Losing the Kennedy seat.

The Scott Brown election in Massachusetts is far less momentous than has been depicted.

To understand it simply requires holding onto two attributes of the Massachusetts electorate that might seem contradictory, but are not. First, that Massachusetts Democrats have a large registration edge over Republicans. Second that Massachusetts has close to if not the largest proportion of independent voters among states. Gallup achieves its ranking of Massachusetts as the third leading Democrat state—with a 34% edge over Republicans—only by allocating independent voters to the side to which they “lean.”

For some, the election results were touted as a bombshell because of the notion that this was Teddy Kennedy’s Senate seat. But if that Senate seat were to be an hereditary peerage, a Kennedy would have to step up and seize it. The Massachusetts election results might have been startling if Joe Kennedy had run and lost. But he chose not to run.

Despite its reputation, Massachusetts is not the Democrat bastion of national imagination. Over the past half-century, we have seen Republicans ruling the Statehouse more than Democrats—though long-time Senate President Billy Bulger would certainly protest the notion that any Governor ruled the Statehouse during Bulger’s reign. The 28 years of John Volpe, Frank Sargent, Bill Weld and Mitt Romney outstripped the 20 combined years of Mike Dukakis, Endicott Peabody and Deval Patrick. By way of comparison, in both New Jersey and Virginia, the sites of the other recent Republican gains, these numbers are reversed, with 28 years of Democrat rule compared to 20 Republican years.

A defining characteristic of top of the ticket statewide races in Massachusetts—a state with a hard earned reputation for local politics, patronage and corruption—is that they have not been dominated by old time pols, and each of these Governors—Democrats and Republicans alike—ran and won as reform candidates campaigning as much against the entrenched party establishments as embraced by them. Statehouse operative John Sasso may have greased the wheels to assure Michael Dukakis won the nomination, but the liberal Democrat from Brookline never won the hearts of party regulars. (I will leave aside for the moment the question how a half century of reform governors could have resulted in so little reform.)

If one is to draw a lesson for national politics from Massachusetts, it is less about policy—the notion that the Massachusetts electorate was voicing its opposition to federal healthcare legislation—than about politics. And in this regard, the message from Massachusetts is not particularly different than from New Jersey or Virginia. It is that the Democrat candidates lost the good will among independent voters—the voting block that was essential to the Obama victory two years earlier—as those voters leaned the other way.

Ironically, losing in Massachusetts—and losing the 60th vote in the Senate—may have been the best thing that could happen for Barack Obama. The Massachusetts loss should mark the end of Obama’s ceding the floor to Harry Reid and Nancy Pelosi—whose leadership has been anathema to the change the independent voters thought they were getting in 2008—and force a realignment of the President’s strategy. While in the first few days following the Brown election, the White House appeared to be flailing about for a message—leading to real fears that the wheels were coming off the bus—its ultimate embrace of the nationally broadcast question time with Republicans may have marked a turning point.

For the first time in many years, the public was able to witness—and our elected officials were able to participate in—real discussion over real issues. This was an astonishingly simple antidote to dangerous levels of public cynicism, at a time when Washington has been reduced to rhetoric and spin, and talk show hosts wield dangerous influence over our politics.

Every hour of every day, we are pummeled by a media that makes its living stirring us up, and exacerbating the fears and resentments that are easy enough to feel without the encouragements of Sean and Rush and Michele and Ed and the rest. And time is on their side, because most of the challenges we face take time. The economy will take time. Deleveraging takes time. The real world takes time. The only think that does not take time is the Internet and cable TV. They get faster every day.

As a nation, and as a polity, having our leaders discuss matters directly is a refreshing change. After years of debating the best format for presidential debates, we have never really gotten past various versions of gotcha questions. Yet, last week, when they put the President and Congress into a room, gave them a microphone and told them to have at it, apparently they were able to do just that. And do so intelligently and with civility.

So perhaps the message from Massachusetts is just what it should be: That the electorate—led by a growing, independent center—will continue to vote for the other guy until they see something that looks like progress. And progress does not mean a filibuster-proof majority for one party, it means injecting some degree of integrity into political debate and moving away from a system simply defined by the pursuit of partisan advantage.

And that would be a good thing.

Sauce for the goose.

The Feds, the mortgage bankers, commercial banks and investors in mortgage-backed securities conspired to let people buy homes with little or no money down. One’s choice of villains in the saga that ensued based on where one sits in the political wars. Investment bankers. Mortgage bankers. Standard & Poor’s. Barney Frank. Chris Dodd. Frank Raines. Alan Greenspan. Whatever.

But now, faced with a cascading foreclosure problem, homeowners—a questionable notion for owners of a property with zero equity—are being told that the moral and ethical thing to do is to stay in their homes, and make good on “their” obligations. After decades of watching Donald Trump walk away from any bad deal, declare bankruptcy, and go back to the same banks for another bite at the apple, American owners of bankrupt—debt exceeds asset value—properties are being asked to stay the course, to “do the right thing.”

This, of course, is the Paulson Doctrine. On March 3, 2008, two weeks before the collapse of Bear Stearns, the Treasury Secretary set forth the principle that—unlike Mr. Trump—homeowners should stay the course.

Homeowners who can afford their payments and don't have to move, can choose to stay in their house. And let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator – and one who is not honoring his obligations.

Today, the Paulson Doctrine has been embraced from the President on down, as the responsible course of action. For an increasingly diverse America, this is the new Protestant Ethic. Forget Donald Trump, the serial bankrupt celebrity celebrated for a decade as the face of the American economy. Forget that the banks that made all those loans—time and time again—to Donald Trump, have had those and so many other bad beds paid off by the American taxpayers.

There is no greater irony than the continuing spectacle of American taxpayers—the yet-to-be-born grandchildren of American taxpayers actually—who once thought that they had secured their piece of the American Dream, are now being told by the very bankers who they have bailed out that their moral and ethical obligation is to stay the course.

Thirty years ago, in the first day of the class “Financial Markets and Disintermediation” at the Wharton School, Professor Smith began by musing that each of the world’s great religions decry the impact of debt on the individuals and society, and are derisive of bankers and banking activities. His words were lost on the gaggle of aspiring investment bankers, who aspired to follow in the footsteps of Michael Milken and Donald Trump rather than consider WWJD.

The Koran is enlightening on the subject of debt. The principles of sharia lending suggest that debt creates an undue power relationship between the lender and the borrower, and accordingly it suggests that there should be elements of risk-sharing in lending activities. While referencing the Koran in any regard may make one suspect in American discourse today, the notion of risk-sharing in financial arrangements, and in particular in financial arrangements where the power relationship is totally skewed toward the lender as in the world of consumer and mortgage banking, is worth considering.

While Professor Smith was reflecting on moral considerations, across the hall Professor Percival was articulating the Miller Modigliani Capital Asset Pricing Model, a central tenet of the Wharton finance program. In simple terms, this model—based on the theoretical work of Nobel laureate economists Franco Modigliani and Merton Miller—demonstrated that you cannot increase the value of a business by increasing the level of debt—the approach for which Wharton grads led by Michael Milken would become famous over the ensuing decade, unless debt receives favorable treatment under the tax code relative to equity.

If the last paragraph made no sense, don’t worry. The point is that we are in the process of unwinding a massive debt crisis that has laid bare a number of fundamental flaws with our financial system, inequities in our legal system, and corruption of our political system. And a central cause of the over-leveraging is that our tax code gives everyone incentives to “lever up.”

It is easy to point out the moral hypocrisy of demanding “homeowner responsibility” in a society that for years has celebrated business icons that eschew such practices. However, it will be harder to acknowledge how—much less garner the political will to change—the rules and practices that directly contributed to the financial crisis. Democrats will decry ending the tax deductibility of mortgage interest that appears to make homeownership more affordable. Even more difficult will be changes that provide balanced treatment of debt and equity. But if we are to build a more resilient economy and address the very real problems of over-leveraging, we have to consider the extent to which the crisis that emerged was a direct consequence of the incentives that the tax code created.

Tilting at windmills.

Senators Maria Cantwell (D-Wash) and John McCain (R-Ariz) have joined together to in a show of bipartisanship to promote what should be obvious: Our banking system is structurally flawed, and the changes instigated by the passage of the Financial Services Modernization Act of 1999 should be fundamentally reconsidered. Cantwell and McCain have proposed legislation to reverse the provisions of the 1999 Act that ended the Depression-era Glass Steagall Act rules that separated investment and commercial banking.

While the conventional wisdom is that Cantwell and McCain are tilting at windmills, Congress must consider three simple notions as it considers financial services reforms. First, that institutions playing with insured deposits should be limited in what they do with public money. Second, that institutional size is a threat, and therefore large banks should be broken up into smaller banks. Finally, that financial innovation and trading in financial derivatives must be evaluated and regulated with respect to risks and benefits.

Interestingly, the arguments against these notions have remained largely unproven. Paul Volker—one of the few remaining Wise Men on financial matters in Washington, with the death of Bill Seidman—has wryly argued that for all the talk, there has been no financial innovation of widespread value since the invention of the ATM. Financial derivatives—heralded by Alan Greenspan as tools that would transfer risk to those most able to afford it—have turned out, in the words of Financial Times editor Martin Wolf, to have transferred risk to those least able to understand it.

Financial derivatives, and in particular credit default swaps, were at the center of the collapse of AIG. A credit default swap (CDS) contract is in its essence an unregulated form of insurance against the risk of default on a bond, wherein the purchaser of the contract pays the counterparty—the insurer—an annual payment in exchange for protection in the event of a bond default.

The CDS market is a huge market, with the bulk of the insurance provided by our largest banks. For those banks providing insurance, there is no requirement for setting aside capital against the risks that are undertaken, and as such the annual payment on the contracts constitute a type nearly unlimited leverage.

One question that has to be asked is what societal purpose is served by CDS contracts. Consider the two possible scenarios, using a company we will call YRC, Inc. In the first scenario, an investor holds a portfolio of YRC bonds. The bonds were purchased at a dollar price of 100, and if all goes well, the investor will receive 100 cents on the dollar at the maturity of the bonds. In this case, the investor would like to insure against the risk of YRC going bankrupt, and purchases a CDS contract that will protect it from any losses in the bonds if YRC goes belly-up. While this may sound like a fine idea, it is a socially destructive proposition, as in the event of financial problems at YRC it places that investor in a position of preferring bankruptcy to a negotiated restructuring of the company that would preserve the company but require some sacrifice on the part of the bondholders, as traditionally happens in a workout. Therefore, instead of aligning the interests of stakeholders, it undermines the alignment of interests that is necessary for navigating difficult situations.

In the second scenario, traders that do not hold YRC bonds decide to speculate on YRC’s financial condition, and purchase CDS contracts on YRC bonds in the hope of selling those contracts later at a higher price—when the likelihood of a YRC default is perceived to have increased. (Remember, the value of the CDS contract rises as perceived default risk on the bond rises, as the contract pays out upon bankruptcy).

In this scenario, the CDS contracts do not serve a fundamental societal purpose, but rather are trading instruments, or—in the words of Michael Lewis—side bets. With approximately $60 trillion of CDS contracts outstanding—an amount that far outstrips the outstanding principal amount of corporate bonds—these side bets constitute the bulk of outstanding CDS contracts.

The case against allowing such CDS contracts was made early on in the financial crisis by Lehman Brothers CEO Richard Fuld, who argued that traders at Goldman Sachs and Bear Stearns exacerbated the collapse of Lehman by shorting the stock and going long (purchasing) the Lehman CDS contract, with each trade—pushing down the stock price and pushing up the CDS price (or spread)—creating a reinforcing cycle that confirmed the market perception that the collapse of Lehman was inevitable. As the collapse neared, the traders won on both trades.

And, of course, YRC is a Fortune 500 trucking company—YRC Worldwide—that almost went the way of Lehman Brothers. As reported yesterday in the Wall Street Journal, the company almost failed to win bondholder consent for a restructuring plan, as bondholders holding CDS contracts preferred to hold out for bankruptcy to trigger a payout on those contracts. The bondholders consented only after threats of public protests by the Teamsters against institutional fund managers led in an agreement. The fundamental point regarding the destructive role of the CDS contracts was made in the WSJ article, in a comment by Mike Green of Tenex Capital, an advisor to YRC:

“It’s fundamentally improper that people can force an insurer to pay a policy when the person insured has the right to destroy his property.”

Congress appears to be ready to accept fundamental principles that must be questioned. First, institution size creates an inherent risk to the system. Arguments that institutional interconnectedness means that smaller institutions also create systemic risk does nothing to respond to the suggestion that the risk is greater with larger institution size. The problems created by institutional size include financial risk, institutional complexity that will inhibit both regulatory oversight as well as effective resolution actions, and the political power that increases with size and will mitigate against enforcement action and legislative reform over time. The latter issue should be self-evident as we watch the growing stranglehold that Wall Street has over federal policy.

Second, there should be a connection reestablished between deposit insurance and institutional role and function. Bank lending is a core function in the real economy, and this function is not augmented by institutional size or trading prowess.

Third, there should be a connection reestablished between participation in the Federal Reserve System and institutional role and function. It is hard to imagine the continuing rational for Goldman Sachs and Morgan Stanley to continue as bank holding companies.

Fourth, while the rhetoric of efficient transfer of risk sounds like an admirable principle, attention should be given to the notion that risk is an important element of lending and credit decisions. Accordingly, products that appear to mitigate transactional risk—such as credit default swaps—may exacerbate systemic risk. If CDS contracts undermine the alignment of interests between bondholders and the company, those contracts should not be allowed.

Strictly business.

Just imagine how angry the American public would be if they knew the whole story.

For months, we have listened to the whining from Wall Street. U.S. banks are having a record year, and they want to be paid a lot of money. Billions and billions of dollars.

Public indignation is deep. After all, over the past year, we have watched as hundreds of billions of dollars of public money has been poured into bank balance sheets. We have—we are assured—taken steps that were necessary to bring our financial system back from the brink. We may not have liked it, but we had no choice.

But now that we have stemmed the tide, now that the Great Panic of 2008 has abated, we have been forced to watch these same institutions moan about how bad they have it. Citigroup—the one that received $45 billion in taxpayer funds, plus a couple hundred billion extra in public underwriting of bad assets—wants to wipe the slate clean by paying the money back and calling it even. So they can pay themselves billions of dollars in bonuses.

Wells Fargo, the arriviste among the financial elite, is complaining about the competitive disadvantages that they face as a consequence of federal compensation constraints. Constraints that prevent them from paying themselves billions of dollars in bonuses.

Goldman Sachs—caught in a lie by a federal Inspector General who refuted Goldman’s sanctimonious claim that even if the world had collapsed, they would have been fine—is trying to fend off accusations of unwarranted hubris and greed—which reached a pinnacle when they announced plans to pay themselves $21 billion in bonuses—by announcing that their senior partners will take their share of the billions in stock.

But what if the public understood the whole story? How is it that the banks are now having one of their most profitable years ever? Given that there is not much lending going on, and that the newly increased credit card fees have only just begun to flow into bank coffers, where is all that money coming from?

It is coming from proprietary trading. “Prop trading” is the kind of betting with the bank balance sheet that was made illegal for commercial banks back during the Great Depression, when the FDIC and deposit insurance was created. The price of having the federal government guarantee bank deposits was separating the lending and depositary functions of commercial banking from trading and risk activities of investment banking. Thus, in 1935, the commercial bank J.P. Morgan & Company was separated from the investment firm Morgan Stanley.

But this separation was undone in 1999 to facilitate the creation of the megabanks that we have today. However, while the Financial Services Modernization Act of 1999 ended the separation of activities, FDIC deposit insurance remained in place. And this year, the elite of the financial world—JP, Citi, Wells, BofA, Goldman and Morgan Stanley—have finally emerged for what they are: Gigantic hedge funds backed up by the full faith and credit of the United States of America. Wall Street bankers making big bets with our money, content in the knowledge that if they win their bets, they will pocket the cash. And if they lose, we will all pick up the mess.

But it really does get better. So exactly how did they make all that money this year?

Well, the trade of the moment has been the U.S. dollar carry trade. A foreign currency carry trade is simple in concept. Borrow money where interest rates are low, and invest where interest rates are high. Or simply stated: Short the U.S. dollar. Buy the currency of a country where interest rates are higher. The beauty part is that by continually assuring the world that U.S. interest rates will remain near zero for the foreseeable future, the Federal Reserve has assured traders that they can keep the trade in place for some time.

So the Wall Street elite, just months removed from their near-death experience, are now making a fortune shorting the U.S. dollar. One year ago, faced with the greatest financial panic in generations, the American people swallowed hard and bailed out the banks. Today, the banks have moved on, and are tearing down the currency of the nation that saved them.

But it is nothing personal. It is strictly business.

And the carry trade will work out fine. Until it doesn’t. Then the trade will unwind quickly, and those who do not get out in time will get hurt badly.

But the banks are not worried. If the unwinding of what NYU economist Nouriel Roubini has labeled “the mother of all carry trades” takes a bank or two down with it, everything will be all right. Because the bank deposits are still insured, and we now know to an absolute certainty that if one of the elite institutions fails, we will bail it out. Again.

It is time that we come to grips with the depravity of the current situation, and potential damage that continuing down this path may yet do to the financial system and to our economy.

Our commercial banks are not, and should not be, hedge funds. U.S. dollar carry trades and writing credit default swaps are not core commercial banking functions. They are not necessary to the efficient functioning of our financial system.

The U.S. dollar carry trade is destructive to our currency, and is creating asset bubbles across the world, as leverage is transferred from our markets into others. For their part, credit default swaps serve no useful purpose in proportion to the systemic risks they create.

It is time to go back to basics. Commercial banks provide essential services in our economy. They enable the Fed to control the distribution and pricing of capital to the productive sectors of the economy. They provide secure depositary and asset management services.

Unfortunately, pending Congressional legislation has done nothing to address the central risks that the new financial landscape presents to our economy. Rather than reinstitute restrictions on bank activities or restrain institution size, Congress is looking to regulatory solutions that hold little promise of success when the next crisis emerges. And rather than recognizing the problem of moral hazard, this week Congress took the first step of embracing it in statute.

This year, Wall Street has shown its true colors, but the public has yet to understand the depth of the betrayal. It is not the continuing absence of lending, or jacking up credit card fees, or hiking consumer interest rates, or even the constant refrain of complaints about limitations on executive compensation. No, the greatest betrayal is that with the American economy as weak as it has been in years, with the dollar weakness threatening to unravel the international commitment to the role of the dollar as the reserve currency, Wall Street has shown no shame about attacking the currency of the nation that came to its aid.

If this is the path that the elite commercial banks have chosen, if they have been fully seduced by the lucre of trading, Congress needs to revisit the fundamental rules of the game, and revisit the central rationale for deposit insurance and the structure of the commercial banking system.

Bankers leaving town?

So what was this image from the New York Times this week?

Healthcare lobbyists coming crossing the Potomac for a meeting on the Hill?

Goldman Sachs bankers heading to the Hamptons to spend their bonus checks?

No, it turns out it was a group of uninvited guests crossing the reflecting pool on their way to a reception on the White House lawn. You can see Tareq Salahi, standing fourth from the left, in his formal hoodie.

Hell hath no fury.

Just when I had convinced myself that behind the curtain, hidden from public view, Barack Obama had a plan—for Afghanistan, for the Middle East, for Iran, for Russia, for education, for energy, for financial regulation, for health care… or at least for some of them—I saw Obama Campaign Manager David Plouffe pitching his book on The Daily Show.

Plouffe was in full campaign mode, selling the successes of the first year of the Obama presidency, as well as his new book—The Audacity of Winning. Grinning and determined, he spoke with an evangelical fervor.

The Audacity of Winning. Coming from the Obama campaign manager, the title itself is at best an ironic commentary on hope as a political strategy, but at worst the title bluntly mocks the electorate that invested their hopes and dreams in the Obama campaign.

Electoral losses this month in New Jersey and Virginia provided a grim reminder to Plouffe and the Democrats of the fragility of their electoral victories of just one year ago. If 2008 was an election year when young and independent voters set their cynicism aside and embraced the hope that a different tenor might come to national politics, 2009 saw young voters abandon politics and independent voters abandon the hope briefly flickered a year earlier.

The voters in New Jersey and Virginia did not get it wrong. They were not impatient. They were not premature in their assessment. By all accounts, the hope Obama offered—the belief that Washington can shift to a new trajectory and engage the real and deep challenges that threaten our nation’s future—is, if not dead, on life support. The past year has been one of deep and unremitting partisan rancor. A year has been lost with nothing to show for it but growing evidence that national politics is indeed a rigged game.

The easy response—and we have heard it for months—is that the Republicans are responsible for the intransigence in Washington. After all, it takes two to tango. But at a defining moment in the healthcare debate, John Boehner threw down the gauntlet. Healthcare reform, he stated, would be Obama’s Waterloo. Defeat healthcare legislation and you defeat Obama. Game on.

But at that moment, President Obama failed to engage the overarching issue of politics and partisanship, and instead the healthcare debate devolved into little more than another Washington food fight. Obama abdicated his commitment to reframe political debate and ceded the field to Congressional leaders with no interest or inclination to keep hope alive.

Harry Reid and Nancy Pelosi had no interest in Obama’s pledge to young and independent voters to change the tenor of politics in Washington, because it is their politics. For Reid and Pelosi, the political price of setting aside the interests of the SEIU and the Trial Lawyers and others in favor of a bi-partisan deal was too high to pay. Instead of reaching across the aisle, Democratic leaders preferred instead to mute industry opposition to healthcare legislation by bringing the industry heavyweights—big pharma, the hospitals association and ultimately the insurance companies—inside the tent. After all, that would only cost money.

The result is legislation that makes a mockery of sensible healthcare reform. It is expensive. It continues deeply entrenched incentives to overspending. Its financing is dishonest. And it protects those industry interests—promising expanding markets and limited cost controls—along with the interests of unions and lawyers heavily invested in the status quo, proving once again the power of lobbyists and contributors to take any major piece of legislation and manipulate it to their benefit.

So was it all just words? One year in, where is the evidence that the campaign that was designed to win by building on the hopes and dreams of the electorate was something more than just tactics? Where is the courage to take the long view? Where is the courage to take on your friends and occasionally accommodate your adversaries? And where is the courage to take on the contributors and lobbyists that neuter and manipulate one legislative initiative after another.

Have we seen any of that?

This year, we have watched events unmatched perhaps since the Gilded Age a century ago, as bankers have dipped their hands deeply into our pockets and those of our children to protect and enrich themselves, and nothing but whimpers from our elected representatives who tell us that this is the way it has to be—even as they take some of that very same money for their own campaigns.

But it is not just the bankers. The pharmaceuticals and insurance industries will dig deeper into the federal trough as subsidized drugs and insurance mandates are enacted. Energy companies and traders are eagerly ogling the new carbon trading bonanza that looms under the cover of cap and trade legislation. And out in the heartland, Monsanto is rewriting the rules of the farm economy under the protection of intellectual property laws that give it greater and greater control over the agricultural economy and farm incomes.

November’s results were not haphazard. Voters have not forgotten or forgiven the Republican sins and profligacy of the Bush years. But that was then and this is now, and Dick Cheney is not on the ballot. But 2010 looms large, and 2012 not long after that, and for all the mocking of the Teaparties, Democrats are skating on thin ice, and there is real anger out there, and disgust and disappointment.

In all likelihood there will be no healthcare bill this year, and that may well be for the better. The Democrat strategy of relying on a narrow, partisan margin was undone in the House when an anti-abortion Democrats upended the political calculus and may leave Democrats to deal with their own internal battles. Then, perhaps, David Plouffe and his associates will look in the mirror. And perhaps they will not like what they see. Barack Obama is not doing well, despite what Plouffe insisted to an incredulous Jon Stewart.

If Barack Obama wants to get reelected, and win votes one more time from the young and independent voters who put him over the top, perhaps it is time he stop playing politics and govern like a president who is willing to lose. Nancy Pelosi and Harry Reid are not doing Obama any favors, and will not win a single young or independent voter to his side next time. Unless he redeems his campaign slogans about changing our politics and demonstrates the courage to do what he promised to do the first time around, Obama will lose anyway, and have nothing to show for it but words.

What are they thinking?

With the announcements of record Wall Street bonus pools, and rising credit card fees, it is time to sit back and see where we go from here.

In the wake of the near collapse of the US financial sector one year ago, Hank Paulson and Ben Bernanke took extraordinary measures to avert collapse. Turning caution to the wind, they arranged shotgun mergers, decided who would live and who would die, and brought the word trillions into our every day vocabulary. By the time they were done, the landscape of American banking has been transformed. Today, the six banking organizations that received $160 billion between— JP Morgan, Bank of America, Citigroup and Wells Fargo, and the former investment banks Goldman Sachs and Morgan Stanley—are now looking to a future in which they can dominate the financial services landscape.

But perhaps the term financial services is misleading in this context. After all, as bank earnings reports were rolled out for the most recent quarter, and news headlines announced the record bonus pools that the banks were preparing to pay, it became clear that these earnings derived from trading activities, rather than traditional commercial bank lending activities. Before our eyes—and with the full support of the Federal Reserve and the US Treasury—the transformation that we have witnessed is not of the conversion of major investment banks such as Goldman Sachs and Morgan Stanley into commercial banks, but rather of each of these firms into government guaranteed hedge funds.

I readily concede that I am using the term hedge fund loosely. After all, hedge fund is a generic term for a relatively unregulated investment vehicle, that is permitted to invest in a wide range of unregulated derivatives and other investments, and whose returns are dedicated to a limited universe of investors. And certainly, the practices of JP Morgan or Goldman Sachs, who undertake massive proprietary trading activities, run huge derivatives books, and dedicate the preponderance of their earnings to senior employees, should not be lumped into the same category.

But on the other hand, if it walks like a duck…

Today, the commercial banking world is sharply divided. With over eight thousand commercial banks and savings institutions, these six firms hold less than 50% market share. Therefore, by traditional measures of market concentration, they are far from monopolistic. But as individual firms, their size dwarfs their cohorts, even considering that two of them, Goldman and Morgan Stanley are not traditional depository institutions. Together, the six boast total deposits of $2.7 trillion, or an average of $444.8 billion per firm. This compares with an average of $107.2 billion for the next six largest banks, and $76.0 billion for the following six. The fiftieth largest—well within the top 1% among all banks—Associated Bank of Wisconsin, has deposits of $16.4 billion.

At the same time, as JP Morgan and its brethren have increasingly concentrated on derivatives trading, loan securitization, securities underwriting and proprietary trading—and as these activities have contributed disproportionately to profitability—the share of bank assets dedicated to traditional commercial bank lending—the type that is most directly linked to the local economy in towns across the nation—has similarly decreased. Therefore, it is not a stretch to suggest that even as the Federal Reserve and Treasury have concentrated for the past year on addressing the risks to the financial system that largely emanated from the largest firms, these firms have at the same time migrated the farthest from the tradition public mission of the commercial banking industry.

It may be hard in the face of the drumbeat of stories about the banks and their problems and their bonuses to remember that commercial banking is an industry with a specific public mission: To take deposits and make loans. It was in the wake of the Great Depression, that the Glass-Steagall Act was passed to restore confidence in the commercial banking industry. Glass-Steagall forced the separation of commercial banking (lending) and investment banking (trading, underwriting), and created the FDIC to insure the deposits of commercial banks.

Beginning around 1980, the banking industry began a steady assault on Glass-Steagall, as investment banking firms sought access to the large pools of commercial bank deposits and commercial banks sought to expand into trading activities that would allow each type of firm larger profit and bonus opportunities. These efforts finally culminated in the Financial Services Modernization Act of 1999, which finally ended the Glass-Steagall restrictions and allowed the complete merger of investment and commercial banking organizations. However, the 1999 Act left FDIC insurance in place, resulting in the hybrid creature that emerged, able to attract government-insured deposits, and utilize those deposits across a range of lending, securities trading, and newly emerging derivatives trading activities.

Today, the financial policy brain trust of Ben Bernanke, Larry Summers and Tim Geithner have rejected calls for structural reforms to the banking system and to reinstate the Glass-Steagall restrictions. Despite the experience of the past several years, culminating in the financial crisis one year ago, they are suggesting that the concentration of power represented by these six firms is acceptable and desirable, and reform efforts should focus instead on the creation of a single systemic risk regulator to oversee those institutions deemed too big to fail.

Standing alone against Bernanke, Summers and Geithner within the Obama administration is former Fed chairman Paul Volcker. Volcker continues to call for the reinstatement of the Glass-Steagall restrictions, and recognizes the imperative of maintaining the link between deposit insurance and commercial bank lending.

It is hard to imagine what Bernanke, Summers and Geithner are thinking, and how they can look at the devastating experience of the past two years, and not conclude that something is fundamentally wrong. Financial modernization did little to help those thousands of commercial banks who have stuck to their knitting, and who now have been sorely disadvantaged by the federal bailouts of their large competitors. Proponents of financial deregulation argue that Volcker and other advocates for turning back the clock are recalcitrant Luddites, yet they have been hard pressed to demonstrate how the creation of the new class of hybrid commercial-investment banks and unregulated derivatives trading have added value to the economy.

Can Bernanke, Summers and Geithner seriously believe that a systemic risk regulator can control the risks that are embodied in these massive firms? Recent history suggests that the risks entailed in the trading strategies, quantitative models, complex derivatives and contract risks were never fully understood by the risk managers, bank CEOs and directors of their own organizations. Bank regulators were captive of the banks themselves as they sought to understand the information that was provided to them. Capital requirements other traditional tools for containing risk proved to be of only marginal value in the face of derivatives with nearly unlimited leverage, and collateralization requirements buried deep in unregistered and unregulated contracts.

