And those not viable should be shut down and have their bad assets bought by a government-owned body (which would sell them over time) and their deposits shifted to healthy banks to make those banks even healthier. Some experts believe we still need to close 1,000 banks.
This process will be painful, but probably by the end of a year the market will clear, investors will come in, and the surviving banks will be ready to lend to each other and you and me. The “thing itself” here is that banks still don’t want to lend because they still don’t know the true value of their own balance sheets, let alone anyone else’s.
The market has to clear. We can do it painfully and quickly, as we did with the dot-coms, or we can be Japan and drag it out.
So whether it's cars, Kabul or banks, we have to stop wishing for the worlds we want and start dealing with the things themselves. If Obama does, his first year will be excruciatingly painful, but he could have three years after that to be creative. If he doesn’t, I fear that cars, Kabul and banks will dog his whole presidency.
Monday, January 5, 2009
Saturday, November 22, 2008
The Auto Makers Are Already Bankrupt
Admitting the obvious is their best chance to restructure.
By Paul Ingrassia
WSJ.com
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.
By Paul Ingrassia
WSJ.com
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
Townhall.com
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.
Townhall.com
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.
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
Introduction
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, www.memrieconomicblog.org
Middle East Media Research Institute
October 30, 2008
Introduction
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, www.memrieconomicblog.org
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.
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.
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