Obama in Untouchables Remake, with Deliverance Edge

The Untouchables — substitute the White House for Capone:

Sean Connery / David Axelrod: And then what are you prepared to do? If you open the can on these worms you must be prepared to go all the way. Because they’re not gonna give up the fight, until one of you is dead.Kevin Costner / Obama: I want to get Capone! I don’t know how to do it.

Sean Connery / David Axelrod: You wanna know how to get Capone? They pull a knife, you pull a gun. He sends one of yours to the hospital, you send one of his to the morgue. That’s the Chicago way! And that’s how you get Capone. Now do you want to do that? Are you ready to do that? I’m offering you a deal. Do you want this deal?

Clearly Sen Obama is more Hyde Park [think Coco Plum] than Chicago. In the political maneuvering for the White House, he appears to be unable or unwilling to do anything unscripted in the original Daley / Axelrod / Plouffe playbook. The Obama camp squealing about moving a debate under historic legislative circumstances seems more apropos of a Deliveranceouttake than a presidential campaign. Consider where the political landscape might be early next week:

  • Rescue Plan in place with conservative amendments.
  • Debates all moved forward — shudder shudder — one week.
  • McCain will have been seen as undermining the initial Bush / Paulson proposal — actions which run directly counter to the Democrat’s 3rd Bush-term attack mantra.
  • McCain will have appeared to have acted decisively in asking the debates to be moved and getting into the middle of the action in Washington.
  • In contrast, Obama’s ‘voting present’ tendency will be highlighted by McCain ads [can’t wait] which replay Obama’s comments about his self-perceived leadership role, stating that, if you need us, if I can be helpful.”

Dick Morris explains why he thinks the strategy will work:

Knowing how unpopular the bailout is with the American people, the Democrats are not about to pass anything without broad Republican support even though their majorities permit them to act alone. Instead of signing on with the Democratic/Bush package, the House Republicans are insisting on replacing the purchase of corporate debt with loans to companies and insurance paid for by the companies, not by the taxpayers. That, of course, is a popular position. McCain would be comfortable to debate this issue division all day. And, if the Dems don’t cave into the Republican position, that’s probably exactly what he’ll do on Friday night’s scheduled debate in Mississippi.

But the Democrats are not about to be stubborn. They know their package is a lemon and need the political cover of Republican support. So the Republicans can write their own ticket…and they will. John McCain will be at the center of the emerging compromise while Obama is out on the campaign trail kissing babies. If the deal is cut before Friday’s debate, my bet is that McCain shows up in triumph. If it isn’t, he shows up anyway and flagellates Obama over the differences between the Democratic package and McCain’s.

For the first time I think the ‘ol fart’s gonna win this thing.

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The Brilliance of McCain’s Move
Dick Morris and Eileen McGann
Friday, September 26, 2008

McCain has transformed a minority in both houses of Congress and a losing position in the polls into the key role in the bailout package, the main man around whom the final package will take shape. He arrived in Washington to find the Democrats working with the Bush Administration to pass an unpopular $700 billion bailout. The Democrats had already cut their deal with Bush. The Dems agreed to the price tag while Bush agreed to special aid to families facing foreclosure, equity for the taxpayers, and limits on executive compensation. But no sooner had McCain arrived than he derailed the deal.

Knowing how unpopular the bailout is with the American people, the Democrats are not about to pass anything without broad Republican support even though their majorities permit them to act alone. Instead of signing on with the Democratic/Bush package, the House Republicans are insisting on replacing the purchase of corporate debt with loans to companies and insurance paid for by the companies, not by the taxpayers. That, of course, is a popular position. McCain would be comfortable to debate this issue division all day. And, if the Dems don’t cave into the Republican position, that’s probably exactly what he’ll do on Friday night’s scheduled debate in Mississippi.

But the Democrats are not about to be stubborn. They know their package is a lemon and need the political cover of Republican support. So the Republicans can write their own ticket…and they will. John McCain will be at the center of the emerging compromise while Obama is out on the campaign trail kissing babies. If the deal is cut before Friday’s debate, my bet is that McCain shows up in triumph. If it isn’t, he shows up anyway and flagellates Obama over the differences between the Democratic package and McCain’s.

By Monday, at the latest, the Democrats have to cave in and pass the Republican version. They don’t dare pass their own without GOP support, so they will have to cave in to the Republican version.

Then McCain comes out of the process as the hero who made it happen when the president couldn’t and Obama wouldn’t. He becomes the bailout expert.

And, of course, the bailout will work. With the feds standing behind the bad debt, whether by purchase or loans and insurance, Wall Street will breathe a sigh of relief. Bears won’t dare bet against the economy with the entire weight of the federal government on the other side. They may be bears but they are not rabid.

Finally, McCain, as the reigning expert on bailouts, then can take the tax issue to Obama, saying that a tax increase, such as the Democrat is pushing, would destroy the bailout, ruin the economy, and trigger a collapse.

This bold move by McCain is about to work. Big time.
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CAMPAIGN 2008
Obama’s Inner Circle

By James A. Barnes, National Journal
© National Journal Group Inc.
Monday, March 31, 2008

If potential presidents can be judged by how they run their campaigns, then how they staff those efforts may provide important clues to the kinds of talent they would recruit for their administrations. Because Democratic front-runner Barack Obama is a relative newcomer to national politics, an examination of his inner circle of political and policy advisers offers new windows into his thinking, leadership style, and sources of expertise.

The Democratic front-runner’s team has a relatively shallow bench, but its political achievements thus far are quite impressive.

To be sure, Team Obama has made a few stumbles that give pause to some observers. One of the candidate’s foreign-policy advisers resigned after a Scottish newspaper quoted her as calling Hillary Rodham Clinton a “monster.” Another, a retired general, likened former President Clinton to infamous red-baiting Joseph McCarthy. And Obama’s chief economic adviser inadvertently became a minor liability after it was reported that he met with Canadian diplomats in Chicago and either played down Obama’s skepticism about the North American Free Trade Agreement or had his informal remarks misinterpreted, as the campaign maintains.

Obama’s team has a relatively shallow bench: Several players are responsible for an extraordinarily wide range of policy areas. But whatever the lapses and shortcomings of Obama and his closest aides, it’s hard not to be impressed with their political achievements. The campaign has taken on the power couple who have dominated Democratic politics for the past 16 years and reduced a once-mighty heir apparent to a lackluster underdog.

“I would describe it as an excellent campaign,” says Democratic media consultant Tad Devine, who worked on the presidential campaigns of nominees John Kerry and Al Gore but is not taking sides in the Obama-Clinton battle.

Although Obama has had a solidly liberal voting record in the Senate — the most liberal record in 2007, according to an analysis by National Journal — his policy advisers tend to be moderates. Indeed, Obama explains his roll-call record as a product of votes that push senators to one extreme or the other, and he maintains that his presidency would move the nation into a less ideological, more cooperative era.

What follow are mini-profiles of many of the key players on Obama’s political and policy squads.

POLITICS
Obama is fortunate to have a gifted team of experienced political operatives guiding his historic run for the White House. It’s a group united by deep loyalty to the candidate, even though few knew him before his 2004 campaign for the Senate.

“You have to give them really high marks for a good, solid campaign,” says media consultant Bill Carrick, who has been involved in Democratic presidential politics since 1980 but is currently neutral. “They knew exactly what they had to accomplish, and did it.”

Well over a dozen political operatives have played key roles getting Obama to the brink of the 2008 Democratic nomination. At least four in particular stand out.

David Axelrod
“Ax,” as he is called around the campaign’s Chicago headquarters, met Obama in the early 1990s when he was a community organizer leading a voter-registration drive on the South Side. Axelrod served as advertising director for Obama’s 2004 Senate campaign. Today, as Obama’s chief strategist, he is responsible for crafting ads and helping the candidate to hone his message.

A former political reporter, Axelrod, 53, left the Chicago Tribune in 1984 to become press secretary for then-Rep. Paul Simon, D-Ill., who was running for the Senate. He soon took over as campaign manager. After Simon won, Axelrod formed a political consulting firm in Chicago and quickly established himself as a fixture in Windy City politics, as well as statewide. In 1989, Axelrod went to work for Richard M. Daley in his first successful bid to be Chicago’s mayor, and he has remained close to the Daley machine ever since. Although Daley’s ascent to the job his legendary father had held displaced the African-American leadership from City Hall, Axelrod has helped to elect several black mayors around the country, including one of Daley’s predecessors, Harold Washington.

No one successfully navigates the byzantine and bare-knuckles world of Illinois politics without causing at least a bit of controversy, and Axelrod has been criticized over the years for some hard-hitting television spots. But his reputation in the consulting business is solid, and he is generally held in high regard. Tom O’Donnell was a media consultant for Chris Van Hollen of Maryland in 2002 when he ran against Kennedy family member Mark Shriver, an Axelrod client, in a high-profile Democratic primary for a U.S. House seat. After Van Hollen won, O’Donnell recalls, Axelrod “called me and said we ran a really good campaign. I think it’s the first time I had a competitor do that,” he said. “He’s got a lot of class. And I think he’s done a tremendous job in this campaign.”

Since 2002, Axelrod’s firm, AKP&D Message and Media, has worked on 42 primary or general election contests around the country and helped win 33 of them. Axelrod was a media consultant for John Edwards’s 2004 presidential bid. Ironically, Axelrod interviewed to become Hillary Clinton’s media consultant when she first ran for the Senate in 2000. He didn’t get the job, but he did produce issue advertising boosting her candidacy for the New York Democratic Party and the Democratic Senatorial Campaign Committee.

David Plouffe
As Obama’s campaign manager, Plouffe is widely credited with running one of the most impressive presidential nominating operations in recent memory. He is known for his discipline and for his ability to maintain a steady course through a campaign’s inevitable ups and downs. “He is the most focused, talented operative I’ve ever worked with,” says Democratic lobbyist and Clinton supporter Steve Elmendorf. “He never gets distracted by any of the chatter or Beltway stuff,” adds Elmendorf, who, as then-House Minority Leader Dick Gephardt’s chief of staff, hired Plouffe to be his deputy in 1997.

Plouffe, 40, got an early taste of presidential politics working on the 1992 Democratic bid of Sen. Tom Harkin of Iowa. After it ended, he managed the re-election campaign of Rep. John Olver of Massachusetts. Plouffe returned to his home state of Delaware in 1994 to manage the unsuccessful Senate bid of then-Attorney General Charles Oberly. He then went to New Jersey to run Robert Torricelli’s victorious campaign for the Senate in 1996. Afterward, Torricelli’s media consultant, Bob Shrum, urged Elmendorf to hire Plouffe. He moved over to run the Democratic Congressional Campaign Committee for the 2000 election.

After that cycle, he joined David Axelrod’s Chicago-based consulting firm. In 2004, Plouffe took a leave of absence to serve as a senior adviser to Gephardt when the Missourian made his final run at the Democratic presidential nomination.

Valerie Jarrett
Although she isn’t well known inside the Beltway, Jarrett is a fixture in Chicago politics and in the Obama family. Jarrett, 51, is a senior unpaid adviser to the campaign, and is a confidant of both the candidate and his wife, Michelle.

“She’s totally loyal to both of them, can be totally honest with both of them,” one Obama operative said. “She does not pretend to know something that she doesn’t know, but she is a person in the room who is not reluctant to say exactly what she thinks to the candidate and the candidate’s other advisers.”

Jarrett’s role as an honest broker in the campaign stems from her deep friendship with the candidate and his wife. Barack Obama met Jarrett in 1991 when she was Chicago Mayor Richard M. Daley’s deputy chief of staff and was interviewing Obama’s then-fiancee for a job in City Hall. The three have been close ever since. A lawyer, Jarrett got her start in city government as a deputy corporation counsel for finance and development.

After serving at Daley’s side, Jarrett was a commissioner in the city’s Planning and Development Department and went on to chair the Chicago Transit Board, which oversees the city’s public transportation system.

She is also a member of the University of Chicago’s board of trustees and chairs its Medical Center Board. She is vice chair of Chicago 2016, the committee spearheading the city’s bid for the Summer Olympics. Jarrett oversaw the Chicago Stock Exchange until stepping down last year to become CEO of Habitat Co., a real estate development and management firm. Some have mentioned her as an eventual mayoral candidate.

Jarrett has deep roots in the Windy City. Her maternal grandfather was Robert Taylor, who ran the Chicago Housing Authority in the 1940s. Her late father-in-law is former Chicago Sun-Times columnist Vernon Jarrett. She also has a familial link to Washington: Superlawyer and Bill Clinton confidant Vernon Jordan is her great-uncle.

Robert Gibbs
Gibbs, the Obama campaign’s communications director, has probably had more to do with helping the freshman senator successfully navigate the byways of “the club” than anyone except Obama’s Senate chief of staff, Peter Rouse. That’s no small accomplishment, notes a veteran Democratic Senate aide: Given the hype surrounding Obama’s arrival in Washington, he could have easily stumbled, making a presidential bid more difficult. “The spotlight was stronger on him, and he didn’t have a margin of error,” the Senate veteran remarked. While not Obama’s alter ego, Gibbs, 36, is the institutional memory of the team; he joined Obama as press secretary after he won his Senate primary and then served in that position in his Senate office.

Gibbs has experience on the presidential trail. Before he signed up with Obama, he was a press spokesman for John Kerry during the early phase of his 2004 campaign. Gibbs is also familiar with the nonstop thrust and parry of campaign coverage. He was director of communications for the Democratic Senatorial Campaign Committee during the 2002 midterm elections, and he has served as a spokesman for high-profile Senate campaigns, including Debbie Stabenow’s successful 2000 race in Michigan and then-Sen. Ernest Hollings’s victorious 1998 re-election campaign in South Carolina.

ECONOMICS
Obama draws his economic advice largely from academics who fall within the broad Democratic mainstream of the dismal science, although they do have streaks of heterodoxy. Some are outsiders with few ties to the party’s policy establishment in Washington, while others served in the Clinton administration or elsewhere in government.

Austan Goolsbee
The University of Chicago economist, who by most accounts is playing a dominant role in vetting Obama’s policy proposals on a wide range of issues, had managed to keep his name out of the press — until three weeks ago. That’s when news leaked of a meeting that Goolsbee held with Canadian officials to explain his candidate’s call to renegotiate the North American Free Trade Agreement. After Canadian officials said that the economist had dismissed the tough rhetoric as political posturing, the Clinton campaign used their account to argue that Obama was insincere or a secret advocate of free trade. Obama’s team tried to counter by insisting that Goolsbee has played only a minor, unpaid role in the campaign, but this was disputed by other Democrats with knowledge of his influence.

Goolsbee himself certainly believes in free trade. Unlike Alan Blinder, Paul Krugman, and other left-leaning economic experts who are questioning the axiomatic belief among economists that free trade is always good, Goolsbee’s faith hasn’t been shaken, according to colleagues.

Those who know Goolsbee, 38, describe him as a committed centrist. He favors a variety of tax cuts and credits to accomplish Obama’s major goals for health care, education, housing, and reducing poverty, and he is considered a fairly strong voice against deficit spending. Obama’s choice of Goolsbee as his senior economic adviser is unusual because he has never worked in government. Goolsbee is not a political neophyte, however: He worked on Obama’s 2004 Senate campaign, and he played a peripheral role in John Kerry’s presidential campaign that year. The kerfuffle over his NAFTA comments may betray some lack of political experience, but colleagues say that Goolsbee is typically not caught off guard. “He is ambitious and political. I think he’d catch on in Washington very quickly,” said a fellow economist who is not involved with any campaign.

Goolsbee has other skills to draw on if his role becomes more public — he was a legendary debater at Yale University, where he won national competitions. Like most other economists, he’s on record as favoring some things that few Democratic politicians would want to defend — incentive pay for government workers, for example — but nothing that would cause Obama bigger problems than the NAFTA flap.

Jeffrey Liebman
Like Goolsbee, Liebman is known as an academic economist with a centrist streak. Unlike Goolsbee, however, he has Washington experience — a stint in 1998 and 1999 as the White House aide coordinating the Clinton administration’s Social Security proposals. Not much came of that process, but Liebman earned the respect of Democratic economic policy experts. On the Obama campaign’s relatively small policy team, the 40-year-old Liebman serves as the resident expert on tax and fiscal policy, as well as on Social Security and other entitlement programs.