Furthermore, political influence over regulators is a fact of life in Washington, and over time will undermine whatever independent structure these three wise men might have in mind. One need only point to Summers’ own success in 1998 in silencing Brooklsey Born—the head of the independent Commodity Futures Trading Commission—when she argued the inconvenient truth of the growing systemic risks presented by the unregulated derivatives market, at a time when Summers and the Clinton administration were arguing the merits of financial deregulation.

It is mind boggling that we can continue down this road. Paul Volcker must be applauded and supported for his unflagging efforts to bring attention to this issue. He is a wise man standing against smart men. And he is right.

Heads I win. Tails you lose.

Thirty years ago, Salomon Brothers and Goldman Sachs were two of the “bulge bracket” underwriting firms that dominated Wall Street. Both firms with partnerships with trading cultures that characterized their organizations. It was a time when Wall Street firms were looking far and wide for ways to increase their access to capital. Trading firms make money by making bets. More capital meant bigger bets. Bigger bets meant more money.

In 1980, in pursuit of a bigger balance sheet, Salomon CEO John Gutfreund negotiated the sale of his firm to Philipp Brothers, then the largest commodity trading firm in the world. The sale was not without controversy. Within Salomon, bond traders—led by Salomon family member William Salomon—opposed the sale. How, they asked, would traders be paid what was their due in the event the new firm lost money in other far-flung commodity businesses? As partners, they had a reason to be concerned by over-expansion into business lines that they neither understood nor controlled. They did not yet appreciate the benefits of trading with Other People’s Money.

But the sale of Salomon went through—John Gutfreund pocketed his $30 million bonus—and over the next few years, the new firm, Phibro-Salomon was acquired by Travelers Insurance. Travelers, in turn, was acquired by Citibank, to create the financial supermarket that was supposed to give American banking a global dominance to match the well-capitalized Asian and European counterparts.

The Salomon story was part of the evolution of Wall Street over the past thirty years, as the storied Wall Street firms succumbed to the lure of capital to give up their partnership status and merge into commercial banks and to become publicly traded corporations. And while the Wall Street investment banks did achieve their goals of increasing their access to capital—and ultimately won back their access to the massive pools of depositor money that they lost with the passage of the Glass-Steagall Act in 1933—the cost to the rest of us has been significant.

Where, after all, was William Salomon when Lehman Brothers decided to bet the ranch on collateralized mortgage securities that would ultimately bankrupt the firm. Where was William Salomon when Bear Stearns increased its leverage to thirty times, based on financial models that few in the firm really understood. And where was William Salomon when Joseph Cassano, the head of AIG Financial Products took the insurance giant headlong into the credit default swap business.

There was a moment when Cassano made his case to the AIG Board of Directors. The credit default swap contracts that AIGFP was providing to financial giants such as Goldman Sachs had no risk to AIGFP, argued Cassano, and therefore all of the annual receipts paid to AIGFP under those credit default swap contracts could be taken as current income—and used to pay very large bonuses—rather than held as reserves against future risk. CDS contracts are essentially insurance contracts provided to guarantee against defaults on corporate bonds, but Cassano argued that the bonds were so strong that there was no credit risk, and therefore the money paid to AIGFP was essentially free money.

But there was no William Salomon on the AIG Board of Directors. Unlike the old Wall Street partnerships, directors of corporations are largely insulated from the financial consequences of their decisions. Had AIG been a partnership like the old Salomon Brothers, a William Salomon would likely have asked the logical question of Joseph Cassano:

Goldman Sachs is paying us tens of millions of dollars a year, but you are telling us there is zero risk. One of us is wrong. This is a game of poker, and there is an idiot at the table. And you are telling me that Goldman Sachs is the idiot? I don’t think so. I think we are the idiots at this table. If Goldman Sachs is paying us tens of millions of dollars a year, we are taking risk, and we sure better know what that risk is, because we are betting our future on it.

But, of course, AIG was not a partnership, and the rest is history.

But the Phibro-Salomon story had one chapter left. This summer, Citibank—the failed financial supermarket that is now a ward of the State—sought approval from the US Treasury to pay bonuses in order to keep a group of highly profitable traders from leaving the bank. The bonuses—the most famous being the $100 million for Andrew Hall—were to be for traders in its Phibro commodity trading subsidiary.

William Salomon saw the writing on the wall. The partnership trading culture that was critical to Salomon Brothers success—a culture that combined incentives and accountability—would not survive an evolution into a corporate model. What we have learned is that the incentives to make big bets and take big risks has survived, but without the accountability. Andrew Hall made $2 billion for Citigroup placing energy bets, and was due to be paid $100 million. But what of those whose bets lost Citigroup $2 billion? They have not even lost their jobs.

The trading firms gained the access to the capital that they sought in the 1980s, and they found the joy of playing with Other People’s Money. And for twenty years, the game has gone on.

Heads I win, tails you lose. Or in David Einhorn's more elegant formulation, Private Profits, Socialized Risk.

Today, the US Treasury and the Fed are trying to hold the pieces together. AIG. Citi. Bank of America. GMAC. Fannie Mae. CIT Financial. But why? Where is the evidence that large financial corporations are more efficient at allocating capital than smaller banks? Surely, they have not been sound custodians of depositor funds or of the public trust. Neither have they proven they can deliver more predictable returns on shareholder equity than smaller, more nimble financial institutions, who themselves are increasingly disadvantaged by each bailout. Whose interest has conglomeration served but that of insiders seeking greater compensation with less risk?

One central question to all of this is whether the fundamental corporate model is not central to the problem. Today, absent prosecution for fraud, the CEOs and directors of all of these failed firms will walk away with much of their wealth intact, insulated from the consequences of the decisions they made. For years now, they have been playing with our money.

New regulatory regimes will not be adequate to control this systemic risk. Controlling banker compensation might have a populist appeal, but no one should imagine it constitutes systemic reform. Regulatory bureaucracies cannot control systemic risk in massive financial corporations, because the systemic risk is the massive financial corporation.

Thirty years ago. William Salomon was suggesting a simple truth: Sound decision-making, incentives and accountability require that those who are making decisions and placing bets have their own capital at risk.

They're back.

It is not clear how foreign policy strategy is being set in the Obama administration. But the execution has the appearances of a well-considered and orchestrated dance. And when the music stopped this week, standing together on the stage, united in common purpose, were the Big Four of wars gone by—the U.S., Great Britain, France and Russia.

The surprise this week was not the disclosure of a second, secret Iranian uranium enrichment site. Nor the ensuing condemnation and threats of collective action. What was surprising was the distinct voices that were heard. It was French President Sarkozy and British Prime Minister Brown whose declarations were strongest, with Russian President Medvedev joining shortly thereafter. Finally, an American President was able to speak a bit more softly—and by the demonstration of common purpose suggest a bit more stick on behalf of the international community.

For the first time in a while, Iranian President Ahmadinejad seemed caught off guard. His normal swagger was muted, perhaps with the realization that his days of manipulating Russia against the West have ended. More perhaps with cold fear that it was he that was manipulated by Russia, and that his miscalculations may weaken him considerably in his battles to retain power at home.

Perhaps American foreign policy is coalescing around some basic realities of the world. There are real threats out there, and we do not have the capacity to fight them alone. The unilateralism of the past decade was defined less by our determination to go it alone into war than by the belief that we could fight all battles and recast all nations in our own image. Almost without exception—perhaps China, as our lead banker, was the exception—we demanded fealty to our image of democratic progress from all of our antagonists.

But when you are fighting on all fronts, your ability to build enduring coalitions on any one of them is diminished. Russian Foreign Minister Sergey Lavrov has long articulated this view. Yes, as he has suggested for the better part of a decade, Russia and the United States have more issues that unite them than divide them. And yes, when presented with the top five issues of concern facing the U.S. in the international arena—perhaps including among them Afghanistan, Iran, Iraq, Islamic fundamentalism, drug trafficking, nuclear proliferation—Russia was a potentially valuable ally in all of them.

But the problem was that Russia had their own top five list, and Lavrov has long complained that if there was to be a partnership, it could not be one-sided. Russia’s concerns had to matter as well. Yes, Russia was prepared to be an ally in the Global War on Terror, but the Russian list had to be on the table. And they had a different list. Chechnya. Georgia. NATO. Missile defense. Encirclement. Status.

Russia’s list was fundamental to the continued integrity of the Russian nation. Russians may be paranoid, but the simple fact is that people are out to get them. U.S. official policy has been and continues to be one of encirclement, while many prominent voices go well beyond that—most notably Carter-era National Security Advisor Zbigniew Brzezinski—and argue that U.S. policy should be the dismemberment of the Russian state.

The dismemberment of the Russian state is not so far fetched. Before the fall of the Soviet empire, the Soviet Union claimed a population of nearly 300 million people. Today, Russia is a nation of just over 140 million, and it is shrinking rapidly. With low birth rates, high infant mortality, short life expectancy, and minimal immigration, by mid-century Russia’s population is projected to decline by more than 20%, to approximately 110 million.

The prospect of Chechen independence—and the demands for independence that would likely ensue from other minority groups should Chechnya succeed—further threatened the future of Russia. This fear explained in large measure Russia’s vociferous objection to NATO’s declaration of independence for Kosovo, and Russia’s steadfast claim that the international community can only grant nationhood through the legal powers granted to the United Nations.

Russia’s intransigence in dealings with the United States is rooted in its defense of national self-interest. For several years, Putin and Medvedev have been intent in their actions in international affairs—from supporting Iran to instigating the Ukrainian natural gas crisis—to force the United States to deal with them and their issues.

U.S. actions over the past nine months indicate that U.S. policy has evolved, and that we may finally be paying attention. The nuance is the distinction between what we say and what we do. The Bush administration talked about partnership and an alignment of interests, but took every opportunity to dismiss Russian concerns on the ground.

Now, the process seems to have been inverted. Vice President Biden—an early and vociferous backer of the Kosovo action that was so objectionable to Russia—has emerged as the voice of American support for the process of democratization and continued support for Ukraine and Georgia.

But Putin and Medvedev are realists, less moved by words than action. At the same time as Biden was talking the talk, the administration was walking a different path. During the early months of the administration, Russia threatened U.S. resupply routes into Afghanistan, and U.S. access to a key air base in Kyrgyzstan. One can imagine at that moment that the administration looked down the road at the real threats that loomed, and took a hard look at the facts on the ground. One can imagine that at that moment, they weighed the real impact on the ability of the U.S. to pursue its strategic goals and determined that Russia was—as Lavrov long suggested—better to have as an ally than face as an obstacle and an adversary.

It really was never a question. After all, for all the rhetoric—whether from Biden, Bush or Cheney—about U.S. support for Georgia or a common defense of Ukraine—neither we nor our European allies have had or likely would ever have the willingness to go to war with Russia in their Near Abroad. Our actions may have been designed to tweak them and continue the great game wherever possible—but never with the intention of real escalation.

One question this week has been how long ago did the U.S. learn of Iran’s second enrichment facility. Was it many months ago, and were the strategic moves to bring ourselves closer to an effective alliance with Russia—such as shifting our policy on strategic missile defense in Poland—in preparation for this next phase of the confrontation with the Iranian regime? Or was it simply fortuitous that the steps had been taken, and the groundwork had been laid that would allow Russia and the U.S. to stand together against a common threat?

Perhaps it doesn’t matter. But it does matter that our foreign policy may be built less on rhetoric, and more on our capacity to build effective alliances against real, and common, threats.

The grand illusion.

Most of us have lived through, or will live through, the painful years of watching our parents’ health decline. Behind the ugly partisan rancor of the town halls and the healthcare debates is the simple truth of that common experience.

Whether our parents have cancer or Alzheimer’s or dementia, or are simply dying of old age, we watch as their bodies become frail and their minds fade. These are our parents, once our providers and protectors, sapped of the energy and vitality that we for so long took for granted.

The medical bills. The residential communities. The in-home care. The drugs. They drain our parents’ savings and ultimately strain our family resources. We may have thought that Medicare would suffice, until one day a bill arrives from a rehab facility or a hospital, or a new drug is prescribed. From that day, the emotional pain of end of life care is compounded by the financial strains that bleed outward, undermining sibling comity, and threatening the resources set aside for kids' education, for family vacations, or for retirement.

There is no easy solution to this. We are all living longer, and the advances of technology and science now offer us the ability to fend off diseases that years ago barely existed—largely because we used to die younger and never contracted them. As a close friend put it—a Jesuit priest with a way with words—the longer any machine works, the more the maintenance costs go up.

People like to compare Medicare with Social Security, but the challenges facing Social Security are manageable by comparison. When Franklin Roosevelt created Social Security in 1935, it was a stroke of political—if not financial—genius. Social Security offered retirement security at age 65 to American workers whose average mortality at the time was 59. Therefore, it offered an entitlement to people who—on average—would be dead before they were eligible.

But even with longer lifespans, Social Security is a controllable and predictable program. The mortality curve shifts slowly and we can—at the end of the day—choose to change the parameters of the program that affect cost: the retirement age, the cost of living adjustments, the basis of pay, and the basis of taxation.

Healthcare has no such certainties. Unlike information technology, which offers greater and greater power at less and less cost, investments in healthcare technology and pharmacology that increase longevity and cure rare diseases may be moral victories for humanity but only exacerbate the financial strain on society and families. This is the dilemma of healthcare: The better we get at it, the faster the costs will escalate.

Dr. Andrew Weil, and many others, have pointed out that the solution to our healthcare crisis lies in how we choose to live our lives, and ultimately how we choose to die. In a similar vein, Atul Gawande suggests that the solutions to the cost and quality of healthcare lie in large part in the choices and conduct of the providers themselves. If physicians turn the practice of healthcare into an exercise in profit maximization, they will do better as individuals, but their patients and the system itself will suffer.

But as in most areas of life, good choices and ethical practices cannot be compelled or overseen by government. Regulatory regimes can enforce measurable practices—such as the concentration of melamine in dog food, or rat hairs in cola. But the federal government has no capacity to regulate the quality of collaboration among and conduct of individual medical practitioners.

The person who cried out at one town hall meeting to not let the government get its hands on Medicare has been duly castigated for the irony and ignorance of the remark. But at a deeper level, the remark encapsulates the problem we face.

Medicare is a government program. While many proponents of single payer healthcare point to Medicare as a model, it is a program that pays providers far less than the cost of services, and therefore results in substantial cost-shifting that exacerbates the medical insurance costs paid across the rest of society.

But Medicare is the lifeline of the elderly, and of the families of the elderly. That person may want to believe that Medicare exists above and apart from government, but of course it does not. Each Medicare patient—and their families—are relying on Other People's Money for their care, but they feel entitled to have it with few strings attached nonetheless. But the truth is that it is one more tax-funded program. Just like the stimulus money. Just like the wars. Just like everything else.

Medicare is our cushion. It insulates us from painful decisions that otherwise would be ours. But it is an illusion.

The fear and rage evinced by the person at the town hall presages the pain to come as that illusion is laid bare. If Medicare is Other People’s Money, then those other people are surely entitled to set the rules. But even worse is the realization of what would happen if it were not there. Without Medicare, we would have to be paying those costs for our parents’ end of life care ourselves.

Based on Dartmouth research data, per patient Medicare costs for the last two years of life range from approximately $50,000 to $100,000 across the country. And this is just the part paid by Medicare, which as we all learn is only part of the puzzle. These costs stand in stark contrast to the Federal Reserve data on household finances, that indicate that the median family net worth has fallen from $120,000 in 2007 to $99,000 as of October of last year. It is not a stretch, therefore, to suggest that we are spending with other people's money far more than we could spend if it was our own.

The person who cried out at the town meeting may have been voicing a fear we all hold deep inside. What if it is all an illusion? What if Medicare is not an impenetrable wall that protects us from those decisions that are most painful?

For many years we have accepted the illusion and comfort that Medicare offers. Spending Other People's Money has changed the decisions that we make, and our assumptions and expectations about the care our loved ones receive. We now clamor to rest assured that they will receive all of the care a physician might recommend—with little consideration of the cost to the system of which we are a part.

But federal government resources are no more than the pooling of our collective family resources. In the end, we will return to the questions that for many years we have been able to avoid. How would we choose what steps to take—and what procedures to forego—if it was our limited family resources that would be drained away by each of our decisions? And what choices would our parents make if they understood the magnitude of the impact of each decision on their children and grandchildren?

The question of how we are going to spend scarce resources is with us. We confront it around the kitchen table, and it is time that we accept that it is the central question of healthcare challenge. It is the question that will consume our politics in the years ahead, because the years of free money and free choices have come to an end.

The specter.

A specter is haunting America—the specter of debt.

Birthed in the dying years of the Cold War, the American polity lost its way. Public policy, as encapsulated in the Federal budget, was always about making hard choices among competing priorities and constituencies. The notion that resources were limited was a critical discipline, and the ability to navigate the process of allocating resources was the stuff of which Congressional leaders were made. Throwing arrows is easy. Building a budget in a democracy is hard stuff.

Traditionally, Democrats were the party that believed in spending more—and taxing more, while Republicans once were the grownups of the American political system, sternly cautioning against the political urges toward deficit spending and international adventurism.

But the world changed over the last quarter century. Faced with the realities of survival in a competitive world economy—and the exigencies of political fundraising—Democrats brought corporate America inside their tent and muted their hostility to the private sector. For their part, since George H.W. Bush uttered the words Voodoo Economics in his failed efforts to derail the Reagan Revolution, the unholy alliance of tax cutting Republicans and big spending Republicans marked the death knell of that party’s claim to the moral high ground in matters of fiscal propriety, while Neo-conservatives brought to the GOP an evangelical fervor to change the world that was once a Democratic credo.

The numbers are stark. Over the past twenty-five years, Democrats and Republicans alike forswore their allegiance to the central responsibility of elected legislators to make choices, balance priorities and pass budgets with integrity. Perhaps they were not to blame, after all East Asian countries led by China continued to fund our deficits by buying our bonds and offered cheap money as an alternative to the more painful options of cutting spending or raising revenues. These foreign purchases of our debt were not an act of faith in the almighty dollar as much as a simple expedient of the export-driven model of economic development that has become the norm across the world.

Over the past quarter century, China, the Asian Tigers of South Korea, Hong Kong, Taiwan and Singapore, and more recent converts such as Vietnam, pursued a successful economic development strategy built on selling manufactured goods into the U.S. consumer market. As these countries took in massive amounts of dollars, they faced two options: They could recycle those dollars back into the U.S. or watch the value of the dollar decline and their own currencies rise. There really was no choice, as the export-driven development model that was lifting the Asian nations out of poverty required that their currencies not rise in value relative to the dollar, so that their low-cost goods remained attractive in the U.S. market. Accordingly, U.S. Treasury securities became the preferred investment for Asian trade-surplus dollars, and our financial markets become flush with that kept long-term interest rates low.

What was lost in the orgy of low cost debt that ultimately engendered the securitization boom in credit card and home equity lending—and enabled growing deficit spending at the federal level—was that the American economy, like the American household, was living on a chimera of growth that belied the underlying damage that was being done to our economy.

As the table here illustrates, over the past twenty-five years, our economic growth has increasingly been driven by imported capital. In the same way that the average American household saw no real income growth during the past decade, but increased their spending through borrowing, so too the national GDP was flat, but for the growth realized through externally borrowed dollars.

Today, we are faced with stark choices. But if the healthcare debate is any measure, it is evident that our political establishment has lost much of its capacity for honest debate and real decision-making. Twenty-five years of free money and no discipline has made a mockery of the federal budget process, as we now are accustomed to avoiding choices and accepting the false notion that there are obligations that are non-negotiable.

For two decades now, we have become accustomed to justifying any manner of spending, from education to tax cuts, as an investment in our future. This rationale is a direct outgrowth of the availability of low-cost capital that has itself undermined the ability to weigh and make choices. This has undermined as well the notion of a national consensus on foreign policy, as we now go to war with little regard for the financial cost. With no fiscal consequences and no universal service, war has become a sideshow of American political life.

Today, the generation-old paradigm may well be shifting. It is with no small amount of irony that even as our Republican and Democratic representatives have lost anything but a rhetorical commitment to the traditions of responsible budget policy, it is the Chinese Communist Party—the largest holder of our debt and the most at risk for the consequences of a devalued dollar—that is becoming insistent that we pay attention to our cascading fiscal mess.

Surely, as the source of the free capital to which we have become addicted, the Chinese have little more standing to scold us than the crack dealer who declares to the destitute customer that it is time to stop. The true dividend to the Chinese is not the return on their investments, but rather the economic growth that has lifted the livelihood of hundreds of millions of Chinese out of poverty over the past two decades—paid for graciously by the American factory workers whose livelihoods were lost.

But ironies aside, we have to listen. A new economic model could be beneficial to us—over the longer-term. Increased domestic savings and a declining dollar in the short-term could make overseas manufacturing less competitive, and allow America to begin building things again. But the near-term pain will continue for some time, as the process of paying down the debts that we have accumulated will take years. And we have become a very impatient nation.

The problem, however, is not our ability to listen. The problem is that after twenty-five years, the very skills required to build a federal budget that faces up to real facts, weighs priorities and makes real choices, may be gone from our political DNA. The Death Panel debate, while fraudulent on its face, offered the first inkling of the challenges to come when capital becomes scarce once again, and we are confronted with competing priorities for limited budget dollars.

The truth is that there is a Death Panel, that is charged to sit and decide how limited resources should be allocated. To weigh the needs of the elderly against the needs of the young, the costs of healthcare against the costs of war. But it is not the faceless panel of bureaucrats of Sarah Palin's imagination. It is Congress. It is time they get used to it.

The greening of Goldman Sachs.

The US economic turnaround may not be complete. The AIG turnaround may not be complete. The GM turnaround may not be complete. But Goldman Sachs is back.

“A Swift Return to Lofty Profits” proclaimed in the New York Times, as Goldman Sachs reported that it earned $3.44 billion in the second quarter, and is preparing its largest bonus payout in history. And without doubt, those lofty bonuses are well earned.

Consider how effectively Goldman has navigated the roiling waters of the global financial crisis. First, Goldman received a $10 billion injection of TARP funds to help it weather the market turmoil. Next, it swiftly converted itself into a commercial bank and member of the Federal Reserve system, gaining access to low or zero cost capital at the Fed Discount window and access to federally guaranteed borrowing through the FDIC Temporary Liquidity Guaranty Program. Finally, it garnered a $13 billion payout at one hundred cents on the dollar for its outstanding credit default swap contracts with AIG.

Now, we are told, Goldman’s profitability stems from its trading prowess in global markets. Really? A $3.44 billion profit in the second quarter could be accounted for simply by a 25% run-up in the value of the CDS portfolio from its value when AIG stood as a bankrupt counterparty.

No, Goldman may have trading prowess, but that pales against its political prowess.

Thirty years ago, most of the major Wall Street investment banks were partnerships, and those with the greatest prestige and market power—Salomon Brothers, Goldman Sachs, Lehman Brothers and Morgan Stanley—eschewed retail brokerage in favor of institutional relationships and proprietary trading. Only Merrill Lynch prided itself on retail brokerage and being a member of the New York Stock Exchange.

Then, the world changed, as investment banking firms looked far and wide for new ways to strengthen their balance sheets and access new pools of capital. One by one, the old-line partnerships fell by the wayside, casting aside their culture and independence for the lure of other people’s money. Salomon merged first with Phibro, and then was subsumed into the emerging Citibank colossus. Lehman was acquired by American Express. Morgan Stanley suffered the ignominy of merging into the Sears Roebuck/Dean Witter/Discover financial services company.

Only Goldman Sachs retained its culture and identity, even though it too tossed aside its partnership heritage in exchange for the lucre and capital offered through a public stock offering.

As one watches the evolution of Goldman, it is hard not to become a conspiracy theorist. After all, Goldman’s rise from merely the top of the heap into the stratosphere has come after years of growing influence in Washington as one Goldman partner after another were appointed to senior positions in the Cabinet or White House—John Whitehead, Robert Rubin, Josh Bolten, Hank Paulson, to name a few—and tens of millions of dollars of political contributions found their way from Goldman Sachs into the campaign war chests of members of Congress, of Senators and Presidents, Democrats and Republicans alike.

Perhaps the public interest and the private interest just happened to coincide with the passage of the Financial Services Modernization Act in 1999 and the Commodity Futures Modernization Act of 2000. Perhaps the conversion of Goldman Sachs—a non-depositary institution—into a commercial bank, with access to Fed Funds and the Discount window, and eligible for FDIC guarantees on its debt offerings was in the public interest. And perhaps the public interest was somehow served when Goldman and others jumped to the front of the line of AIG creditors and were made whole on their credit default swap contracts with a bankrupt counterparty.

Perhaps. But we must conclude—because we believe in truth, justice and the American way—that Robert Rubin, Josh Bolten and Hank Paulson influenced and guided public policy in ways that was truly in the public interest, and that there was no nefarious connection between all of those campaign dollars and the direction of our national policy in any manner that unduly benefitted Goldman Sachs over the years.

Perhaps. But this year, appearances matter. And this is the year that has seen $10 billion of TARP money and $13 billion of AIG money and who knows what amount of additional Federal Reserve funds or federal guarantee benefits flow into the coffers of Goldman Sachs.

So perhaps, this year, Goldman Sachs employees should be content with the tripling in value of their stock—surely a direct result of all of the financial largesse that has flowed Goldman’s way—and perhaps this is a year when $3.44 billion of Goldman Sachs profits should not turn into bonuses, without due consideration for how all of that was possible, and where that money came from.

From the rest of us.

After the fall.

We have yet to see what the Iranian regime will be prepared to do in the face of real opposition. After all, the leaders of the opposition questioning the election results—Mir Hussein Mousavi, Mehdi Karroubi and Hashemi Rafsanjani, and others who have emerged as fellow travelers, including Ali Larijani and Mohammad Khatami—are each deeply routed in the Islamic revolution, and each served as either the leader of the parliament or the President of the Islamic republic.

More to the point, each rose to the top of Iran’s tightly controlled political apparatus, gaining personal power through a political system that excludes ex ante any candidate deemed to be a threat to the ruling regime. Therefore, one can fairly wonder why the Supreme Leader Ali Khamenei jumped the gun in declaring a winner, since the system was rigged before the vote. But apparently that was not enough.

Here in the realm of the Great Satan, we tend to view things through our own eyes. So before Michael Jackson, Mark Sanford and Sarah Palin drove Iran from our TV screens, we were fixated on the images of street protests in the wake of the Iranian election. For us, in Iran––as in Florida––the question was, “Who really won the vote.”

But as the images of Tehran have faded, debates over who won have given way to a clear understanding that the integrity of the election in Iran is not the measure of democracy there. At the same time, the Iranian regime is coming to realize that the integrity of the election, or lack thereof—whether perceived or real—may be its undoing.

From the moment the polls closed, when Supreme Leader Ayatollah Ali Khamenei declared the victory of President Ahmadinejad a “divine assessment,” Khamenei undercut his own credibility as a dispassionate ruler committed to the integrity of the electoral process. While Iranians may have come to accept limitations on what candidates are allowed on the ballot, fundamental Shia principles of fairness and justice demand that the integrity of the process be respected.

Instead of showing patience and respecting the process, Khamenei undermined his own credibility. But more important, he opened the door for the narrative that soon emerged: Those who questioned the results were guilty of apostasy. And in Islam, apostasy is a mortal sin, and such accusations have justified the most extreme incidents of Islamist violence.

Today, even though the demonstrations in the streets have disappeared from cable news, the debate in Iran has been elevated from vote counting and ballots to treason and apostasy. It doesn’t get much clearer than that.

The issue is no longer about the election results. The issue now is about the core principal of the Islamic Revolution—velayat-e faqih—that Islamic law requires that power over civil society must lie with the clerical order of Islamic jurists.

This debate is deeply rooted in the Islamic Revolution of 1979. At the time of the Revolution, Ayatollah Khomeini was the most vocal proponent among the senior Shia clerics of velayat-e faqih, while he was opposed at the time by his peer and rival Ayatollah Abul-Qassim Khoi, who disagreed with that interpretation of Islamic law, and dissented from the urge to assert clerical dominion over civil society. While Khomeini won the day and dominated the revolution against the Shah of Iran, velayat-e faqih has never been accepted across the senior Shia clerical order as settled law.

The debate over velayat-e faqih has reemerged as the central issue in Iran. Today, even as the Revolutionary Guard—the Praetorian Guard founded by Ayatollah Khomeini in 1979 to defend the clerical regime—is asserting its control over the streets of Tehran, Supreme Leader Ayatollah Ali Khamanei’s impatience in handling the election may ultimately cost the regime its legitimacy.

A central figure in the debate over velayat-e faqih will be the leading protégé of Ayatollah Khoi, Ayatollah Ali Sistani, the Iranian cleric who is demonstrating the principals of his mentor in his patient oversight of civil society and the emerging democracy in Iraq. For Iranians in the streets, as well as clerics in the holy city of Qom, Sistani is among the most revered religious figures, and a cleric of greater authority and stature than Ali Khamenei himself.

The irony is that none of the leading actors the Iranian drama, Mousavi, Karroubi, Rafsanjani, Larijani or Khatami have identified themselves with Sistani or opposition to the existing order of clerical dominion over civil society. They are each products of the existing system. And yet the principle of velayat-e faqih is what is at stake and will emerge as the issue at hand.

The prospect of change—counterrevolution by any reasonable definition—in Iran poses real dangers, as any evolution to a more open democratic process and easing of clerical dominance will yet face many hurdles, and may take many years. As Ali Khamenei loses stature due to his mishandling of the post-election period, the winner over the near term may well be President Mahmoud Ahmadinejad, whose ties to the Revolutionary Guard may allow him to assert greater power in Tehran, even as religious and legal arguments are debated in Qom. How the those debates play out in Qom may determine the long-term direction of the Iranian revolution, but how control over the Revolutionary Guard and the military evolves will likely determine whether the opposing camps in the post-election era reach a near-term accommodation, or Iran devolves instead toward a traditional dictatorship.

All in.

Even as the Obama administration may be consumed by efforts to stem the depth and duration of the recession, we appear to be at a tipping point in foreign affairs that can lead to positive new directions or a new downward spiral in regional conflicts.

The opportunities at hand are complex and interconnected. And unlike the high stakes, three-hand game among Russia, China and the United States of the Nixon era, which subsumed all of the smaller countries into bit roles, the diplomatic world today involves a wide range of actors, each of whom has real interests, has signaled their readiness to play, and can each affect the potential outcomes for the others.

The historical background is important in several regards. First, the global economic collapse has illustrated the interdependence of national economies, while at the same time demonstrated the risks to individual states that flow from that interdependence. Accordingly, many national leaders find themselves at a point where they have to choose—both as a matter of policy and politics—whether they are in or out, whether they accept the rules of globalization, free trade, and interdependence, or whether they will opt for a return to economic protectionism and political self-preservation.

Second, the election of Barack Obama signaled the end of the Neoconservative era in US policy, and portends a renaissance of realism in foreign affairs and diplomacy based on national self-interest. As much as war might be the proven solution to depressions past, Americans have grown weary and cynical over calls to arms and regime change over every looming international confrontation, and the rest of the world seems ready to embrace new directions as well.

Russia, for one, has been pushing for an alignment of interests since Vladimir Putin first called George Bush to pledge Russia’s support after the 9/11 attacks. Putin sought—but ultimately failed—to build a new strategic relationship with the US around a number of specific areas of common interest—stemming the Jihadist threat emerging in Chechnya and Muslim former Soviet republics, defeating the Taliban, controlling Iran’s nuclear ambitions, and controlling drug trafficking—for which Russia could leverage the reinstatement of the Bush ‘41 and Clinton-era US commitments to curtail NATO expansion toward Russia.

Now, after several years of declining relations, and with the ruble in free-fall, Putin is signaling a desire to try again. After years of trying to swing a big stick to get our attention—cutting off natural gas supplies to Ukraine and Europe, sending arms to Iran and Venezuela, and sending tanks into Georgia—Russia is trying a bit of carrot—opening its territory for the US to resupply its troops in Afghanistan and delaying the deployment of missiles in Kaliningrad.

Iran, meanwhile, is looking to get into the carrot and stick game. Like Russia, Iran grates at being disrespected and has sought out strategies that might force the US to bargain on equal terms. Certainly, as President Obama announced his plans for withdrawing from Iraq, it was not lost on many that Iran—almost single-handedly—can determine whether those plans can succeed.

Iran has much to offer—enabling an exit from Iraq, moderating the role and conduct of Hezbollah, and, of course addressing the nuclear issue—and has much to gain—recognition of its role as a regional power, reducing the threat of American troops on both its eastern and western boarders, fears of being frozen out in a US-Russian rapproachment, and an end to American threats of regime change.

Like Russia, Iran’s economy is in shambles, and the June presidential election looms to be a critical moment. The entrance of former president Mohammad Khatami into the presidential race in early February may signal that Iranian Supreme Leader, Ayatollah Khamenei is willing to move toward a moderation of Iran’s hard line direction and rhetoric, embodied in current president Mahmoud Ahmadinejad, and substantively address the concerns of the international community.

Syria, another long-time target of US regime change, also needs to demonstrate its bona fides at this moment of political change. Just as Russia reached out to Syria over the past several years to demonstrate its continuing ability to stir the always-simmering Middle East pot, Syria can on its own significantly influence the next trajectory in the politics of the Middle East.

Like Iran, Syria controls one long border with Iraq, and can influence the outcome of President Obama’s exit strategy. Similarly, as the home of the Hamas political leadership, and as the long-time suzerain of Lebanon, the Syrian intelligence apparatus can directly control the direction and temperature of the Palestinian-Israeli conflict. Like others, Syria has its interests—in territory and regime survival—for which it will play its cards.

Achieving our foreign policy goals requires that each of these key nations change their approach to us and to others. We have tried threats of regime change and war, and we are broke and tired. Ironically, however, this has led to a moment of opportunity where each country may be motivated to move in a new and positive direction.

For Russia, Iran and Syria, this is a moment of opportunity. Their leaders, Putin, Khamenei and Assad, are rational and cunning adversaries. Each has demonstrated the ability to work with us when it served they and their country’s interests, or to resist our threats and recriminations when it did not. Each of them has a hand to play, and yet each knows that they risk being left behind if they fail to seize the moment.

For Barack Obama, as well, this is a moment of opportunity. But as he has suggested when speaking of the economic challenges we face, in the world of foreign policy, our major challenges are interconnected. He cannot put any aside for another day.

Iraq. Afghanistan. Iran. Pakistan. Al Qaeda. Israel-Palestine. Lebanon. Energy. Venezuela. For each of these, Russia, Iran and Syria—in one combination or another—can be the fulcrum for success or failure.

This is the President’s moment.

Reality bites.

This Sunday, the New York Times asked a panel of economists, “When Will the Recession Be Over?” A few panelists offered hopeful words, ‘Perhaps later this year… if there are no more surprises.’ The eternally pessimistic Nuriel Roubini suggested three years… or more. One sage observer offered the wisdom of bubbles past: You don’t reach the bottom until people stop asking.

We are having a hard time accepting that recovery will take time. Leveraging, or getting into debt, is a lot of fun. For twenty years or so, as interest rates declined and lending standards loosened, America went on a debt-funded spending spree. Across the country, as housing prices rose and the home-equity lending came into vogue, Americans used their access to money to live beyond their current incomes, creating an illusion of prosperity and growth.

Deleveraging, on the other hand, is not fun. It ultimately requires reducing debt. Actually getting rid of it. For American households—whose real incomes have been flat for a decade or more—it means returning to the standard of living that they could afford before the borrowing spree started, adjusted further downward to allow them to pay off the debts they accumulated during the boom years.

So far, our public policy responses to the housing collapse and banking crisis have largely amounted to various strategies for shifting the debt burden around. In the name of stability, the TARP program socializes the losses from our financial sector. Now, in a similar vein, we are proposing to tackle the problem of home foreclosures. But unlike the TARP program that puts the bank losses on the broad shoulders of the Federal government, the strategies to boost the housing market will shift the losses experienced by current homeowner onto the next generation of homebuyers.

Consider this. In 1981, the median home price was $62,000, and the annual cost of funding the purchase of that home at the then-current 16.6% mortgage rates, and with a 20% down payment, was $8,900 per year. $8,900 was 47% of the median family income at the time of $19,000, indicating that the median priced home was not affordable for most families.

As interest rates declined through the 1980s and 90s, home prices escalated as affordability increased. By 1998, the cost of carrying an 80% mortgage on a $128,400, median priced home dipped to $8,228, or just 21% of the 1998 median family income.

By 2007, median home prices increased a further 70% to $217,800. 30-year mortgage rates only dip another 1% or so, but home priced increases were aided by the advent of all sorts of “creative” mortgages, that continued to reduce buyer monthly payments.

For more than two decades, the growth in home prices was made possible by the long-term decline in mortgage interest rates, and at the late stage of the bubble by interest only, variable rate, and teaser-rate mortgages. Despite all hopes for a revival of the real estate market, and particularly a new period of growth in home prices, this is not likely to happen.

Current Federal strategies to re-stimulate the housing market to address the foreclosure problem are ill-advised. Over the past several months, the Federal Reserve has initiated efforts to push long-term mortgage rates down toward 4.5% by purchasing mortgage-backed securities. In addition, the newly enacted stimulus package included an $8,000 first-time homebuyers tax credit.

The problem with these efforts is that they will not fix the fundamental problem, but instead will simply push the problem—the loss of home equity—onto the next generation of homebuyers.

Consider this example. Take the median US home that was worth $220,000 during the years 2005 to 2007, but which might be worth $180,000 today, reflecting a loss in value of nearly 20%. This reduced home price, with a market-rate, 6% mortgage and 80% down, would cost the new owner around $10,500 annually. However, with a 4.5% mortgage rate and the $8,000 tax credit, this new owner can afford to pay $215,000, and still owe only $10,500 annually.

This is the same game that we have watched for the better part of two decades. The buyer—who has been taught to focus on the monthly payment as the measure of “affordability”—is willing to pay the higher price for a home because of the availability of low-cost financing. The seller is happy, because they receive close to the 2005-2007 price of their home. For two decades, this logic worked, because interest rates were continuing to drop and home prices were continuing to rise.

But the situation today is different, creating two very real problems. First, these policies constitute deliberate inducements to entice homebuyers to pay over-market prices for homes, as a matter of public policy. It is reasonable to expect that once the Federal actions that induced the purchase are ceased––the artificially low mortgage rates and the tax credit—the market price of the home the buyer purchased for $215,000 in the example above will fall back to its current value of $180,000.

Therefore, the impact of these policies will be to benefit—or “bail out”—the current homeowners who are facing substantial losses, by passing those losses on to the new homebuyers.

Second, and equally important, new homebuyers should be on notice that the “great deals” that they might see in the real estate market today are only great in comparison to prices at the high point of the real estate bubble. The implied suggestion is that once the current mess is behind us, home prices will continue to rise once again. But that is not likely to be the case.

There are two simple reasons for this. First, tightened rules governing mortgage banking will end the lending practices that artificially lowered the carrying costs of purchasing a home and supported the run-up in home prices. Traditional conforming mortgages with real down payments and more conservative underwriting standards will once again tie home affordability to household incomes and long-term mortgage costs.

Second, long-term mortgage rates are more likely to rise than fall, once the Federal Reserve Bank curtails its market intervention to suppress mortgage rates, and particularly if Congressional action allows judicial rewriting of mortgage contracts, which will undermine the security of—and therefore increase the cost of—mortgage loans.

Many will argue that since we have chosen to bail out the banks, it is only fair that we bail out homeowners. That is a fair argument, and one that Hank Paulson and Ben Bernanke and Congress should have considered before we began our long walk down this path.

But Federal actions to artificially boost home values will not socialize the losses in home values, but instead will literally pass one family’s loss on to the next. Like the TARP program, the fundamental problem is that the losses are real, and try as we might to shift them around to avoid the pain, they will not go away.

Learn from Google. Make the federal budget free.

Why tax people?

Really. We now know that no one likes paying taxes. The presumption was that Democrats liked taxes and that Republicans were opposed to them. But clearly that hypothesis was proven wrong. First, when the man who now sits atop the IRS, Tim Geithner, was nominated to be Treasury Secretary, it turned out that he preferred to not pay taxes.

But that failed to prove the point, as for many it was unclear whether Geithner was actually a Democrat. But Tom Daschle turned the trick. It finally was clear that Democrats, like Republicans, do not like to pay taxes.

Back in the day, taxes were not the issue. Spending was the issue. Back then, when everyone presumed that balancing budgets were among the sole tasks that our members of Congress were charged to perform––that and trashing the UN––Republicans liked to spend less and tax less. Democrats liked to spend more… and were somewhat agnostic on taxes. It was not that they liked taxes per se, but they were a necessary step to get to spend more.

Then Ronald Reagan changed everything, and all assumptions were cast to the wind. Since the Reagan Presidency, Republicans learned that spending really was not so bad, as long as taxes didn't have to pay for it. At first they voiced horror at the fiscal consequences of tax cuts, but, in time, they got over it.

And in time it really annoyed the hell out of Democrats. Ronald Reagan had led the Republican Party to the Promised Land. Cut taxes, spend money and let the chips fall where they may.

The premise was simple. It was unarguable. At any level of taxation, there is a lower level that will put more money back in the hands of taxpayers, and that will provide more resources for businesses to hire people and spur the economy onward.

It has become axiomatic. At every level of taxation, there is a lower level that if achieved will spur on the economy.

Therefore, following the logic to its natural conclusion, the optimal tax rate is zero.

Unless you need money. For stuff. Guns. Butter. You know. Stuff.

Or so we thought.

Today, we are approaching political Nirvana. In the final great leap of bipartisanship, the new administration is reaching for a new middle ground. Cut taxes in a nod to Republicans (and, it turns out, to everyone else, who also prefer to not pay taxes.) And increase spending. Because… Well. Because we can. Because we must.

And forget all those arguments about the expiring 2001 and 2003 Bush tax cuts. That is not a tax increase. That is just reality once again coming back to bite us.

Pardon the digression, but those tax cuts marked the beginning of the end of any integrity in tax policy. The scoring rules at the time required that tax legislation be budget neutral over a ten-year horizon. Congress was unable to pay for the tax cuts with other increases or spending cuts, so they paid for them by having them expire in year eight or so. So they complied with the ten-year scoring rules. Kind of. Lots of cuts for eight years. Lots of revenue to pay for them in years nine and ten.

Back in 2001, as they contemplated years of tax cuts that would suddenly expire, people jokingly referred to 2010 as “the year we push momma from the train,” because in 2011 the estate tax would rise dramatically back to its 2001 level. Well, here we are in year eight, and there is no need to worry about the estate tax. The estates were invested with Bernie Madoff.

Everyone gives lip service to debt being the problem that got us into our current mess. Not passing on to our children “a debt they cannot pay” was the great bi-partisan applause line of the President's speech the other night. They applaud fiscal responsibility. They just don’t believe in it. Or know what it is.


Look at the record over the past two decades. Our economic performance has been flat, other than the growth that we have literally purchased with debt. As a nation, we are like households whose real income has been flat for a decade, but who fund an increasing standard of living—new electronics, cruises, home improvements—through more and more borrowing. For years now, as a nation, our GDP growth has increasingly been purchased with imported capital.

Really.

Take a look at the new federal budget. $3.55 trillion of spending. A $1.75 trillion deficit. Maybe we have reached the tipping point. Finally, our revenues may become less than half our budget, and we can begin to migrate our tax rates to their optimal level.

Zero.

That does not mean we will have a 100% deficit. Far from it. We will still have cattle grazing fees.

And we will have the loan guarantee fees that the Federal Reserve charges for guaranteeing private debt. Those should be growing.

Oh. Sorry. Those aren’t in the budget.

My bad.

The return of the business cycle

Twenty years or so ago, when my I was planning a move to California for a new job position, I listened to an interview regarding a study of the psychological affects of recessions on individuals and communities. Specifically, the study compared the incidence of mental illness, depression and suicide in Los Angeles during the recession there in the early 1980s with New Hampshire during the 1970s.

Apparently, mental illness, depression and suicide were more prevalent in southern California at the time than had been the case in New Hampshire during the previous decade. The study attributed much of the different experiences of the affected communities to differences in family and community structure. In New Hampshire, people continued to live in extended families and extended communities. During the economic downturn, older members of the community would tell stories about earlier recessions, and pass on the wisdom of the elders:

Economic cycles are part of life, like the seasons. Families need to cut back and save as the downturn approaches. During the downturn, workers need to be patient and improve their job skills. And, like the seasons, this is normal, and like a hard winter, this too will pass.

Los Angeles was a very different place, where people had moved to the new world of optimism and opportunity. But in the face of an economic downturn, the perspective of life and the economic seasons was lost. Instead, lacking the wisdom of the grandparents and elders in the community, the fear and pessimism that comes with job losses and economic decline was exacerbated and reinforced.

Over the past months, our country has responded to the recession with fear and pessimism that has been largely unchecked by an historical perspective on economic cycles. We have responded as Los Angeles responded, and the politicians and the pundits are exacerbating the fears expressed in conversations around kitchen tables, in beauty salons and at Starbucks.

Looking back, it is apparent that the depth and severity of our current economic downturn is due in large measure to the success of the Federal Reserve in forestalling significant periods of economic downturn for much of the past twenty-five years. We forgot—as individuals, as families and as businesses—that the economy is cyclical.

But even worse, we lost the value of periodic recessions as a cleansing and humbling time. For individuals and families, recessions are a time to take stock, to cut back on our materialist tendencies, to save, to pay down debts, to retool our skills. For businesses, recessions are a time to rethink strategy, to close marginal operations, and improve attention to costs and excess. For bankers, it is time to learn to write off bad debts and tighten up lending standards, and perhaps teach young associates the basic principle that when there are no profits, there are no bonuses.

In 1997, Foreign Affairs magazine published “The End of the Business Cycle,” trumpeting the success of the west in conquering the business cycle.

“Business cycles -- expansions and contractions across most sectors of an economy -- have come to be taken as a fact of life. But modern economies operate differently than nineteenth-century and early twentieth-century industrial economies. Changes in technology, ideology, employment, and finance, along with the globalization of production and consumption, have reduced the volatility of economic activity in the industrialized world. For both empirical and theoretical reasons, in advanced industrial economies the waves of the business cycle may be becoming more like ripples.”

Lost in the triumphalism of the article was recognition of the important role that periodic economic downturns play in stemming the exuberance, the hubris and the bad habits that build up during the expansionary phase of the economic cycle. For the past twenty-five years, the Federal Reserve has managed to forestall the regular economic downturns that previously characterized the post-war years. The dramatic increases in labor productivity that came about through computerization and changes in information technology, and the suppression of wage inflation that resulted from globalization and outsourcing, combined to suppress inflationary pressures.

As a result, the economy ploughed forward through crisis after crisis, through failure and fraud. The collapse of Continental Illinois. The savings and loan crisis. The bankruptcy of Drexel Burnham. The Asian financial crisis. The Russian financial crisis. The Internet bubble. The collapse of Long-Term Capital Management. September 11th. Enron. WorldCom. At each point of crisis or threat to the financial markets and investor confidence, the Fed was able to forestall downturns and spur continued economic growth by flooding liquidity into the system or pushing down interest rates, with little concern to the normal inflationary consequence.

Ten years later, in 2007, Business Week Chief Economist Michael Mandel articulated the new economic paradigm on his Economics Unbound blog.

“We now may be in a world of mini-recessions—sharp falls in one or two sectors which do not pull down the whole economy… A sharp drop in one sector—say, housing—may pull down a couple of adjacent sectors, such as furniture. But the rest of the economy steams on, and maybe even accelerates, as resources are transferred from the weak sectors to the strong sectors.

“This picture of the world actually fits very well with neoclassical economics. We may get a couple of quarters of negative GDP growth, but deep economy-wide recessions may be an anomaly rather than the norm.”

Now, we have learned that there is no new paradigm, and the business cycle is still with us. But this time, without periodic downturns to temper our exuberance and stem our excesses, we are paying a heavy price.

Consider this. Since Paul Volker stepped down as the Chairman of the Federal Reserve twenty years ago, median family income has increased ten percent in real terms. During that same period, household mortgage debt increased almost six-fold and consumer credit more than tripled, and financial institution debt grew more than eight-fold. Together, household and financial institution debt increased by over $24 trillion.

Even now, over a year into this financial crisis, we have yet to fully accept the depth of pain and dislocation that deleveraging may require. As we face the consequences of the boom years, we are going to need old wisdom as much as we need new policies. We are going to need to remain calm in the face of 24-hour cable shows playing on our fears and trumpeting every moment of our economic travails. Last night, President Obama tried to move beyond the position of policy wonk-in-chief, toward the role of the grandfather in New Hampshire. He scolded us for our excesses, while reminding us that the economy is cyclical and will rebound in time.

But what will we have learned when this moment is past? Will students of the Dismal Science no longer see the “end of the business cycle” as the Holy Grail of economic polity? Will we accept that the cycles of economic life are a necessary—and ultimately productive—check on human tendencies toward excess and exuberance? Or will we quickly fall prey to the hubris of policymakers and pundits who will as we ride the next wave, assure us that this time, once again, things will be different.

Take a deep breath, and let go.

This week, the Federal Deposit Insurance Corporation took over Silver Falls Bank in Silverton, Oregon. Silver Falls Bank was the 14th bank taken over by the FDIC this year. This compares with 25 banks that failed in 2008 and 3 in 2007. Bank failure is not unheard of. And up until a week or so ago, the term “nationalization” was not invoked.

Since its creation in 1933, the role of the FDIC has been to prevent runs on banks by insuring bank deposits and to oversee the orderly disposition of failed banks. For the better part of a century, it has done its job quietly and effectively. And today, we would all be well served to let the FDIC and its capable leader, Sheila Bair, do their job.

From the beginning of the current financial crisis, one of the problems has been the failure of the leading agents of the government, embodied by Hank Paulson and Ben Bernanke, to establish clear rules and follow them. Instead, we have plodded along, from crisis point to crisis point. From Bear Stearns to Fannie Mae to Merrill Lynch to Lehman Brothers to AIG to Washington Mutual, each collapse engendered a unique response by the Treasury and the Federal Reserve.

In a similar manner, the focus of the $700 billion Toxic Asset Relief Program—the federal bailout—to address the insolvency of the nation’s largest banks has veered from the purchase of toxic assets to injections of capital to guaranteeing of assets. Now once again, toxic asset purchases are back in vogue as the strategy of choice, this time under the “good bank, bad bank rubric.”

This week, the stock market broke through its technical support levels, and now appears headed toward 6,000 as its next support level. Some observers have suggested that the decline reflected the market response to looming plans for the “nationalization” of the banking system and one more step down the road to socialism, as trumpeted on the cover of Newsweek.

But market decline was not a result of the fear of nationalization, and nationalization would not mark the next milestone on the road to socialism. Quite the contrary. Investors are running away from banks—good banks and bad banks alike—precisely because the federal efforts to date have obscured the true financial condition of the banks. Faced with uncertainty and poor information, investors will always pull back and wait for the fog to clear.

The takeover of insolvent banks by the FDIC is the way the process is supposed to work, and the way it has always been allowed to work—up until now. For all of the debates over the “Swedish Model”—where banks were taken over, balance sheets reconfigured, and then spun back out to private ownership—the way they did it in Sweden is not actually all that different from the way they do it at the FDIC, when the FDIC is allowed to do its job. Insolvent banks are seized. Assets are sold off and the depositors are paid or, if possible, the balance sheet is cleaned up and the bank is sold off to a new owner.

The problem today is that a small number of our insolvent banks, notably Citi, are very big and very visible. But the problems they face are the problems that the FDIC was created to fix. This is not nationalization, it is essentially a debtor-in-possession bankruptcy process whereby the FDIC serves as the receiver.

If left to do its job, the FDIC would do what the banks resolutely refuse to do: sell their bad assets, accept the price of their business decisions, and move on. The banks refuse to do it because it would force them to face up to what the markets, and increasingly outraged taxpayers, have known for a while: They are insolvent.

For years, America has told other countries how to deal with financial crises: Cut your losses. Clean up your balance sheets. Get on with it.

This week, the stock market said the same thing.

On a side note, the Ford Motor Company—the one that is not taking federal money—has seen its market share rise steadily for the past four months. This is the way markets are supposed to work. Saving one company or another—or one bank or another—is not an inherent public good, however politically compelling. And pumping public money into one company serves to dramatically disadvantage their competitors.

One of the biggest mistakes that Hank Paulson made was demanding that banks take TARP money, even if they didn’t want to—or need to—in order to remove the stigma from those who did. Somehow, this was supposed to be a way of maintaining confidence in the system. But instead of protecting the bad banks, by letting them hide among the good, it has achieved the opposite. That is why investors have turned their back and are walking away.

The banking industry and the markets would be better served if the politicians and the pundits quieted their politically loaded hubris about nationalization, and if the Treasury and the Fed let the process work, as it has been designed to work. Forget about creating good banks and bad banks. Let insolvent banks take their medicine. Management, shareholders and bondholders will pay a steep price for business failure. And let the banks that are healthy take market share from those that are not.

It is time to let the process work. Punish failure. Reward success. This is not nationalization, it is the way the system is designed to work. Time to take the banks off the dole, and let Sheila Bair do her job.

Money talks. Or at least it ought to.

It needs to be said: The Congress of the United States has no business setting the terms of executive compensation. That is not how capitalism is supposed to work.

But then again, the US Government has no business giving tens of billions of dollars to corporations, and getting nothing in return but a hope and a prayer. That is not how capitalism is supposed to work, either.

Take Citi. This Thursday, the market value of Citigroup––the icon of the American banking establishment––was $18.3 billion. That is to say, at least according to the old school rules, that for $18.3 billion, you could purchase all of the common stock of the company. For something less than that, you could purchase enough shares to control the Board of Directors.

Yet, over the past few months, the US Government has invested $50 billion in Citi. In the parlance of the venture capital world, we invested $50 billion in a company, and the “post-money” value is $18.3 billion. Suffice it to say that the “pre-money” value––the value of the company before the infusion of new capital––was a big negative number.

By any normal measure, Citi was insolvent. The common equity was worthless, but for the infusion of public money. So, all of the arguments of nationalization are somewhat academic. The federal government did not wipe out the common equity holders, the market did. If there is market value remaining, it exists only at the sufferance of the US taxpayers. The only question is what how the government should be asserting its rights and privileges.

In a normal world, an investor who bails out an insolvent company takes control of the board of directors––by one means or another. And any appropriate controls on executive compensation––on bonuses and the like––are subject to the control of the board, as they are in any corporation. But what seems to be broken in all that has transpired over the past few years, is that the fundamental concept of board control and corporate governance.

The notion is simple. A corporation is a company owned by stockholders. The stockholders elect a board of directors to serve their interests in the governance of the company. The board hires and fires the chief executive and the management team, sets compensation, and establishes corporate policy and the like.

But little has been spoken about the boards of the great American financial institutions that have brought the world economy to its knees. Sure, Robert Rubin has been silenced for his complicity as a member of the board of directors of Citigroup. But little has been said about the more fundamental issues, conflicts and failure of corporate governance that have occurred on our long march toward the abyss.

Richard Fuld, the CEO of Lehman Brothers, who demonstrated an astonishing lack of imagination as he sat before Congress and suggested that, even in the wake of the financial collapse, he could not think of a single thing that he would have done differently if he could do it all over again. Fuld served as both Chairman and CEO of Lehman Brothers, a not uncommon situation in corporate America where a CEO effectively reports to him or her self, evaluates his or her own performance and sets his or her own compensation.

If Lehman had been a partnership––as it was for most of its corporate existence––perhaps this conflict would be acceptable. But for a publicly traded company, this relationship violates one of the central tenets of corporate governance: That the CEO is accountable to the board of directors, and that the directors represent the interests of the stockholders.

AIG further illustrates the problem of the failure of board oversight. The collapse of AIG was directly a result of the company’s failure to understand the risks related to its burgeoning credit default swap business. The profits of the global insurance giant became increasingly tied to its credit derivatives business, run by Joseph Cassano, the head of AIG Financial Products. Yet even as Cassano represented that there was no risk of AIG losing “a single dollar” on any of its credit default swap transactions, no one on the board managed to ask the simple question of why sophisticated financial institutions––the counterparties on the other side of those transactions––would willingly pay AIG billions of dollars annually, if there was no risk of loss. Presuming that all of those sophisticated counterparties were not fools, a board member might have asked, how can that be?

Looking back over years of financial crisis and collapse, and one common thread has been the failure of board governance of public companies. The savings and loan debacle. The collapse of Drexel Burnham Lambert. Enron. Each was characterized by boards who had lost site of their central purpose: To hire and fire the CEO, set corporate policy, and serve the shareholder interests.

Congress should take no action to set the terms of executive compensation. The problem that needs to be fixed is more fundamental: The failure of the fundamental governance structure of public companies. In the investment banking world––in the world of risk––perhaps it is time to return to partnerships and assure that when capital is at risk, people are too. But the days of the cozy, insider boards needs to end. The cost––to the shareholders and the public alike––is too high.

Whether or not the Treasury controls the boards of directors in companies where the common equity has been functionally wiped out is not the salient question, though certainly there is not a true capitalist in the country who would debate whether after a $50 billion investment into a $18.3 billion company, anyone but the US Treasury is entitled to control. The question is how board accountability and responsibility should be reestablished––both for the recipients of TARP funds and across the corporate landscape.

Time to change the rules

Barack Obama has time to consider how his administration will minister to the ailing auto companies, as their demise will be protracted. In the real economy, failure takes time. Sixty days from now GM will still be there.

But the same cannot be said of Citibank.

Today, after investing almost half of the $700 billion appropriated by Congress to buttress the capital reserves of the banking system, the evidence suggests that the Treasury and the Federal Reserve have not achieved their goal of easing the cost or availability of capital. Instead, the major banks are cutting back credit, increasing fees and looking for ways to further solidify their balance sheets. Unless these trends are reversed, the concerted federal action will have been for naught, the recession will deepen and recovery will be forestalled.

More capital alone is not sufficient to fix the commercial banking sector, and a new injection of funds into Citibank will not allay the fear the continues to grip the system. Like Citibank, all of the commercial banks have problem loans and problem business lines, and, traditionally, new injections of capital would provide banks with the resources necessary to work out those issues. But today, the risks are different, and more dire.

The collapse of AIG two months ago highlighted for all market participants the risks presented by derivative contracts on the books of financial institutions. AIG’s demise came in a matter of days––if not hours––once its credit ratings were downgraded from the double-A level to the single-A level. On Friday, September 13th, AIG was in business. On Monday the 15th, AIG was downgraded. On Tuesday the 16th, the global insurance giant was effectively bankrupt.

In the case of AIG, the rating downgrades resulted from write-downs in its holdings of mortgage-backed securities––to comply with mark-to-market accounting rules––which depleted its capital reserves. The downgrades triggered collateralization requirements under the terms of its $450 billion portfolio of credit default swaps. Faced with demands for collateral that exceeded its financial resources, AIG was insolvent.