A professor at Harvard’s John F. Kennedy School of Government, Liebman has a reputation for avoiding stark ideological positions and preferring empiricism to rhetoric. Although he has advocated a balanced approach to Social Security reform that includes raising payroll taxes, he has also produced research showing that such an increase would reduce employment, thus wiping out half of the revenue to be gained. In a Newsweek article earlier this year that tried to identify a “post-Baby Boomer” approach to economics, Liebman supported using monetary policy to manipulate the economy.

Christina and David Romer
The Romers, a married couple, often do research and take on academic responsibilities as a team. Christina Romer is 49; her husband is 50. As professors at the University of California (Berkeley), they are well-known macroeconomists — experts on the workings of the U.S. economy — who jointly hold one of six spots on the academic committee of economists that decides when recessions begin and end. They are both steeped in the history of the country’s economy and have recently produced a series of papers looking at the causes and effects of most of the major changes in tax policy in the last 100 years.

At the same time that Obama is calling for higher income taxes on people making $250,000 or more, the Romers have found that tax increases are generally bad for economic growth and that they primarily discourage investment — the supply-side argument that conservatives use to justify tax cuts for the rich. On the other hand, the Romers have shredded the conservative premise that tax cuts eventually force spending reductions (“starving the beast”). Instead, they concluded that tax reductions lead only to one thing — offsetting tax increases to recover lost revenue.

Daniel Tarullo
Tarullo worked for Bill Clinton for six years, the last three in the White House as the president’s point man on international economic policy. Soon after Obama was elected to the Senate, Tarullo met him at one of those Washington gabfests where wonks break bread with the powerful. The discussion focused on the Central American Free Trade Agreement, which Tarullo opposed and Obama ultimately voted against.

“I was attracted by his unusual combination of passionate aims and calm demeanor,” Tarullo recalls. “And I became convinced he had a rare capacity for leadership that the country will need in the years ahead.”

Tarullo, 55, teaches law at Georgetown University and is a senior fellow at the Center for American Progress, a liberal think tank. He joined Obama’s advisory team in December 2006 and is the go-to guy on currency, foreign investment, and trade. With a book coming out this spring on the need for tighter regulation of banks, Tarullo is also involved in campaign policy discussions about financial regulation and the subprime-mortgage crisis. But so far, the intensity of Tarullo’s interest in banking regulation is not reflected in the campaign.

IMMIGRATION
The 40 or so members of the campaign’s Immigration Policy Advisory Committee come from diverse ethnic and professional backgrounds. The advisers range from immigration advocates to business executives; academics and lawyers are particularly well represented. Many committee members have substantial government experience.

Committee head Mariano-Florentino Cuéllar, a law professor at Stanford University, said that the advisers’ common thread is a belief that progress on immigration reform requires “a certain kind of dialogue” — not a fight — that includes Democrats, Republicans, and independents; is intellectually honest; and recognizes the need to work across government jurisdictions and policy areas. “I think a lot of us on this committee would like to make a difference,” Cuéllar said.

In addition to Cuéllar and lawyer Preeta Bansal, Obama’s top advisers include Jennifer Chacón, a law professor at the University of California (Davis); Robert Bach, a former executive associate commissioner of what was then the Immigration and Naturalization Service; Tara Magner, director of policy for the National Immigrant Justice Center; and Marc Rosenblum, a political science professor at the University of New Orleans.

Mariano-Florentino Cuéllar
A veteran of President Clinton’s 1996 re-election campaign, Cuéllar, now 35, was a top Treasury Department official from 1997 to 1999. Cuéllar, who goes by “Tino,” also advises Obama on criminal justice and national security issues, as well as on outreach to Latino voters.

Like Obama, he believes that comprehensive immigration reform must go beyond addressing border security and the status of the nation’s 12 million illegal immigrants to confronting the current system’s bureaucratic failings, providing job opportunities for American workers, promoting economic development in Latin America, and determining “how our immigration policy reflects our values and needs as Americans.” Cuéllar, who joined the Obama campaign in April 2007, brings expertise on the regulatory side of immigration and international security, as well as what he calls a “passion” for refugee policy.

Preeta Bansal
Obama’s No. 2 immigration adviser sees her role as framing the issues to “recognize the diversity of the immigrant community,” both legal and illegal. Bansal, a 42-year-old partner at law firm Skadden, Arps, Slate, Meagher & Flom in New York City, is a 1993-96 veteran of the Clinton White House and Justice Department. Her path first crossed Obama’s at Harvard Law School, although it was mutual friends who brought her to the campaign.

Bansal became familiar with Obama’s foreign-policy work through her service on the U.S. Commission on International Religious Freedom. She shares the candidate’s emphasis on expanding legal immigration, especially jobs-based immigration, although Obama has also fought for placing a continued priority on family reunification.

The influential Bansal advises the senator on international human rights, legal issues, foreign policy, women’s issues, and outreach to Asian-Americans. Obama “is able to advance progressive principles, but he’s not one of these starry-eyed liberals,” she says. “With him, two plus two equals five, not four. The whole is greater than the sum of the parts.”

NATIONAL SECURITY
“Mainstreamers.” “Centrists.” “Non-ideologues.” These words tend to pop up in descriptions of Obama’s security and intelligence advisers — words that arguably help a candidate who is derided by his rivals as inexperienced. By recruiting eminences grises such as Tony Lake and young, skilled post-Cold War diplomats such as Susan Rice, the campaign appears eager to reassure voters that Obama, with his conspicuous, or at least relative, lack of foreign-policy experience would be surrounded by seasoned hands as commander-in-chief.

Many of Obama’s advisers served in the Clinton State Department or on the National Security Council. Philip Gordon and Ivo Daalder are two notables. Both are now with the Brookings Institution, as are at least three other advisers. Pentagon veterans include Richard Danzig, who was Clinton’s Navy secretary; Maj. Gen. Jonathan Scott Gration, a 32-year veteran of the Air Force; and Lawrence Korb, who served as an assistant Defense secretary in the Reagan administration.

But policy experience is no guarantee of political grace. In the past few weeks, Obama has suffered from embarrassing public gaffes by two advisers. Rice, in response to Hillary Clinton’s TV ads about “red phone” calls at 3 a.m., admitted that Obama had no experience handling such crises — but contended that neither did Clinton nor John McCain, since none of the three had been president. And Samantha Power, an academic and author, had to step down as one of Obama’s closest confidants after she called Clinton a “monster” during an interview.

Tony Lake
One of Obama’s top foreign-policy and national security advisers, Lake was once closely associated with President Clinton, having served as national security adviser from 1993 to 1997, and as the president’s envoy for negotiations that ended the war between Ethiopia and Eritrea. The 68-year-old has advised a number of Democratic presidents and candidates since the 1970s, in a diplomatic career that stretches back 45 years. He and Obama met in Chicago in 2003, and Lake came aboard as a key adviser in early 2007.

Like Obama, Lake opposed the invasion of Iraq. He has since become a central defender of some of Obama’s more controversial foreign-policy positions. When Hillary Clinton called Obama “irresponsible” and “naive” for agreeing, in a debate, to meet “separately without precondition” with leaders of Iran, North Korea, and Venezuela, among others, Lake came to his defense. “A great nation and its president should never fear negotiating with anyone,” Lake declared in a post-debate memo. Still, Lake and other advisers may have cringed at that and others of Obama’s unequivocal assertions, such as his stated willingness to send U.S. forces into Pakistan to root out Al Qaeda without first asking that government’s permission.

Susan Rice
Rice, 43, Obama’s other key adviser on national security, advanced rapidly through the diplomatic ranks at the State Department in the 1990s and was seared by the experience of the Rwandan genocide. “It was the most horrible thing I’ve ever seen,” she said in a 2000 interview with the alumni magazine of her alma mater, Stanford University. “It makes you mad…. It makes you know that even if you’re the last lone voice and you believe you’re right, it is worth every bit of energy you can throw into it.” In 1997, she became assistant secretary of State for African affairs, after serving as President Clinton’s Africa adviser on the National Security Council.

Rice began her career at management consulting firm McKinsey & Co. and is currently on leave from the Brookings Institution. She met Obama during his 2004 Senate campaign and has said that she was drawn to his “remarkably broad and deep grasp of the key foreign-policy challenges of the day.”

Rice is known for her bluntness. “I guess you could say I’m plainspoken,” she told Stanford magazine. “I can be diplomatic when I have to be. But I don’t have a lot of patience for B.S.”

John Brennan
Brennan, the president and chief executive officer of the Analysis Corp., an intelligence contractor in McLean, Va., began advising the Obama campaign on intelligence and counter-terrorism at Tony Lake’s request. A 25-year CIA veteran, Brennan became the first director of the National Counterterrorism Center in 2004, and he now chairs the Intelligence and National Security Alliance, a professional association. He first traveled to the Middle East in the 1970s, studying in Egypt, and he has spent a good portion of his career on regional issues. He ran the CIA’s terrorism analysis during the Persian Gulf War and then became the daily intelligence briefer at the White House. From 1996 to 1999, he served in Riyadh, Saudi Arabia, as the CIA’s chief of station.

Brennan, 52, thinks that President Bush should have moved to ratchet down the extraordinary intelligence measures taken immediately after the September 11 attacks. After the heat of 9/11 dissipated a bit, the administration “should have embarked to engage meaningfully with the [congressional] oversight committees and the judiciary to put in place … programs for the longer term,” Brennan told National Journal.

Like Obama, he favors a combination of public diplomacy and the option of military action to address national security threats. But the two differ on the controversial question of immunity for telecommunications companies that helped the government covertly monitor calls after 9/11. Brennan favors immunity, but Obama voted to strip retroactive immunity from the Senate intelligence bill, arguing that the matter should be settled in court.

ENVIRONMENT
Obama’s core environment and energy advisers come from the moderate wing of the Democratic Party. Like the candidate, they favor federal controls on greenhouse-gas emissions and greater emphasis on developing clean sources of energy. But his green-team members have spent their careers forging partnerships between environmental interests and business, not hugging trees. Many of them were attracted to Obama because of his conviction that environmental goals can be compatible with the needs of his home state’s coal, farm, and nuclear industries.

Almost all of Obama’s top environment and energy advisers have degrees from Harvard, although none attended Harvard Law School with him. The Washington insiders and outsiders who make up his environmental lineup include Daniel Esty, an environmental law professor at Yale who was at the Environmental Protection Agency during the George H.W. Bush administration; Daniel Kammen, an energy and public policy professor at the University of California (Berkeley); and Robert Sussman, a senior fellow at the Center for American Progress who spent 10 years practicing environmental law at Latham & Watkins, and was at EPA during the Clinton administration.

Jason Grumet
The campaign’s official environment and energy policy committee is headed by Grumet, president of the Bipartisan Policy Center, a Washington-based nonprofit established in 2007 by four former Senate majority leaders. The group focuses on developing bipartisan solutions to national security, health care, energy, agriculture, and transportation problems. Before taking that post, Grumet, 41, was executive director of the National Commission on Energy Policy, a coalition of industry, academic, and environmental representatives focused on promoting environmentally friendly energy policies. The commission has since been folded into the policy center.

Grumet met Obama in 2005, after the Illinois Democrat was elected to the Senate. He worked with Obama on his collaboration with Sen. Richard Lugar, R-Ind., on strengthening federal fuel-economy standards for cars. Grumet said he was impressed with Obama’s eagerness to forge compromises with Republicans and other interests involved in the debate. “Having been frustrated in this town for several years with the heroic rhetoric on oil dependence and then the total lack of policy progress, I thought [Obama’s approach] was the way that you can make real progress,” Grumet said.

Howard Learner
Among Obama’s top environmental advisers, Learner has the longest track record with the Illinois Democrat. Learner, 52, is executive director of the Environmental Law and Policy Center, a Chicago-based advocacy group. He linked up with Obama in the early 1990s, when Obama had just finished law school and Learner was general counsel at Business and Professional People for the Public Interest, a Chicago-based law and policy center. “I got to know Michelle Obama and Barack Obama as public-spirited, public-interest lawyers in Chicago who were looking to make a difference,” Learner recalls. “Everybody recognized that they were tremendously talented.”

In 1996, Learner joined Obama’s successful campaign for the Illinois state Senate, and he worked with him on early efforts to require state utilities to generate some of their electricity from renewable resources. Learner says that the renewable-electricity bill adopted last year by the Illinois Legislature was built on Obama’s original proposals. He also worked on Obama’s U.S. Senate race.

Frank Loy
Loy says he first noticed Obama in 2004, when Obama gave his celebrated keynote address at the Democratic National Convention. After Obama’s election to the Senate, Loy began raising money for his presidential race and has since become one of the campaign’s top environmental advisers. Loy argues that Obama is the best candidate to break the stalemates on energy and environmental issues. “In our system, it is not enough to just elect a new president,” Loy said. “As president, you need to be able to operate in a way that gets things done. And that requires both the personality and the history and an attitude that Barack Obama has. He has an amazing ability to work across the aisle and attract voters that are not your standard reliable Democratic voters.”

Loy was an impressive addition to the campaign. The 79-year-old pillar of the environmental community serves on the boards of several national green groups. He held State Department posts during the Clinton, Carter, and Johnson administrations, and he spent 14 years as president of the German Marshall Fund. Loy’s public service stint followed a long career in corporate America.

HEALTH CARE
Obama’s message that lowering health care costs is an essential first step to getting nearly every American insured is one that fits his top health care advisers well. Indeed, two of the three are based in Massachusetts and, thus, have firsthand knowledge of how high costs nearly killed that state’s landmark universal coverage plan. Massachusetts last year became the first state to require nearly every resident to have health insurance, but the public resisted when premium prices were more expensive than forecast. The Massachusetts experience, Obama’s top health care advisers say, reinforced a message that they — as a team — have delivered before: All three helped John Kerry’s 2004 presidential campaign develop a proposal to lower health care costs. They have Washington experience, are established and well respected in Democratic and academic circles, and have worked on other campaigns with advisers who this year lined up behind different candidates. “A lot of us have worked together. It turned out the health policy world is not enormously large,” said David Cutler, professor of applied economics at Harvard’s John F. Kennedy School of Government. In addition to Obama’s health-specific advisers, two of his top economic advisers — Austan Goolsbee, an economics professor at the University of Chicago, and Jeffrey Liebman, a professor of public policy at Harvard University — helped craft Obama’s health proposal.

David Cutler
A professor of applied economics at Harvard’s John F. Kennedy School of Government, Cutler is no stranger to Washington. Obama’s top health care adviser served on the Council of Economic Advisers and the National Economic Council during the Clinton administration, and he helped develop the Clintons’ failed universal health care proposal in the early 1990s. Cutler also worked on health care blueprints for Democratic presidential candidates Bill Bradley in 2000 and John Kerry in 2004.

Although he’s in Obama’s camp, Cutler isn’t a critic of Hillary Clinton’s current health care package. “If you said to me that Senator Obama was never going to run and, ‘What do you think about Clinton’s plan?’ I would say, ‘It’s a terrific plan,’ ” Cutler said. He added: “Whoever the Democratic nominee is will have the support on health care of the entire policy community on the left. I don’t know of anyone who’s uncomfortable in some fundamental way with what is in the plans.” Still, Cutler, 42, maintains that it’s critically important to lower costs before mandating that everyone have coverage, as Clinton has proposed. “If you make insurance affordable and accessible, you will get to 98 or 99 percent of covered people,” he predicts. “Maybe after that you can come in with a mandate for small pockets of people.”

David Blumenthal
When Blumenthal isn’t developing health care proposals for Democratic presidential contenders (this is his fourth go-round), the physician is seeing patients, writing books, teaching at Harvard, and promoting his health reform ideas in Washington. Blumenthal, 59, helped develop a health care proposal in 1988 for Democratic presidential candidate Michael Dukakis that focused on getting all employers to offer insurance. He worked on health care policy for Sen. Edward Kennedy, D-Mass., during his presidential run in 1980, and for John Kerry in 2004. Blumenthal, director of the Institute for Health Policy at Massachusetts General Hospital and a professor of medicine and policy at Harvard, also helped the Dukakis and Kerry campaigns retool their health care proposals for the general election.