The lesson for the major commercial banks that face similar risks was simple: Do everything in your power to rebuild your financial strength and stabilize your credit ratings. Cut back lending, reduce outstanding credit facilities, increase fees, conserve capital, and rebuild your balance sheets. In sum, the lesson for the commercial banks is that if you want to survive––if you don't want to be the next AIG––you should not do any of the things--such as increase lending--that the Treasury is trying to get you to do.

Today, Citibank is rated AA-, which by any measure is a strong credit rating. But the markets are anticipating Citibank’s demise. On Friday, Citibank shares fell 20% to $3.77 and its total market value fell to $20.5 billion, a decline of 90% from a year ago, and less than the $25 billion that the US government gave Citibank just last month. In the credit default swap market, the cost of insuring against a Citibank default rose 20% on Friday.

In normal times, a downgrade to A+ would not be a catastrophic event for a commercial bank, but these are not normal times. While there has been no public indication from Citibank of what the financial consequences of a credit rating downgrade to single-A would be, Citibank is currently the guarantor on $1.6 trillion of credit default swap contracts––almost four times the size of AIG’s portfolio––and it is not unreasonable to imagine that those contracts have comparable collateralization terms. If this is AIG all over again, a downgrade of Citibank’s ratings would lead to the swift collapse of what one year ago was the nation’s largest bank.

But this is not just about Citibank. Over the next several days, the Treasury may announce its plans to pour billions more into Citibank. But even if Citibank survives, the Treasury will not have addressed the fear that is gripping the banks. For this, the Treasury and the Fed need to change the rules of the game: They have to tackle head-on the two issues that conspired to lead to AIG's swift collapse.

First, they should change the mark-to-market rules that have made the balance sheets of financial institutions captive of swings in asset market prices. These rules exaggerate the importance of unrealized gains and losses, and exacerbate economic volatility by undermining stability in the banking sector. Instead, consideration should be given to rules that allow for the smoothing of unrealized gains and losses over time, as is the case in pension fund accounting, to mitigate market volatility by recognizing gains and losses over a multi-year period.

Second, immediate regulatory action should be implemented, vitiating the linkage between changes in credit ratings and collateralization requirements under outstanding swap agreements. While changes in bond ratings have always had effect on an entity’s cost of capital over time, the rating agencies never intended for rating actions to trigger cataclysmic events. In fact, until the collapse of AIG, the collective impact of the collateralization triggers in swap contracts was barely recognized as a material risk factor for financial institutions. Any counterparty who objects to this change should be free to void the agreement to which they are a party.

With the implementation of these two steps––changes in the mark-to-market rules and removing the collateralization provisions from existing derivatives contracts––the Treasury can immediately reduce the pressure on Citibank and on other financial institutions. Then they can focus on the real job of recapitalizing the banking system, and perhaps the banks will get back to the business of lending.

Bailouts. All the rage.

The debate over the bailout rages on.

On the one hand, the companies involved have only themselves to blame. No one denies that they brought this on themselves. The nation watches incredulous as the wealthy CEOs fly into the nation’s capital on their private jets and claim that it was not their fault––and begrudge anyone who suggests that their compensation should limited if they receive federal aid.

It is hard not to want to let them face the rigors of bankruptcy. Let others in their industry who did not make bad decisions reap the rewards of their strategic wisdom and take market share from those made bad choices. That is the way it is. That is the way it’s supposed to be.

Those arguing for the bailout question whether the economy can sustain the wreckage and havoc that will ensue if the companies are allowed to fail. They argue that rather than risk the widespread repercussions of a collapse, we should invest in the companies, shore up their financial condition, and hope they make better decisions going forward.

So we held a national debate and in the end, after the cajoling of Wise Men from across the Capitol, Congress and the President approved the $700 billion bailout for the finance industry.

We had a referendum on pain and our willingness to walk the walk of our capitalist principles, and we decided we just weren’t up to it.

Now come the automakers. It is like deja vu all over again. Once again, the companies have brought this on themselves. Once again, the wealthy CEOs fly in on their private jets, and show nothing approaching accountability for their circumstances.

And once again the fundamental question is whether the companies and their stakeholders will suffer for their own bad judgments, and whether their competitors who have demonstrated strategic wisdom will be allowed to take market share from those who made bad choices. The way it is supposed to be.

Those arguing for the Detroit bailout question whether the economy can sustain the wreckage and havoc that will ensue if the companies are allowed to fail. But this time, the resistance is fierce.

The hypocrisy of the moment is profound. This is not an argument for or against aid to Detroit, but against the hubris that now surrounds the debate. Would a debtor-in-possession bankruptcy process be a better choice over the long term to secure a better future for GM and Ford? Perhaps. Are other American automakers that are highly successful in the marketplace—Toyota, Honda, Nissan, BMW et al—disadvantaged by a government bailout? Sure.

And each of these arguments could have been made in the financial bailout. Like the automakers, the best efforts of Hank Paulson may just be delaying the day when Citibank succumbs, and newer, foreign-owned banks with a growing presence—Toronto Dominion, Banco Santander, FirstBank—emerge from the middle market to replace those at the top who fall under the weight of their bureaucratic indifference to the customer and their derivative-laden balance sheets.

As Joseph Schumpeter famously wrote, the process of Creative Destruction is the essential fact about capitalism. It is the driving force of innovation and growth. But as we are now witnessing, there is destruction and collateral damage along the way. Sometimes the damage is small and incidental, and sometimes the damage is cataclysmic.

We already chose not to face head-on the consequences of failure on Wall Street. Now, as the economy is coming undone, one has to question whether this is the moment to let GM and others fall under the weight of their legacy cost structures. The arguments for bankruptcy and the urgency of finally having Detroit make the real changes that are essential to its future are valid. But bailout opponents should not kid themselves into thinking that the process will be smooth or without collateral damage.

All of the obligations that GM will walk away from in bankruptcy—retiree healthcare, support for redundant dealerships, bond and lease payments for redundant facilities—are payments that someone else receives. Our essential challenge as we address the economic recession is to sustain economic activity and demand in the marketplace as consumers and companies reduce their spending. A GM bankruptcy will exacerbate this challenge and increase the costs to government at all levels to sustain economic activity and mitigate the collateral damage.

In many ways, our response to the auto industry is shaped by our response to the financial collapse. We rose to the urgency of that challenge, and now watch incredulous at the apparently arbitrary allocation of those billions of dollars of our money. Why has $150 billion been allocated to secure the interest of counterparties to AIG derivatives rather than simply to secure the policyholders? Why have we given tens of billions to the largest commercial banks only to see them cut back lending and increase banking fees? Why are we giving money to American Express––the lender to the richest Americans––while little is done for homeowners? Why have we rewarded failure and not instead mitigated collateral damage and allowed those who have been successful in the marketplace to win?

We have watched one bailout unfold, and we have not been impressed. We heeded the Wise Men, and now we feel violated.

But how do we now hold failing auto companies to a higher standard? And why now, when money is being tossed around the Street like confetti? Is it because this time the beneficiaries would be autoworkers and retirees rather than well-heeled moneymen, who to this day have yet to apologize to the nation for the destruction they have wrought?

Building US foreign policy in a networked world

Faced with a choice for Secretary of State between Hillary Clinton, Chuck Hagel and Bill Richardson, President-elect Obama’s choice should be clear. While all of them have strengths to serve the new president well, only Governor Richardson brings both a depth of experience and a philosophical commitment to Barack Obama leadership style.

Each of the candidates brings great strengths to the position. Hillary Clinton would bring unrivaled superstar status to the position, and provide unmatched energy and focus to push ahead the Obama foreign policy agenda. Like her husband, she is a pragmatist who will quickly grasp the nuances of every issue, and she will bring––as she does to all things––a tremendous motivation to succeed.

Chuck Hagel is a very different choice. He is a serious student of foreign policy and military affairs, with a deeply grounded understanding of the international world. Unique among the Washington crowd, Hagel understands and has spoken on the most serious foreign policy challenge that we face, which remains our relationship with Russia. Our ability to address all other international issues—Iran, Iraq, the Middle East, nuclear proliferation, drug trafficking, and financial integration and regulation—will be either facilitated or undermined by our relationship with our former adversary. Hagel understood immediately our error in embracing the Kosovar declaration of independence, which undermined the primacy and principles of international law, and the far-reaching consequences of that action, which continue to unfold. Hagel recognizes the importance of American leadership that embraces the world in all its complexity, particularly after years of hubris and empty threats that have eroded our credibility and capacity to lead.

But in Bill Richardson, President-elect Obama can choose a seasoned international diplomat and negotiator who truly embraces the core of Obama’s worldview. Like Obama, Richardson understands and has practiced a style of diplomacy and leadership that begins with listening, and that is grounded in the view that even as disparate parties may have widely differing agendas, the most complex and intractable conflicts can be addressed if differences are acknowledged and respected, as a first step toward identifying and achieving common goals.

In addition, Richardson would bring to the administration a broad network of relationships across the international community and an ability to take on the portfolio of State with no learning curve. From his time as UN Ambassador, to his range of assignments as an international negotiator during both Democrat and Republican administration, Richardson has built an international reputation for diplomatic skill, integrity and credibility.

Much has been made of this being a time of transition from a uni-polar to a multi-polar world. But this is not an accurate reflection of the world that President-elect will inherit. The US will remain the dominant military and financial power for decades to come. However, the significance of that status is what people expected it to be, and the world has not, and will not in the future, march to our tune on account of that power. The emergence of asynchronous warfare and strategy has proven to be an effective counterpoint to US military dominance, and years of US deficits have led to the emergence of China and other countries as powerful financial players, even if the dollar remains dominant in times of crisis. Today, our power gives us the capacity to lead, but will not compel others to follow.

The celebrations around the world that greeted the election of Barack Obama reflect the hope that positive and effective US leadership will reemerge in the world. But that leadership must reflect a new world of struggling and emerging democratic nations that will each need to chart their own politics and path forward. This is a world that will need American support, encouragement and direction, but will not respond well to hubris or dictates from foreign soil.

The world today is defined by overlapping networks. National identity remains elemental, but in almost every conflict across the globe, we are witnessing the influence of transnational linkages and networks that put a claim on community identity. Afghanistan, Georgia, Kenya, Kosovo, Indonesia, Iran, Iraq, Lebanon, Palestine, Russia, Sri Lanka, Syria, Timor, Ukraine, Zimbabwe. All of these nations are facing conflicts where religious, ethnic, tribal and family identities are threatening the primacy national identity as a unifying force. These challenges will be exacerbated rather than solved by democratic reforms––national unity was easier to maintain at the point of a gun––and demand the development of national and transnational institutions to create legal, political and regulatory frameworks for the new century.

In this world, US leadership and policy will need to focus on multiple levels and strategies. At the highest level, the US must define and focus on its core strategic interests. This is and will always be its primary priority. At the same time, the US must implement policies that encourage and support regional networks and leadership to engage regional conflicts and issues. The world of emerging and evolving democratic states must, under American leadership, learn new skills in conflict resolution. And all roads will no longer lead to Rome.

This is a world that is ready for the leadership of Barack Obama, who built a political campaign based on a philosophy of uniting people with vastly differing identities toward common purpose. This is the world in which Bill Richardson has been immersed for decades. A world he understands from extensive personal experience, and one where, like Barack Obama, he is greeted warmly wherever he goes as one who has the knowledge, understanding and philosophical stance that can enable him to bring together even the most entrenched adversaries.

Farther down the rabbit hole

The longer this goes on, the more absurd it is becoming.

Hank Paulson may know what he is doing. He may have insight that is lost on the rest of us. But then again, he might not.

It is not easy to suggest that a man with the pedigree and swagger of a former chairman of Goldman Sachs does not know what he is doing. But there it is.

Over the past few weeks, in the name of recapitalizing the banking system, we have witnessed the largest concentration of financial power and privilege in a century. Three of the new titans of the banking world––JPMorgan, Bank of America and Citibank––have emerged far larger and more powerful than before the financial crisis began. Their assets have ballooned. Regulation W has been waived, and FDIC deposits are now unfettered by restrictions put in place almost a century ago. And they have new infusions of taxpayer capital that some have unabashedly suggested will be used to acquire regional middle market banks and future expand their dominance in the marketplace.

Not to lose out on a good thing, American Express this week sought and received Fed approval to convert itself into a bank, so that they could get in on the action.

This, Hank Paulson suggested, marked the Government’s initiative to unlock the consumer credit market.

The irony, of course, is that these are not the institutions that will pull us out of the recession. These are not the institutions to which small businesses turn to finance the great American engine of job creation and growth. Those would be the community banks and middle market banks, that have largely eschewed the risks of derivatives and securitized obligations that have brought the larger institutions and hedge funds to their knees. And those are the institutions whose plight has been largely overlooked by the bailout strategies that Hank Paulson has pursued. Far from being helped, those institutions have been placed at a competitive disadvantage by the aggressive steps that the Treasury and the Fed have taken to concentrate financial power in a handful of dominant institutions.

We are now in the Alice in Wonderland phase of the financial bailout. The world of public policy has disappeared into the rabbit hole, and we have no idea where we are going to end up. But it is now clear that Hank Paulson has no idea either.

The greatest failure of the bailout has been in not letting institutions that did stupid things fail, and to focus public policy on how to mitigate the public and systemic consequences of that failure. In the case of Lehman Brothers, we failed to anticipate and prepare for the downstream consequences. But instead of learning the lesson that we must look down the road and anticipate systemic consequences, we turned our back on the core principle that failure is essential in competitive markets and exacerbated our problems in our approach to AIG.

The collapse of AIG came as a result of its exposure to the collateralization provisions of its credit default swap (CDS) business. To date, the bulk of the $150 billion federal cost of bailing out AIG has gone to making good on the collateralization obligations under those CDS contracts. Essentially, instead of protecting the AIG policyholders and otherwise letting AIG fail, and reaffirming the principle that stakeholders––from bondholders to CDS counterparties––are at risk in the marketplace, the Treasury chose to protect the rights of CDS counterparties with public dollars.

Halfway through the $700 billion, we are still facing two central problems. First, Paulson, Bernanke and Congress have yet to find a way to unravel the mortgage-backed securities market. The central issue here is that once mortgages are pledged in a pool to multiple investors, the terms of any individual mortgage cannot be renegotiated without impairing the contract rights of some of those investors. As a result, while mortgages held in whole by a single institution can be renegotiated, those that have been securitized may not be able to be fixed. This means that for a subset of mortgages, a foreclosure process may not be avoidable. If this is the case, federal policy should address the affects of foreclosures on families and communities, and let the process of unwinding the CDO market work itself out.

Second, the risk that credit default swap contracts present to the financial system has to be recognized and addressed. CDS contracts are essentially insurance policies against financial loss on bonds, where one party pays a premium to the other party, who agrees to make them whole in the event of a bond default. The issues are twofold. First, there is no regulatory framework that regulates the capital reserves that an institution must hold to write this type of insurance. Second, there is no requirement that the purchaser of the insurance actually own the bond in question, and there is no limit to the amount of insurance that can be written against any given bond. As such, the CDS market has become a purely speculative market that––as Michael Lewis suggested in his magnificent epilogue to Liar’s Poker––allows investors to make side bets in the bond market without actually investing any money. It is, simply state, a market with infinite leverage.

JPMorgan, BofA and Citi have approximately $13.7 trillion of credit derivatives outstanding, in compared to total combined assets of $3.9 trillion, while JPMorgan alone has approximately $7.9 trillion outstanding, in compared to total assets of $1.4 trillion. These banks will argue that their derivatives “book” is evenly balanced between long and short positions. But this ignores the fact that AIG did not collapse because of its exposure to the credit events in its CDS portfolio, but rather because of the collateralization requirements that ensued in the wake if its bonds being downgraded below “AA.”

Today, these three banks are rated "AA," with at least two of them facing downward pressure on their ratings. However, it is likely that even JPMorgan CEO Jamie Dimon––the reigning superstar of the financial firmament––does not know how much collateral JPMorgan would be forced to post to their CDS counterparties in the event they were to be downgraded. But suffice it to say that each of these banks have CDS books that are several times larger than that of AIG, and any such downgrade would likely wipe out their capital reserves.

Even as Congress and the Treasury look for solutions to the mortgage foreclosure problem, they should act immediately on credit derivatives. Three steps are warranted. First, a complete industry database must be created to track contracts, exposure and collateral terms. Second, a regulatory framework must be created to establish capitalization and reserve standards. And third, similar to the insurance industry regulatory framework, the federal government should immediately levy the equivalent of an insurance premium tax on credit derivatives to fund the public costs of financial protections and regulation.

Today, insurance premium taxes are levied in the range of 5% of premium volume. If CDS pricing averages 200 basis points on the outstanding $62 trillion, a similar fee on the annual CDS payments would generate approximately $62 billion, and provide a reasonable start at amortizing the costs of the federal bailout. And perhaps, if the industry complained that the cost was too high, it would serve the higher purpose of providing an incentive to unwind the most highly leveraged sector of our financial system.

The prospect of hanging concentrates the mind

“The prospect of hanging concentrates the mind.” Samuel Johnson.

After decades of fretting over the low American savings rate, Americans are putting away their credit cards and hunkering down for a long, cold winter. And the rest of the world is trembling at the thought.

The anticipation phase of this financial crisis is coming to an end. In a world of six-hour news cycles, people are beginning to realize that nothing is going to be fixed quickly. Last week’s god, Hank Paulson, is this week’s afterthought.

No, he did not fix it. No, he does not know what we should do with the $700 billion. No, he does not know what AIG did with the $100 billion. And no, he does not know what to do next.

Soon, people will turn off the cable news circus. The election will be over, and there will only be the uncertainty of what lies ahead.

For a president Obama—willing to turn the page on the Neoconservative rhetoric that has dominated American foreign policy of late—the financial crisis will offer a dramatic opportunity to reshape international relations, in positive and constructive ways. After all, the denouement of the crisis that is slowly placing a vice grip on nations across the world has brought a new clarity to international relations. And as each nation now looks out over the precipice, the hubris that has characterized the past few years may give way to a new willingness to build bridges.

In the early moments of the financial debacle, our allies in Europe—to say nothing of those across the world resentful of our new militarism—could barely conceal their satisfaction as the dollar fell, the price of oil rose and the end of the era of US dominance loomed. But that moment was fleeting before the interconnectedness of the 21st century economy became the dominant fact of the new world order.

Within a few short weeks, new realities emerged. As stock markets around the world plummeted—from 40% across Europe to 60% across Asia to over 70% in Russia, Ireland and Iceland—the interdependence and integration of national economies, and the ease of migration of capital, undermined newfound notions of prosperity from Ireland to Russia.

In European capitals, the ascendant notion of an economic decoupling from the United States fell by the wayside as nations quickly sought to protect their own interests and the euro crashed. In Russia, the collapse of energy prices demonstrated the fragility of an economy that has failed to build legal institutions and will soon show what little protection Russia’s new financial reserves can provide in the face of an international recession.

At the same time, for the United States, two dominant doctrines of the post-Cold War era have been discredited. First, the consuming conflicts in Iraq and Afghanistan have demonstrated the limits of overwhelming military power to force change and democratization. Second, the financial crisis and final capitulation of Alan Greenspan have demonstrated the limits of unfettered free markets and the power of uncontrolled ambition and greed to foment global chaos.

Today, the reality of economic interdependence can transform political relationships, as evidenced by our relationship with China. Two years ago, as Europe was trumpeting the emerging decoupling, China demurred. China’s communist leaders grasped the implications of the integrated international economy better than her European counterparts, and understood—as good Marxists—that economic imperatives trump traditional political arguments. China tightly linked her currency to the dollar and, after decades of saber rattling, has now tempered her threats to take back Taiwan by force.

Our relations with China are a marked contrast to our relations with Russia. For years, we have dealt with China quietly and respectfully—despite domestic protests regarding Tibet and religious persecution. With Russia, nothing has been quiet or respectful, but rather our policy has been long on hubris and trapped in Cold War rhetoric, if not ideology.

In early October, Chancellor Angela Merkel visited Moscow, where she announced that Germany would oppose efforts to admit Ukraine and Georgia into NATO. Her announcement has offered the US an opportunity to step back and reframe our relations with Russia. A new administration will now have the ability to rebuild our relationships with Russia, as with many other countries, on principles that reflect the new economic realism of international economic integration and our own understanding of the limits of military power. Simply stated, Russia—as China has accepted—can no longer impose her will at the point of the gun, while we must lead with a tempered rhetoric in a world where tanks alone cannot achieve our goals.

The strength of the dollar in a time of global crisis has reaffirmed the critical role of American leadership—to say nothing of the importance to the rest of the world of a vibrant American economy—to others. At the same time, an end to American hubris and a touch of the humility that George W. Bush once embraced, may allow us to provide the leadership that the world now desperately needs.

For a new president who grasps how dramatically the world has changed in the past month, and who appreciates both the complexity of international economic integration and national identity, this will be a time of unprecedented opportunity.

The twilight of John McCain

The fact that Bill Kristol’s advice to John McCain is being taken seriously is itself nothing short of comical.

When McCain secured the Republican nomination in the spring, many patriotic Americans sighed felt a sense of relief. While John McCain could not be counted on the bring balance to a Supreme Court heavily weighted with Republican nominees, he was a men of integrity and credibility as a national politician who would stand against the most partisan forces, and act in the broad national interest.

That is to say, he would be a departure from the last eight years. Eight years that have greatly damaged our nation. Economically we are deep in debt and our financial system is teetering on the brink of collapse. Militarily we are overstretched and hamstrung in our ability to respond to new threats. Internationally, we have lost much of our credibility in the world and our capacity to lead—at a time when centered leadership is badly needed and hard to find. And morally, our embrace of torture as a tool of national policy has undermined the national character that has been part of our strength in the world.

But it was John McCain himself, not some Washington cabal as Kristol suggests, who brought McCain’s candidacy to its current state of affairs. Despite his attack ads accusing Barack Obama of Unbridled Ambition, it is John McCain who cast his faith in the American people to the wind, and tried to remake himself in the mold of George W. Bush.

It is John McCain who cast aside his principled opposition to torture as a tool of public policy in an effort to reach out to the Party base.

It is John McCain who cast aside his opposition to tax cuts that benefited the rich and drained the national treasury in a time of war, to embrace new and deeper tax cuts in an effort to gain the affection of the Party base.

It was John McCain who reached out to evangelical leaders—not just evangelical voters—and muted his opposition to their contribution to the destruction of civil discourse in our society and in our politics.

It is John McCain who cast aside his long-time political advisors––who had help craft the McCain Brand that stood for integrity and straight talk that was critical to his success as a national candidate—and hired in their place his current team of Bush era and Rove-trained advisors, who have cut him off from the press and done much to destroy the essential character that—we thought—set John McCain apart from other candidates.

And finally, it is John McCain who failed to stand up to his new campaign team and select the centrist vice-presidential candidate of his choosing—Joe Lieberman or Tom Ridge—and elevated in their stead a candidate who lacked any of the core attributes of experience and wisdom that he valued above all else.

Above all else but winning, it seemed.

John McCain is a man driven by his political instincts, and by a sense of decency in the public square. But he has proven in this campaign—despite the profound irony of the Country First slogan—that this time around, he was going to do what it takes to win.

Many supporters looked at the Palin nomination as the final moment when McCain himself could pivot toward the center. Palin would be sent out to placate the base, while McCain would return to the ground on which he is most comfortable. Openness. Candor. The politics of the center over the braying of the extremes.

But this is not the choice that John McCain made. Not this time. Instead, McCain lost his bearings. Perhaps it the roar of the supporters who turned out to see Sarah Palin. Perhaps it was the anger at being upstaged by young, stoic and unflappable Obama. But rather than veering to the center, McCain embraced a new populism and raged against the machine.

His campaign strategy changed week to week. Day to day. His rhetoric has become shrill and pandering, disconnected to any core message or program.

I’ll get Osama bin Laden… I know how to do it.

I will lower gasoline prices.

I know how to lower food prices.

I can fix this financial crisis. I know how to do it.

I know how to fix Wall Street.

This race is about Main Street vs. Wall Street.

There have been hints of old McCain from time to time, as he has shown discomfort with the quality of the campaign rhetoric, and has balked at elements of his newfound strategy. But as much as Bill Kristol would like to deflect the responsibility from his candidate, the failure of the McCain campaign rests firmly with the candidate.

Now, as the Barack Obama as un-American Terrorist Sympathizer strategy has failed, the McCain campaign is making a belated effort to return to the McCain Brand: John McCain as courageous and measured centrist, who will bring balance to the Democratic majorities in Congress and steady leadership to a the nation in its hour of need. Finally, John McCain will reach out to the large political center, where once he found succor and support, and which in the sunset of the Bush era has once again emerged as the key to electoral success.

But it is too late for that. John McCain chose personal ambition over principle and trust in the American people. He took his beloved brand and tossed it to the gutter. His integrity and credibility—all one has in politics—have been destroyed. Instead of centered and wise, he has proven to be fickle and petulant and impetuous.

We will never know which is the real John McCain. But he alone is responsible for where he finds himself today. All he has left is to consider his legacy.

Credit default swaps and the crisis of confidence

Five years ago, billionaire investor and American icon Warren Buffett suggested that financial derivative products were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

Five years ago, few people were paying attention, and even fewer understood what he meant. Even today, as the term credit default swap (CDS) is migrating from the financial cable networks to CNN, MSNBC and the mainstream media, the critical role of these arcane derivative products in the undoing of the financial markets is not well understood.

The term derivative product is a general term for a contractual agreement between two parties whereby the counterparties exchange––or swap—payments based some underlying benchmarks, applied against a contract notional amount.

The most widely used derivatives are interest rate swaps, which account for more than 75% of the global $530 trillion derivatives market, compared to the 10% that comprise credit default swaps. In its most basic structure, an interest rate swap provides that Party A will pay Party B an amount equal to a fixed interest rate times the contract notional amount, and receive an amount equal to a variable interest rate times that same amount. Many businesses that borrow money from commercial banks at the variable prime rate use interest rate swaps to fix their annual cost of borrowing and avoid interest rate risk.

In contrast, credit default swaps are financial products that allows for the transfer of the default risk related to owning a corporate bond from one party to another. For example, imagine that before the current market meltdown, CalPERS––the large California public pension fund––owned $100 million of IBM bonds, but wanted to insure against the risk of a bond default. CalPERS could accomplish this by negotiating a $100 million, five-year credit default swap with AIG––which up until a month ago was a global, triple-A rated financial institution.

Under the terms of the swap, CalPERS would make an annual swap payment to AIG equal to––for example––1% of the $100 million swap notional amount. In return, AIG would pay CalPERS the amount of any losses that CalPERS realized in the event of a default by IBM. For example, if IBM went bankrupt during the contract period, and bondholders were only repaid twenty cents on the dollar, AIG would pay CalPERS $80 million. And to secure AIG’s obligations, the swap contract would require that if AIG were downgraded from triple-A level to below double-A, AIG would post collateral equal to 20% of the notional amount of the swap contract, or $20 million.

Then came the AIG collapse.

While the general view of the AIG collapse is that it was a function of collapse of the mortgage-backed securities market, in truth it was a direct consequence of AIG’s CDS exposure. Four weeks ago, AIG was a triple-A rated insurance company. Today, it is being dismantled. If AIG had large investment losses in mortgage-backed securities, but no CDS exposure, AIG would still be in business today.

In simple terms, AIG’s collapse came as a result of the following sequence of events:

1. In the wake of the decline in real estate prices, the market value of mortgage-backed securities declined.
2. Under accounting rules that were established after the downfall of Enron––implemented to require rapid disclosure of investment losses––AIG marked down the value of its mortgage-backed securities portfolio.
3. These investment losses resulted in a reduction of AIG’s capital reserves––the core measure of its financial strength.
4. As a result of the decline in AIG’s capital reserves, Standard & Poor’s and Moody’s Investors Service downgraded AIG from triple-A to the single-A level.
5. These rating downgrades to the single-A level triggered collateralization requirements under AIG’s CDS contracts.
6. The amount of the collateral that AIG had to produce under its estimated $450 billion of CDS contracts approximated $100 billion.

And AIG did not have $100 billion in available funds.

This was the explosive event that destroyed AIG. It was not the market losses on its investments in mortgage-backed securities. It was not payouts on CDS contracts where default events had actually occurred. It was a collateral call.

The AIG story illustrates two important aspects of the current crisis of confidence within the financial markets. First, AIG’s collapse in a matter of days resulted from the collateral requirements under the terms of contracts that are opaque, unregulated and difficult to track on corporate financial statements. As Buffett and others have suggested, the risk in the AIG derivatives portfolio was explosive—and ignored until it was too late.

Second, the AIG story illustrates how a collateral call under a CDS contract can have the effect of positioning the CDS counterparty—the institution on the other side that claims rights to the collateral—senior to the AIG policy holders and bondholders.

As US and European central bankers are working to define a collective strategy to rebuild confidence in the financial system and to reinvigorate inter-bank lending, the destabilizing impact of the CDS market remains one of the central problems to be addressed.

The problem seems straightforward. After the AIG collapse, how does one institution trust its exposure to another? If CitiBank seeks a loan from JPMorgan, how does JPMorgan know whether some event might be looming that will result in a collateral call under some of the myriad derivatives contracts to which CitiBank is a party, a collateral call that in a matter of hours could bring Citibank to its knees.

The US has now signed on to the British plan to make direct investments in banks, but simply injecting liquidity and capital will not address this concern. But US officials appear to be resisting the second British proposal––which provides for direct central bank guarantees of inter-bank loans. Like guaranteeing deposits, guaranteeing inter-bank loans would transfer the risk of the unknown from the banks to the central banks.