When Obama declared for president, Cutler, who was already working with the senator, contacted Blumenthal. On the Obama campaign, Blumenthal has advocated a strong commitment to funding and adopting health information technology, and Obama has proposed spending $10 billion a year for five years to move toward standards-based electronic health care systems for doctors and hospitals. (Clinton has proposed spending $3 billion a year for several years.) Blumenthal is writing a book that examines what former presidents have proposed and accomplished in the way of health care access and cost containment. He hopes that it will be out in time to influence whatever health care initiatives Congress and the new president pursue next year. “In American politics, you elect a president, not a plan,” he said.

Stuart Altman
The Obama campaign came looking for Altman specifically to get the veteran health care economist to resurrect a proposal he had drawn up for John Kerry’s presidential campaign. (Altman and Obama policy strategist Heather Higginbottom had worked together on Kerry’s campaign.) The proposal would have the federal government reimburse employers for some catastrophic health care costs and would require employers to use that money to reduce workers’ premiums. It has become a major selling point of Obama’s health care plan, and it marks one of the few distinctions between his proposal and Hillary Clinton’s.

Altman, the 70-year-old dean of Brandeis University’s Heller School for Social Policy and Management, helped develop a plan for President Nixon that would have required most employers to buy insurance for their workers and would have created a federal health plan that anyone could purchase. He served on President Clinton’s transition team but declined to participate in the Clintons’ health care reform effort in the early 1990s. “It was too big, a total restructuring of our whole health system,” he says. Altman praises Hillary Clinton’s current health care plan, however, and notes that it resembles Obama’s proposal. One difference he supports is Obama’s wait-and-see approach to mandating that everyone have health insurance.

LEGAL AFFAIRS
Obama doesn’t need advisers to prep him on constitutional theory. He lectured on the topic at the University of Chicago after moving to the Windy City in 1991 upon receiving his Harvard law degree magna cum laude. He is at ease fielding questions from voters who oppose President Bush’s expansive interpretations of executive powers on issues ranging from torture to habeas corpus to war powers.

Nonetheless, Obama has tapped into his networks at Chicago and Harvard for legal advisers — for policy advice and for counsel on campaign matters. His University of Chicago roots help explain his philosophical preference for incentives rather than mandates, a key difference between his plan for achieving universal health coverage and that of Hillary Clinton.

His Harvard advisers include heavy hitters in constitutional and criminal justice law, such as professors Martha Minow and Ronald Sullivan and former Harvard professor Christopher Edley Jr., now dean of the law school at the University of California (Berkeley). From beyond the ivory towers, Obama’s legal thinkers include Eric Holder, deputy attorney general during the Clinton administration; and Cassandra Butts, a former Harvard classmate and now senior vice president for domestic policy at the Center for American Progress, who has advised him on domestic policy.

Laurence Tribe
Tribe remembers Obama as one of his best students in his 40 years of teaching constitutional law at Harvard. Tribe has argued three dozen cases before the Supreme Court, and he literally wrote the textbook on constitutional law used across the country. He argued Vice President Gore’s side in Bush v. Gore, the Florida vote-counting case, before the Supreme Court in 2000, so it’s no wonder that he is part of the team that Obama has assembled to respond to any voting irregularities or other legal issues that arise in the campaign.

A leading liberal scholar, Tribe, 66, is also an active member of an ad hoc group of policy experts who advise Obama on habeas corpus and other constitutional concerns, as well as on increasing Americans’ access to the justice system. Tribe told National Journal that he and other legal affairs advisers worked on a set of policy proposals — but that Obama’s own ideas were better. “He’s very interested always in finding common ground,” Tribe said. “It’s not so much finding the midpoint on a line where people are arranged from left to right, but finding a way to get an angle that’s perpendicular — or comes at the line from a different angle.”

Charles Ogletree
Another Obama-professor-turned-adviser is Ogletree, 55, who has been at Harvard since 1985. Before that, he was a District of Columbia public defender, which shaped his professorial focus on civil rights and criminal justice. He wrote a book on school desegregation, and he counseled Anita Hill when she testified before the Senate Judiciary Committee during the confirmation hearings for now-Supreme Court Justice Clarence Thomas.

Ogletree has advised Obama on reforming the criminal-justice system as well on constitutional issues. He is a member of the Obama campaign’s black advisory council, which also includes Cornel West, who teaches African-American studies at Princeton University. The group formed after Obama skipped a conference on African-American issues in Hampton, Va., to announce his presidential candidacy in Illinois.

Cass Sunstein
From the University of Chicago, law professor Cass Sunstein, 53, joins Tribe and Ogletree in advising Obama on an ad hoc basis. Sunstein is headed to Harvard later this year after 27 years at Chicago. Earlier, he worked at the Justice Department’s Office of Legal Counsel and clerked for Supreme Court Justice Thurgood Marshall.

Sunstein’s stint at OLC — the executive branch’s legal advice center — gave him a special appreciation of presidential prerogatives that can help his former law school colleague develop nuanced positions on separation-of-powers issues.

Many Democrats have railed against Bush’s use of presidential signing statements, for example. Like Sunstein, Obama has not rejected the use of signing statements outright; both argue that as long as the statements don’t purport to overturn law, they can be useful in explaining how a president intends to carry out the will of Congress. “There’s nothing wrong with signing statements as such,” Sunstein told National Journal. He also shares Obama’s University of Chicago-honed preference for incentives rather than mandates. Sunstein and fellow Chicago professor Richard Thaler have written Nudge: Improving Decisions About Health, Wealth, and Happiness, a book published this month that expounds on this theme.

(Correction: An earlier version of this story incorrectly reported that top immigration adviser Mariano-Florentino Cuéllar opposes the fence being constructed on the U.S.-Mexico border. National Journal deeply regrets the error.)

Staff Correspondents Lisa Caruso, Brian Friel, Shane Harris, Margaret Kriz, John Maggs, Marilyn Werber Serafini, and Bruce Stokes contributed to this article.
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Economies of Scale(s) – Literally

Since free markets are taking it on the chin this week, a little reminder.

There is an article in the Economist which describes how a free-market can solve an environmental problem, an issue typically addressed from a governmental perspective. From the article:

Like most other fisheries in the world, Alaska’s halibut fishery was overexploited—despite the efforts of managers. Across the oceans, fishermen are caught up in a “race to fish” their quotas, a race that has had tragic, and environmentally disastrous, consequences over many decades. But in 1995 Alaska’s halibut fishermen decided to privatize their fishery by dividing up the annual quota into “catch shares” that were owned, in perpetuity, by each fisherman. It changed everything….… Now a study of the world’s 121 fisheries managed by individual transferable quotas (ITQs), one form of market-based mechanism, has shown that they are dramatically healthier than the rest of the world’s fisheries (see article). The ITQ system halves the chance of a fishery collapsing.

By giving fishermen a long-term interest in the health of the fishery, ITQs have transformed fishermen from rapacious predators into stewards and policemen of the resource. The tragedy of the commons is resolved when individuals own a defined (and guaranteed) share of a resource, a share that they can trade. This means that they can increase the amount of fish they catch not by using brute strength and fishing effort, but by buying additional shares or improving the fishery’s health and hence increasing its overall size.

It’s now official, I am the only blogger in the world to note Alaska and not mention the Republican’s VP candidate.

See the complete article at end of this post.

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Economies of scales
Sep 18th 2008
From The Economist print edition

A new way of saving fisheries shows it can work; it deserves more attention

BEFORE 1995 the annual fishing season for Alaskan halibut lasted all of three days. Whatever the weather, come hell or—literally—high water, fishermen would be out on those few days trying to catch as much halibut as they could. Those that were lucky enough to make it home alive, or without serious injury, found that the price of halibut had collapsed because the market was flooded.

Like most other fisheries in the world, Alaska’s halibut fishery was overexploited—despite the efforts of managers. Across the oceans, fishermen are caught up in a “race to fish” their quotas, a race that has had tragic, and environmentally disastrous, consequences over many decades. But in 1995 Alaska’s halibut fishermen decided to privatise their fishery by dividing up the annual quota into “catch shares” that were owned, in perpetuity, by each fisherman. It changed everything.

Bream of sunlight

Despite their salty independence, even fishermen respond to market incentives. In the halibut fishery the change in incentives that came from ownership led to a dramatic shift in behaviour. Today the halibut season lasts eight months and fishermen can make more by landing fish when the price is high. Where mariners’ only thought was once to catch fish before the next man, they now want to catch fewer fish than they are allowed to—because conservation increases the value of the fishery and their share in it. The combined value of their quota has increased by 67%, to $492m.

Sadly, most of the rest of the world’s fisheries are still embroiled in a damaging race for fish that is robbing the seas of their wealth. Overfished populations are small, and so they yield a small catch or even go extinct. Yet the powerful logic in favour of market-based mechanisms has been ignored, partly because the evidence has largely been anecdotal. Now a study of the world’s 121 fisheries managed by individual transferable quotas (ITQs), one form of market-based mechanism, has shown that they are dramatically healthier than the rest of the world’s fisheries (see article). The ITQ system halves the chance of a fishery collapsing.

By giving fishermen a long-term interest in the health of the fishery, ITQs have transformed fishermen from rapacious predators into stewards and policemen of the resource. The tragedy of the commons is resolved when individuals own a defined (and guaranteed) share of a resource, a share that they can trade. This means that they can increase the amount of fish they catch not by using brute strength and fishing effort, but by buying additional shares or improving the fishery’s health and hence increasing its overall size.

There are plenty of practical difficulties to overcome. In theory, for instance, you should allocate shares through auctions. But if fishermen do not agree to a new system, it will not work. So fishermen are typically just given their shares—which can lead to bitter, politicised arguments. In Australia, a pioneer in ITQs, a breakthrough came when independent allocation panels were set up to advise the fishing agencies, chaired by retired judges advised by fishing experts. The next test will come in November, when two large American Pacific fisheries decide whether to accept market management.

ITQs, and other market mechanisms, are not a replacement for government regulation—indeed they must work within a well regulated system. And they will not work everywhere. Attempts to use ITQs in international waters have failed, because it is too easy for cheats to take fish and weaker regulations mean there are no on-board observers to keep boats honest. And ITQs will not work in slow-growing fisheries, where fishermen may make more money by fishing the stock to extinction than they ever would by waiting for the fish to mature. But in most of the world’s fisheries, market mechanisms would create richer fishermen and more fish.

There was a time when fishermen were seen as the last hunter-gatherers—pitting their wits against the elements by pursuing their quarry on the last frontier on Earth. Those days are gone. Every corner of the ocean has been scoured using high technology developed for waging wars on land. Politicians and governments still seek to cope with fishermen’s poverty by subsidising their boats or their fuel—which only accelerates the decline. Instead governments should promote property-rights-based fisheries. If fishermen know what’s good for them—and their fish—they will jump on board.
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A rising tide
Sep 18th 2008
From The Economist print edition

Scientists find proof that privatising fishing stocks can avert a disaster

FOR three years, from an office overlooking the Atlantic in Nova Scotia, Boris Worm, a marine scientist, studied what could prevent a fishery from collapsing. By 2006 Dr Worm and his team had worked out that although biodiversity might slow down an erosion of fish stocks, it could not prevent it. Their gloomy prediction was that by 2048 all the world’s commercial fisheries would have collapsed.

Now two economists and a marine biologist have looked at an idea that might prevent such a catastrophe. This is the privatisation of commercial fisheries through what are known as catch shares or Individual Transferable Quotas (ITQs).

Christopher Costello and Steven Gaines (the biologist) of the University of California and John Lynham of the University of Hawaii assembled a database of the world’s commercial fisheries, their catches and whether or not they were managed with ITQs. As these fisheries were not chosen at random and without having any experimental control, they borrowed techniques from medical literature—known as propensity-score matching and fixed-effects estimation—to support their analysis. The first method compared fisheries that are similar in all respects other than the use of ITQs; the second averaged the impact of ITQs over many fisheries and examined what happened after the quotas were introduced. Whichever way they analysed the data, they found that ITQs halted the collapse of fisheries (and according to one analysis even reversed the trend). The overall finding was that fisheries that were managed with ITQs were half as likely to collapse as those that were not.

For years economists and green groups such as Environmental Defense, in Washington, DC, have argued in favour of ITQs. Until now, individual fisheries have provided only anecdotal evidence of the system’s worth. But by lumping all of them together the new study, published this week in Science, is a powerful demonstration that it really works. It also helps to undermine the argument that ITQ fisheries do better only because they are more valuable in terms of their fish stocks to begin with, says Dr Worm. The new data show that before their conversion, fisheries with ITQs were on exactly the same path to oblivion as those without.

Racing to fish

Encouraging as the results are, ITQ fisheries are in the minority. Most fisheries have an annual quota of what can be caught and other restrictions, such as the length of the season or the type of nets. But this can result in a “race to fish” the quota. Fishermen have an incentive to work harder and travel farther, which can lead to overfishing: a classic tragedy of the commons.

The use of ITQs changes this by dividing the quota up and giving shares to fishermen as a long-term right. Fishermen therefore have an interest in good management and conservation because both increase the value of their fishery and of their share in it. And because shares can be traded, fishermen who want to catch more can buy additional rights rather than resorting to brutal fishing tactics.

The Alaskan halibut and king crab fisheries illustrate how ITQs can change behaviour. Fishing in these waters had turned into a race so intense that the season had shrunk to just two to three frantic days. Overfishing was common. And when the catch was landed, prices plummeted because the market was flooded. Serious injury and death became so frequent in the king crab fishery that it turned into one of America’s most dangerous professions (and spawned its own television series, “The Deadliest Catch”).

After a decade of using ITQs in the halibut fishery, the average fishing season now lasts for eight months. The number of search-and-rescue missions that are launched is down by more than 70% and deaths by 15%. And fish can be sold at the most lucrative time of year—and fresh, so that they fetch a better price.

In a report on this fishery, Dan Flavey, a fisherman himself, says some of his colleagues have even pushed for the quota to be reduced by 40%. “Most fishermen will now support cuts in quota because they feel guaranteed that in the future, when the stocks recover, they would be the ones to benefit,” he says.

Although governing authorities are important in setting up ITQs, so is policing of the system by the fishermen themselves. In the Atlantic lobster fishery a property-based system has arisen spontaneously, says Dr Worm. Families claim ownership over parcels of sea and keep others out. Anyone trying to muscle in on the action risks being threatened; their gear may be cut loose or their boat could vanish.

Jeremy Prince, a fisheries scientist at Murdoch University in Australia, has been involved in ITQs since they were pioneered in the early 1980s by Australia, New Zealand and Iceland. In Australia they are only one way of managing with property rights, he says. Depending on the nature of a fishery, other methods may work better. These might divide up and sell lobster pots, numbers of fish, numbers of boats, bits of the ocean or even individual reefs. The best choice will depend on the value and underlying biology of each fishery, and in some places they may not work at all. In a fishery with a large, unproductive stock that grows slowly, fishermen may prefer short-term profit to the promise of low long-term income and catch all the fish straight away. Nevertheless, Dr Prince believes that, overall, market-based mechanisms are the way forward.

The most difficult place to introduce market-based conservation methods is in international waters. Attempts to do so have ended in failure. One problem is that there is simply too much cheating in the open ocean. Some scientists think a renegotiation of the law of the sea through the United Nations is the only way forward—or a complete ban on fishing in international waters. Although a dramatic course of action, the effects may not be so huge. Dr Worm reckons that 90% of the world’s fish are caught in national waters.

So, if Dr Costello and his colleagues are right and the profit motive can drive the sustainability of fisheries, why do the world’s 10,000-plus fisheries contain only 121 ITQs? Allocating catch shares is a difficult and often fraught process. In America it can take from five to 15 years, says Joe Sullivan, a partner in Mundt MacGregor, a law firm based in Seattle. The public, he says, sometimes resists the privatisation of a public resource and if government gets too involved in the details of the privatisation (rather than leaving it to the fishermen to work out), it can end up politically messy. But evidence that ITQs work is a powerful new hook to capture the political will and public attention needed to spread an idea that could avert an ecological disaster.
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Is There a Kristol Meth(od) to His Madness?