Paulson and Bernanke may view this last British proposal as one step too far in the socialization of the financial system. But until the CDS market is brought into an effective regulatory framework and the legal rights of creditors are clearly established, do we really have any choice but to take this next step?

It seems that long ago—weeks maybe—we stared the moral hazard issue in the eye. And we blinked.

Whatever the theoretical importance of letting people and institutions fail, it seems that we have already decided that as a matter of public policy and political priorities, we just can’t take the pain.

Deleveraging society

It remains unclear at this moment if there will be a resolution of the impasse surrounding the proposed $700 billion bank bailout bill. Since negotiations fell apart on Thursday, House Minority Leader John Boehner—with a brief cameo of John McCain—has been leading a phalanx of disgruntled House Republicans in opposition to the Main Street bailout of Wall Street.

Were that the situation was so simple.

The House Republican rerun of Pat Buchanan’s Peasants with Pitchforks routine would be charming, if it were not so off base. This financial crisis, while being billed as a Wall Street bailout, is all about Main Street. And if the House Republicans want to see the roots of this crisis, they need only look in a mirror. This crisis is all about debt. It is all about us.

Over the past quarter century—dating to the dawn of the Reagan Revolution in fact—America has become awash in debt, and sub-prime home mortgages are just the tip of the iceberg. Home mortgages. Credit cards. Auto loans. Business loans. Federal debt. As shown below, since 1980, our public debt has grown ten-fold, from $4.4 trillion to over $45 trillion


Somehow, in the early days of the Reagan years, one fundamental premise did not take root. While Reagan era luminaries such as David Stockman and Grover Norquist trumpeted about the notion that cutting revenue would lead inexorably to cutting expenditures, they underestimated the character and adaptability of the American political system. The abiding lesson of the Reagan years was not that Americans—people of thrift and hard work we were told—would embrace a government that did less for them so they could do more for themselves, but rather that there is nothing that we used to pay for with cash and hard work that we cannot instead pay for with debt—and leave for some future generation to deal with in the distant future.

Turns out, we are not as virtuous as we like to believe.

As illustrated below, our indebtedness—not just as a government but as a society—took off. As a percent of our national income, our cumulative debt burgeoned from a stable level of around 150% of GDP to 350% and counting.


As a nation, we have ceased to save, and—political rhetoric notwithstanding—we have never seriously considered that we should stop spending.

As we are getting in deeper and deeper debt, and as our national savings rate has declined to near-zero, we rely almost exclusively on foreigners to provide us with capital to fund our excessive public, private and corporate spending habits.

In addition, as the chart below illustrates, our growing debt is also increasingly owned by countries—China and Russia most notably—who are often our adversaries in international affairs. This fact was evident in the Fannie and Freddie bailout a few weeks ago, when Treasury Secretary Henry Paulson took pains to avoid any action that would diminish the value of the Fannie Mae bonds held by the Chinese, even as he wiped out the value of the preferred stock held by domestic banks.

Therefore, our growing indebtedness is quickly obliterating the dividing line between domestic fiscal policy and foreign policy. Like any debtor, we will increasingly have to temper our behavior in order to not get cross-wise with our creditors. If any of these holders of our bonds should decide to dump our paper or even move to diversify their central bank reserves out of US government securities, the dollar will fall further and our long-term interest rates will rise.


Our growing borrowing from abroad is a function of our continuing federal fiscal deficits, as well as our trade deficit—the difference between what we export and what we import. These two amounts together comprise our “current account” deficit, and generally reflect the amount of capital that we import every year to fund our public and private expenditures that we cannot pay for from governmental revenues, export earnings or out of our own annual savings.

The problem that we face is our growing addiction to debt as the driver of national income growth. The graph below presents the growth in national Gross Domestic Product over the past several decades, and illustrates the portion of that growth that can be accounted for through imported capital or financing as reflected in the current account deficit.

This data suggests that imported capital has funded an increasing share of our year-over-year GDP growth, and that since the beginning of this decade, the nation has experienced little growth in national income beyond that which has been purchased by borrowing against our future. While in all fairness, the current account deficit is not an exact proxy for imported capital—a portion of the trade deficit, for example, reflects accounting and other transactions—but the gist of the argument remains. The share of our annual GDP growth that is derived from infusions of foreign capital has been growing steadily over the course of this decade—the red line taking over the green—to the point where nearly all of our annual growth has been derived from foreign borrowing.

We are no longer a nation that is paying our own way and in control of our financial destiny, but rather have become addicted to increasing uses of debt to financing our way of life. These are not the characteristics of a great nation or a great people.


The obvious question for the next president will be how to change course. The crisis we face is not how to fix a banking crisis, but rather how to deleverage a society that has become increasingly dependent on debt and imported capital.

Historically, the traditional fix to excessive debt is inflation. As inflation grows, the borrowed dollars are paid back in a devalued currency.

And that strategy appears to be in play already. As this final graph illustrates, the decline in the dollar over the course of the decade against the Euro, and increasingly against the Chinese Renminbi will allow us to pay these countries back with a currency that will be worth far less to them then the currency they originally lent to us. If this seems a bit confusing, just consider that in 2001, oil was priced at $20 per barrel, compared to around $100 per barrel today. That illustrates the extent to which the dollars that we are using to pay back our borrowing are worth less in value—80% less in the case of oil value—than the dollars they lent to us a few years ago.


The risk, of course, is how long our international creditors will play this game with us, and when they will look to protect their own financial interests and be a bit less lenient in funding ours.

So as John Boehner and the House Republicans claim that they are looking out for Main Street, while decrying the abuses and profligacy of Wall Street, a long look in the mirror might serve them—and the rest of us—well. There are no innocents in this crisis, and the longer we refuse to look honestly at our complicity in the creation of this crisis, the steeper the cost will be of setting things right.

Plan B

Email query from the Caribbean:

Dem bald man say, You gotta give us $700 billion by Friday.
Dem beard man say, We’ll get back to you on the rest of this.
Dem bank man say, No vote now, sky gonna fall.
Dem law men say, F--- y'all. If Monday show and we still here. Wat den?

It is, of course, all a confidence game.

Markets are a confidence game—perhaps trust is a better word—built on the belief that tomorrow will come around and it will be a lot like today. That buyers and sellers will show up. That the rules will be enforced. And most trades are completed on a handshake.

And politics is a confidence game. Despite all the appearances of a knife fight, it is not unlike a trading floor. Deals are made on a handshake, and you are only as good as your word.

Today, the two games are joined. 535 members of Congress have to take the measure of Henry Paulson and Ben Bernanke. More than anything, the members detest and resent having their backs pushed up against the wall.

Deep down, they suspect this is just a Wall Street gangbang, as the banks push to include credit card receivables and other questionable assets in the grab bag, as the lobbyists swirl around looking for the greatest payday in the history of paydays, and as the CEOs with their homes in the Hamptons call to plead their case.

More than anything, the members cannot abide being told they have forty-eight hours, and they have no choice.

But what if they demur. What if through the peculiarities of the vote, the votes aren’t there.

Perhaps the members of the Republican Study Committee hunker down and decide to vote their convictions, and demand that investors and homeowners alike pay for their bad decisions.

Perhaps Bernie Sanders and the smattering of liberals not yet co-opted by the Democratic Leadership Council put their foot down on the principle that public aid must come at the price of public ownership.

And then the broad swath of the Center, cringing in embarrassment at being upstaged by the principled fringe, heed the populist call and abandon the Paulson Plan.

What then indeed?

Congress would look for a Plan B. And perhaps Plan B would focus on the underlying mortgages that are the root of the problem, rather than simply bailing out the financial intermediaries. After all, the fundamental problem with the mortgage-backed securities market is the lack of good information. With good information—however bad the news—liquidity would return to that market. Securities would find their appropriate market level.

Under a Plan B, Congress might create an interim insurance facility that would guarantee a portion of CDO cashflows—pending a workout of the underlying mortgages. Congress could direct the HFA and state mortgage finance agencies to work with troubled homeowners to restructure the terms of their mortgages, perhaps swapping a portion of the mortgage value for an equity share in future sale proceeds, to keep people in their homes and recoup some value over time. They could give bankruptcy judges the right to recast mortgages in default. And they could score political points by directing the FBI to focus on fraud and corruption in the finance industry.

For its part, the Fed window would be flung wide open for the banks and others who did not make bad choices to grab market share from those who did. And the market would do what it is supposed to do. Those who made bad choices suffer. Those who did not do well.

And there is a lot of money to be made on the hundreds of billions of CDOs that Paulson and Bernanke proposed to purchase for $700 billion, once information on the underlying assets is confirmed and value can be determined. Under Plan B, however, these profits would flow to hedge funds and private equity groups that would move in to acquire the illiquid assets that are now being marked to market at levels well below their real value. With aggressive federal action to validate and fix the underlying mortgages, a market for these securities would reemerge, and, with the prospect of profits to be made, every incentive will be in place to find and fix the underlying mortgages.

The problem, of course, is that Plan B is purely hypothetical. And it means that Monday morning would come without a fix in place. It means facing down the two wise men and their bailout plan and playing a game of chicken. And watching to see if the sky falls.

And there could be a lot of pain in the short-term. And in this case the short-term is the forty days before 435 members of Congress get their report cards from their constituents. Better to cast a vote for $700 billion and blame the bald guy if it fails, than bet on Plan B, even if, in the long-run, Plan B might be the right choice.

After all, as Lord Keynes famously said long ago, in the long-run, we are all dead.

The Gordian Knot

The swift demise of American capitalism did not arrive as imagined by John Dos Passos—farmers with pitchforks linked shoulder-to-shoulder with the urban proletariat, marching on Wall Street to tear down the House of Morgan—but rather at the urgings of America’s leading financiers, who have cast aside their dog-eared copies of Atlas Shrugged and are now looking to the Government, with pleading in their eyes and fear in their hearts, in the hope that someone can clean up the mess and make things right again.

It is truly a Gordian Knot that Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke are seeking to unravel, with threads that are interconnected and entangled.

Last Thursday evening, the two men met with leaders of Congress, and by all accounts left them speechless, as they described the cataclysm that might yet unfold. Though the meeting was not public, one can imagine how the presentation might have unfolded.

Paulson and Bernanke began by offering a timeline of events as the markets spiraled out of control—perhaps using AIG as Exhibit A. They described how the housing bubble, irresponsible lending and borrowing practices, and complex mortgage securitization structures led to the issuance of billions of dollars of securities that were vulnerable to a downturn. They explained how, as the housing market deteriorated, the mortgage-backed securities lost value and became illiquid. Under accounting mark-to-market rules established after the Enron collapse, the banks recognized these losses. As losses grew, the firms lost their capital reserves, their strong bond ratings, and their access to low-cost capital. Panic ensued. Banks and other financial institutions stopped lending as they moved to conserve cash. Short-term interest rates shot up in a matter of hours.

Almost overnight, the world lending markets dried up.

Paulson and Bernanke then pointed to two non-financial events that illustrated the public panic that would ensue if action were not taken to stanch the downward spiral.

The first event was the swift run on money market funds—nearly $90 billion withdrawn in one day—that came in the wake of the Fed’s decision not to bail out Lehman Brothers. Clearly, Paulson and Bernanke failed to anticipate the impact of a failure by Lehman on money market funds that invested in its commercial paper, and the run on money market funds that ensued after one fund, the Primary Fund, “broke the buck” and passed on its losses in Lehman paper to its money market fund investors.

The second event was contemporaneous run on AIG offices in Asia, where insurance policyholders frantically sought to cash in their policies prior to the looming collapse of the insurance giant. Facing public unrest, Asian central bank officials—who happen to be the largest holders of US Treasury securities—contacted Washington with some succinct advice: Fix it.

But as harsh as these real world examples are of the unraveling that might ensue if Paulson and Bernanke are not successful, there is a more troubling scenario that might have stunned Congressional leaders into silence. Perhaps, Paulson and Bernanke then turned to the problem that surfaced just as AIG teetered on the brink, before Paulson rushed in to buy the company last week.

AIG, like Lehman and Bear Stearns, is a major participant in the credit default swap market. The CDS market links buyers and sellers of corporate default risk, and offers the holders of corporate bonds the ability to sell the default risk associated with those bonds to a counter party. And as in most derivative contracts, credit terms are agreed to pursuant to which each party agrees to collateralize its obligations to the other party with Treasury securities, should its own credit be downgraded.

According to public accounts, just before the takeover, AIG had a collateral call on $60 billion of CDS contracts that required that the company immediately post $15 billion of Treasury securities as collateral, and anticipated a similar demand under a further $380 billion of its CDS contracts.

The $15 billion collateral call would have had an immediate impact on all of AIGs creditors and policyholders, as it would give the CDS counterparties a prior claim on those funds, putting their claims ahead of the range of other AIG creditors. A comparable collateral call on the other $380 billion of CDS contracts would have increased the aggregate collateral call to $100 billion, wiping out the company’s resources.

$100 billion of US Treasuries. That's 2% of the total volume of US Treasury securities. In the world.

What Paulson and Bernanke might have pointed out to the Congressional leadership, is that there are $62 trillion of CDS contracts currently outstanding—among American and international commercial banks, investment banks, hedge funds, pension funds and others. $62 trillion of uncharted obligations with attributes of debt to one party and a high-stakes gamble to the other.

$62 trillion. An amount greater that the $54 trillion gross domestic product of the entire world, as estimate by the World Bank.

On Sunday House Minority Leader John Boehner declined to describe the words that silenced Congressional leaders at the meeting, noting that there are certain things that you don’t discuss in public. Illiquidity in the banking system is something you can discuss. A run on money funds that was staunched you can discuss.

A universe of $62 trillion CDS contracts—defaults on which can send participants scrambling to seize collateral and protect their interests—derivative products whose terms and conditions are not subject to regulation or supervision—financial obligations once described by Warren Buffet as financial weapons of mass destruction—the impact of which no one really understands.

That is something you don’t talk about on the Sunday talk shows.

It is too much to grasp, really.

God's wars

It is five in the morning and I am wide-awake.

Nothing keeps me up at night. I have always been a sound sleeper, never one to get up and read in the middle of the night. That would be my wife. But it is five in the morning and I am wide-awake.

I have not written on the Sarah Palin nomination prior to now, frankly, because I did not feel I knew enough. I have worked with many Governors, and other politicians, and I am quite comfortable that people can surprise you. You just don’t know. I did not have a sense of how she thinks, and I did not have a sense of how she carries herself.

The strongest signal to me were comments from Gary Bauer, and his enthusiasm for her based on her stance on a vary narrow set of issues. I know as a general matter that if Gary Bauer feels one way on something, I am bound to end up on the other side.

But her comments in her interview with Charles Gibson on ABC—and equally her lack of humility—on foreign policy were astonishing. She dissembled on the question of whether the Iraq War is a task from God. I had watched the whole video of her speaking before a church audience and she was not—as she suggested—arguing, as Lincoln did, that she meant only that we should hope we are on God’s side. His remark was made when considering the devastation and horror of the Civil War, and was a statement of humility in the face of horror.

But that comment was not decisive, as none of us would like to be held to account for every public utterance.

Rather, it was her comfort with war—combined with a very simplistic view of events. Hers is a Manichean worldview, of those who are for us and those who are against us. That is what pierced through. Her answers were largely scripted, but underlying the script, her comfort with that world shone through to me.

She brings a determined fervor to her comments that suggest that war with Russia would be a fine notion, if it grew out of an obligation to Georgia. She offered no sense that Russia’s volatility was a foreign policy challenge to be managed with the goal of avoiding war.

Last week, Dick Cheney described our conflict with Russia as one that pitted them against the “Free World.” Harkening back to the days of us vs. the Communists, he spoke with the certainty of a great ideological warrior.

The problem is that we are no longer in a great ideological war. The Berlin Wall is gone, the Iron Curtain is no longer, and however imperfect their democracy, Russia's future must now be guided by the Russian people. Russia is a capitalist nation, part of the world economy, and an integral trading partner with Europe and Asia, just as we wanted them to be. Our relations with them are no longer black and white, and the challenges with them are as they are with all nations, about how we navigate power, self-interest and mutual interest.

Eight years ago, George W. Bush preached humility in the world, and it masked his sense of good and evil in the world that has informed his conduct of foreign policy. Sarah Palin came across to me as a true believer, equally comfortable with a righteous sense of good and evil, but lacking Bush’s political sense to keep it under wraps—or Lincoln’s deeply rooted understanding that even as one must fight battles, the certainty of good and evil is never so simple.

I suspect that is why she appeals to Gary Bauer, and why it is five in the morning and I am wide-awake.

Country first

Got some blowback from the last piece on our fiscal situation. Some have questioned my mental health for suggesting that whatever our financial mess, it is inconceivable that a Democrat could do anything but make it far worse. Whatever the cause, it is not the Republicans.

It is Congress, they pass the money bills! It is old people and the AARP! It is Democrats who love to spend!

This argument reflects the old adage that, “If you aren’t a Democrat in your 20s you have no heart. If aren’t a Republican in your 40s you have no brain.” However, while Newt Gingrich and others worked hard to change the first part, the Republican Party long ago abandoned its principles of fiscal conservatism that were the root of the second part.

In the 1970s, as the Republican Party was embracing supply-side economics and jettisoning its long-held, conservative fiscal principles, Milton Friedman cautioned his Republican colleagues not to be disingenuous. Despite the tax-cut rhetoric that was becoming the Party’s new mantra, the true size of government is measured by spending, and fiscal deficits are simply deferred tax increases. To cut taxes and keep spending is not conservative, he insisted, it is simply dishonest.

As much as McCain supporters would like to cling to the notion that the Republican Party has remained true to its long-abandoned principles, the historical evidence does not support their argument. People, of course, are unlikely to change their political views based on actual data—and no right-thinking Republican would acknowledge that Bill Clinton and Robert Rubin did a better job on the economy that either George Bush and Michael Boskin—but the argument that Republicans are either the party committed to smaller government or balanced budgets is simply specious.

As illustrated in the graph below, going back forty years to 1968—the starting date for data readily available from OMB and the Congressional Budget Office—through twenty-four years of Republican leadership and sixteen years of Democrat leadership, the overall size of the federal government, as measured by total outlays, has remained largely constant at 20% of the Gross Domestic Product—economic shorthand for the size of the US economy. Most notable during this period has been the growth of entitlement programs—primarily Social Security, Medicare and Medicaid—which have risen from 5.6% of GDP to 10.6% of GDP, and the concurrent 44% decline in discretionary spending, which largely comprises defense and domestic spending.



As this graph illustrates, the most dramatic decline in discretionary spending came under Nixon—the last Republican president elected as a traditional fiscal conservative before the Reagan Revolution—as defense spending declined significantly with the wind-down of the Vietnam War. Discretionary spending also declined under Clinton—who on fiscal matters famously pronounced “We are all Eisenhauer Republicans now"—though Republicans are always quick to take credit for Clinton's budget success, a claim that is not supported by the data presented below. And discretionary spending decreased modestly under Reagan, as defense spending rose while discretionary spending declined.

Under Jimmy Carter, overall discretionary spending was flat—defense spending rose a bit, while domestic spending fell—while discretionary spending rose as a percentage of GDP under Ford and George W. Bush.

The data shows that discretionary spending, and in particular domestic spending, fell under both Democratic presidents, while it rose under both Bush presidents. The data on the public debt is less ambiguous, as illustrated below. Here, the pattern is clear. The change in Republican Party doctrine to embrace of supply-side economics brought with it an acceptance of deficit spending and a build-up of the national debt as the price of growth—even if over the long-term the growth never brought the books back into balance.



As illustrated here, the national debt declined under Nixon—an old-time conservative Republican—as well as under Carter.

Fiscal deficits took off during the Reagan presidency, as the Reagan tax cuts were implemented without commensurate reductions in federal outlays. The public debt doubled as a percentage of GDP during the Reagan-Bush years. During the Clinton years, shrinking deficits and ultimately budget surpluses contributed to a decline in public debt. Finally, under George W. Bush, new tax cuts combined with war spending have contributed to renewed growth in the national debt.

Faced with the evidence that Republican presidents have left a trail of deficits and debt in their wake, supporters insist that deficits are the fault of Congress, and particularly of Congressional Democrats. But here again, the OMB data tells a different story. Executive budget recommendations and the impact of Congress on spending and deficits are tracked within OMB data beginning in 1982. The OMB data presents the executive budget recommendation, the actual deficit that was realized, and determines the extent to which the difference—generally a higher deficit—resulted from Congressional over-appropriation, economic conditions or technical factors.

The graph below illustrates the annual executive budget recommendation for each year, and the impact of subsequent Congressional action in red. While Congressional spending bills over-spent the executive recommendations in almost all years, the impact of this overspending was generally a fraction of the deficit starting point in the executive budget.



This data suggests that—as one would hope would be the case—that the primary driver of fiscal outcomes is the recommended administration budget, despite the desire to put our fiscal mess at the feet of Congress. During the period 1982-2007, administration budget recommendations contained average deficits of 10% of outlays, while the average impact of Congressional over-spending was 1.9% of outlays. Prior to the current administration, where the impact of Congress is overstated due to administration decision to keep war funding out of the executive budget and rely instead on supplemental appropriations, Congressional over-spending averaged just 0.8% per year.

Nor does the data support the notion that the fiscal culprit is the innate profligacy of Democrats. Congressional over-spending during years when Democrats controlled both houses of Congress averaged 0.4% of outlays, and averaged 0.6% when Democrats controlled both houses of Congress and the White House. During years when Republicans controlled both houses of Congress, overspending averaged 2.3% of outlays, and it averaged 4.6% when Republicans controlled both houses of Congress and the White House.

No doubt the McCain campaign will continue to push the time-honored attacks against the tax and spend Democrats. A visceral appeal against "Barack Reid Pelosi O'Biden." But they will offer no evidence to support their claims, because the Republicans long ago lost that high ground. The fact is that both parties spend; the difference is whether they pay for their spending, or borrow the money and push off the day of reckoning.

Then they will argue that their policies are pro-growth. And, of course, that is true. All things being equal, lower taxes are stimulative. But that is not supply-side magic, just the old school Keynesian economics that Friedman inveighed against. To argue that we must continue with the policies that have gotten us here, you have to answer the question of how and when will we stop digging ourselves into an ever-deeper hole, and why it will not be increasingly painful the longer we wait.

This is the dilemma that years of debt and deficits have left us with: there are few good choices left today.

But as our fiscal situation is weighing heavier—as each American family is now burdened with its $265,000 share of the new debts that the nation has taken on in the past seven years—it is past time that we move beyond the old rhetoric and acknowledge—as Milton Friedman suggested years ago—that continuing these fiscal policies is irresponsible.

We all know that cutting taxes is great politics, and we would all rather pay less than more, but isn't John McCain running on the principle that it is time to put the country first?

At the precipice

Four years ago, with total aplomb, George W. Bush faced the nation and argued that if he were not reelected, all notions of “fiscal sanity” would be gone in Washington, DC. The notion of this president as the boy who held his finger in the fiscal dike would be comical if it were not so tragic.

One need only walk around New York City and see townhouses for sale with prices in dollars and euros to realize how far the mighty have fallen. One need only travel in foreign capitals to realize that while our infrastructure falls into disrepair, other nations are robustly investing in their future. Only a fool can argue as our debt burden grows and the dollar slides that we are not standing at a precipice.

Still, with an economic plan that offers more and deeper tax cuts, and no grasp of the consequences of continuing down the same path, John McCain is proving that the Republican Brand endures.

Republican: Balanced budgets. Small government. Individual liberty.

Not since George H.W. Bush almost thirty years ago attacked Ronald Reagan’s proposed tax cuts as Voodoo Economics has a national Republican leader stood up for the most basic tenets of Republican doctrine. Or what once was Republican doctrine.

In the 1980 contest between Bush and Reagan, the Republican Party formally turned away from any substantive commitment to fiscal responsibility because, as Grover Norquist—the founder of American’s for Tax Reform and one of the architects of the contemporary Republican coalition—likes to point out, the constituency that votes on the basis of balanced budgets is small—generally the old money and Wall Street set—and can be bought by a commitment to cutting taxes.

When Ronald Reagan took office, the public debt stood at $712 billion. Twelve years later, it had increased more than four-fold to $3.2 trillion. Under Bill Clinton’s watch, the increase was a mere $70 billion in eight years, or 2%. When George W. Bush took office, the public debt stood at $3.3 trillion. This year, it stands at $5.4 trillion, and increase of 64%.

Still today, Republicans claim the principles of fiscal responsibility as their own, and decry Democratic profligacy. But what data are they looking at? Coca Cola was once sold as a health elixir, but the evidence would prove otherwise. Where is the truth in advertising that adheres to the most basic areas of civic choice?

Today, any semblance of the historic identity of the Republican Party has been sundered. Based on Concord Coalition data, the total fiscal burden—including public debt and future unfunded entitlements—on each American totals $175,000, or $455,000 on each household. Eight years ago, these amounts were $72,500 per person, or $188,750 on each household. Therefore, the price of the past eight years—of tax cuts and massive increases in spending—has been over $100,000 per person, or $265,000 per family.

$265,000 per family. Enough to put four kids through the average public university, but instead just a burden on America's future.

Compare these numbers to per capita income of $33,250 and median family income of just over $50,000. Consider the real struggle that most families face to put kids through college, and the ease with which this new $265,000 obligation has been foisted on those same families.

This is not a theoretical debt burden, but rather the real cost of our current liabilities. It is the real world manifestation of Republican icon Milton Friedman’s wisdom—offered to contradict the economic hocus pocus of supply-siders—that a fiscal deficit is simply a commitment to raise taxes in the future. Deficit spending, as true Republicans easily grasped, is simply evidence of political opportunism and moral weakness.

The simple fact is that in 1982 the Republican Party walked away from fiscal responsibility, as it fell prey to—in the words of long-time Republican wise man Pete Peterson—the unholy alliance of tax-cutting and big spending Republicans, and their grip on the Party is as tight as ever.

Where is John McCain's political courage today? How is he putting the Country First today when he trades away his once-valued integrity for votes, even as his plans will foist an ever greater fiscal burden on the country's future?

This issue is manifest in the debate in the Presidential race over extending the 2001 and 2003 tax cuts. These tax cuts—which John McCain opposed when they were originally enacted for being skewed to the rich and inappropriate as the nation went to war—were approved in a manner of unmatched cynicism as they were set to expire within a ten-year timeframe to create a pretense of being “revenue-neutral,” even as the intention from inception was to characterize efforts to oppose extending them as a tax increase.

Today, John McCain proposes new cuts in corporate tax rates in addition to extending the 2001 and 2003 legislation as it expires. The Office of Management and Budget projects the cost of an extension of the 2001 and 2003 tax cuts, without regard to the additional corporate tax cuts, at $2 trillion. Meanwhile, McCain proposes to pay this cost through eliminating Congressional earmarks, which according to Citizens Against Government Waste peaked in 2005 at a cost of $27 billion. Therefore, even if all earmarks are eliminated, at their peak they would barely pay for one-third of the interest cost alone of extending the tax cuts.

In contrast, in 1993, Bill Clinton took the Democrat Party in the opposite direction, as he moved the party away from its roots, and embraced the very principles that the Republicans eschewed. As Bill Clinton declaimed early in his presidency, "We're all Eisenhower Republicans now. We stand for lower deficits and free trade and the bond market.” Today, Democrats propose to shift the tax burden toward the wealthiest Americans in favor of the middle class—much McCain advocated at the time of the 2001 and 2003 tax cuts—while adhering to the revenue neutral principle that was once claimed by Republicans.

Over the weeks to come, John McCain will pull the old horse out of the barn for one more run around the track. He will claim the Republican mantle of fiscal responsibility with the full-throated enthusiasm of either a naïf or a craven opportunist.

But will people notice that the horse is dead? Will the depth of the Republican brand still have enough juice to offer the voters succor one last time?

As Americans sit around the kitchen table, will they understand that the $265,000 that they have taken on in the last eight years is the price they will have to pay for failing to challenge those who prey on their optimism and their patriotism?

Will they understand that every tax cut and war and entitlement comes with a price and that none of the goodies that they are offered are ultimately paid for by anyone but themselves?

And will they understand that unless they stop accepting the easy answers, the price tag the next time around is only going to be higher?

A word please?

Enough with all of this.

Just ask a simple question: “Did John McCain know that Bristol was pregnant?”

There are two possible answers. Yes, he did. Or, no, he did not.

Is it really possible that the answer is yes?

Could John McCain, having realized that he could not pick his friend Joe Lieberman due to the ruthless blowback from the right wing and evangelical community, picked a woman he barely knew—that everyone barely knew—fully aware that her 17 year-old, unmarried daughter was pregnant?

That is nearly inconceivable. He would announce his selection, the attractive, strong and valiantly conservative Governor of Alaska to be his running mate right in the wake of Barack Obama’s speech. This would counter the Democrat bounce and energize the Party in the time leading up to the convention.

And what? This secret would not get out? The news would not undermine the energy he sought to build as he changed the conversation from Barack to the Republican ticket?

No. Sorry. That simply is not possible.

Therefore, the answer must be no, John McCain did not know at the time he named Sarah Palin to be his running mate.

But how could this information have slipped through the cracks? Clearly, it was not the fault of those responsible for vetting the candidate. Should they have known that she supported the Bridge to Nowhere before she opposed it? Sure. Should they have known that she supported a windfall profits tax on oil companies in Alaska? Absolutely. But no Washington lawyer would have written on the standard list of questions, “Which of your children are pregnant?” I don’t even think it would be legal.

So the answer really can only be that for reasons only known to Sarah Palin, she declined to mention it. For reasons that we may never not, either (a) it slipped her mind, or (b) she believed that it was a private matter and none of John McCain’s business, or (c) she thought it would hurt her chances, or perhaps, (d) she never really thought she was under serious consideration, so why bother?