The drug crystal meth and William Kristol’s advice and encouragement for John McCain may seem unrelated, but that’s probably because you’re not a conservative trying to get him elected. The need to escape reality as our candidate identifies greed and deregulation as the main causes for the financial crisis, is not to be underestimated.

I think Kristol is the most effective political conservative advocate — for liberals it’s Paul Krugman. He’s got his work cut out for him with McCain. He’s up to it though, an excerpt from his column:

That’s why McCain’s action Wednesday–announcing he would come back to Washington to try to broker a deal to save our financial system–could prove so important. The rescue package that was so poorly crafted and defended by the Bush administration seemed to be sliding toward defeat. The presidential candidates were on the sidelines, carping and opining and commenting. But one of them, John McCain, intervened suddenly and boldly, taking a risk in order to change the situation, and to rearrange the landscape.

Of course his motives were partly election-related. But “the interest of the man must be connected with the constitutional rights of the place.” If candidate McCain, for whatever mixed motives, ends up acting in a way that results in a deal that is viewed as better than the original proposal, and that seems to stabilize the markets and avert a meltdown–he’ll benefit politically, and he deserves to. For McCain will have acted presidentially in the campaign–which some voters, quite reasonably, will think speaks to his qualifications to be president.

All articles referenced are copied in full at end of post.

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Weekly Standard

A Presidential McCain
McCain’s bold move could reframe the election–and win it.
by William Kristol
09/25/2008 12:00:00 AM

THERE’S A REASON voters in presidential races tend to shy away from electing senators. The primary skills of a legislator–talking, compromising, “representing”–are different from those of an executive–deciding, choosing, “executing.” There are individuals who have the ability both to deliberate patiently and act energetically–but it’s a rare combination. The best legislators tend not to be great executives, and vice-versa.

This year, for the first time in U.S. history, both major party nominees for president are sitting senators. The winner may be the one who can convince some portion of the electorate that he’s less “senatorial,” and more “presidential,” than the other.

That’s why McCain’s action Wednesday–announcing he would come back to Washington to try to broker a deal to save our financial system–could prove so important. The rescue package that was so poorly crafted and defended by the Bush administration seemed to be sliding toward defeat. The presidential candidates were on the sidelines, carping and opining and commenting. But one of them, John McCain, intervened suddenly and boldly, taking a risk in order to change the situation, and to rearrange the landscape.

Of course his motives were partly election-related. But “the interest of the man must be connected with the constitutional rights of the place.” If candidate McCain, for whatever mixed motives, ends up acting in a way that results in a deal that is viewed as better than the original proposal, and that seems to stabilize the markets and avert a meltdown–he’ll benefit politically, and he deserves to. For McCain will have acted presidentially in the campaign–which some voters, quite reasonably, will think speaks to his qualifications to be president.

As for the question of Friday night’s debate, which some in the media seem to think more important than saving the financial system–if the negotiations are still going on in D.C., McCain should offer to send Palin to debate Obama! Or he can take a break from the meetings, fly down at the last minute himself, and turn a boring foreign policy debate, in which he and Obama would repeat well-rehearsed arguments, into a discussion about leadership and decisiveness. And if the negotiations are clearly on a path to success, then McCain can say he can now afford to leave D.C., fly down, and the debate would become a victory lap for McCain.

So the action of these few days becomes more important than the talk of that hour and a half Friday night. One could even say the contrast between the two men in action becomes the true debate over who should be president. The media, being talkers and debaters, love debates, overestimate their importance, and are underestimating the possible effect of McCain’s dramatic action. In the debate itself, McCain should mock the media’s greater concern for gabbing than solving our economic problems, and should associate Obama with such a talk-heavy media-type approach to politics. If the race is between an energetic executive and an indecisive talker, the energetic executive should win.

William Kristol is editor of THE WEEKLY STANDARD.
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George Will Channels Alvarez Guedes

The great Cuban comic, Alvarez Guedes, tells a great joke where the punch line is a drunk informing the unattractive lady who has just called him a drunk, that he will be sober tomorrow, whereas her appearance will be unchanged.

See if you can see the parallels in George Will’s column:

Conservatives who insist that electing McCain is crucial usually start, and increasingly end, by saying he would make excellent judicial selections. But the more one sees of his impulsive, intensely personal reactions to people and events, the less confidence one has that he would select judges by calm reflection and clear principles, having neither patience nor aptitude for either.

It is arguable that, because of his inexperience, Obama is not ready for the presidency. It is arguable that McCain, because of his boiling moralism and bottomless reservoir of certitudes, is not suited to the presidency. Unreadiness can be corrected, although perhaps at great cost, by experience. Can a dismaying temperament be fixed?

It’s not just George Will, this is what John Fund from the WSJ Editorial page had to say:

What is John McCain thinking? First, Mr. McCain takes a wild swing by saying as president, he would have fired Chris Cox, chairman of the Securities and Exchange Commission, for “betraying the public trust.” It turns out a president doesn’t have the statutory authority to do that, and Mr. Cox has been a political asset in dealing with the financial meltdown of last week. Indeed, the day after his call for Mr. Cox’s firing, Mr. McCain retreated and called him “a good man.”

Now Mr. McCain has compounded his error by floating the name of Andrew Cuomo, the pugilistic Democratic New York attorney general, as his possible nominee to head the Securities and Exchange Commission. Mr. McCain told CBS’s “60 Minutes” that Mr. Cuomo had “respect” and “prestige,” praising his tenure as secretary of housing and urban development in the Clinton administration.

I’m voting for McCain. Further, I think that Sen Obama is undeserving of the presidency, lacking in experience and patriotism. Add in his consistently radical associations, and the guy is a walking & talking Manchurian candidate. And yet, if McCain loses, no tears here.

George Will puts his finger, the middle one, on the reason why. I think a lot of his maverick positions, with the exception of immigration, are evidence of [Sally] Fieldism. The guy really just wants to be liked by the MSM elites. Why else would an intellectually honest conservative continue to advocate for campaign finance laws in the face of their consistent failure to achieve their objectives?

All articles referenced are copied in full at end of post.

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September 23, 2008
McCain’s Queen of Hearts Intervention
By George Will

“The queen had only one way of settling all difficulties, great or small. ‘Off with his head!’ she said without even looking around.”

— “Alice’s Adventures in Wonderland”

WASHINGTON — Under the pressure of the financial crisis, one presidential candidate is behaving like a flustered rookie playing in a league too high. It is not Barack Obama.

Channeling his inner Queen of Hearts, John McCain furiously, and apparently without even looking around at facts, said Chris Cox, chairman of the Securities and Exchange Commission, should be decapitated. This childish reflex provoked The Wall Street Journal to editorialize that “McCain untethered” — disconnected from knowledge and principle — had made a “false and deeply unfair” attack on Cox that was “unpresidential” and demonstrated that McCain “doesn’t understand what’s happening on Wall Street any better than Barack Obama does.”

To read the Journal’s details about the depths of McCain’s shallowness on the subject of Cox’s chairmanship, see “McCain’s Scapegoat” (Sept. 19, Page A22). Then consider McCain’s characteristic accusation that Cox “has betrayed the public’s trust.”

Perhaps an old antagonism is involved in McCain’s fact-free slander. His most conspicuous economic adviser is Douglas Holtz-Eakin, who previously headed the Congressional Budget Office. There he was an impediment to conservatives, including then-Congressman Cox, who as chairman of the Republican Policy Committee persistently tried and generally failed to enlist CBO support for “dynamic scoring” that would estimate the economic growth effects of proposed tax cuts.

In any case, McCain’s smear — that Cox “betrayed the public’s trust” — is a harbinger of a McCain presidency. For McCain, politics is always operatic, pitting people who agree with him against those who are “corrupt” or “betray the public’s trust,” two categories that seem to be exhaustive — there are no other people. McCain’s Manichean worldview drove him to his signature legislative achievement, the McCain-Feingold law’s restrictions on campaigning. Today, his campaign is creatively finding interstices in laws intended to restrict campaign giving and spending. (For details, see The Washington Post of Sept. 17, Page A4; and The New York Times of Sept. 20, Page One.)

By a Gresham’s Law of political discourse, McCain’s Queen of Hearts intervention in the opaque financial crisis overshadowed a solid conservative complaint from the Republican Study Committee, chaired by Rep. Jeb Hensarling of Texas. In a letter to Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke, the RSC decried the improvised torrent of bailouts as a “dangerous and unmistakable precedent for the federal government both to be looked to and indeed relied upon to save private sector companies from the consequences of their poor economic decisions.” This letter, listing just $650 billion of the perhaps more than $1 trillion in new federal exposures to risk, was sent while McCain’s campaign, characteristically substituting vehemence for coherence, was airing an ad warning that Obama favors “massive government, billions in spending increases.”

The political left always aims to expand the permeation of economic life by politics. Today, the efficient means to that end is government control of capital. So, is not McCain’s party now conducting the most leftist administration in American history? The New Deal never acted so precipitously on such a scale. Treasury Secretary Paulson, asked about conservative complaints that his rescue program amounts to socialism, said, essentially: This is not socialism, this is necessary. That non sequitur might be politically necessary, but remember that government control of capital is government control of capitalism. Does McCain have qualms about this, or only quarrels?

On “60 Minutes” Sunday evening, McCain, saying “this may sound a little unusual,” said that he would like to replace Cox with Andrew Cuomo, the Democratic attorney general of New York who is the son of former Gov. Mario Cuomo. McCain explained that Cuomo has “respect” and “prestige” and could “lend some bipartisanship.” Conservatives have been warned.

Conservatives who insist that electing McCain is crucial usually start, and increasingly end, by saying he would make excellent judicial selections. But the more one sees of his impulsive, intensely personal reactions to people and events, the less confidence one has that he would select judges by calm reflection and clear principles, having neither patience nor aptitude for either.

It is arguable that, because of his inexperience, Obama is not ready for the presidency. It is arguable that McCain, because of his boiling moralism and bottomless reservoir of certitudes, is not suited to the presidency. Unreadiness can be corrected, although perhaps at great cost, by experience. Can a dismaying temperament be fixed?
georgewill@washpost.com
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* SEPTEMBER 23, 2008

McCain Shorts Himself
By JOHN FUND

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What is John McCain thinking? First, Mr. McCain takes a wild swing by saying as president, he would have fired Chris Cox, chairman of the Securities and Exchange Commission, for “betraying the public trust.” It turns out a president doesn’t have the statutory authority to do that, and Mr. Cox has been a political asset in dealing with the financial meltdown of last week. Indeed, the day after his call for Mr. Cox’s firing, Mr. McCain retreated and called him “a good man.”
[Andrew Cuomo]

Now Mr. McCain has compounded his error by floating the name of Andrew Cuomo, the pugilistic Democratic New York attorney general, as his possible nominee to head the Securities and Exchange Commission. Mr. McCain told CBS’s “60 Minutes” that Mr. Cuomo had “respect” and “prestige,” praising his tenure as secretary of housing and urban development in the Clinton administration.

Mr. McCain must be looking at a different record than I am. Mr. Cuomo was a political grandstander at HUD, ranging far afield to file frivolous lawsuits against gun manufacturers. He also spent taxpayer money to hire such firms as Booz Allen Hamilton, PriceWaterhouseCoopers, and Ernst & Young to paper over snafus at his agency.

Among the problems created by Mr. Cuomo while at HUD were what the liberal Village Voice called last month “a series of decisions between 1997 and 2001 that gave birth to the country’s current crisis.” A Voice investigation found that Mr. Cuomo “took actions that — in combination with many other factors — helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded ‘kickbacks’ to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.”

Most egregiously, Matthew Rees of the Weekly Standard documented how Secretary Cuomo used the power of his office to declare war against Susan Gaffney, the HUD inspector general who was investigating charges of self-dealing by Cuomo aides. The Government Accountability Office later concluded Mr. Cuomo had used underhanded tactics to pursue spurious charges of racial discrimination against Ms. Gaffney.

The GAO found that HUD’s decision to handpick two lawyers to investigate the discrimination charge, and award them contracts totaling $100,000 (the normal cost is about $3,000), represented “significant deviation” from the standard process of investigating discrimination complaints.

Ms. Gaffney, a classic whistleblower in the maverick tradition John McCain claims to embody, was an innocent victim of Mr. Cuomo’s smear machine. Mr. McCain needs to go back and look at the Cuomo record at HUD — and at the New York Attorney General’s office for that matter — before he so loosely and recklessly promotes Mr. Cuomo as someone to oversee the nation’s securities regulation.

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Terrorist Ayers and Obama Campaign Lies

The best case scenario is that Sen Obama is lying about his various mentors influence in his life to minimize the political damage from their radical backgrounds. The worst case scenario is that he agrees, in places that never make their way onto position papers, with their hostile views of America.

If elected, Sen Obama would have earned the presidency based on a combination of political skill, identity politics and disavowing seemingly every non-family influence in his life – in order of appearance:

  • Frank Marshall Davis
  • Rev Wright
  • Tony Rezko
  • William Ayers
  • Kenny G Smith

In yesterday’s WSJ, Stanley Kurtz makes the case that Obama and Ayers had a close association, as opposed to the ‘guy in the neighborhood’ story the Obama campaign has spun. Mr Kurtz did not have an easy time getting to review the records — see an earlier postabout the intimidation efforts he faced. A recap of the details:

  • 1994 – Chicago Annenberg Challenge (CAC) is formed by William Ayers. CAC’s agenda flowed from Mr. Ayers’s educational philosophy, which called for infusing students and their parents with a radical political commitment, and which downplayed achievement tests in favor of activism.
  • 1995 – An inexperienced Obama was appointed the first chairman of the board, which handled fiscal matters. Mr. Ayers co-chaired the foundation’s other key body, the “Collaborative,” which shaped education policy. There are 4 other board members.
  • 1995 – Barack Obama’s political career — his first run for the Illinois State Senate — was launched at a gathering at Mr. Ayers’s home.
  • From 1995 through 2001, $100 million was handed out by the foundation.

My insincere political advice to the Obama campaign — Since your efforts to hide the association with Ayers have failed, go in the opposite direction. Nominate Ayers for Neighbor of the Year!!! I don’t know about the rest of you, but my neighbors don’t call with offers to run Foundations. They call the zoning board if I leave materials on my lawn. America needs more neighbors like Ayers!

Think about it – one of the main criticisms of Sen Obama is his lack of executive experience. Yet, neither he or his campaign ever mentions his role in CAC. They act like they have something to hide. The more we find out about Willam Ayers’s relationship with Obama, the more we understand their lies.

Article referenced is copied in full at end of post.

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WSJ * SEPTEMBER 23, 2008

Obama and Ayers
Pushed Radicalism
On Schools
By STANLEY KURTZ

Despite having authored two autobiographies, Barack Obama has never written about his most important executive experience. From 1995 to 1999, he led an education foundation called the Chicago Annenberg Challenge (CAC), and remained on the board until 2001. The group poured more than $100 million into the hands of community organizers and radical education activists.
[Obama and Ayers] AP

Bill Ayers.

The CAC was the brainchild of Bill Ayers, a founder of the Weather Underground in the 1960s. Among other feats, Mr. Ayers and his cohorts bombed the Pentagon, and he has never expressed regret for his actions. Barack Obama’s first run for the Illinois State Senate was launched at a 1995 gathering at Mr. Ayers’s home.

The Obama campaign has struggled to downplay that association. Last April, Sen. Obama dismissed Mr. Ayers as just “a guy who lives in my neighborhood,” and “not somebody who I exchange ideas with on a regular basis.” Yet documents in the CAC archives make clear that Mr. Ayers and Mr. Obama were partners in the CAC. Those archives are housed in the Richard J. Daley Library at the University of Illinois at Chicago and I’ve recently spent days looking through them.