Perhaps we will never know. I tend to go with (d). After all, even her mother-in-law thought she was kidding—and plans to vote for Obama in any event.

But just imagine how awkward it must have been. Some moments after he made his decision, and the word was going out. She thought, ‘Oh, my.’ And she turned to the presumptive Republican nominee, and in a soft voice said, “Senator, a word please…”

What is it with white people?

So, my wife and I are sitting here, and I look to her and just shake my head. What is it about these White kids that they just keep having babies? Wouldn't you know that that man makes the effort to put a White on the ticket, and a woman at that, and the next thing you know, her daughter is pregnant!

I mean really, what with all the advantages they give White people, the least you would think that they would teach their kids some values and not go around being like that. And now they say that she was the same thing, pregnant in high school and had to get married and all?

The shame of it is that this is going to set White people back another 20 years. Not going to find another presidential nominee picking a White person to be on the ticket, I don't care how badly they want to reach out and get the base motivated and whatnot. I don't care who says it's a White persons turn, or any of that. I just say enough of that. They can't show up on a a ticket for more than an hour, or day, or what, and one of them shows up being pregnant.

So I'm done, and my wife gets all up in my face. You know, Hell, she says, you don't know what our kids do, and where they do it, and with whom. So why are you getting so worked up about this poor White woman? She can't control what her daughter does. (Ain't that the truth, I manage to butt in.) So don't tell me that just because she is White, you are going to blame her for it, and tell me that because of that, you don't think she should run the country.

Why you men! You wouldn't say boo if she was a man! If she was a White man (Then she wouldn't be a she, now would she, I chime in, but she ignores me. Whatever.) you wouldn't have a word to say, except maybe for some comment about Where's was the mother at?

After all, it was a man that did this to her, but they are going to do the right thing, and get married.

Who is? I ask.

Bristol. Her daughter. The girl who's pregnant. And Levi.

Levi? Who's Levi?

He's the one who went and got her pregnant.

Levi?

Figures. I knew the Jews were behind this.

Casus belli or modus vivendi?

Since early August, when Russian tanks pierced the mountain passes of South Ossetia and rumbled into the Georgian heartland, we have found ourselves in an oddly familiar place. It is like one of those moments when you return to your old neighborhood after decades away. As you walk the streets, there is a warm feeling of familiarity. A sense of comfort, of a time when life was simpler and the rules were clear.

Oh, for the Cold War and the remembrances of things past. It was a time moral clarity, when partisanship ended at the water's edge, of the Marlboro Man and enemies in black hats.

If the Cold War ended one evening in December 1991—when then-Russian President Boris Yeltsin and his compatriots conspired to topple the Soviet state—perhaps the uni-polar world of American power that ensued ended this month. This is not to say that Russia has reemerged as a counterweight to American power, but rather that Russia’s willingness to push back against the West’s determined policy of encirclement has illuminated the limits of American power, and perhaps of American judgment.

The emergence of our new conflict with Russia has come with breathtaking swiftness and the verbal invective has been startling. Condi Rice publicly mocked Vladimir Putin and labeled Russian behavior bizarre. Zbigniew Brzezinski likened the Russian aggression to Hitler’s Germany. Across the political and media class we are assured that we are witnessing unwarranted and irrational aggression. Russian conduct has undermined US-Russian relations and threatens to plunge the world into a new Cold War.

But if there is a surprise here, it is that there is such surprise here. After all, Putin has decried NATO expansion for several years and his concerns have been largely ignored. When Russian tanks rolled into Georgia, Putin's objective was not territorial aggression, but rather to waken the West—and America in particular—to Russia's anger at the continuing policies of encirclement. Ironically, Putin's objective was not to get into a debate about the future of Georgia and South Ossetia, but rather—no doubt clumsily—to elevate bi-lateral discussions to the strategic level.

But as the crisis deepens, as American politicians of all stripes pile on, and as Russia deepens her diplomatic isolation, one has to ask if this is the direction that we want go. Is it really in our interest to play a game of chicken with a nuclear-armed and paranoid adversary?

It did not have to come to this. In the wake of 9/11, the event that was supposed to change everything, Putin made his case for a grand alliance with America. After the planes hit, Putin was the first international leader to call George Bush and pledge his nation’s solidarity and support. Russia provided critical support to US efforts in Afghanistan—where the US had few intelligence assets on the ground—including helping the CIA build critical alliances in Afghanistan and supporting the development of US bases in the former Soviet states in Central Asia. Beyond Afghanistan, Putin proposed to be a partner in dealing with Iran, whose radical Islamism was a vital threat to Russia, within and without.

For Russia’s part, Putin asked that we recognize Russian strategic concerns along with our own. First, he asked that we temper our response to Russia’s internal struggles with Chechen terrorists. Second, he asked that we curtail the expansion of NATO into Georgia, and particularly into Ukraine. Finally, he asked that we not locate missile defense systems in Eastern Europe.

Russia’s fears of America were not irrational, despite our political and media consensus to the contrary. After all, in the wake of the dismantling of the Soviet Union, American policy remained overtly hostile to Russia. Despite assurances to the contrary from Presidents Reagan and Bush, the US supported NATO expansion to Russia's borders; Neoconservatives targeted Russia and Putin for regime change; and mainstream policy advisors argued that US policy must now promote the dismemberment of the Russia.

Putin, it should be noted, was and remains immensely popular in Russia. He has brought stability and pride to the Russian people, after the pain that ensued with the dismemberment of the Soviet empire as Russian people lived through debasement at the hands of their archrival; the destruction of their currency, personal saving and standard of living; environmental degradation through chemical and nuclear contamination; a dramatic decline in mortality; years of internal bombings and terrorism in the nation’s capital at the hands of national separatists; and the plundering of national wealth at the hands of their elected leadership.

Intelligence analyst George Friedman argues that the defining provocation by the West was the Kosovo conflict in 1999. That action—heralded as a success in the West—was implemented under the auspices of NATO after Russia blocked UN action. That event marked the ascendency of NATO—an organization in which Russia has no voice—as an international body empowered to act in support of separatist movements without preexisting legal authority to do so. That authority was vested in the United Nations, which embodied two principles. First, that borders were defined and frozen. Second, that action to change borders could not be undertaken without UN sanction.

For Russia, a country with literally hundreds of ethnic groups, regions and languages, the Kosovo issue and the negation of UN authority threatened to undermine its control of its own borders and state. The West’s support of Kosovo’s declaration of independence earlier this year marked the final step in the undermining of international institutions and rules governing international relations, borders and sovereignty. From the Russian perspective, with Kosovo, the West had laid the legal groundwork for actions not simply to contain Russia, but to begin to break it apart.

When Georgia launched its assault on South Ossetia, Putin seized the moment to raise the question: What rules are going to govern international law and sovereignty in the years ahead? Will the UN rules and the notion of fixed borders apply, as his neighbor to the Georgia claimed in justifying its invasion, or were we going to live under the new Kosovo rules, that the Americans and the West had now embraced, when might would replace right? If NATO could usurp UN authority and christen Kosovo a state, Russia could do the same.

When American Secretary of Defense Robert Gates promptly announced that under no circumstances would America come to Georgia’s aid militarily, he was simply affirming what Putin knew to be the case: In the wake of two long wars and a debased currency, the US has become long on hubris and short on stick, and would not come to Georgia's defense. The era of American uni-polar authority was pronounced to be a dead letter.

Seven years ago, when we were stronger and Russia was weaker, Putin proposed a partnership with America, but we demurred. Yet today, as we face a hostile and expansionist Iran, and a resurgent Taliban, Russia continues to share our interests in controlling Iran and Jihadism. Today, as before, Russia’s cooperation is critical to our efforts in Afghanistan. And today, Russia has become a critical source of energy to Europe and a true partner in the world economy. Today, the logic of US policy that seeks to further destabilize Russia is not apparent. Perhaps, given the challenges we face in the world, and the real threats to our national and economic security, we should consider setting aside our animus toward Russia, just for a little while.

The irony is that Putin does not want the Kosovo rules or a war with the West. The Russian leader knows well that a new arms race will undermine Russia’s future and ability to build a real economy. Sending Russian tanks into Georgia was not a provocation. Quite the contrary. Vladimir Putin was just trying to get our attention.

Perhaps it is time that someone listens.

Ivan's ghost

I call on all governments to join with the United States and the community of law-abiding nations in prohibiting, investigating, and prosecuting all acts of torture and in undertaking to prevent other cruel and unusual punishment… Nowhere should the midnight knock foreshadow a nightmare of state-commissioned crime. The suffering of torture victims must end, and the United States calls on all governments to assume this great mission.
President George W. Bush. June 26, 2003

When Dan Levin was appointed to head the Office of Legal Counsel—the Deputy Attorney General whose legal judgments determine what is legal and what is not—in 2005, it fell to him to address the question that loomed as a brewing crisis deep inside the Bush Administration: What constituted torture, and were the interrogation practices that had come to be accepted as permissible at the CIA Black Sites and Guantanamo Bay—but which were rejected as torture by the FBI and many in the military—illegal under US and international law?

Levin, a meticulous lawyer, ultimately determined that he could only parse the meanings of suffering and pain, and offer guidance on the outer limits of suffering that agents of the United States government could legally inflict on prisoners, if he subjected himself to the interrogation practices that his opinion sought to judge. And so he did.

Levin’s actions defined the seriousness of purpose that characterized those who put their professional integrity and careers on the line to oppose the power of the Vice Presidency in the Bush Administration, and oppose the policies and practices that characterized the Dark Side of the Global War on Terror.

All Americans should read The Dark Side, Jane Mayer’s new book on the GWOT, and the battle that it depicts for the hearts, minds and soul of America that was fought between and among senior members of the Bush administration. Try as one might to view this as partisan treatise, one comes to the inescapable realization that it is about the seductive quality of retribution.

This is not a partisan issue for the simple reason—as Mayer has noted about her own post-9/11 sympathies—that in the early days following 9/11, New Yorkers—and Americans—of all political stripes, were little concerned by thoughts that our nation might overstep the bounds of legality, propriety and moral conduct in the GWOT that would unfold.

The apparent fact is that the interrogation practices at issue yielded little if any actionable intelligence. Now, we are left to look into the mirror as Americans and ponder the excesses that were done in our name, and that we condoned in the wake of the fear and moral outrage brought on by the 9/11 attacks. Excesses that were condoned and embraced as the price of fighting this new type of war that demanded extraordinary measures, even as those within the Administration with experience in these matters argued—almost to a man—the methods employed would not be effective.

This book forces the reader to consider questions far beyond the simple question of the effectiveness of torture as an intelligence tool—justified under the ticking bomb rationale and the popularity of the TV show 24. What about kidnapping and torturing an innocent bystander? Would intent or lack thereof suffice to provide protection against criminal charges or war crimes prosecution? What if the information gleaned from torture was not critical, or proved unreliable? What if years passed and the ticking bomb argument had long faded? What if at every step of the way, dissenters at senior levels argued that the actions were illegal? What if the FBI as an institution dissented and declined to participate, and the military leadership and legal counsel argued that the entire infrastructure put in place following 9/11 was a legal and moral violation of the nation’s history and purpose?

Now, as we recognize the passing of Alexander Solzhenitsyn, we have to consider where we go from here. Where do we go as a nation that willfully embraced inhumane and illegal actions not in pursuit of information, but for the satisfactions of retribution. As we recall the Life of Ivan Denisovich—the iconic symbolic of a government’s abuse of power—we must now consider our complicity in the life of Khaled el-Masri, a German citizen who was kidnapped, flown to a secret prison and tortured—his life destroyed—all while his American overseers believed him to be innocent. Not Masri because he was one person caught up in Kafka’s nightmare, but because he was but one person caught up in a system of our creation that to this day the public believes was justified.

He who does battle with monsters needs to watch out lest he in the process becomes a monster himself. And if you stare too long into the abyss, the abyss will stare right back at you.
Frederich Neitzsche. Beyond Good and Evil

Read Mayer’s book. Consider the comment of a CIA official involved in the Masri affair when George Tenet, Condi Rice and Colin Powell debated the need to tell the German government what they had done to one of their citizens, “For guys who are basically running ‘Kidnap Inc.’ they sure were pretty squeamish.”

How squeamish will we be when forced to come to grips with the events that transpired? What happens when on a trip to Europe, Dick Cheney or Alberto Gonzales or one of many others is arrested and presented with an indictment on war crimes or criminal conspiracy charges by Germany, on behalf of Khaled el-Masri, or some other nation whose citizens were caught in our web? How will the American President lead the nation through the outrage that will ensue?

For all of the talk of post-partisanship, the demands on America’s new president to lead us through the recriminations that will ensue will be trying. The true test of leadership will be how the president we select is able to temper the emotions of their own partisans, and lead us as a nation through an acceptance of the facts and a resolution of the direction forward. John McCain or Barack Obama may face challenges on the economy and the wars, but the greatest challenge may well be leading us through the miasma of emotions and politics that will ensue as we finally come to grips with what has become of us.

Endgame

Could there be a worse idea from the Obama campaign than declaring victory on May 20th? Maybe, but for a campaign that has ridden successfully through some very rough waters, you would not imagine they would save their tactical miscues for the all-important endgame. Or pronounce them with such fanfare in advance.

Clearly, the campaign leadership is tired, and hoping to bring this long saga to an end. But what they suggest as an event to provide closure will do exactly the opposite.

This has been a long and dramatic campaign. Indeed, through all of the drama and the sweep of the narrative—from the early predictions of an all-New York contest pitting Clinton against Guiliani, to Michael Bloomberg’s flirtations, Mark Warner’s non-flirtations and Fred Thompson’s failed flirtations, to these final months of the resurgent Clinton drive—two things have proven out. First, public opinion polling is a ragged science. Second, hubris will not go unpunished.

Which brings us back to May 20th.

Barack Obama has won the Democratic nomination. Barring the tsunami that remains the whispered hope of Terry McAuliffe, Howard Wolfson and Harold Ickes, the race is over. They held a primary in West Virginia, and no one cared.

What is left in the Democrat race is the denouement of Hillary Clinton’s campaign and the beginning of the reconstruction of the spirit and determination of a divided party. The Hudna, if you will, when emotions calm in advance of the real battles yet to come.

What remains is for Hillary Clinton to choose her time and place for showing the strength of character and resolve to lead her proud and determined troupes into the tent. This Obama cannot do, but this the Obama campaign can surely undermine. Clinton and even more her followers need time and calm and an opening to move toward unity. The test of character for Obama is remain still and allow this to happen.

The Clinton campaign has mapped out the steps for this to occur. Like the Obama campaign, they have broadcast their plans for the endgame. Oregon and Kentucky will vote. The Party will meet in due course on May 31st to address the Florida and Michigan situation. Puerto Rico will vote on June 3rd, two weeks from now.

And then it will be over. As Clinton has suggested, all voters will have had their say. All outstanding issues will have been formally addressed. The math will be the math, and the outcome will be clear. The dance will be complete. Then, after whatever negotiations are to be had—whether around campaign debts, the vice-presidency or a nomination to the Supreme Court—Clinton will stand with Obama on a stage.

Standing with him at her side, she will offer her fiery oratory against John McCain, call her supporters to arms, declare her full-throated support of her erstwhile adversary, and stand united with him, hands joined and arms aloft.

Which brings us back to May 20th.

The proposed victory declaration does nothing to advance this agenda. Clinton’s West Virginia victory offered conclusive proof that the end has come. This is the endgame not of the battles but of the party nomination process. This is a time for quiet attention to mending, rather than the pounding of chests and gloating that will only cast new fuel on the dying embers, and rip open wounds that are just looking for reasons to heal.

Gas tax holiday nonsense

There really was not good news last week. Facing the combined impact of skyrocketing oil prices, rising food prices, falling home prices and tighter credit, the American consumer is in a bad mood, and the University of Michigan consumer sentiment index in April fell below forecast level to the lowest level since 1982. In addition, the U.S. economy lost 80,000 jobs in March, the most in five years—bringing the total jobs lost over the first quarter of the year to a hair under a quarter million—and the jobless rate rose to 5.1 percent, the highest level in more than two years.

For the first time in a generation—since the Ronald Reagan pronounced it Morning in America—the U.S. economy is losing jobs and Americans may be facing a real and prolonged recession, not just one of those two or three-quarter slow-downs that have pretended to be economic hard times since Paul Volker ruled the fed and tamed the post-Vietnam stagflation with the harsh economic medicine. How many remember that back in the day, inflation and unemployment each could be measured in double-digits, and the key measure—the Misery Index—was calculated by adding the two together.

Oil, the underpinning of the American economy and American culture for a half-century, has doubled in price over the past three years and increased by 20% in the past few months alone, and sits above $119 per barrel. Normally, hurricanes in the Gulf, political unrest in Nigeria or failing production facilities in Venezuela lead to spikes in energy costs, and lower prices in the futures market illustrate the transitory nature of market unrest. But not so today. Sure, there were some military skirmishes in the Persian Gulf this week—real ones, not just Hillary Clinton’s threats to obliterate Iran—and political unrest in Nigeria was back in the news—but high oil prices look to be with us for a while, as the futures market projects oil above $110 through the middle of the next decade—as far out as futures are traded. At the pump, this means that the $4.00 gas price is not an aberration. Energy markets are spilling over into the supermarket as well, as well, as flour and eggs and other basic foodstuffs are showing the affect of the diversion of 25% of America’s corn crop into ethanol production.

It will be an interesting question to see if the political establishment can rise to the challenge of steering a democracy through the dramatic shifts that are affecting our economy and world. So far, even as President Bush pronounced that help is on the way—in the form of the stimulus rebate checks—one has to wonder if there is not some form of leadership that might be called for other than throwing money—Chinese money at that—at the problem. After all, if $4.00 gas is our lot, perhaps a gas tax holiday, as proposed by Republican presidential candidate McCain is neither sound policy nor responsible leadership.

All pandering aside, shouldn’t a proposal that will: (i) increase gas use, (ii) increase oil company revenues, (iii) increase demand pressures on the price of oil, (iv) increase oil company earnings, (v) reduce government trust fund resources for rebuilding transportation infrastructure, (vi) increase oil company earnings, (vii) increase petrodollar outflow to Gulf states, (viii) increase downward pressure on the dollar, and (ix) not necessarily reduce prices at the pump, be greeted with some skepticism? Somewhere?

It is fair and appropriate for our elected officials to want to do something to help. But faced with the looming recognition that the ethanol subsidies built into the President’s energy program have proven to be a debacle for the consumer—even if a boon to the farmer—perhaps some more thought should be given to the gas tax holiday. After all, the government’s goal should be help the situation over the longer term, and even if you happen to be a Senator looking to a fall presidential vote, policies should stand up to some modicum of scrutiny.

The role of the government is not to prevent markets from working, but to give people the tools and information they need to make prudent and long-term choices. Perhaps our perspective on energy should adjust if the world of energy is itself changing. If energy is going to be a dear and costly commodity in the future, perhaps we are better off as consumers understanding that message. Here is an idea: how about building the subsidies now larded into the budget for each energy source into the price. That is to say stop subsidizing and focus instead on letting markets work, letting the consumer know the full price of what they are using so that they can adjust their choices according.

Internalization of external costs is not a new idea, it just happens to be one that many industries prefer to avoid. The nuclear power industry is loath to pay the cost of insuring against nuclear accidents or the cost of disposal. The oil industry no doubt would hate to see the cost of defending oil resources in unstable countries built into the cost at the pump. But the alternative is that we pay for these things anyway, but by not bearing the full cost when we drive or when we operate our appliances, we simply delay that much further the day when new forms of energy become competitive in the marketplace.  

Would it be a tough sell? Perhaps. But there is only one wallet here. Ours. Assuming of course that we plan to pay back all the money we are borrowing from the Chinese. 

It is all about honesty. Markets are tough, as anyone who has been buying eggs or flour recently can tell you. But markets are where freedom of choice and honesty of consequences are allowed to play out, without regard to political ideology or pandering. So instead of cutting taxes on gasoline, consider a plan to increase them. Slowly, predictable, over time.

Increase taxes or fees on oil or carbon to internalize as much of the true cost as possible. At the same time reduce income taxes in tandem. Return to basic principles: make subsidies transparent, internalize costs, let markets work. And remember that the money all comes out of the pockets of the electorate. The best politicians can do is provide good information, make things as efficient as possible, and get out of the way.

Someone, tell that to John McCain.

Before the Pennsylvania primary

Forget what happens in Pennsylvania tomorrow. It doesn’t matter.

Hillary Clinton will not leave the race for one simple reason. The Democratic Party is heading for a train wreck of catastrophic proportions, and she—for one—is not going to step aside and watch it happen.

The United States of America is not going to elect Barack Obama to be its next president. Not gonna happen. That is what she told Bill Richardson when her long-time friend and her husband’s cigar buddy called to say he was going to endorse her opponent.

Bill. He CANNOT win.

Not you are betraying me and my husband. Not I am a better candidate.

He CANNOT win.

Not an opinion. A statement of fact.

This is not about race. This is not about experience. This is not about who has a better health care plan.

This is not about whether Reverend Jeremiah Wright loves America. Or whether Bill Ayers loves America. Or whether Barack Obama wears a flag pin. Or Whatever. And it sure as hell is not about whether there was a sniper in the woods one brisk morning on the tarmac in Tuzla.

For all of the arguments back and forth—He said, she said. He said she said—this race is about a simple question:

Are American politics going to change fundamentally?

That is the question. Hillary is running as the embodiment of the premise that politics is hardball, it is tough and it is a zero-sum game. There are votes, there are winners and there are losers. This is the way of American politics, from the early years forward. Any suggestion that today’s harsh partisanship is a new phenomenon is a misreading of our nation’s political history.

Barack Obama is running to create a new politics, a politics where people come together and deal with tough problems in a non-partisan way. He is suggesting that the famous injunction of Senator Arthur Vandenburg—that partisanship should end at the water’s edge—should be extended from foreign policy to domestic policy. He is suggesting that instead of extending the politics of division and wedge issues to foreign policy—as we have now successfully done—we should be doing the reverse. Rolling back the tide of partisanship.

As Hillary Clinton sees the world, the tide of partisanship is not going to be rolled back. It is part of who we are. Politics is about winning and losing. That is why we vote. This race is about who will be cared for in the years ahead. Hedge fund managers or single mothers with no health coverage. And it is about the Supreme Court.

Either we win or they win. So you see, the race is not about whether Reverend Jeremiah Wright loves America. Or whether Bill Ayers loves America. Or whether Barack Obama loves America. Or whatever.

But that is what the fall election is going to be about. Because the Republicans know that most Americans want life to be simple, not complicated. Sitting around their kitchen tables, Americans want to be safe. They want to believe that their country is a good country, and that they are a good people. They don’t want erudite speeches. They don’t really want to deal with tough problems, if they aren’t their problem. The American people want lower taxes. They want good jobs. And—Yes, Virginia—they believe in the private sector and capitalism—and by and large they believe that the old saw—I am from the Government and I am here to help you—is in an oxymoron.

Democrats can’t win when they make things complicated. And Barack Obama is making things complicated. Hope is complicated. Change is complicated.

What is shocking is the number of Senators and Governors, and others who should know better, who have endorsed Senator Obama as a response to their children’s conviction. Senators and Governors and others who should know better have been drawn into an idealistic fantasy world.

The Clintons, on the other hand, are adults who see the world for what it is, and will do whatever it takes to keep the Democratic Party from succumbing to all of the self-righteous, self-absorbed idealistic claptrap. Someone has to keep the children of America from leading their parents down a Yellow Brick Road after a Pied Piper on a path that leads nowhere.

He CANNOT win.

Not an opinion. A statement of fact.

So Hillary Clinton is not getting out of the race. No matter what happens tomorrow.

Because as she sees the world, the future of the Democratic Party is at stake.

Confessions of a bitter elitist

Elton John was blunt and to the point: If Hillary Clinton loses, the misogyny of the voters will be to blame. He was not the first to make the case. After all, Robin Morgan’s email—to name one—was a legal brief of the wrongs that have been done to women. Her only failing was in not making the connection as to why that compelled the reader to redress the past by pulling the lever for her woman.

Gloria Steinem took the argument a step further, making the startling suggestion that the reason to vote for Hillary is that Black men have had the vote for a half-century longer than women. Again, both the credulity of the argument and the political conclusion seemed questionable—or as one friend suggested, “And therefore what, exactly?”

I can find many reasons to support Hillary Clinton for president. She is very smart. She knows the issues—domestic and international—inside and out. She is determined. And she will fight to the death for what matters to her. And I have great respect for anyone who has embraced her for her strengths, forgiven her weaknesses and will go to the mat for her. No problem.

But there are many reasons that one might quarrel with the argument that Hillary is most qualified to be the standard bearer for the Democratic Party, and they are valid and compelling arguments for declining to support Hillary’s candidacy now.

Failed Leadership in the Past. Hillary’s record of executive leadership is thin, but the single instance when she was handed the mantle was with health care reform under her husband’s administration. While it is rarely discussed—which is particularly surprising given that her experience with healthcare is central to candidacy—that episode was a debacle. The secrecy and arrogance of her approach led directly to its failure, to the Gingrich Revolution and to her husbands embrace of the Republican welfare reform bill, in order to reestablish is own credibility in Washington.

Ability to Learn From Mistakes. One of the hallmarks of executive leadership is the ability to learn and adapt from mistakes. Indeed, some would argue that failure is as important one’s growth as a chief executive as success. Hillary’s current approach to healthcare—suggesting once again that her plan and her ability alone can deliver results—evidences little learning from her past performance.

The Urge to Power Overwhelms the Urge to Change. It has become a staple of late night comedy that Hillary is finding her voice. At age 60, most politicians know who they are [Mitt Romney is not 60 yet, give him time]. The long time complaint of Republicans against Bill Clinton was that he had no core principles beyond the will to power, and that he would throw anyone under the bus who got in his way. Hillary was always viewed on the left as the principled voice of the Clintons, but that stance ended with her embrace of welfare reform and alienation of Peter and Marion Wright Edelman.

By the end of the Clinton administration, Hillary had embraced welfare reform and the deregulation of the financial system [see Sub-Prime Crisis at Wikipedia] as well as free trade and other initiatives that enabled the Clintons’ to triangulate between the left and the right. This week, Hillary is a churchgoing, gun-toting, working class gal. Just imagine what tomorrow might bring.

If you ask yourself one simple question, it illustrates the quandary with Hillary: What type of Commander in Chief would she be? Would she emulate Maggie Thatcher to prove herself to the military and to the male establishment or would she bring a fundamentally different perspective and set of values to the job? What would trump, her core beliefs or some kind of triangulation algorithm? How does Hillary measure her own success? The differences among the candidates in this regard is significant. One can easily imagine John McCain or Barack Obama losing this race and moving on with their lives. Hillary, and Bill, evince a need to win that is deep and urgent .

Issue of Corruption. Hillary has had a virtual pass on the most troubling issue in the Clinton use of power. The fundraising scandals with Johnny Chung and Norman Hsu have only been the most traditional areas where money was raised and laundered, and favors were granted. The pardons were far more egregious, and none more egregious than the pardon given to Marc Rich. While many would argue that this is old news, it is not. The pardons came on the last day of the Clinton presidency, and most voters likely never gave any of it a second thought. It is, after all, politics.

But the case of fugitive financier Marc Rich was not just politics, but has all the appearances of old-time corruption. The Justice Department was adamant that Rich not be pardoned. Bill Clinton said he was just following the process. When Congress investigated, the participants took the Fifth Amendment. But in the wake of the pardon the Clintons received hundreds of thousands of dollars for the library and the foundation.

Before descending farther into the rhetoric of a right-wing nut, it is important to note that the contributions to the foundation and the library remain sealed at the Clintons’ request. The Colombia trade agreement issue that was just in the center of the news is important not because of who does or does not believe in free trade at the Clinton’s kitchen table. Rather, it is the important issue of how a husband and wife address issues of policy and corruption. Which brings up the final issue.

Mixing Business with Business. Bill Clinton received $800,000 for speeches in support of the Colombia free trade agreement. He then contributed the funds to Hillary’s campaign. He received a $30 million contribution to his foundation—with $100 million yet to come—for helping a Canadian win a uranium contract in Kazakhstan. The use of a tax-exempt foundation to garner benefits from public action —and therefore as a tool of public corruption—first found fertile soil in Philadelphia. The question that has barely been raised in the media is what the rules are for a husband-wife presidency, and how Bill’s activities will be monitored and constrained. He has already said that contributors to both the library and the foundation will be made public after she is in the White House—but only contributors going forward. He has said that he owes a promise of confidentiality to the contributors—a debt that apparently is greater than he owes the voting public.

Manipulation in Pursuit of Power. OK. This one is unfair. After all, campaigns are all about manipulating the public in pursuit of power. But the premise of Microtrends, Mark Penn’s book and central to his political outlook, is that success is achieved by targeting myriad archetypal groups and selling each what they want to hear. And so as the time is winding down on the campaign, Hillary is morphing to each audience. In Scranton, she is the church-going, gun-shooting child of rural America. In Pittsburgh she is the protectionist old-time union activist. In Erie, she is the working class girl who worked the night shift. The problem of with the microtrends strategy is that people have a history—which in Hillary’s case is of being a Hollywood-loving, anti-gun, free-trader, from a middle class family, albeit with enough caveats along the way to give her cover. Microtrends is a demographic theory, and one with great salience for Proctor & Gamble and Saatchi & Saatchi. But for a politician still seeking her voice, it reeks of exigency and a lack of core principles or purpose.