The Chicago Annenberg Challenge was created ostensibly to improve Chicago’s public schools. The funding came from a national education initiative by Ambassador Walter Annenberg. In early 1995, Mr. Obama was appointed the first chairman of the board, which handled fiscal matters. Mr. Ayers co-chaired the foundation’s other key body, the “Collaborative,” which shaped education policy.

The CAC’s basic functioning has long been known, because its annual reports, evaluations and some board minutes were public. But the Daley archive contains additional board minutes, the Collaborative minutes, and documentation on the groups that CAC funded and rejected. The Daley archives show that Mr. Obama and Mr. Ayers worked as a team to advance the CAC agenda.

One unsettled question is how Mr. Obama, a former community organizer fresh out of law school, could vault to the top of a new foundation? In response to my questions, the Obama campaign issued a statement saying that Mr. Ayers had nothing to do with Obama’s “recruitment” to the board. The statement says Deborah Leff and Patricia Albjerg Graham (presidents of other foundations) recruited him. Yet the archives show that, along with Ms. Leff and Ms. Graham, Mr. Ayers was one of a working group of five who assembled the initial board in 1994. Mr. Ayers founded CAC and was its guiding spirit. No one would have been appointed the CAC chairman without his approval.

The CAC’s agenda flowed from Mr. Ayers’s educational philosophy, which called for infusing students and their parents with a radical political commitment, and which downplayed achievement tests in favor of activism. In the mid-1960s, Mr. Ayers taught at a radical alternative school, and served as a community organizer in Cleveland’s ghetto.

In works like “City Kids, City Teachers” and “Teaching the Personal and the Political,” Mr. Ayers wrote that teachers should be community organizers dedicated to provoking resistance to American racism and oppression. His preferred alternative? “I’m a radical, Leftist, small ‘c’ communist,” Mr. Ayers said in an interview in Ron Chepesiuk’s, “Sixties Radicals,” at about the same time Mr. Ayers was forming CAC.

CAC translated Mr. Ayers’s radicalism into practice. Instead of funding schools directly, it required schools to affiliate with “external partners,” which actually got the money. Proposals from groups focused on math/science achievement were turned down. Instead CAC disbursed money through various far-left community organizers, such as the Association of Community Organizations for Reform Now (or Acorn).

Mr. Obama once conducted “leadership training” seminars with Acorn, and Acorn members also served as volunteers in Mr. Obama’s early campaigns. External partners like the South Shore African Village Collaborative and the Dual Language Exchange focused more on political consciousness, Afrocentricity and bilingualism than traditional education. CAC’s in-house evaluators comprehensively studied the effects of its grants on the test scores of Chicago public-school students. They found no evidence of educational improvement.

CAC also funded programs designed to promote “leadership” among parents. Ostensibly this was to enable parents to advocate on behalf of their children’s education. In practice, it meant funding Mr. Obama’s alma mater, the Developing Communities Project, to recruit parents to its overall political agenda. CAC records show that board member Arnold Weber was concerned that parents “organized” by community groups might be viewed by school principals “as a political threat.” Mr. Obama arranged meetings with the Collaborative to smooth out Mr. Weber’s objections.

The Daley documents show that Mr. Ayers sat as an ex-officio member of the board Mr. Obama chaired through CAC’s first year. He also served on the board’s governance committee with Mr. Obama, and worked with him to craft CAC bylaws. Mr. Ayers made presentations to board meetings chaired by Mr. Obama. Mr. Ayers spoke for the Collaborative before the board. Likewise, Mr. Obama periodically spoke for the board at meetings of the Collaborative.

The Obama campaign notes that Mr. Ayers attended only six board meetings, and stresses that the Collaborative lost its “operational role” at CAC after the first year. Yet the Collaborative was demoted to a strictly advisory role largely because of ethical concerns, since the projects of Collaborative members were receiving grants. CAC’s own evaluators noted that project accountability was hampered by the board’s reluctance to break away from grant decisions made in 1995. So even after Mr. Ayers’s formal sway declined, the board largely adhered to the grant program he had put in place.

Mr. Ayers’s defenders claim that he has redeemed himself with public-spirited education work. That claim is hard to swallow if you understand that he views his education work as an effort to stoke resistance to an oppressive American system. He likes to stress that he learned of his first teaching job while in jail for a draft-board sit-in. For Mr. Ayers, teaching and his 1960s radicalism are two sides of the same coin.

Mr. Ayers is the founder of the “small schools” movement (heavily funded by CAC), in which individual schools built around specific political themes push students to “confront issues of inequity, war, and violence.” He believes teacher education programs should serve as “sites of resistance” to an oppressive system. (His teacher-training programs were also CAC funded.) The point, says Mr. Ayers in his “Teaching Toward Freedom,” is to “teach against oppression,” against America’s history of evil and racism, thereby forcing social transformation.

The Obama campaign has cried foul when Bill Ayers comes up, claiming “guilt by association.” Yet the issue here isn’t guilt by association; it’s guilt by participation. As CAC chairman, Mr. Obama was lending moral and financial support to Mr. Ayers and his radical circle. That is a story even if Mr. Ayers had never planted a single bomb 40 years ago.

Mr. Kurtz is a senior fellow at the Ethics and Public Policy Center.

Please add your comments to the Opinion Journal forum.
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Rescue Plan as Seen From the Left, Center & Right

In trying to find a common thread from each of the political spectrum’s, I have to conclude that Ben Bernanke [Fed] and Henry Paulson [Treasury] do not have enough credibility remaining to get the rescue plan they are seeking.

Perspective from the LeftPaul Krugmanof the NY Times has a four-step view of the financial crisis:

  1. Bursting of the housing bubble
  2. Financial Institutions with too little capital
  3. Financial Institutions unable or unwilling to lend
  4. Financial Institutions trying to pay down their debt by selling assets, which has led to a downward spiraling of prices, known as the ‘paradox of deleveraging.’

He refers to the Paulson package as ‘trash for cash.’ He emphasizes that the same people who have been telling us that things were under control, now tell us the sky is falling and we have to act now. Specifically he notes:

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

Perspective from the CenterRobert Samuelson of Newsweek emphasizes how much of a confidence game this all is and how financial institutions have lost it. He lays out how this all developed:

  • Housing bubble burst resulting in big losses in $1.3 trillion market for subprime mortgages.
  • The losses should have been manageable to the economy since US stocks and bonds totaled $50 trillion in 2007, however no one knew the real value of the losses, so the confidence crisis spreads.

The Fed has done 3 things to prevent eroding confidence from becoming panic:

  1. Cut interest rates on Fed Funds – from 5.25% to 2%
  2. Act as lender of last resort through new ‘lending facilities’ = $300 billion to date
  3. Prevent bankruptcies – Bear Stearns, Fannie Mae & Freddie Mac, and now AIG.

Each of these steps have lost their hoped for effects as new developments emphasized that the crisis was not manageable, i.e. loss of confidence in Bernanke and Paulson. We can’t even have an idea how much this will all cost. He summarizes:

Objections to Paulson’s proposal abound. It would rescue some financial institutions from bad decisions. Some investors doubtlessly bought subprime securities at huge discounts and would reap massive profits by reselling to the government. That might trigger an angry public backlash. The program would be huge (“hundreds of billions,” says Paulson) and could burden future taxpayers. To which Paulson has one powerful retort: It’s better than continued turmoil and possible panic. But that presumes success and begs an unsettling question: if this fails, what — if anything — could the government do next?

Perspective from the Right – The WSJ Editorial page mission is to not allow the perception to take hold that this crisis is primarily attributable to deregulation and greed. First they have a little fun:

Once upon a time, in the land that FDR built, there was the rule of “regulation” and all was right on Wall and Main Streets. Wise 27-year-old bank examiners looked down upon the banks and saw that they were sound. America’s Hobbits lived happily in homes financed by 30-year-mortgages that never left their local banker’s balance sheet, and nary a crisis did we have.Then, lo, came the evil Reagan marching from Mordor with his horde of Orcs, short for “market fundamentalists.” Reagan’s apprentice, Gramm of Texas and later of McCain, unleashed the scourge of “deregulation,” and thus were “greed,” short-selling, securitization, McMansions, liar loans and other horrors loosed upon the world of men.

Then the WSJ Editorial page gets down to business and tell you who failed to do what:

  • Federal Reserve – Original sin of this crisis was Alan Greenspan’s easy money from 2003 to 2005.
  • Fannie Mae & Freddie Mac – Created by government, they — like Obama insider Jim Johnson — abused the subprime market to meet Congressional demands to finance affordable housing and increase their own bonuses. Their investors [mainly mainland China] correctly assumed that the investment was without risk, given their political mandate.
  • Credit-rating oligopoly – A few credit rating agencies pass judgment on the risk for all debt securities in our markets. Many of these judgments turned out to be wrong. Assets officially deemed rock-solid by the government’s favored risk experts have lately been recognized as nothing of the kind.
  • Banking regulators – The great irony is that the banks that made some of the worst mortgage investments are the most highly regulated. The Fed’s regulators blessed, or overlooked, Citigroup’s off-balance-sheet SIVs, while the SEC tolerated leverage of 30 or 40 to 1 by Lehman and Bear Stearns.
  • Community Reinvestment Act – This 1977 law compels banks to make loans to poor borrowers who often cannot repay them. Banks that failed to make enough of these loans were often held hostage by activists when they next sought some regulatory approval.

All articles referenced are copied in full at end of post.

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WSJ Editorial – 9/22 – A Mortgage Fable

Once upon a time, in the land that FDR built, there was the rule of “regulation” and all was right on Wall and Main Streets. Wise 27-year-old bank examiners looked down upon the banks and saw that they were sound. America’s Hobbits lived happily in homes financed by 30-year-mortgages that never left their local banker’s balance sheet, and nary a crisis did we have.

Then, lo, came the evil Reagan marching from Mordor with his horde of Orcs, short for “market fundamentalists.” Reagan’s apprentice, Gramm of Texas and later of McCain, unleashed the scourge of “deregulation,” and thus were “greed,” short-selling, securitization, McMansions, liar loans and other horrors loosed upon the world of men.

Now, however, comes Obama of Illinois, Schumer of New York and others in the fellowship of the Beltway to slay the Orcs and restore the rule of the regulator. So once more will the Hobbits be able to sleep peacefully in the shire.

With apologies to Tolkien, or at least Peter Jackson, something like this tale is now being sold to the American people to explain the financial panic of the past year. It is truly a fable from start to finish. Yet we are likely to hear some version of it often in the coming months as the barons of Congress try to absolve themselves of any responsibility for the housing and mortgage meltdowns.

Yes, greed is ever with us, at least until Washington transforms human nature. The wizards of Wall Street and London became ever more inventive in finding ways to sell mortgages and finance housing. Some of those peddling subprime loans were crooks, as were some of the borrowers who lied about their incomes. This is what happens in a credit bubble that becomes a societal mania.

But Washington is as deeply implicated in this meltdown as anyone on Wall Street or at Countrywide Financial. Going back decades, but especially in the past 15 or so years, our politicians have promoted housing and easy credit with a variety of subsidies and policies that helped to create and feed the mania. Let us take the roll of political cause and financial effect:

– The Federal Reserve. The original sin of this crisis was easy money. For too long this decade, especially from 2003 to 2005, the Fed held interest rates below the level of expected inflation, thus creating a vast subsidy for debt that both households and financial firms exploited. The housing bubble was a result, along with its financial counterparts, the subprime loan and the mortgage SIV.

Fed Chairmen Alan Greenspan and Ben Bernanke prefer to blame “a global savings glut” that began when the Cold War ended. But Communism was dead for more than a decade before the housing mania took off. The savings glut was in large part a creation of the Fed, which flooded the world with too many dollars that often found their way back into housing markets in the U.S., the U.K. and elsewhere.

– Fannie Mae and Freddie Mac. Created by government, and able to borrow at rates lower than fully private corporations because of the implied backing from taxpayers, these firms turbocharged the credit mania. They channeled far more liquidity into the market than would have been the case otherwise, especially from the Chinese, who thought (rightly) that they were investing in mortgage securities that were as safe as Treasurys but with a higher yield.

These are the firms that bought the increasingly questionable mortgages originated by Angelo Mozilo’s Countrywide and others. Even as the bubble was popping, they dived into pools of subprime and Alt-A (“liar”) loans to meet Congressional demand to finance “affordable” housing. And they were both the cause and beneficiary of the great interest-group army that lobbied for ever more housing subsidies.

Fan and Fred’s patrons on Capitol Hill didn’t care about the risks inherent in their combined trillion-dollar-plus mortgage portfolios, so long as they helped meet political goals on housing. Even after taxpayers have had to pick up a bailout tab that may grow as large as $200 billion, House Financial Services Chairman Barney Frank still won’t back a reduction in their mortgage portfolios.

– A credit-rating oligopoly. Thanks to federal and state regulation, a small handful of credit rating agencies pass judgment on the risk for all debt securities in our markets. Many of these judgments turned out to be wrong, and this goes to the root of the credit crisis: Assets officially deemed rock-solid by the government’s favored risk experts have lately been recognized as nothing of the kind.

When debt instruments are downgraded, banks must then recognize a paper loss on these assets. In a bitter irony, the losses cause the same credit raters whose judgments allowed the banks to hold these dodgy assets to then lower their ratings on the banks, requiring the banks to raise more money, and pay more to raise it. The major government-anointed credit raters — S&P, Moody’s and Fitch — were as asleep on mortgages as they were on Enron. Senator Richard Shelby (R., Ala.) tried to weaken this government-created oligopoly, but his reforms didn’t begin to take effect until 2007, too late to stop the mania.

– Banking regulators. In the Beltway fable, bank supervision all but vanished in recent years. But the great irony is that the banks that made some of the worst mortgage investments are the most highly regulated. The Fed’s regulators blessed, or overlooked, Citigroup’s off-balance-sheet SIVs, while the SEC tolerated leverage of 30 or 40 to 1 by Lehman and Bear Stearns.

The New York Sun reports that an SEC rule change that allowed more leverage was made in 2004 under then Chairman William Donaldson, one of the most aggressive regulators in SEC history. Of course the SEC’s task was only to protect the investor assets at the broker-dealers, not the holding companies themselves, which everyone thought were not too big to fail. Now we know differently (see Bear Stearns below).

Meanwhile, the least regulated firms — hedge funds and private-equity companies — have had the fewest problems, or have folded up their mistakes with the least amount of trauma. All of this reaffirms the historical truth that regulators almost always discover financial excesses only after the fact.

– The Bear Stearns rescue. In retrospect, the Fed-Treasury intervention only delayed a necessary day of reckoning for Wall Street. While Bear was punished for its sins, the Fed opened its discount window to the other big investment banks and thus sent a signal that they would provide a creditor safety net for bad debt.

Morgan Stanley, Lehman and Goldman Sachs all concluded that they could ride out the panic without changing their business models or reducing their leverage. John Thain at Merrill Lynch was the only CEO willing to sell his bad mortgage paper — at 22 cents on the dollar. Treasury and the Fed should have followed the Bear trauma with more than additional liquidity. Once they were on the taxpayer dime, the banks needed a thorough scrubbing that might have avoided last week’s stampede.

– The Community Reinvestment Act. This 1977 law compels banks to make loans to poor borrowers who often cannot repay them. Banks that failed to make enough of these loans were often held hostage by activists when they next sought some regulatory approval.

Robert Litan, an economist at the Brookings Institution, told the Washington Post this year that banks “had to show they were making a conscious effort to make loans to subprime borrowers.” The much-maligned Phil Gramm fought to limit these CRA requirements in the 1990s, albeit to little effect and much political jeering.

We could cite other Washington policies, including the political agitation for “mark-to-market” accounting that has forced firms to record losses after ratings downgrades even if the assets haven’t been sold. But these are some of the main lowlights.

Our point here isn’t to absolve Wall Street or pretend there weren’t private excesses. But the investment mistakes would surely have been less extreme, and ultimately their damage more containable, if not for the enormous political support and subsidy for mortgage credit. Beware politicians who peddle fables that cast themselves as the heroes.
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September 22, 2008
The Great Confidence Game
By Robert Samuelson

WASHINGTON — It’s doubtful that former Princeton University economist Ben Bernanke and ex-Goldman Sachs CEO Hank Paulson imagined what awaited them when they took charge of the Fed and the Treasury in 2006. Since then, they have put their agencies on a wartime footing, trying to avert the financial equivalent of an army’s collapse. As in war, there have been repeated surprises. As in war, the responses have involved much improvisation — for instance, the $85 billion rescue of American International Group (AIG). But last week their hastily built defenses seemed threatened, and so Paulson proposed a radical solution of having the government buy vast amounts of distressed debt to shore up the financial system.