But with her back against the wall, Elton John delivered the message that has become the bludgeon used against Obama supporters: Hillary is only losing because of misogyny among the electorate. This is not delivered as a social critique—a claim that in the privacy of the voting booth people’s prejudices emerge—rather it is an attack on the individuals working for or supporting Obama. This is the ultimate extension of the politics of political correctness: If you don’t vote for her—not a woman, but this woman—it is an indictment of your character.

So we have come full circle. The essence of the political race is no longer about the character of the candidate. It is now about the character of the electorate. If Hillary loses, it will be because of misogyny and unfairness. Forget issues of her own past conduct or performance, forget the manipulations of a campaign of inevitability, forget issues of corruption and conflicts of interest. If she wins Robin Morgan and Gloria Steinem and others who are standing at the barricades with their fists thrust in the air shouting No Passaran should not be surprised if after they have invested their hopes and dreams, Hill and Bill do not turn on them as they have on others whenever it suits their purposes.

The other day, Hillary suggested that only she could end the war in Iraq. On the face of it, it was a preposterous statement. What if she gets hit by a bus? Will the war go on forever? For 100 years? I think not. The world will survive if she is not the next president. And a judgment of whether to support her candidacy can be made fairly and honestly, based on the history that she—and her husband—have made.

If Hillary loses, she and Bill should fully embrace that they were the lead actors in her demise. The media gave her all the advantages of incumbency as they embraced the narrative of inevitability for more than a year—until losing Iowa undermined the premise. It was no Establishment White Man that was her undoing, but a judgment that it is time to turn the page and look forward to a future of new personalities and new possibilities.

China syndrome

After a bad first quarter, the stock market rebounded sharply on April Fools Day. But this week the major market indices fell sharply in the wake of news that can only be described as the same-old, same-old. This time, the news that gave a bad taste to the end of the week was that General Electric missed its earnings targets, and missed them soundly. It was the unanticipated extent of GE’s under-performance that most unnerved the market. Over the past weeks, the market has been struck by new sectors of the economy being infected by the sub-prime mess. First the banks. Then the brokerages. Then the insurance companies. And so on.

GE’s suggestion that it fell short due to the impact of “disruptions in the capital markets” on its financial services businesses should not have been a surprise. But what was shocking was that this company that rarely misses guidance by more than a penny or so should miss the target by such a wide mark. After all, what has made GE an icon for so many years has been its ability to manage both its earnings and investor expectations. The fact that GE directed full-year guidance on earnings growth down from “at least” 10% to near zero was a further wake-up call for anyone who has managed to sleep through the ruckus in the financial markets of late.

Last week’s April Fools Day rally––which came in the wake of optimism that the financial sector had hit bottom and a correction in surging commodity prices––suddenly seems a long time ago. After rallying 6.6% in the prior week, the S&P financial sector dropped 4.6% this week.

This was a significant week in the currency markets, as China’s currency, the yuan—the renminbi to some—rose to new heights against the dollar. The yuan, pegged at 8.2 to the dollar until the Chinese allowed their currency to float in July 2005, has appreciated 16% against the dollar since then.

This is important on the home front for several reasons. First, and most directly, it will make Chinese-made goods more expensive over time—indeed the 16% appreciation acts no differently than a 16% tariff or tax on imported Chinese goods. But more important, an expensive yuan—and the prospect of a more expensive yuan to come—offers the most effective deterrent to the outsourcing of jobs to China.

Trade has been an embarrassing item on the political circuit these days. After all, during the NAFTA debate in Ohio, it should have struck most observers that America is not losing many jobs to Canada. And, I dare say, Colombia is not the risk that it would seem to be from all the press attention to a trade riff between Hill and Bill. It is understandable that candidates have foresworn speeches on the impact of floating currencies on long-term investment and competitive advantage, or for that matter on international stability, but hopefully the surviving candidate’s policies will be better informed than their political strategies.

Like Japan before it, China may be on a trajectory away from being the source of cheap consumer goods. And this has both good and bad consequences that the political class should be focused on. The risk to America in the future will not be a China that is a source of low cost labor, but rather, a China that is becoming a source—and a very large source indeed—of well-educated and disciplined workers in engineering and the sciences. Someday we may wish for the days when we lost our low-end jobs to China.

The American worker listening to pandering politicians and pundits, they should be looking for only three things: portable pensions, portable and affordable healthcare, and affordable and lifelong access to education. Political-speak continues to be dominated by language that views American workers as passive agents. “Government needs to retrain workers… We need to retrain you…” The reality of the world today is that a politician or government worker is increasingly unable to understand the skills, attitudes and aptitudes that any given worker will need to learn to get ahead.

Twenty years or so ago, Peter Drucker described a future in which every worker would be a free agent in a competitive marketplace, with the need to seek out new skills and new knowledge on an ongoing basis to succeed through several careers in the course of their work life. Well, as George Allen—the coach, not the Senator—liked to say, the future is now. It is time for our candidates to talk less about the solutions from the 1950s and 1960s, and try to imagine what solutions will work in the 2020s and 2030s, when today’s children of Pennsylvania will be in the middle of their third or fourth careers.

Memories of war

I am sorry, but this I just don’t get.

”I remember landing under sniper fire. There was supposed to be some kind of greeting ceremony at the airport, but instead we just ran with our heads down to get into the vehicles to get to our base.”

Turns out there was a greeting ceremony. With a little Bosnian girl bearing flowers. So the story was altered a bit.

”I was told that the greeting ceremony had been moved away from the tarmac, but that there was this eight-year-old girl and I said, ‘Well, I, I can’t. I can’t rush by her. I’ve got to at least greet her. So I greeted her. I took her stuff and I left. Now that’s my memory of it.”

But then the videotape emerged, showing Hillary Clinton and Chelsea greeting the U.S. officials, stopping for photos, then moving on.

In politics, as Michael Kinsley once noted, a gaff is when a politician tells the truth. When they tell a—well, a non-truth—they misspoke. And so it was here according to campaign aids. For the candidate herself, it was a mistake.

"I made a mistake. I have a different memory."

But the purpose of the story was to impress upon listeners the candidate’s experience and bona fides to be commander-in-chief, to convey a sense that she has faced the fires of war. If the story was not true, a better explanation would have been to tell us of the experience that she was thinking about. After all, running from a plane across a tarmac under sniper fire—with one’s daughter no less—does not appear to be something that one would forget. So either she had that experience—but confused the circumstances—or she never had the experience and recalled the event from whole cloth.

This matters. After all we are in the midst of an historical period when chief executives are granted wide latitude to go to war or not. George Bush wore his flight suit for the media when he landed on the carrier Abraham Lincoln—with the banner Mission Accomplished draped as the backdrop—because he intended to convey a sense of competence to lead and seriousness of purpose. Hillary Clinton’s story of a Leader Under Fire is designed to accomplish a similar, visceral purpose.

Fair enough. Unless it is not true.

I for one do not particularly care if Hillary Clinton was under fire in Bosnia. Unless she was never under fire. Anywhere. If she was under fire, then she misspoke. If she was never under fire, she lied. And that is what matters. After all, we have three candidates from which we will chose our next president, and at the end of the day issues of judgment, honesty and integrity matter.

Palpable fear

The question is this: When we look back on this moment, will it mark the beginning of the end of this economic cycle, the market bottom of a regular, if turbulent, economic downturn. After all, the S&P500 is 20% off its highs of last fall. The yield curve, once inverted and predicting a downturn, has a strong positive slope. And fear is palpable in the markets, and in the public square. All of these can be signs of a market bottom.

Or perhaps not. Perhaps this is just the end of the beginning. With the collapse of Bear Stearns and the plummeting dollar, is what we are seeing in the flight from the dollar into hard assets just the first stage in the final reckoning, for the United States and for the world. Could this be the moment when the dollar’s slide marks more than the balancing of accounts as envisioned at Bretton Woods a half-century ago? Could this instead accelerate the movement away from the dollar as the world’s reserve currency and the basis of economic transactions far beyond our shores. Is this the moment that Eurocentrism is to be put to the test, and the question raised at Versailles and put to rest at Nuremburg will once again be on the table. Is Europe really able to lead the world?

Despite the rhetoric, this is not yet the Asian century. The threat of a collapse in the American economy has given the lie to the pretense of a multi-polar world. For all of their assets, their reserves and their sovereign wealth funds, the Asian economies still live on the margin of the American economy. Nothing has made this evident than the plight of the dollar, with the emerging fears that a 3% downturn in America could become a 20% downturn in Taiwan, and the realization that China, with 500 million people living in poverty, remains a mercantilist nation decades away from being ready to turn her attention to the plight of her neighbors.

This week, all of the questions remain unanswered. Ben Bernanke has bet the house on stanching the tide of the sub-prime crisis. Tuesday, the Fed will drop the Fed Funds target rate by 75 or 100 basis points, a move that will further exacerbate the dollar's decline. The Fed has placed its bet, and would rather see the dollar go down than the banking system. This is coming in the wake of the busiest week on record for the Fed. This past Tuesday, the Fed announced a $200 billion program to take illiquid mortgage-backed securities back from the banks, and then on Friday arranged for JPMorgan—the Whitest of the old White Shoe investment houses—to acquire Bear Stearns, a firm whose roots are from a distinctly different tradition. But the Fed did more than arrange this marriage, it provided the dowry as well, agreeing to share with JP the downside risk.

Some will balk at the notion of a bailout, but the stockholders and employees of Bear Stearns would challenge that description of the deal. After all, at a price of $2 per share, the employees at Bear—half of whom stand to lose their jobs—saw the value of their 35% stake in the company fall by 99% from $8 billion to around $80 million, with much of that decline coming since the closing bell on Friday. Instead, this should lead to calls for reregulation of the financial sector, which was largely deregulated in 1999.

Ben Bernanke has given the lie to the notion that deregulation in the banking sector is a balanced policy, and it is hard to imagine who in his shoes would act differently. Faced with the looming collapse of the financial sector, the problem of moral hazard—the risk that failing to let those who made bad bets suffer will contribute to future bad behavior—will not prevent intervention. In the moment, when the world is collapsing around you, there is just too much at stake to dwell on ethical and market theory. But don’t blame Bernanke, after all, we went through Continental Illinois, Long-Term Capital and the Savings & Loan mess ad seriatum. Same story. Same result. More or less.

Thus, the question of whether we sit at the beginning of the end or the end of the beginning is not an academic one. Our country—which has been living beyond its means for decades—may actually have finally bitten off more that we can chew. With a $3 trillion war and a $2 trillion financial crisis both in full swing, and both requiring massive infusions of foreign capital, the fix this time might involve some pain. Maybe it is time to set some new rules, for the private sector and for the public sector as well.

But at the end of the day, the rest of the world has a stake in our survival—at least for the moment—because we are kind of like a big Wall Street investment bank that has done some stupid things. Many people may want us to pay the price for our conduct, but they don't want to get hurt in the process. They don't want to play a game of chicken when their own future is at stake.

So you tell me, is this the time to buy, or what?

Geraldine's moment of lucidity

What was your moment of epiphany, Geraldine, when you realized that society had bent over backward for the Black Man? What was the moment when the resentment of one caught looking upward at the glass ceiling boils over into a rage of the privileges offered to those who were offered instead the legacy of the lynching tree?

It is no fault of Hillary’s that the candidate that has emerged as her antagonist is a Black Man. Surely, Geraldine Ferraro believed that she was signing up for the Great Campaign that would pit Hillary against the best Man the system might put forward. And certainly she is not alone in having failed to truly grasp the significance of the historical moment. But in her lashing out, her words betrayed her. To suggest that being Black in American politics is an advantage is curious. Point if you will to the ranks of African American Senators or Governors, or those elected to majority White districts whose residents looked beyond color to elect the man or woman.

Our system remains rife with the symbols of centuries of the abject oppression of Black Men. Our criminal justice system educates more Black Men, by some counts, than our great universities. Affirmative action, once viewed as a critical tool to redress past and current disadvantages, lies but a shell of its former self, its demise at once a symbol of America’s commitment to egalitarian values and denial of the cruelty and ugliness of its past. But meanwhile, Title Nine lives on. Ironically, it is OK to offer White Woman a free ride for their prowess at lacrosse but not to the descendents of the African slave trade.

I would have thought that the intellectual prowess of the icons of the Women’s Movement would have shown greater insight. To condemn Obama’s rise as one more manifestation of the Old Boy’s Network rising up to defend the status quo against the rise of a woman warrior fails the tests of intellectual honesty. Why not instead move the conversation forward rather than backward. Why not question why America’s fixation with racial identification fails to accept Obama as bi-racial. Why not—if we are to be true to our commitment to our children who view the world with far greater nuance and acceptance of difference—let this moment deepen and animate our understanding of identity.

If Hillary loses the nomination battle, the scars will be bitter and deep for her supporters, whose belief in her is firm and deep. But Ferraro has fallen prey to her own demons. Barack Obama is not Jesse Jackson. Barack Obama’s base was not Black until Bill Clinton made it so. Before Iowa, a majority of Black voters were for Clinton. But the world of identity politics is part of Democracy, not a creature of this race. And Hillary’s strategy has been built on that reality. Clinton chief strategist Mark Penn early on articulated their calculus being to win the 48% of the electorate that is Democratic, and pull up to 20% of Republican women—and when push comes to shove, that will be the case that they will make to the super-delegates.

That is the case they will make, and the case that they are making now. Plus, they will argue, America will never elect a Black Man to be president. Despite whatever Geraldine might think.

Where's the beef?

For a fourth time, the Obama campaign seems to be gathering momentum.

On each previous occasion––after the votes in Iowa and in South Carolina, and on Super Tuesday––Hillary Clinton successfully stemmed its rising tide. Now, the contest seems to be nearing its final moments, when Clinton will either succeed in turning Obama back for good, or find her campaign overwhelmed by the historical moment.

Hillary Clinton’s campaign was built on three core strategies––Monopolize the money. Build momentum. Dominate the message––and early on her success was unarguable. During the year leading up to Iowa, the Clinton campaign locked down a large proportion of the major Democratic donors, and with that money in place the campaign built momentum on the theme of inevitability. The campaign was a juggernaut, and they fully expected Super Tuesday to mark the end of the nomination process.

Instead, the day after Super Tuesday, two legs of the strategy lay in tatters. The momentum had dissipated, and the Obama campaign stunned the political world when it announced that in January it had raised $32 million, including contributions from 170,000 new contributors.

Only Hillary Clinton’s message remains in tact, and she is looking for a Walter Mondale moment to regain the upper hand. Like Clinton this year, 24 years ago Walter Mondale was the presumptive nominee facing an insurgent challenger whose rhetoric seemed high on fluff and low on substance, until Mondale dispatched Gary Hart in a single, dramatic moment. Now, Clinton is hoping for such a moment, when she might turn to Obama in a televised debate and utter Mondale’s famous words, “Where’s the beef?”

And her campaign imagines the devastation it would wreck on Obama’s campaign as the shallowness of his response would be apparent for all to see, reverberating in the millions of YouTube replays that would follow.

But that moment is unlikely to come. Today, American's have lost faith in our political institutions––in Congress and the Presidency––and have become acutely aware that as a nation we cannot fix our problems until we fix our politics.

Over the past twenty years––since Lee Atwater and others perfected a style of politics that used wedge issues to divide Americans against themselves––political strategies and tactics have exacerbated our differences at every turn, as each party sought to find an edge in pursuit of power.

The American people now know that we have paid a steep price for the politics, tactics and divisiveness of the past twenty years, and it is now clear that these politics have failed the American people. The truth is that in a world where Americans find themselves competing with workers in China and India and Brazil, we know that we can no longer afford the luxury of the political games that have sapped our country of our ability to solve the real problems we face.

Hillary Clinton’s hope to take Barack Obama down on the basis of her greater mastery of the intricacies of policy and the superiority of her healthcare plan is unlikely to succeed. It will not succeed because the overwhelming reality is that for the American electorate today, this election is not about who has the best plan.

After all, fifteen years ago, America watched as Hillary Clinton led the Clinton administration's effort to fix our healthcare system. She had a plan then––as she has a plan now––and her plan may have been better than everyone else’s plan. But that effort ended in failure. And it was nasty and partisan and hostile.

Today, everyone has experts and everyone has a plan. But that is no longer enough. Voters are looking past the plans into the stance of the candidates toward the most fundamental problem we face: our politics.

So if she finds her moment and turns toward Barack Obama and asks him, Where’s the beef?, she should not be surprised if it does not work out as she hoped.

The fundamental difference between the Clinton and Obama campaigns is not about Where’s the beef? but rather about What is the beef? What is it that really matters if we are to move forward as a society and a nation?

Hillary Clinton believes that plans matter most. Barack Obama, on the other hand, understands that Americans are tired of perfect plans and perfect solutions that lead nowhere. Instead, they want solutions. Not perfect solutions, perhaps, but solutions that can work, that are built on comity rather than conflict, and that emerge from mutual respect rather than recrimination.

Clinton’s dilemma as she tries to slow Obama’s campaign one final time is that her message––the final leg of her strategy––is not resonating with the voters. Because the beef is no longer about detailed plans and brainpower, it is about a simple question: Can this candidate move the country in a better direction?

The American people know that we have paid a terrible price for the politics, the tactics, and the divisiveness of the past twenty years, and we know that if we make the same choices we did in the past, we can only blame ourselves if we get the same results.

No going back

And then there were three.

As Mitt Romney stepped aside, there were—with apologies to Mike Huckabee—three candidates left vying for the Presidency, each now given a one-in-three chance of taking office in January 2009, according to the futures market trading at Intrade.com. With nine months still to go until Election Day, the country—and the world—have a long time to consider what will come next.

According to a British friend, the American election has captivated Europe—much to the astonishment of the European press—and to the chagrin of the Gnomes in Brussels. This was, after all, to be the time of the Great Decoupling. This was to be the time when Europe, with a strong currency and an America besotted by war and internal division, would free itself from the economic bondage of Wall Street and the Dollar and American suzerainty.

Instead, the turmoil in the markets over the past six months has had the opposite effect. Since last August, the world financial markets have been in the grip of a liquidity and financial crisis as bank balance sheets have suffered the after effects of a massive lending bubble and credit has disappeared. While the sub-prime market meltdown has reached the front pages of the newspapers, the extent of the liquidity crisis last August that left the world markets shaken never really made it beyond the financial press, despite the firing of a bank CEO here and there and a growing public awareness that things could get a lot worse before they get better.

But with the collapse of the European equity markets two weeks ago, reality came crashing home. Early that Tuesday morning, the Federal Reserve Bank dropped its key interest rates by 75 basis points—three quarters of one percent—to buttress the markets against a spillover effect from Europe and a global unraveling. Then, a few days later, the Fed dropped rates a further 50 basis points.

The Fed actions were heretical. After all, faced with a collapsing dollar and oil at nearly $100 per barrel, the last thing that the United States can afford is a run on its currency. And that would seem to be the natural consequence of the Fed’s actions. After all, who would keep money in Dollars if the value loomed to decline further, and the interest rates were declining, rather than shifting in to Eurobonds, offering stability AND a higher yield? What oil producing country would not want to denominate oil in Euros, or some other basket of currencies, instead of in Dollars? What country holding our bonds as their reserve currency would not want to diversify?

And why not dump the Dollar? After all, each nation needs to look after itself. America had it coming, no? With our trade deficits, our budget deficits and our gas-guzzling SUVs—to say nothing of our militant unilateralism—the world was ready for new leadership. America’s time was past.

But the tell-tale signs did not emerge, and there was little evidence of a new run on the Dollar. By all accounts, the countries that have financed our deficits have not sold. Our long-term bond interest rates have gone down, not up. Asian countries and Arab countries, flush with cash from selling us cars and computers and oil have been the first in line to buttress our financial system and invest capital in our banks.

Only the Europeans have waited to the last minute to recognize the depth of their dependence on the United States. Only after their markets collapsed did the sophisticates of the Eurozone grasp what was evident to the new financial elites of China and Singapore, Dubai and Abu Dhabi: The new globalized world, the world of markets and trade and commerce and finance, remained America’s world. It was America’s creation, and for the moment, it is dependent on American leadership.

This is the world that we wanted. That we created. American foreign policy since World War II has been to lead to a world of free markets, where political divisions would give way to economic interdependency. Our objective was to see the nations behind the Iron Curtain—China, Russia and their satellite nations—and the socialist block countries of India and Egypt and their non-aligned fellow travelers, forsake military competition for economic competition.

This is the world that we desired, and it is the world that we have achieved. The closed factories of the Rustbelt. The migration of our economy from manufacturing to service. The two-income family. The end of defined benefit pension plans. The new imperative of lifelong learning. The pressure for new, non-workplace health insurance. These are all manifestations of our victory in the Cold War, and our success in creating the world of our imagination. The world of economic competition and competitive markets, in the hope of forestalling a world of resource wars and nuclear confrontation.

While much of this is old news, the past several weeks have added a new reality, a new granularity, to our picture of the world. When the Fed threw caution to the wind and reduced interest rates by 25% in one week, when they dispensed with the traditional incrementalism, they were struggling with a new reality. In a world where the Dollar has become the reserve currency, the Feds core monetary policy tools for managing our economy have lost power. Similarly, as Congress passed a stimulus package, it was clinging to an antiquated notion that the tools of Keynesian fiscal policy—spending as a tool for spurring economic growth—had more than marginal influence in a world of massive and unchecked deficit spending.

The new reality is that in a world where much if not most of our currency circulates beyond our borders, our tools of monetary and fiscal policy no longer have the power they once had. This is not just our new reality, but the reality of others as well. As central bankers in Brussels struggle with growing demands that they spur growth, while those in Shanghai struggle to contain it, each now realizes that their future—if not their currency—is pegged to ours.

President McCain. President Clinton. President Obama. One of them will inherit a world where the rules have changed, and where domestic monetary and fiscal policy tools will no longer be adequate to dictate our economic future. The new president will have to build new strategies for the coordination of economic policies that address this new and deep interdependency. China and Singapore, Dubai and Abu Dhabi know full well that a collapse of the American Dollar will bring all of them down with it. But only over the past few weeks have their counterparts in Europe come to realize that like the American people, their future will depend on the quality of leadership that emerges from our elections, and whomever that person turns out to be, they have a very real interest in their success.

The art of strategy

As February 5th approaches, the nation appears to be heading to the Clinton-McCain contest that was deemed to be inevitable before McCain’s long decline and Obama’s rise. But first, McCain must prove that he can win a primary without independent support, and Clinton has to finally bury the Obama insurgency.

McCain’s challenge is formidable, as he is seeking to break from the formula that has been the key to Republican Party electoral success in presidential contests since rising out of the ashes of Barry Goldwater’s defeat in 1964. For all of the fealty shown by this year’s crop of Republican presidential aspirants to the memory of Ronald Reagan, the underpinning of Republican success has not been character or charisma, but rather strict adherence to the formula set forth long ago by Grover Norquist, long-time conservative activist and President of American’s for Tax Reform.

Don’t raise taxes. Preserve property rights. Protect the Second Amendment. Support home schooling. Oppose abortion. Support communities of faith. Protect marriage.

Norquist rules have been the cornerstone of a Republican coalition that endured for decades. It brought together seven groups, each of whom were moved to vote on a single issue.

Pro-faith. Anti-tax. Pro-gun. Anti-gay. Pro-life. Anti-sex education. Pro-property.

Norquist understood that if those single-issue voters stayed together, they could control the government.

“The reason the center-right coalition holds together, the Reagan voters, the George W. Bush voters… vote and are moved by a desire not to be messed with themselves. And as long as everybody’s primary vote-moving issue is dealt with well––and that’s what Bush did, that’s what Reagan did, that’s what the next Republican nominee that gets this right will do––then the coalition is a low-maintenance coalition, because nobody in the room wants anything at the expense of anyone else on a vote-moving issue.”

“As long as the Christians don’t try and steal anyone’s guns, and the gun-owners don’t try to steal anyone’s property, and the property-owners don’t throw prophylactics at the Christians’ kids, we can all work together because nobody is in anyone else’s face, nobody is in anyone else’s pocket, and we can all go fight the Left the rest of the week.”

And it worked. And it endured.

If a Clinton-McCain contest emerges, the Republican Party will be in uncharted waters.

Despite being a traditional conservative on social issues, John McCain never bought into Norquist’s vision, and has been anathema to elements of the Republican Party for years. His campaign collapsed and was largely left for dead after his efforts to mend fences with evangelical leaders. His strength––his brand––lay in his hero status, his straight-talk persona, and his integrity. He is a big picture candidate. Pandering––the essence of Norquist’s business model––simply did not suit him.

This stands in stark contrast to Hillary Clinton’s campaign strategy, as formulated by strategy guru Mark Penn. Penn, the author of Microtrends, views America and the electorate as a quilt of distinct socio-cultural groups with their own interests and concerns, and fashioned the campaign accordingly. However, Penn’s is not a Democrat version of the Norquist strategy, as his are not single-issue voting groups, but rather archetypes built on the familiar model of “Soccer Moms” and “NASCAR Dads.”

However, Barack Obama’s campaign challenged the fundamental premise of Penn’s targeting strategy. Obama’s candidacy was not build on positions, but rather an appeal to an inchoate notion that the nation needs a different kind of leadership, that after years of the Blue-Red Civil War, it is time to rebuild the notion of Nation.

Obama’s appeal loomed to be devastating to Clinton, just as any campaign that is built on interest group politics can appear craven next to a larger appeal to the better angels of our nature. Obama’s message brought out the worst in Bill Clinton, in particular, who was reduced to inveighing against the risks of idealism and false hope. However, the emergence of race during the week after New Hampshire turned the tide for the Clinton campaign, and has been devastating for Obama.

In the Iowa caucuses––now receding deep into memory––Obama won among all voter groups except for older women, and after his victory speech the Pundit Class was building him up as a combination of J.F.K. and M.L.K. Less than a week later, despite losing New Hampshire to Clinton largely on the basis of her strong rebound among women voters, Obama continued to enjoy strength across all voter categories.

In the wake of her New Hampshire victory, however, Clinton uttered words that will become legend in the world of political strategy. Clinton embraced the King metaphor but suggested that while visionary leadership was fine, it took L.B.J. to enact the legislation that King’s rhetoric engendered.

For the week that followed, Clinton pressed the theme that she was the political leader with the muscle and finesse to tame the bureaucracy and drive a progressive agenda, while Obama was just talk. But the strategy was not intended to resuscitate the memory of L.B.J. Rather, the objective was to turn the discussion to race.

And it worked. Outrage ensued that Clinton had subordinated King’s achievements to those of Lyndon Johnson, and––even worse––that almost half a century later a visionary Black leader would still have to rely on White leadership to see their dreams come into reality.

Hillary stoically withstood days of racially charged vituperation, drawing on her and her husbands deep reservoirs of support in the Black community. But by the time a truce was called before the Nevada vote, the trick had been turned, and Obama had been transformed.

No longer was he the visionary, whose base was drawn from those eager for fundamental change––the latest in a long Democratic Party tradition that included Eugene McCarthy, Bobby Kennedy, George McGovern, Gary Hart, Paul Tsongas and Howard Dean. Now he was first and foremost a Black Candidate, inheriting the mantle instead of Jesse Jackson.

And what was wrong with that? After all, Jackson won more primaries than almost anyone on that list.

But as the Nevada vote rolled in, what was wrong became clear. In less than a week, the entire dynamic of the race had changed. Identity Politics largely displaced the debate over Change vs. Experience, and the Obama campaign was badly wounded.

For the Clinton campaign, this transformation was essential. After all, she had won New Hampshire in the wake of the Teargate episode that drew women to her banner in large numbers. While that was fine as a means of reviving a campaign that was failing, she could not allow herself to become identified as a Women Candidate.

Therefore, labeling Obama as the Black Candidate served two purposes. First, even if it ceded a major voting block to him, it marginalized his campaign and undermined its national prospects. Second, it neutralized the negative aspects of her own reliance on women, by making each candidate an identity candidate.

And what a good trade it was. In Nevada, Clinton might have lost much of her support within the Black community––which backed Obama three to one––but in exchange she gained a dominant edge among Women, Whites and Latinos.

How quickly the new politics devolved to the old. The Clinton campaign and its surrogates immediately began to spin expectations based on the logic of the newly reframed campaign. They have pronounced Obama the likely winner the upcoming South Carolina vote on the basis of its large Black vote––a tactic that in turn solidifies the image of Obama as the Black Candidate, diminishes the importance of the outcome if he wins, and magnifies the importance if she wins––while remaining silent on the corollary that they fully expected to win California and New York in the trade.

If a Clinton–McCain contest emerges, it will be a throwback. John McCain will once again be John McCain, and will run on the basis of his iconic status as a maverick and as a leader, eschewing his lapse into Grover Norquist’s world of coalition politics. Clinton, for her part, will have to choose which voice to embrace. Mark Penn long ago scripted the general election as one in which she would quilt together the Democrats' 48% Blue vote, and build a broad electoral victory by drawing in up to 20% of Republican Women.

But that was then. The successes of both the McCain and Obama campaigns reflect a public weary with the old political rules and strategies, and a desire for a future that is different from the past. Offering a future that is different from the past––a past defined by divisive national politics and twenty years with a Bush or Clinton in the White House––will be a tough sell for Hillary. Despite all of the advantages that Clinton will enjoy in this Democratic year, McCain’s stature and independence may enable him to draw support across party lines, much as Obama was able to do.

There is no small irony that this all comes to a head in the South Carolina, the state where George W. Bush buried John McCain in 2000 through a racially-charged strategy. The Clinton campaign has regained its position of dominance, and challenged Obama to respond in turn if he is to regain his momentum.