It’s all about confidence, stupid. Every financial system depends on trust. People have to believe that the institutions they deal with will perform as expected. We are in a crisis because financial managers — the people who run banks, investment banks, hedge funds — have lost that trust. Banks recoil from lending to each other; investors retreat. The ultimate horror is a financial panic. Paulson aims to avoid that.

As is well-known, the crisis began with losses in the $1.3 trillion market for “subprime” mortgages, many of which were “securitized” — bundled into bonds and sold to investors. With all U.S. stocks and bonds worth about $50 trillion in 2007, the losses should have been manageable. They weren’t, because no one knew how large the losses might become or which institutions held the suspect subprime securities. Moreover, many financial institutions were thinly capitalized. They depended on borrowed funds; losses could wipe out their modest capital. So the crisis spread.

Since August 2007, the Fed has done three things to prevent eroding confidence from becoming panic. The first was standard: cut interest rates. By April, the overnight fed funds rate had fallen from 5.25 percent to the present 2 percent. The aim was to promote lending and prop up the economy. By contrast, the second and third responses broke new ground.

If banks still avoided routine short-term loans — fearing unknown risks — then the Fed would act aggressively as the lender of last resort. Bernanke created several new “lending facilities” that allowed commercial banks and investment banks to borrow from the Fed. They received cash and safe U.S. Treasury securities in return for sending “securitized” mortgages and other bonds to the Fed. In this manner, the Fed has lent more than $300 billion.

Next, the Fed and the Treasury prevented bankruptcies that might otherwise have occurred. With the Fed’s backing, the investment bank of Bear Stearns was merged into JP Morgan Chase. Fannie Mae and Freddie Mac, the mortgage giants, were taken over by the government; their subprime losses had also depleted their meager capital. And now AIG, the nation’s largest insurance company, has been rescued.

How much all this will cost taxpayers is unclear. It could be many billions — or nothing. For example, the Fed is charging AIG a hefty interest rate and expects to be repaid from the sales of the firm’s businesses. But turning the Fed into a massive lending agency supporting specific firms and types of credit was a dramatic shift from its role of regulating interest rates and credit conditions. The official justification: Companies that lent to and traded with the salvaged firms wouldn’t suffer further losses.

Unfortunately, these confidence-building exercises slowly lost their effect. As today’s surprise followed yesterday’s, it became less convincing that Paulson and Bernanke could control the crisis. Practical problems also loomed. The Fed has financed its lending program by reducing its massive holdings of U.S. Treasury securities. It could not do this indefinitely without exhausting all its present Treasuries. A danger: The Fed might then resort to old-fashioned — and potentially inflationary — money creation.

Against that backdrop, Paulson suggested something resembling the Resolution Trust Corp. of the savings and loan crisis. This new entity would buy subprime mortgage securities to stabilize the financial system. But hard questions remain. Which securities would be eligible? Just subprime? Suppose a weaker economy creates new classes of bad debt — say credit card securities? What price would the government pay? Would government hold them to maturity or sell? What about U.S. securities held by foreigners?

Objections to Paulson’s proposal abound. It would rescue some financial institutions from bad decisions. Some investors doubtlessly bought subprime securities at huge discounts and would reap massive profits by reselling to the government. That might trigger an angry public backlash. The program would be huge (“hundreds of billions,” says Paulson) and could burden future taxpayers. To which Paulson has one powerful retort: It’s better than continued turmoil and possible panic. But that presumes success and begs an unsettling question: if this fails, what — if anything — could the government do next?

Copyright 2008, Washington Post Writers Group
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NY Times
September 22, 2008
Op-Ed Columnist
Cash for Trash
By PAUL KRUGMAN

Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There’s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.

Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.

So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.

I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.

But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.
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Oval Office Conversation

After they stepped outside, they made a historic announcement about their request to have the federal government buy distressed assets in an effort to avoid a financial market collapse. But here’s my guess as to the conversation they had in the Oval Office before heading outside:

UNOFFICIAL NONEXISTENT TRANSCRIPT

Bush: Chris [Cox, SEC Chairman], glad to see ya’, but weren’t you fired yesterday?
Cox: Demagogic pols and gambling in the casino, I’m shocked I tell ya.’ To think I was once on his VP short list.
Bush: Shoot John don’t mean it, he’s just desperate to say something. Always been his damn problem.
Ben Bernanke [Fed Chairman]: Obama’s been quiet on all this.
Bush: Daley [Chicago Mayor, kingmaker] must be outta town.
[laughter]
Bush [glancing at transcript]: Henry [Paulson, Tresury Secretary], your a smart fella, how do you pronounce this word, liquid-nity?
Paulson: Mr President, when we pitched this idea a few months ago you said to sit tight. Care to take a bow?
Bush: Nah, no way this goes down without an official crisis.
Paulson: What makes a crisis official?
Bush [badly imitating the Platters]: Ownleee youuuu can make da dar’ness briiiidde.
Paulson: I feel so used.
Bush: Now you know how your clients felt. If you need to speak to someone for support, I can gitya Colin Powell’s cell.
Cox: You’ll never get through, every McCain insider has him on speed dial.
Bernanke: I hear their so desperate to get Powell, they offered Palin.
Paulson: The VP slot?
Bernanke: No Baberham Lincoln herself.
Cox: Wow, when they said she was a team player, they weren’t kidding.
Bush [speaking into desk as if it was bugged]: Hey guys, sorry I’m late, whatcha talking about.
[laughter]
Bush: OK tell me again, who looked most scared when you guys laid it all out on Capitol Hill yesterday.
Bernanke: Well Nancy Pelosi looked like she just left her Archbishop’s office and Harry Reid just kept glaring at Barney Frank.
Cox: Takes a real man to make eye contact with Frank, his aides get so jealous.
[laughter]
Presidential aide: Sir, Scott McClellan is waiting.
Cox: McClellan?
Bush: Running gag, means time to go. Remember gentlemen, grim’s the word.

——————————————————————————

ONLY YOU (Platters)

Only you can make this world seem right
Only you can make the darkness bright.
Only you and you alone
can thrill me like you do
and fill my heart with love for only you.

Only you can make this change in me,
for it’s true, you are my destiny.
When you hold my hand,
I understand the magic that you do.

You’re my dream come true,
my one and only you.

Only you can make this change in me,
for it’s true, you are my destiny.
When you hold my hand,
I understand the magic that you do.

You’re my dream come true,
my one and only you.

One and only you.

——————————————————————————-
NY Times
September 20, 2008
Bush Officials Urge Swift Action on Rescue Powers
By EDMUND L. ANDREWS

WASHINGTON — The Bush administration, moving to prevent an economic cataclysm, urged Congress on Friday to grant it far-reaching emergency powers to buy hundreds of billions of dollars in distressed mortgages despite many unknowns about how the plan would work.

Henry M. Paulson Jr., the Treasury secretary, made it clear that the upfront cost of the rescue proposal could easily be $500 billion, and outside experts predicted that it could reach $1 trillion.

The outlines of the plan, described in conference calls to lawmakers on Friday, include buying assets only from United States financial institutions — but not hedge funds — and hiring outside advisers who would work for the Treasury, rather than creating a separate agency. Democratic leaders immediately pledged to work closely with Mr. Paulson to pass a plan in the next week, but they also demanded that the measure include relief for deeply indebted homeowners, not just for banks and Wall Street firms.

At the end of a week that will be long remembered for the wrenching changes it brought to Wall Street and Washington, Mr. Paulson and Ben S. Bernanke, the Federal Reserve chairman, told lawmakers that the financial system had come perilously close to collapse. According to notes taken by one participant in a call to House members, Mr. Paulson said that the failure to pass a broad rescue plan would lead to nothing short of disaster. Mr. Bernanke said that Wall Street had plunged into a full-scale panic, and warned lawmakers that their own constituents were in danger of losing money on holdings in ultra-conservative money market funds.

People involved in the discussions on Friday said that Mr. Paulson said he did not want to create a new government agency to handle the rescue plan. Rather, he said, the Treasury Department would hire professional investment managers to oversee what could be a huge portfolio of mortgage-backed securities.

He indicated that he wanted to buy securities only from United States financial institutions, a decision that could anger legions of foreign institutions that poured hundreds of billions of dollars into the American mortgage market in the housing boom, and have customers located here.

Basic questions remained unanswered as of Friday evening, including how much of the mortgage market the administration hoped to buy up. The broader economic questions were even more daunting. What were the dangers in letting the government borrow another $500 billion — which ultimately might have to come from foreign investors — at the same time the deficit was already skyrocketing?

Would this epic bailout lead to the same kind of runaway inflation that plagued the United States throughout the 1970s?

But as the stock market zoomed for the second day in a row, mainly in response to hopes of a sweeping bailout plan from Washington, President Bush and lawmakers alike focused on how fast they could deliver as much government help as necessary.

“Given the precarious state of today’s financial markets — and their vital importance to the daily lives of the American people — government intervention is not only warranted, it is essential,” President Bush said in a speech in the Rose Garden at the White House.

News of the giant rescue plan sent stock markets soaring around the world. The Dow Jones industrial average shot up 368 points, or 3.35 percent, on Friday, after having jumped 410 points on Thursday on early rumors of the plan. The rally erased the losses from earlier in the week and allowed stock prices to end higher for the week. Perhaps more important to Fed and Treasury officials, the credit markets showed signs of thawing as well. Yields on three-month Treasury bills had sunk to almost zero on Wednesday and Thursday as investors fled from most debt securities and poured their money into the safest and shortest-term Treasuries. But on Friday, the yield on three-month Treasuries had edged up to 0.99 percent — still well below normal, but much closer to normal than before.

Meanwhile, the Federal Reserve and Treasury deployed additional tens of billions of dollars to prevent an investor panic and flight from the nation’s money market mutual funds. Such funds, totaling $3.4 trillion in assets, are held by tens of millions of individuals and are traditionally considered as safe as bank deposits. But they had come under pressure in recent days as investors began to pull money out faster than the funds could sell assets.

The Fed announced that it would lend money to money market funds to make certain they could meet all the demands of investors without having to sell off assets — including mortgage-backed securities — at fire-sale prices.

The Treasury Department, in a coordinated announcement, said it would use $50 billion in the government’s Exchange Stabilization Fund, a fund normally reserved to deal with currency imbalances, to insure money market fund customers against losses.

While the stock market showed its euphoria, the political obstacles to resolving the financial crisis remained high. The first is simply a matter of time: Congress is set to adjourn at the end of next week, and it is being asked to approve a plan involving more money than any single program in history.

As of Friday evening, Mr. Paulson had yet to deliver a formal plan to Congress. House and Senate leaders pledged to work through the weekend, but they insisted that Mr. Paulson bring them a detailed plan rather than just an outline.

An even bigger obstacle was the goal of the plan. President Bush and Mr. Paulson made it clear that their primary, and perhaps only, goal was to stabilize the financial markets by removing hundreds of billions of dollars in “illiquid assets” from the balance sheets of banks and financial institutions.

“Confidence in our financial system and its institutions is essential to the smooth operation of our economy, and recently that confidence has been shaken,” the president said. “We must address the root cause behind much of the instability in our markets — the mortgage assets that have lost value during the housing decline and are now restricting the flow of credit.”

But Democratic lawmakers insisted that any plan would also have to provide relief to millions of families that were poised to lose their homes to foreclosure.

The House Speaker, Nancy Pelosi of California, said she would insist that the plan “uphold key principles — insulating Main Street from Wall Street and keeping people in their homes by reducing mortgage foreclosures.”

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said the plan would have to include requirements that the government reduce the loan amounts or improve the terms for many distressed borrowers.

“We should be more willing to write down the mortgages,” Mr. Frank said in a telephone interview on Friday. “We’ll become the lender. The government will wind up in a controlling position so that we can reduce the number of foreclosures.”

Democrats also plan to push to include another economic stimulus measure that could provide extra money for Medicaid, highways and public work projects. Republican leaders quickly warned Democrats against trying to use the emergency to extract other gains.

“Loading it up to score political points or fit a partisan agenda will only delay the economic stability that families, seniors and small businesses deserve,” said Representative John Boehner of Ohio, the House Republican leader.

In the conference calls with lawmakers, Mr. Bernanke said that the critical need was to have the government unclog the financial system by taking over unsellable assets — primarily securities tied to bad mortgages — so that financial institutions could resume normal business. Without action, Mr. Bernanke warned, the panic would quickly lead to a deep and extended recession.

In a briefing to reporters on Friday morning, Mr. Paulson said administration officials would try to lift the overall mortgage market by having the Treasury Department immediately start buying mortgage-backed securities on the open market.

The Treasury Department had already announced plans to buy $5 billion worth of securities issued by Fannie Mae and Freddie Mac, as part of its bailout of those two government-sponsored mortgage companies earlier this month. But Mr. Paulson plans to step up the Treasury’s buying, a move reminiscent of the Japanese government’s attempt to prop up Japan’s stock market by buying shares.

In addition, Mr. Paulson said Fannie Mae and Freddie Mac would be pushed to buy more mortgages and mortgage-backed securities. Because the government has seized both companies and put them into a conservatorship, policy makers have direct control over their activities.

Congressional officials said that they expected to get copies of a written proposal from the Treasury Department either late Friday or Saturday morning at a meeting on Capitol Hill between Treasury and Congressional staff members.

Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, said that he was eagerly awaiting the administration’s plan. “I am anxious to see what they are going to offer and what tolerance level there is for things we feel a need to include if they don’t include it themselves,” Mr. Dodd said in an interview.

Mark Landler, Carl Hulse and David M. Herszenhorn contributed reporting.
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Issac Newton and how economic bubbles develop

Lawrence Lindsey is one of the most prominent economists in the world. He also has much credibility on the topic of economic bubbles, given that as a Fed Governor in 1996, he made the prescient case that central banks have a responsibility to burst bubbles. In his Weekly Standard article, Mr Lindsey makes the following points:

  • Stop with the depression comparisons — In 1929, Americans had the per capita GDP of people now living in the Balkans. Today it is five times higher. So even if we have a depression, there won’t be any Hoovervilles or soup lines. There may be a massive increase in demands for public assistance and rental housing, but this is hardship, not the privations of the 1930s.
  • Model of how bubbles develop – A great idea comes along: exotic spices from afar; the beauty of tulips; canals as the hot new mode of transport; railroads making canals obsolete; a radio in every home or a car in every garage; the Internet and dot commerce; home prices that can only go up. Those who first pursue the idea make money. They tell their friends, and their friends pile in. More buyers mean higher prices. Lenders lower their standards [e.g. no down payment or proof of income]. Balance sheets improve, even more join in.
  • Even smart people make mistakes – Isaac Newton lost money in the South Sea Bubble.
  • Downward cycle described – Financial institutions borrowed and lent to each other, creating a so-called counterparty risk. When one institution got into trouble, it suddenly couldn’t pay its counterparties. That meant the other institutions began to run short of cash as well. Cash-short financial institutions had to start dumping financial assets, typically securities backed by real estate, into the market thus depressing prices further.

Lindsey proposes the following changes:

  1. Remove the FDIC $100,000 limit at banks – If there is a commercial bank failure and depositors have uninsured assets frozen, there will be a run on the entire banking system.
  2. Change credit rating rules – Increased delinquency rates and worsening market conditions will make carrying credit card receivables difficult for banks. Currently these decisions are made by rules programmed into computers.
  3. Inflation is the lessor of economic evils we may face – Do we really want to chance the hundreds of millions of people who have joined the global middle class during the last decade dropping back into poverty? Do we think this can happen without geopolitical consequences?

Lindsey’s complete Weekly Standard article is copied below.

—————————————————————————
Weekly Standard
High Anxiety
We went from playing inflation-era Monopoly to playing depression-era Monopoly in mid-game.
by Lawrence B. Lindsey
09/29/2008, Volume 014, Issue 03

Friends and tradesmen, not to mention clients, have all been asking me the same question in the past few weeks. Is this 1929? Are we headed for a depression?

Let’s begin with the somewhat reassuring point that even if we are headed for a depression, it will not be like the memories or pictures in history books we have of the 1930s. In 1929, Americans had the per capita GDP of people now living in the Balkans. Today it is five times higher. So even if we have a depression, there won’t be any Hoovervilles or soup lines. There may be a massive increase in demands for public assistance and rental housing, but this is hardship, not the privations of the 1930s.

We have learned from what happened back then and from Japan’s experience in the 1990s. We will probably not make the same mistakes. We will, however, make other mistakes (and indeed we already have). Although conditions change, the basic human motivations of fear, greed, ignorance, and hubris are enduring.

Keep in mind as we go through these tough times that even the smartest people can be wrong. Isaac Newton lost money in the South Sea Bubble. He not only figured gravity out, but was Master of the Mint, as close to being a central bank governor as one could be back in the seventeenth century. Recognizing the developing bubble, he sold his position. Then, when prices continued to rise, he decided that he must have been mistaken and bought back in just before the top, ultimately losing a small fortune.

More than three centuries have passed, but the model is still the same. A great idea comes along that has some grounding in economic reality: exotic spices from afar; the beauty of tulips; canals as the hot new mode of transport; railroads making canals obsolete; a radio in every home or a car in every garage; the Internet and dot commerce; home prices that can only go up. Those who first pursue the idea make money. They tell their friends, and their friends pile in. More buyers mean higher prices for assets related to the core idea. Lenders, seeing a new idea whose price is rising, lower prudential standards as those investing in that idea have all made money and never defaulted on their loans. Higher asset values means improved balance sheets, a greater feeling of economic security, and so even more willingness by all parties to borrow and lend.

We all fell for it again. Who do you think we all are? Geniuses like Newton?

Most readers, I trust, have played the board game Monopoly. But probably few of us actually play by the original rules, which provide insight into hard times. One popular embellishment of the original version is to pool all the money collected from Chance, Community Chest, Income Tax, and Luxury Tax and pay it out to the person who lands on Free Parking. Some expand this further, adding one of every kind of bill (a total of $686) to the take of the lucky player who lands on the space that the original rules designed as a free space where nothing happens. Improvisations like this turn a game originally designed for adults in the hard times of the 1930s into a much faster “Inflation Era” Monopoly, a game in which even children can accumulate cash and have a good time. Indeed, the desire to use the game to teach children the rudiments of money and economics in a manner which is fun is one of the reasons most players end up changing the rules.

The biggest rule change most contemporary players use, though, is to have the bank pay the owners of houses full cost when they sell them back or “liquidate” them. The original rules paid the owners only half. This changes the game completely. Property development becomes a very risky proposition rather than a sure thing. The pace of “economic activity,” building houses and hotels, is excruciatingly slow as the money supply in the game is restricted to the income supplied when players pass GO and the risk of losses is high. Then, after a long process of building, just as the game board gets nearly fully developed, an economic accident occurs when one of the more aggressive players hits Street Repairs in Chance or Community Chest and must liquidate his holdings at fifty cents on the dollar. Wealth is destroyed and houses and hotels crumble. Welcome to Depression Monopoly.

I stumbled on this when trying to explain what was happening in the economy to my 16-year-old son with whom I had played many games of Monopoly under the inflation version of the rules. We had found the 1930s version too demoralizing, quit before finishing the game, and resolved that, whenever we played with my younger son, we would use the inflation version, pumping as much money in through Free Parking as possible and definitely giving full price for houses. The American economy has just moved from the Inflation Monopoly rules to the Depression ones in mid-game.

For at least the past 15 years, house prices have risen in most parts of the country. Money was ample. Fortunes were made by acquiring as much land as possible and developing it. Risks were minimal. If you ran into an unforeseen event and had to sell, you could get at least as much as you paid for the house, repay the bank, and move on with a small profit. It was such a sure thing that a record number of American families bought second homes. Owning rental housing became fashionable again for the first time since the 1980s when tax law changes converted it from the one-of-each-bill version of Free Parking into the economically neutral “free space” version.

Our financial institutions evolved to meet the new rules. Lending that required the traditional 20 percent down payment became passé. In 2006, the median down payment for first-time homebuyers was just 3 percent. Proof of income (i.e., that when you passed GO you would collect $200) became optional as did basic tests of past ability to repay debts.

Most important, the accounting and regulatory rules for holding reserves against these loans evolved from hard and fast provisioning to ones based on “historical experience,” meaning the low default rates of the past few years with prices only going up. These provisions were not adequate when prices went down. The reason our financial institutions are in trouble is that they are now taking back homes on which they lent 90 cents on the dollar, but which their owners can only sell for 75 or 80 cents. So, even if the bank repossesses the house, it loses money and does not have adequate provision for the loss.

The problem got more complex as financial institutions borrowed and lent to each other, creating a so-called counterparty risk. When one institution got into trouble, it suddenly couldn’t pay its counterparties. That meant the other institutions began to run short of cash as well. Cash-short financial institutions had to start dumping financial assets, typically securities backed by real estate, into the market thus depressing prices further. This produced another round of problems for financial institutions and a downward spiral.

Authorities responded by trying to arrange deals where relatively healthy institutions bought the ones on the verge of bankruptcy. In the case of Bear Stearns, they succeeded in getting J.P. Morgan to deal only by agreeing to absorb potential losses up to $29 billion. But the list of potential purchasers is now getting very slim.

Whenever a financial institution expands by buying another, less solvent, institution, its own capital position is weakened. So, this phase of industry consolidation through government-encouraged acquisitions will prove quite limited. Collectively, the amount of capital that exists in the entire financial services industry is already stretched, so unless more capital is injected from outside the system, some institutions will inevitably not find buyers and will fail. (This is what happened to Lehman Brothers.) And when an institution fails, losses due to counterparty risk ripple through the system. The collective amount of capital in the financial services industry drops still further, forcing still more failures.

This is why so many people are now wondering if we are headed for an economic depression. This dynamic of spiraling failure is eerily reminiscent of what happened in the early 1930s–just as there are many good analogies between the 1920s and what has happened in our economy since the early 1990s. There are important differences, of course, but since most of us are really mini-financial institutions, the issues are not merely of academic interest. A digression into economic self-preservation in a game of real-life Depression Monopoly might be useful.

First, readers would be well advised to actually sit down and write up a budget if they have any doubts about whether their current income is covering their bills. Just to be clear, expenses include not only the minimum payment on an item like a credit card, but all the charges incurred in the month plus the minimum payment. And income does not include any draws on saving or home equity lines of credit. I once went through a budget exercise with a struggling 20-something and asked why he didn’t have anything budgeted for gasoline for his car. His response was that he simply put it on his credit card so it didn’t count as long as he was making the minimum payment.

Second, people should make sure that they have at least three, and ideally six, months’ income saved in a place where they can get at it readily like a bank account or money-market fund. This is on top of items like retirement saving and college accounts.

Third, once this threshold is met, it is doubtless a good idea to start reducing debt, particularly on credit cards and auto loans. These are about to get much harder to obtain as the credit crunch inevitably spreads from the commanding heights of the financial sector into the consumer credit arena. It will not be surprising to see the limits on credit cards lowered sharply, fees for holding cards rise, and auto loans tough to qualify for. The goal for households should be to be able to use credit cards for convenience only–paying the bill in full each month–and to have the ability to pay cash for larger purchases like a car.

Finally, for those lucky enough to meet the above criteria, where one deploys one’s assets becomes a serious matter in the current environment. There was a saying in the 1930s that you should not have all your eggs in one basket. It meant spread the assets around. In the calm environment of the last few decades this dictum was rejected for the convenience of one-stop financial shopping. You might want to consult a financial adviser or at least inquire at the institutions where you have assets what the insurance limits are and under what circumstances your assets can be seized by creditors of the institution. This means asking questions about deposit-insurance limits, the assets backed by money-market funds, and whether your investments are in custodial accounts.

It is sad that we have to waste time in our busy lives worrying about things that people have not had to concern themselves with since the 1930s, but, frankly, aside from officials at the Fed and Treasury, the political leadership in both parties seems clueless about what is happening. Their inattention to these matters has contributed to our current mess, and this must change now.

First, President Bush should ask Congress to immediately remove the limit on FDIC insurance for transactions accounts at banks. This is central to protecting the payments system that allows the economy to function. Currently the cap is $100,000, which might seem like a lot, but barely covers the biweekly payroll and vendor costs of a company with a dozen employees. Once there is a commercial bank failure in which uninsured depositors see their accounts frozen, ripple effects will start to emerge that will end with a run on the banking system. Small and larger businesses alike will have no choice but to seek safe havens for their working capital, as will well-off individuals for the money they use to meet monthly expenses.

Second, politicians and regulators need to decide on the appropriate rules for reducing consumer credit lines once delinquency rates start to rise or market conditions make carrying credit card receivables–the amount of money you owe on your cards–difficult for banks. Currently these decisions are made by rules programmed into computers that were established when few thought we would ever see the kinds of credit conditions we are experiencing today. Prudent cash management by credit card companies will come into direct conflict with the credit needs of the household sector and the ability of the economy to sustain both spending levels and employment.

Third, and most important, policymakers are going to have to force us back from the current Depression Monopoly downward spiral toward the Inflation Monopoly arrangements. This is not as obvious a choice as one might expect. As recently as late summer Fed officials were expressing concerns about inflation being their main challenge, and politicians of both parties found it easy to oppose “bailouts” of seemingly well-heeled financial institutions, their owners, and their employees.

I realize that we risk rekindling all the imprudent behavior and excessive leverage that comes under the phrase “moral hazard” by trying to change the rules back. But continuing along our current track also involves morally dubious risks, like widespread unemployment and household and business bankruptcies. In this global economy, it also involves noneconomic risks that are reminiscent of the 1930s. Do we really want to chance the hundreds of millions of people who have joined the global middle class during the last decade dropping back into poverty? Do we think this can happen without geopolitical consequences? Despite some disappointing comments on the credit crisis, at least John McCain seems to understand the links between free trade and global security issues, something his opponent apparently fails to grasp.

The government’s decision on Thursday to buy mortgage-backed securities–adopting the “full price for houses” rule–is a major step toward propping up the mortgage market and the financial industry. It was coupled with a variety of other rule changes that constitute a big step back toward “Inflation Monopoly.” But as with any change in the rules there are going to be a lot of unintended consequences.

Start with the centerpiece of the plan, the purchase of mortgage-backed securities by the Treasury. This should help prop up prices, at least initially. But, there are some unusual aspects to the rule change. The government is purchasing assets from financial institutions that are still solvent, i.e., still playing the old game. Back in the days of the 1989 Thrift Bailout and the Resolution Trust Corporation, the government simply assumed the assets of any bankrupt institutions that the FDIC had to step in and insure. This time, ongoing businesses will have to decide which assets to sell and at what price.

In our Monopoly example, imagine you need cash and own Park Place but haven’t been able to make a deal with the owner of Boardwalk. The government will take it off your hands, but for a price that is yet to be determined. One problem: You and the other players don’t know if the government is going to turn around and auction the property off, allowing the player with Boardwalk to buy it. If so, that other guy might make a huge windfall at your expense and at the expense of the other players.

Also, this appears to be a onetime deal from the government. Should you sell now or take your chances in the market place? Say you own the three Yellows and have invested in placing three houses on each. You’re solvent, but no one has landed on your houses leaving you cash strapped and disillusioned about the value of your investment. If you sell now to the government, they are probably going to give you something close to full value for those houses. But, property values are still depressed and the government now owns a ton of property and the financial paper behind it that could be dumped on the market at any time. So, if you don’t sell to the government now while they are offering to buy at something close to full price, you could be forced to dump those houses in the market at half price sometime in the future. Thus, the government may have set up the incentive structure to take on more property, and more taxpayer risk than might otherwise have been the case.

Another example of unintended consequences has to do with the decision to insure money-market funds. Treasury officials probably thought they had to. (An estimated $180 billion came out of the funds on Thursday alone–giving some idea of how quickly a bank run can develop and how large the magnitude could be.) But, the Treasury is not insuring the uninsured depositors in the banks. Likely consequence: a run of money out of the banking system and into the newly insured funds. That’s what happens when you change the rules suddenly.

To make things more complicated, the Securities and Exchange Commission placed a temporary ban on “short-selling,” i.e., making a bet that the price of a stock would go down and also changed the rule that allowed companies to buy their own stock on the open market. They did this on a day when trillions of dollars of stock options came due, thereby manipulating the price of stocks higher. Serious questions are now being raised all around the world about whether or not U.S. markets are being politically manipulated.

Finally, it is far from clear that the Federal Reserve is going to be monetizing this process, or whether the financing is just going to be through more government debt in the market. If there is simply more debt, there will be little long-term increase in economic activity as the higher Treasury borrowing crowds out other investment. Continuing our Monopoly analogy, unless more money is pumped into the game through Free Parking or other devices and on a continuing basis, there will still not be enough money in the game to assure the profitability of all the houses and hotels that have been built. The odds are high that the Fed will ultimately print the money, and in volumes equivalent to giving players one of each kind of bill, but a formal decision on that still lies ahead.

It is very hard to play a game in which the rules change continuously. Once the novelty wears off, much of the fun will have gone out of the game as players will not know how to develop a winning strategy. This is even more true when the game is real and one’s life savings is at stake. The government’s ad hoc approach to the rules of the game to date–soon to be followed by investigations by state attorneys general and federal agencies and endless litigation–has probably permanently impaired the attractiveness of U.S. financial markets. That is a price we all are going to pay for decades to come. As we are all learning, Depression Monopoly is no fun to play.

Lawrence B. Lindsey, a former governor of the Federal Reserve, was special assistant to President Bush for economic policy and director of the National Economic Council at the White House. His most recent book is What a President Should Know .  .  . but Most Learn Too Late (Rowman and Littlefield).
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Greight Time be a Florida Marlins Fan

On the eighteenth of September, the Florida Marlins scored eight runs and won their eighth straight game, which marked their eightieth win of the season. In the game, Mike Jacobs drove in his eighty-eighth run and the win was pitcher Scott Olsen’s eighth of the season.

OK, I’m a little giddy — workin’ on only eight hours … — and it might all turn out very differently, but as of this morning;

  1. The prospects for a Little Havana-based MLB stadium have never been better after a positive Florida Supreme Court ruling on a matter related to the Braman lawsuit.
  2. Our team’s eight young pitchers are the envy of MLB: Chris Volstad (age 21) / Ryan Tucker (21) / Andrew Miller (23) / Josh Johnson (24) / Scott Olsen (24) / Anibal Sanchez (24) / Ricky Nolasco (25) / Reynel Pinto (26) – FYI — that totals one hundred and eighty-eight years.
  3. My namesake [or ‘tocayo’], Jorge Cantu has hit 5 home runs in his last eight [OK actually 7] games to push his total to twenty-eight for the year. When he hit #25, the Marlins infield became the first MLB infield ever to each hit at least 25 home runs in a season — Ramirez (32) / Uggla (30) / Jacobs (32). To push that mark to 30 [sports records rounding fetish], would be amazing. Any achievement in a sport with the history and tradition of MLB, which can be described as ‘first ever’ is something to relish.
  4. One of our future stars, Cameron Maybin, after a good 2nd half of the season in the minors, was called up and is hitting in the eight-hundredths after his first 2 games. That won’t last, but he should next year.
  5. While highly unlikely, the win streak gives the Marlins the opportunity to come within 2 games of the 1st place Phillies [who are looking to win their eighth game in a row], if they sweep this weekend, dependent on the Mets, of course. Bottom line, heading into the next to last weekend of the season, the Marlins have a shot. Even, if they come up short, we end the season against the Mets in NY. Which means that we may yet have another opportunity to rip the heart — weak and timid as it may be — from the chest of those chronic losers [see historic 2007 collapse] in NY for the 2nd consecutive season. Think of it! One more chance to watch the anguish that comes with historic collapses written on the face of Met fans as they say goodbye to Shea Stadium in true NY Met fashion, a Chokapalooza festival! Someone pinch-hit me eight times.

All articles linked or referenced are copied in full at end of post.

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South Florida Sun-Sentinel.com
Marlins might get financing

By Juan Ortega and Sarah Talalay

South Florida Sun-Sentinel

September 19, 2008

Local officials rejoiced at a Florida Supreme Court ruling Thursday that gives them the authority to OK bonds for public projects without voter approval.

Community redevelopment agencies across Florida had been struggling after last September’s high court ruling in Strand vs. Escambia County. The court required a public vote before a government could dispense property-tax money to purchase bonds of longer than a year’s duration.

The ruling even held up financing for a Florida Marlins ballpark because it was tied to other projects using redevelopment dollars.

Now the court says long-term financial plans that pay off debt with future property tax increases are legal, even without voter approval. Delaying the plans for votes “would cause serious disruption” to local governments’ plans for community improvements, Justice Charles T. Wells wrote for the 4-2 majority.

Thursday’s ruling, which effectively reverses the earlier one, gives community redevelopment agencies more flexibility to approve big-ticket bonds.

“What it means is a flood of new activity across the state for CRAs,” said Gary Rogers, director of Lauderdale Lakes’ Community Redevelopment Agency and president-elect of the Florida Redevelopment Association.

The initial, unanimous ruling in Strand cast doubt on construction projects across Florida. Among them is a plan for $3 billion in projects in Miami, including the Marlins stadium, a port tunnel and debt on a performing arts center. Other projects in limbo: a $100 million resort project in Hollywood, affordable townhomes in downtown Delray Beach, and a town square master plan in Boynton Beach.

“It’s been a bottleneck of nearly a year, with huge frustration in project delays all over the state,” Rogers said.

Thursday’s news was particularly welcome for the Florida Marlins, Miami-Dade County and the city of Miami. Their efforts to finance a $515 million ballpark at the site of the former Orange Bowl were held up by auto dealer Norman Braman’s lawsuit challenging how $3 billion in Miami projects were financed.

Miami-Dade Circuit Judge Jeri Beth Cohen was waiting for the Strand decision before ruling on the final count in Braman’s case: part of the financing requires a referendum because it relies on CRA dollars. Cohen has scheduled a hearing for Monday.

The team, city and county argue Strand does not require a public vote on the stadium. But they hope Thursday’s ruling clears up misconceptions about the ballpark and other projects.

“It’s not just about the stadium,” Miami Mayor Manny Diaz said. “It’s about building affordable housing and infrastructure and fixing up the parks in the area, building streets and sidewalks and flood mitigation, job creation-type projects.”

The ruling should also be a huge boost for the $100 million Marriott Ocean Village and Resort on Johnson Street in Hollywood beach. Hollywood officials had promised developers a city community redevelopment agency would secure bonds to pay for a 1,600-space parking garage.

Not everyone was cheering the ruling.

Attorney David Theriaque represented Gregory Strand, a Pensacola veterinarian who challenged an Escambia County road-widening project.

“We think it’s a very sad day for taxpayers,” Theriaque said. “This means local government can incur long-term debt without citizens being able to vote and decide whether that’s a good idea first.”

Staff Writers Linda Trischitta and Ihosvani Rodriguez contributed to this report.
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Miami Herald
Posted on Fri, Sep. 19, 2008

Florida high court ruling clears path for Miami megaplan
BY CHARLES RABIN AND MICHAEL VASQUEZ

Miami’s largest public works initiative in decades received a major legal boost Thursday, thanks to a Florida Supreme Court decision that likely green-lights financing for the $3 billion megaplan.

By extension, the Florida Marlins appear to have cleared the last legal hurdle blocking construction of a $515 million state-of-the-art facility the franchise has sought for nearly a decade.

Miami Mayor Manny Diaz cited the Depression-era New Deal in addressing what the court’s decision means for the growth of his city amid a chaotic and stumbling economy.

”I think if we all retrench and go home and put our money in a shoebox under our bed, then I think you make a bad situation — financially, economically — you make a bad situation much worse,” said the mayor.

The Supreme Court’s ruling dealt with a case in Escambia County, but the decision has resonance in Miami and across Florida. The court ruled that voter referendums are not required when government spends community-redevelopment money to pay off bond debt.

The decision reversed an earlier ruling that had appeared to cast a cloud over the Miami plan’s financing.

The development money, usually administered by community redevelopment agencies, or CRAs, is the glue that holds Miami’s megaplan together. Although not used to directly fund the stadium, CRA money would flow to other pieces of the public works blueprint — freeing up separate dollars to pay for the stadium.

The high court’s ruling had been holding up the final court decision in auto dealer Norman Braman’s lawsuit attempting to derail the stadium. Thursday’s decision could well pave the way for the end of Braman’s case.

Miami-Dade Circuit Judge Jeri Beth Cohen had already tossed six of Braman’s seven lawsuit counts. Last week, Cohen killed a big chunk of Braman’s argument, saying a publicly financed stadium serves the public good.

The final count — over the plan’s financial structure — was on hold as she awaited the Escambia ruling.

It is not clear when Cohen — presiding over an unrelated jury trial this week — will rule. But the Supreme Court’s decision is a strong indication she will toss Braman’s final count.

Braman, vowing an appeal, took little heart in Thursday’s 4-2 court decision, noting three justices who wrote in favor will soon be gone. Then he took a swipe at what he called a ”celebratory press conference” at Miami City Hall.

”With a Wall Street Journal headline this morning saying it’s the worst economy with no help in sight, how could anyone even think of spending these type of dollars for a for-profit business?” Braman asked.

Replied Diaz: “Everyone’s focused on baseball. But the reality here is, it is really about affordable housing and infrastructure, and parks and the homeless.”

Diaz said CRA money will be used for affordable housing and to aid in moving Camillus House to a new Civic Center location. Beyond the 37,000-seat stadium in Little Havana, the public works plan will help build a $1 billion port tunnel, a park at Bicentennial, a streetcar system, and pay a $484 million construction debt at the Adrienne Arsht Center for the Performing Arts.

County Mayor Carlos Alvarez said the projects will create much-needed employment for local residents.

”This is about making decisions that will move this community forward, and making sure Miami-Dade County prospers,” he said.

Braman sued Miami, Miami-Dade and the Florida Marlins in a bid to block the use of $499 million in public money to build the stadium and a parking garage. Braman also tried, but has failed, to halt construction on any of the other projects that use CRA money without voter approval.

TOURIST TAX

The plan envisions some $800 million in CRA money for the projects, with only the ballpark to be built without use of anti-poverty funds. The stadium would be built mainly with tourist tax dollars collected through hotel rooms — and with the team covering about a quarter of the costs.

Marlins spokesman P.J. Loyello said the team will reserve comment until Judge Cohen rules.

Thursday’s ruling involved the case of Escambia County resident Dr. Gregory Strand, who challenged the use of property tax money to pay off a bond debt incurred for road work — without a public vote.

”We think the court’s decision makes it a very sad day for the taxpayers of Florida,” said Strand’s Tallahassee attorney, David Theriaque.

The 4-2 decision reversed an earlier ruling in Strand’s favor. The court agreed to rehear a motion after being inundated with similar cases from counties throughout the state that used CRA money after a precedent-setting ruling on a Miami Beach case dating to 1982.

In his order, Justice Charles T. Wells pointed to the Miami Beach case and said governments have relied on that ruling for 27 years in issuing “bond financing by local government authorities, including school boards, enabling the financing of many public works that have enhanced the quality of life in our state.”

GROUNDHOG DAY

Dissenting, Justice R. Fred Lewis made reference to a Bill Murray movie, saying an article in the state Constitution renders the Miami Beach case useless. ‘Like the hapless protagonist in Groundhog Day, this court will be forced to continuously relive this controversy until we `get it right,’ ” wrote Lewis.

The reversal is likely to have far-reaching implications throughout the state, where the spending of more than a billion dollars in CRA money hangs in the balance for dozens of projects, according to the state’s CRA association.

In Fort Lauderdale, CRA director Alfred Battle said the ruling provides the agency “greater flexibility to finance future projects designed to stimulate economic development in neighborhoods and business corridors.”

”This lessens the burden on taxpayers, and contributes to the long term viability of our urban areas,” said Carol Westmorland, executive director of the Florida Redevelopment Association.

Miami Herald staff writer Dan Christensen contributed to this report.
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Bad Accounting Rules Helped Sink AIG

If, as we are now hearing constantly, the problem is greedy people — like Obama insider Jim Johnson — then the solution is simple, find those people and deport them. But if it’s something else, it might help to consider other factors. A different perspective from a WSJ Op-Ed article:

The current meltdown isn’t the result of too much regulation or too little. The root cause is bad regulation.

Call it the revenge of Enron. The collapse of Enron in 2002 triggered a wave of regulations, most notably Sarbanes-Oxley. Less noticed but ultimately more consequential for today were accounting rules that forced financial service companies to change the way they report the value of their assets (or liabilities). Enron valued future contracts in such a way as to vastly inflate its reported profits. In response, accounting standards were shifted by the Financial Accounting Standards Board and validated by the SEC. The new standards force companies to value or “mark” their assets according to a different set of standards and levels.

The rules are complicated and arcane; the result isn’t. Beginning last year, financial companies exposed to the mortgage market began to mark down their assets, quickly and steeply. That created a chain reaction, as losses that were reported on balance sheets led to declining stock prices and lower credit ratings, forcing these companies to put aside ever larger reserves (also dictated by banking regulations) to cover those losses.

In the case of AIG, the issues are even more arcane. In February, as its balance sheet continued to sharply decline, the company issued a statement saying that it “believes that its mark-to-market unrealized losses on the super senior credit default swap portfolio . . . are not indicative of the losses it may realize over time.” Unless one is steeped in these issues, that statement is completely incomprehensible. Yet the inside baseball of accounting rules, regulation and markets adds up to the very comprehensible $85 billion of taxpayer money.

The complete article is copied below.
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WSJ OPINION PAGE * SEPTEMBER 18, 2008

Bad Accounting Rules Helped Sink AIG
By ZACHARY KARABELL

The decision by the Federal Reserve to loan insurance giant AIG $85 billion in return for as much as 80% ownership of the company is by any measure dramatic. The takeover early last week of Fannie Mae and Freddie Mac represented the culmination of years of intermingling of public and private interests. But the AIG move is de facto a government nationalization of an ailing private company, which, if not unprecedented, has rarely happened in the United States. Even if the intervention was imperative, its scope is startling.

The crisis on Wall Street has, of course, become a political football. Cries of “moral hazard” and “socialism” on one side are drowned out by charges that the current mess is the result of deregulation, and too cozy a relationship between “Wall Street fat cats” and the current administration in Washington. If only reality were that simple. The blame game will continue, but it won’t do much to fix what’s broken.

Let’s get a few canards out of the way: First, yes, stupidity and cupidity and complacency and hubris are involved, and yes, there is gambling in Casablanca. Second, the idea that there is this thing called “the free market” that governments tame or muck up with regulation is a fiction. Governments create the legal conditions for markets; markets shape what governments can do or are willing to do. Regulation versus free-market is a false dichotomy. Maybe in some theoretical universe, if we could start with a blank slate and construct society anew, it wouldn’t be. But we exist in a web of markets and regulations, and the challenge is to respond to problems in such a way so that we decrease the odds of future crises.

And that is where AIG becomes instructive. Even good regulations can’t prevent all future crises, especially ones that are the result of new technologies and changes that result from them. The capital flows, derivatives contracts and nearly frictionless interlinking of global markets today are the direct result of the information technologies of the 1990s. The implications weren’t known until very recently, so it would have been nearly impossible for regulations to have prevented what is happening. But if good regulation can’t prevent crises, bad regulations can cause them.

The current meltdown isn’t the result of too much regulation or too little. The root cause is bad regulation.

Call it the revenge of Enron. The collapse of Enron in 2002 triggered a wave of regulations, most notably Sarbanes-Oxley. Less noticed but ultimately more consequential for today were accounting rules that forced financial service companies to change the way they report the value of their assets (or liabilities). Enron valued future contracts in such a way as to vastly inflate its reported profits. In response, accounting standards were shifted by the Financial Accounting Standards Board and validated by the SEC. The new standards force companies to value or “mark” their assets according to a different set of standards and levels.

The rules are complicated and arcane; the result isn’t. Beginning last year, financial companies exposed to the mortgage market began to mark down their assets, quickly and steeply. That created a chain reaction, as losses that were reported on balance sheets led to declining stock prices and lower credit ratings, forcing these companies to put aside ever larger reserves (also dictated by banking regulations) to cover those losses.

In the case of AIG, the issues are even more arcane. In February, as its balance sheet continued to sharply decline, the company issued a statement saying that it “believes that its mark-to-market unrealized losses on the super senior credit default swap portfolio . . . are not indicative of the losses it may realize over time.” Unless one is steeped in these issues, that statement is completely incomprehensible. Yet the inside baseball of accounting rules, regulation and markets adds up to the very comprehensible $85 billion of taxpayer money.

What AIG was saying then, and what others from Lehman to Bear Stearns to the world at large have been saying since, is that the losses showing up aren’t “real.” Yes, the layer upon layer of derivatives built on the foundation of mortgages is mind-boggling. One reason that AIG had floated beneath the radar screen of the business media (relative to Wall Street investment firms) is that its business model is so complex and opaque that it is impossible to describe simply. It was briefly in the news in 2005, after it was accused of improper accounting by the SEC and the New York attorney general. Then it faded from view, until now.

Among its many products, AIG offered insurance on derivatives built on other derivatives built on mortgages. It priced those according to computer models that no one person could have generated, not even the quantitative magicians who programmed them. And when default rates and home prices moved in ways that no model had predicted, the whole pricing structure was thrown out of whack.

The value of the underlying assets — homes and mortgages — declined, sometimes 10%, sometimes 20%, rarely more. That is a hit to the system, but on its own should never have led to the implosion of Wall Street. What has leveled Wall Street is that the value of the derivatives has declined to zero in some cases, at least according to what these companies are reporting.

There’s something wrong with that picture: Down 20% doesn’t equal down 100%. In a paralyzed environment, where few are buying and everyone is selling, a market price could well be near zero. But that is hardly the “real” price. If someone had to sell a home in Galveston, Texas, last week before Hurricane Ike, it might have sold for pennies on the dollar. Who would buy a home in the path of a hurricane? But only for those few days was that value “real.”

The regulations were passed to prevent a repeat of Enron, but regulations are always a work of hindsight. Good regulatory regimes can mitigate future crises, and over the past hundred years, economic crises world-wide have become less disruptive. The panics of the late 1800s, the bank runs, the Great Depression in Europe and the United States, were all far more severe than what is unfolding today in terms of business failures and jobs, homes and savings lost.

But bad regulation is something to be feared, especially as industries become more complicated. Legislators and agencies would be wary of passing rules regulating how a semiconductor chip is programmed; they would recognize that while the outcomes those chips produce might be simple, the way they produce them is not. Yet financial service regulations sometimes act as if we still live in a time when deposits consisted of sacks of money in a vault.

A few years from now, there will be a magazine cover with someone we’ve never heard of who bought all of those mortgages and derivatives for next to nothing on the correct assumption that they were indeed worth quite a bit. In the interim, there will almost certainly be a wave of regulations designed to prevent the flood that has already occurred, some of which are likely to trigger another crisis down the line. Until we can have a more rational, measured public discussion about what government and regulations can and should do vis-à-vis financial markets, we are unlikely to break the cycle.

There is one final irony: AIG was founded in Shanghai in 1919, when China was emerging from millennia of imperial rule. Over the next century, China turned away from capitalism. Almost 90 years later, AIG is now being taken over by the U.S. government just as the Chinese government is moving as quickly as possible to divest itself of control of major companies. One of those countries is growing fast; one isn’t. Perhaps that is a coincidence; perhaps not.

Mr. Karabell is president of River Twice Research. His “Chimerica: How the United States and China Became One,” will be published next year by Simon & Schuster.
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