Meanwhile, Hillary has opened a new front in the campaign. In the last debate, raised the issue of Obama’s relationship with Chicago developer Antoin Rezko. It is truly a sign of the confidence that the Clintons––whose own campaign finance history includes their own unsavory moments Johnny Chung and Norman Hsu and the pardoning of fugitive billionaire Marc Rich––would take this tack, and invite a reopening of the entire saga of Clintons past.

A saga that is one of the central elements in the desire of many voters to move on.

Whither change.

“Some of us are right, and some of us are wrong. Some of us are ready, and some of us are not.”

With her voice soft and her eyes showing a hint of tears, Hillary Clinton laid herself bare to the voters. Perhaps this will become the signature look that will convey the sincerity to the public that Bill mastered when he bit his lower lip as he felt our pain.

Some of us are right, and some of us are wrong.

In this YouTube moment, Hillary brought her campaign back, laid her claim to the presidency, and set forth her creed. Blunt words hidden behind the soft voice. Steel behind the moist eyes.

While the media focused on the emotional content and visual images, the words themselves expressed sharp differences between Hillary Clinton and Barack Obama.

For months, the contest between Clinton and Obama was largely reduced to the themes of Experience and Change. However, that characterization has been seriously flawed from the outset. After all, Clinton’s claim to “thirty-five years of experience as a citizen activist” masks a resume that boasts just over one term in the Senate as a follow-on to her years as First Lady and her legal practice in Little Rock. Her years as First Lady certainly provided great exposure to the presidency, but its relevance remains an open question.

If nominated as the standard bearer for her party, her claim to the mantle of experience will not hold up long in the general election contest, whether she faces John McCain, Rudy Giuliani or Mike Huckabee, so better to set that argument aside now. The fact is that Clinton’s resume is as thin as any presidential candidate in memory. She has completed one term in the Senate, has never served in the military or held a foreign policy position, and has never been accountable for the basics of executive leadership: setting strategy, making decisions on limited information, building on successes, addressing failures, and learning from both. And however one spins her years as First Lady, even Bill Clinton would be forced to credit Huckabee’s tenure as Governor of Arkansas as a more proven credential.

Yes, Hillary led her husband’s efforts at healthcare reform. But the upshot of that effort does little credit to her claims, as it stands as the signature policy failure of her husband’s tenure. In the wake of that failure, Hillary did not regroup and soldier on, but rather she left the stage while husband Bill beat a tactical retreat as he tacked to the center and embraced Republican welfare reform legislation. Opponents of welfare reform might reasonably argue that the poor paid a heavy price for Hillary’s leadership failure.

Hillary’s words in New Hampshire bring back to center stage a central characteristic of her leadership style that will become pivotal before the election is over. Like the man that she seeks to replace in the White House, Hillary Clinton believes that she is right, and that those who disagree are wrong. And while the facts of her resume may belie her claim to the mantle of Experience, this central aspect of her personality makes the mantle of Change an odd fit as well, particularly in terms of what Change has come to mean in this election year.

The theme pf change that emerged in the Iowa victories of both Barack Obama and Mike Huckabee was not the appeal of the outsider, but rather it was a reflection of the exhaustion of the electorate with the politics of division that have characterized the current administration, and that characterized the Clinton years as well. Whatever their differences on policy, both Obama and Huckabee are comfortable with and reach out to people whose views and experiences differ from their own. Just as Obama visited and embraced the congregation of evangelical pastor Rick Warren––and they embraced him––Huckabee connected with African American audiences that were bypassed by the rest of the Republican field. They share an optimism and humanity that resonate with voters weary of years of Red and Blue, the use of patriotism as a rapier of political tactics, and the politics of personal destruction.

The real distinction between Clinton and Obama is not about experience. It is philosophical and sharp, and Hillary laid it out in her moment of sincerity in New Hampshire.

Some of us are right, and some of us are wrong. The words and the righteousness once reserved for the minions of the vast right wing conspiracy were now leveled at her antagonist for her party’s nomination.

The question that was raised from the moment he considered running for the presidency is about to be answered. We are about to find out if Barack Obama is ready. The campaign over the weeks to come will define both Hillary Clinton and Barack Obama. Clinton in terms of how much this fight means to her and the tactics that she will embrace. Obama by whether he can stand up against the fury of the assault that lies ahead, and whether it deepens his commitment to his core message or whether he shrinks from it.

The race is Hillary’s to lose. After all, all of the advantages are hers. Her team is experienced, and her message is simple. She is expected to do whatever it takes, so few will think less of her if when she goes on the offensive. And much of the core message has already been fleshed out, as it was delivered by Bill Clinton prior to the vote in New Hampshire:

Voting for Obama is a risk. He has no experience. His ideas are flawed. It is all an illusion. Get real.

And there will also be the subliminal messages delivered by surrogates to undermine the Obama campaign, such as the "testimonial" offered by Clinton supporter and former Senator Bob Kerry while campaigning in Iowa prior to the caucuses––and for which he apologized profusely later:

I like the fact that his name is Barack Hussein Obama, and that his father was a Muslim and that his paternal grandmother is a Muslim. There’s a billion people on the planet that are Muslims.

Amazing, really, that after months of being the insurgent running against the inevitable nominee, Barack Obama was the frontrunner for all of two days. Barely twenty-four hours from when three polls were released showing him ahead in New Hampshire by ten points to the day the votes were counted in New Hampshire.

Then, a day after her dewy eyed performance, Hillary won by four points. And it was over.

Now we are back to where it all started. She is once again the presumptive nominee. The advantage is hers. But it will not be about Change, because we have seen this show before. Right or wrong, ready or not, this is about the real world of power politics. The question for the voters, and central to her challenger’s message will be whether we want to go back or whether it is time to move on.
 

It ain't over yet.

Markets are the dominant fact of our lives. They are pervasive and volatile, and yet we continue to be surprised as each peak and valley is upon us.

Last week, we moved to the next phase of the sub-prime mortgage “crisis” as major financial institutions began to succumb to reality, to unwind financial positions and to write-down the value of financial assets. Citibank, Merrill Lynch––the most visible brands in the financial markets––lost billions, and billions more that expected.

How? Just a lot of the same-old, same-old. We have been there so many times over the past quarter century––the Savings and Loan Crisis of the late 1980s, the Japanese market collapse of the early 1990s, the Asian fiscal crisis of the late 1990s, the Dot-com collapse at the beginning of the decade––and each time there are three distinct phases. First, there is the “Gee, it doesn’t get any better than this,” phase.

This is the home-value-as-ATM phase, the NASDAQ hitting 6,000, or the Nikkei nearing 39,000, which was epitomized to me in the late 1990s when a Merrill Lynch broker called our home to propose a product where we would take out a home-equity loan to invest in the stock market. How long had he been a broker? Just a year. This time, the exuberance was manifest in the mortgage markets, where buyers could finance 100% or more of a home purchase, and then pay less than the interest-only cost of the loan for several years.

The problem that these mortgage products claimed to solve is that housing was too expensive, and therefore new products were needed to make things affordable. But the logic was backwards. The housing was too expensive because the financing was too cheap. Take away the financing, sit tight for a while, and the markets will correct. Prices will not stay up if demand dries up. Might take time for people to let go, but reality will set in.

That is the first law of markets. They move. The interesting part of the current crisis is how eager people have been to pronounce how long the correction in the real estate markets will take. This is the “Is it over yet?” phase, and here is a simple rule: If people are still asking if it is over yet, it ain’t over yet. This is the question that keeps people holding on and resisting selling, hoping that the bottom has been reached.

It is only when people give up that the third phase arrives, the vaunted “capitulation" phase. This is when fear sets in, when hope is lost, and when, ironically, it has already become a better time to buy than sell.

In our present financial crisis, the meltdown has not come yet. Some real estate markets will not be hit so hard because they never rose so high, while others, like Manhattan, will not be hit so hard because of exogenous factors. In the case of Manhattan, the plummeting value of the dollar has already driven home prices down over 25%––in Euros––bringing foreign buyers into that market.

The shining star in this financial moment has been the Federal Reserve Bank. Over the past three years, the Federal Reserve has steadily increased the Federal Funds Rate––the rate at which it lends money to member banks and the primary tool that it uses for regulating the pace of economic activity. The Fed was raising rates not as it normally does to subdue economic growth and tame inflation, but for the simple reason that after the collapse of the Dot-com bubble and 9/11 the Fed reduced the Fed Funds Rate to 1.00% from 6.50%, and within the Fed there was great concern that if rates were not raised, they could not be lowered again in the event of a new crisis.

Yes, the logic seems odd––to raise rates for the purpose of being able to lower them––but the fear was real. If there were to be a new crisis––such as the one that is now upon us––and the Fed Funds Rate were still at 1%, the Federal Reserve would have few effective tools for addressing that new crisis and supporting the financial system.

And through it all, Japan loomed as a lesson of how bad things could get if the central bank was left with no tools in the toolbox. Japan, as some might recall, was looming as the new world economic colossus in the late 1980s with their stock market and real estate prices in the stratosphere when the bubble burst and values plummeted by as much as 75%. Faced with price deflation, Japan’s central bankers proved unable to thwart the decade-long recession that ensued––even as they pushed interest rates down to 1/10th of 1%––with devastating social and economic consequences.

Fortunately, in the months ahead, this will not be our challenge. The Federal Reserve retains control over the monetary levers that it needs and unlike the Japanese, American consumers continue to spend money through thick and thin. The difficult choices will be on the regulatory and policy side. Specifically, with a presidential election looming, Washington will be faced with the decisions of how much pain can be tolerated before the bailouts begin.

There will be hard choices ahead, but even the resources of the federal government cannot forestall the pain that comes during a major market decline and new regulation always seems to be designed to address the last crisis rather than the next one. The question that will endure––from one market bubble to the next––is whether, when faced with things that appear to be too good to be true––a no-cost mortgage for example––people might pause for a moment before they sign up and consider that maybe they are.

Winds of war

For those who might have missed the vanguard of the French New Left back in the day, the Situationists were anarchists who sought to create situations that would engender a response that would provide a critique of the system that they sought to destroy. So one day, they put up posters in the metro with pictures of a man sitting behind his desk, in the crosshairs of a gun, with a caption reading, “Wouldn’t you like to kill your boss today?”

Except, of course, that no one got it. No rash of boss-killings ensued, no national debate on the absurdity of work in the capitalist system. Just more ennui.

Osama Bin Laden, on the other hand, was more effective. Sitting in a cave in North Waziristan, his goal was to drive a wedge between the 1.4 billion Muslims and the West, as a first step toward rebuilding the pan-Islamic caliphate. His method was pure Situationist. He would attack America and sit back and wait for the response. It was not his attack that would create the outcome he sought, but the reaction of his adversary, the reaction of the all-powerful, morally corrupt Americans. They would come after him, and in so doing would go to war on Islamic soil. They would slaughter Muslim women and children in their wake, and those images would be broadcast across the world.

He tried for years before we took the bait. He attacked our embassies in Africa. He attacked the Kobar towers. He attacked the USS Cole, but we did not respond. Finally, with the ranks of Al Qaeda reduced to a few dozen stalwarts, they chose to attack the U.S. homeland in a final effort to prod the Americans to come after him.

Bull’s eye.

Six years later, even as the American military trumpets the defeat of Al Qaeda in Iraq and Dick Cheney declares that Bin Laden has been reduced to irrelevance, Al Qaeda has grown from a few dozen men in a cave to a world-wide movement, and the challenge of bridging Islam and the West has become one of the defining societal challenges of this era.

And now a second front has been joined, and we are being baited once again. Iran is working hard to goad the Bush administration to double down on its strategy of preemption and would be quite pleased with an attack, particularly the discrete assault on nuclear facilities that is contemplated in the western media. A limited strike would be the best of all possible worlds. All the benefit, so little destruction.

The Bush administration has become a wonderful foil for the Iranians. After all, little more than a decade after the revolution that brought the clerics to power, the Guardian Council was faced with a popular movement demanding openness, democracy and secularization. Efforts to repress dissent only increased that momentum of the reformists, as the modern Iran that the Ayatollahs sought to forestall grew in the public imagination.

It was the Axis of Evil rhetoric that gave the Guardian Council the latitude to crack down on reform and elevate Mahmoud Ahmadinejad to the Presidency. Since then, the Iranian’s have played a dangerous game, but pursued their strategy diligently, and Ahmadinejad has played the nuclear and Israel cards skillfully.

The Iranians have two goals in this game. First, and foremost, the regime wants to stay in power. This requires an external threat to the regime that can justify the repression of domestic opposition and undermining of democratic institutions, and engender nationalist support for the regime. For this goal, the Americans could not have served interests of the clerical regime any better. Oil revenues are high, Americans are arrayed along their borders beating the drums of war, and even secular Iranians and Iranian ex-patriots support the regime’s assertion of Iran’s national right to pursue its nuclear program.

Second, the regime desires to assert Shi’a leadership in the Islamic world in its struggles with the West and to counter the ascendancy of Al Qaeda. This is an issue that blends ethnic and sectarian rivalry, with substantial historical resonance. After all, the Shi’a lived under the Sunni boot for more than a millennium until the fall of the Caliphate in the 1920s, only to find a new boot appear in its stead, this one made of British and American leather. This goal requires building the Iranian brand in the minds of the far-flung Islamic nation, the Umma, and has been the purpose behind Iranian support of Hamas and Hezbollah, its assault on the Danish cartoons, its Holocaust rhetoric, and Ahmadinejad’s visit to Columbia University, where he took the West’s verbal assaults and gave the lie to the West’s claims of openness and tolerance.

What could be better now for the Iranian regime than to be attacked by the Americans? What better way to in one moment harden domestic resentments against a common external enemy and build sympathy and support across the Islamic world? What better way to establish Iranian bona fides as the Islamic David standing against the American Goliath?

Where in all of this is the American art of strategy in the world? Why are subtlety and nuance the purview of others? Why do we not consider what happens on day two and day three and day four after we utter our words or launch our spears?

Last month, the Iranians showed the other side of their strategy, when, at the request of Lee Hamilton, Iranian supreme leader Ali Khamenei ordered the release of Halah Esfandiari. Esfandiari, an Iranian-born scholar, had been imprisoned for nine months as a “threat to the Iranian state.” Her comments after her release were notable. When she protested to her chief interrogator that she was not a spy, but just “wrote articles and organized symposia,” the Iranian official replied, “Yes, and that is how it started in Ukraine and Georgia.”

The Iranians care first and foremost about the survival of their regime, and the greatest threat the regime is not guns and bullets, but words and ideas.

Now we are at another moment of decision––when we should be thinking clearly about what strategies will best achieve the goals that we seek––before we launch a new war and once again find ourselves doing the bidding of our adversaries. But even as our adversaries in the world have proven adroit at nuanced strategy and asymmetric warfare, our stance in the world has become more linear and less subtle, more bellicose and less thoughtful.

Unfortunately, bellicosity apparently plays in Peoria, so the winds of war may loom as irresistible. Among the leading Republican candidates, war with Iran has become the new national security shibboleth, and with an eye to the general election Hillary Clinton is marching in lock-step. But behind all of the heated words, is there much thought going on? About day two, about day three or about day four?

How is it that five years into the Iraq war, we might once again succumb to the drumbeat of national security populism? Is it possible that our political class has lost the capacity to think about the implications of their words, to be a little more wise and a little less warrior, and to discern whether they are being manipulated by others more thoughtful and strategic than they?

As we dig our hole deeper and deeper, we should remind ourselves that we are neophytes in this neighborhood. When he was in New York, Ahmadinejad made reference to the invasion of Greece by Darius II, over 2,000 years ago. The Sunni and the Shi’a are playing a complex game of tribe and faith that dates back a millennium. The Turks ruled the region for centuries and are loathe to be dictated to. And the Russians, the French and Brits have been contesting the region since before the battle of Yorktown.

We just might not be as smart as we think we are. And everyone else might know a thing or two. And that would be OK.

Memories of Billy Rohr

It did not take long for the grumbling to start: “Are the Red Sox ready to become the Yankees?”

A knife to the heart of those whose lives have been defined by the seasonal yearnings and disappointments inherent to the chosen path; a sharp rebuke to those whose own human frailty led them over time to root as much for the defeat of their Nemesis, as for that chimerical moment when their own heroes might emerge triumphant.

A close friend––still warm from the heat of Dustin Pedroia’s night––remarked of what the future might hold for a team whose young roster of Beckett and DiceK, Ellsbury and Papelbon, DelCarmen, Lester and Buccholtz––along with the evening’s diminutive star––have their best years before them, but was quick to add that should they sign A-Rod, she would “have a hard time continuing as a Red Sox fan.”

For such is the life. Once the yearning defines the soul, the conditionality is inevitable. We are fans, after all, not whores. We cannot be bought. After a lifetime of waiting, what is another decade? Better that than debasing the very meaning of the journey.

The Red Sox have won nothing yet this year––thought last night was a glorious night––and just one World Series to redeem the hopes of those who forty years ago saw a season begin with Billy Rohr blanking the Yankees, and who believed that with he and Yaz and Rico and Boomer, Santiago and Lonborg, the future was bright. A young roster can come to naught, as the Conigliaro brothers can attest, as the heroics of Bernie Carbo and Hendu and Pudge can so easily be taken away by Calvin Shiraldi and Johnny Mac.

It is way too soon to rest on one night’s laurels, for this may be Colorado’s year, but we learn to love the moment and to feel the warmth from the moment that Coco Crisp––a name for the ages––crashed into the wall with the ball cradled in his grasp––for Siddhartha Gautama and every Red Sox fan knows that such moments are fleeting. Each must be inhaled and savored for what it is, for the journey itself.

The moment is barely past when we are awoken from our reverie.

Unable to tolerate the moment of joy for Red Sox fans, whose torment they have so enjoyed over the decades, New York writers dig deep for a journalistic Haiku, and strike with full force.

“Are the Red Sox ready to become the Yankees? Are they ready?”

The problem of Europe

Two weeks ago, Nicholas Sarkozy launched his most direct assault on the European Central Bank. In the view of the new French President, the ECB’s tight money policies threaten to undermine his efforts to open up the French economic system and stimulate economic growth and liberalization. The ECB policies, Sarkozy suggested, were biased toward Germany’s enduring fear of inflation and against his policies of stimulating growth and international competitiveness.

The rift between Sarkozy and the ECB has been exacerbated by the trading relationship between the Euro, the Dollar and the Chinese Yuan. As the value of the Dollar has collapsed under the weight of massive U.S. current account deficits, the Euro has risen to new heights, while the Chinese currency, which does not trade freely, has only risen modestly. The result has been that European goods have become less competitive in the U.S. market. The ECB can ameliorate this problem, as Sarkozy has suggested, by reducing interest rates––at least in concert with U.S. central bankers––which would stem the pace of the Euro’s rise. But this, the Gnomes of the ECB insist, is not their job. Their job is to fight inflation. They are independent. Go away.

Sensing their inability to move the ECB to act, some European finance ministers have responded to the Euro’s rise by beseeching Ben Bernanke to raise U.S. interest rates to support the Dollar. This, however, is not going to happen. The Federal Reserve just lowered interest rates in response to the sub-prime lending crisis, and any upward move would undermine U.S. markets. The Fed’s mandate is to fight inflation and to support economic growth, and whatever is going on with the Euro is simply not their job.

More to the point, the price of Mephisto shoes might be the symptom, but it is not the problem. The problem is more fundamental. It is the problem of Europe.

The European Union is a nice idea. Like the Iraq War, it is an idea that gained momentum among many constituencies that came to support the same policy, though for different reasons. For some, who saw the emergence of Asia and the United States as two great economic forces, the European Union would create a third trading block to protect the European economies. For others, the EU represented an opportunity to assert Europe as a political counterweight to the United States imperial power in the post-Cold War era. For yet others, the EU was necessary to bind France and Germany together so tightly that a third world war between the historic rivals would become an impossibility.

The reality of creating a European Union has been a tough go. The “domestic” economic strategy of the European Union has mirrored the industrial policy of the United States over the decades. While the United States implemented policies to stimulate economic growth in its poorer states––in the south and in the west––so has Europe invested in the economies of its southern and poorer members. Neo-classical trade theories have been realized, as countries with comparative advantages in labor costs or other attributes have benefited, while growth in the Franco-German heartland has stagnated. Imagine Ireland, Portugal and Spain as the sunbelt of Europe.

However, while the rustbelt gave way in economic and political clout to the sunbelt in the U.S., the rise of new economic powers in Europe threatened the cultural identity of the members, as well as the economies of the older powers. European Unionists have implemented the attributes of nationhood before the participants agreed to become a single nation. They have centralized regulation, asserted legal hegemony and created a single currency, even as the EU constitution has failed to win ratification. The Euro-centrists have said yes, even as the people continue to say no.

In the United States, political union came first, then came the struggle to determine the extent to which the center could impose its will on the member states and undermine local law and custom. As one observer noted, the issue finally came to a head in 1863, when the two sides convened at a small town in Pennsylvania to settle matters. After three days of debate, the supporters of a strong center won the day and the matter was settled.

Sarkozy is raising the central question of how a nation that cannot control their monetary policy can seek to control their future. His policies, his presidency and the ability of France to chart a new economic path––one in which fiscal policy will play a reduced role relative to market forces––depend on a parallel monetary policy that makes capital available to a growing entrepreneurial sector.

Alan Greenspan unwittingly underscored Sarkozy’s point of the important linkage between fiscal and monetary policy during his recent book tour, when he indicated the extent to which he directed monetary policy to support the fiscal policies of the federal administrations. Far from adopting the strict constructionist stance of the current ECB, Greenspan recognized the anti-inflationary impacts of technology and deregulation, and allowed an expansive monetary policy that led to sustained economic growth, even as the Dollar and federal current account deficits might have warranted the tighter monetary stance.

Europe, for anyone who has visited recently, is not what it used to be. The quaint villages are not quite as quaint. The local bakeries are disappearing. Local cultures are ceding to the forces of economic integration. Ironically, it is France’s Hungarian-born President that is raising the central question, not just about whether France can control its economic destiny, but whether, just two years after the French voters rejected the proposed European Constitution, France has already lost its ability, and right, to be La France.

Freddy's dead

Bin Laden and Fred Thompson made it official. They both aim to influence the 2008 presidential election.

Bin Laden, in his latest video, offered a message tailored to Democratic and Republican activists alike. First, he offered an end to the war. Second, he offered a massive tax cut and a permanent flat tax of just 2.5%. Blending a message that was overtly part Muhammad and part Chomsky, he asked only that Americans discard their corrupt, corporate-controlled democratic system, and embrace Islam. Small price for a flat tax.

Fred Thompson offered no such message clarity. After six months of planning his entry into the Republican presidential contest, Thompson’s first week on the stump was not encouraging. When right-wing talk show host Sean Hannity popped “The Question,” and asked Thompson why he was running for president and what distinguished him from the other candidates, the newly minted candidate muffed. Well, Sean, the candidate dissembled, I haven’t really thought about it in those terms…

It is an astonishing thing for lay observers of the process to see candidates stumble over The Question, as it would seem to be the single question every candidate knows they are going to be asked. Unlike “How would you get us out of the mess in Iraq?” each candidate can answer this one on their own terms. But when Hannity lobbed the softball his way, Thompson missed.

The depth of the destruction that George W. Bush has done to the Republican Party is evidenced by the lack of an anointed candidate just four months before the first nominating votes are tallied. Not since 1964 have the Republicans had a wide-open contest for the party nomination, as both the party’s famed internal discipline and candidate adherence to the shibboleths––pro-Life, anti-gay, pro-gun, anti-tax, pro-faith––have come undone. Fred Thompson may catch fire, and don the mantle of Reagan that slipped from George Allen's grasp as the word macaca left his lips, but if his first week is any indication, he may never reach the levels of popularity he held before he formally entered the race.

It just isn’t supposed to be this way. The right people have not been consulted. Whether dead, disgusted or indicted, the powerbrokers who are supposed to take care of these things are nowhere to be seen, and the two leading choices for Republican primary voters are a pro-choice, pro-gay, anti-gun, multiple divorcee married to a Jew, and a formerly pro-gay, pro-choice Mormon from a family with a polygamous past.

A choice between Liberal and an Apostate. Just friggin’ great. Now along comes Fred, and he can't say why.

Among the Democratic candidates, message clarity has become the central debate, now reduced to the parsing of single words. Hillary has chosen the mantle of Experience, while Obama has embraced Change. This past week, Hillary showed her Clintonian bloodlines when she took it to Obama by questioning what the meaning of the word Change is, and claiming that she is in fact the candidate offering both Experience and Change.

God help Obama. For surely the game will be up if he loses both words.

The real word that the Clinton campaign is relying on is Inevitability. After staunching Obama’s initial momentum, Hillary now sits around 35-40% among Democratic voters in national polls and holds a 15-20% lead over Obama. In Democratic debates she has been a dominant voice and successfully stoked the emerging sense of inevitability. And it is a strategy that offers increasing returns. The more inevitable she seems, the more likely are others to drop out, temper their rhetorical attacks and pay obeisance to her as the presumptive nominee.

But the funny thing is that the closer people look, the less they seem to like. In Iowa, the first state to put their delegates on the line, five polls taken since August 1st show a very tight race: Clinton 25%, Edwards 25%, Obama 21%, Richardson 12%. Therefore, even as the fires of Inevitability are stoked, on the ground Iowa is a horse race, Nevada and South Carolina--western and southern respectively--are less naturally hospitable terrain for Clinton, and only polling in New Hampshire mirrors the national trends. Accordingly, the prospect looms that the juggernaut could derail in the early weeks of voting, a risk that can be effectively eliminated if Michigan and Florida--states in which her lead exceeds 20%--successfully move forward in the process.

What is most puzzling about the meta-debate between the forces of Experience and the forces of Change, is that Hillary is conceded the mantle of experience, while the best Obama can do is suggest that experience isn’t all it’s cracked up to be, as he proffers Cheney and Rumsfeld as his cases in point. But this is a specious argument. Experience matters deeply in foreign affairs, particularly in a world where our antagonists and counterparts, be they Osama Bin Laden, Ayatollah Ali Khamenei, Vladimir Putin or the Chinese Central Committee, have proven a capacity to think strategically, take a long view of history and see foreign relations a web of complex, interconnected relationships. It would indeed be reassuring to believe that our President was able to see and navigate the world in all its complexities, set forth a vision of the world twenty or thirty years down the road, engage other nations in embracing that future, and lead the world toward that end. To say the experience is not of value seems, somehow, to miss the point.

Even as Hillary is accorded the mantle of Experience, she has in fact held no executive post and stood accountable for her choices in that capacity. Like Obama and Edwards, she is a one-term U.S. Senator and a lawyer with a keen mind. And she was First Lady, and present in the halls of power for eight years. But she was neither the President nor the Vice President, and at best can sell herself as a co-conspirator for the best of her husband’s years.

The experience that Hillary can validly claim, and which should be no small consideration, is her proven ability to withstand the slings and arrows that lie ahead for whichever candidate emerges as the party nominee. From healthcare reform, to the death of Vincent Foster, to the selling of the Lincoln Bedroom, to her husband’s philandering, to the pardoning of Marc Rich, Hillary Clinton has taken the bullets, looked into the camera and never blinked. This is the Experience that Hillary brings as a candidate, and it is no small offering.

But it is not Change.

Perhaps this is what the Iowa voters see. And it is enough to give them pause.

George Tenet goes public

Dick Cheney must get a kick out of watching George Tenet and Hilary Clinton try to change the subject.

Tired of being Dick Cheney’s bitch, and remaining silent as the Vice President repeatedly and publicly blamed the decision to go to war on his assurances that Iraq had stockpiles of WMD, George Tenet is lashing back. In his new book, At the Center of the Storm, Tenet contends that the Vice President and the Administration were intent on going to war all in Iraq along, and that WMD merely served as a pretext.

This is old news. After all, in a 2003 interview in Vanity Fair magazine, then-Deputy Secretary of Defense Paul Wolfowitz forthrightly explained that the Bush Administration had several reasons for launching its war with Iraq––none of which, incidentally, suggested Iraqi complicity in the 9/11 events or constituted a casus belli under the generally accepted laws of war––but chose WMD as the central rationale because it was the easiest to sell.

Much to Tenet’s chagrin, the WMD narrative––including the ensuing claims of intelligence failure and political manipulation––remains central to public discourse around the history of the war, and continues to obscure the more wide-ranging motivations. Riding the talk show circuit, interviewers ignore the substance of his book––the threats the to the nation, the depth and breadth of Al Qaeda's capabilities––and return to the WMD soap opera. What did he know? When did he know it? What did others know? Did he want to apologize to the American people? [Wolf Blitzer, CNN, 5/2/07.]

Bush, Cheney and their acolytes are indifferent to the public WMD debate, however, because it was never determinative. Prior to September 11th, as Tenet suggests, the Bush Administration was intent on removing Saddam Hussein from power for a range of reasons, which reflected the perspectives of different groups within the Administration. First, there were the Neoconservatives. As typified by Wolfowitz and Bill Kristol, this group saw the institution of democratic governments in the Middle East as critical to regional stability and global security, and supported military action in Iraq as a means to establish a beachhead from which to catalyze political transformation.

Second, there was the Office of the Vice President. While Cheney was a member of the neoconservative Project for a New American Century, his strategic focus was on energy security. This group saw Saddam’s commitment to give Russian, Chinese and French oil companies leases to develop the massive Iraq oil fields––after United Nations sanctions were removed––as a fundamental threat to American commercial interests and economic security, and supported military action as a means to achieve three goals: Preventing Russo-Sino control of vital resources, establishing a regime that would direct those contracts to American and British companies, and putting boots on the ground within striking distance of both Saudi and Kuwait, to deter future threats to America’s interests in the region.

Third, there was the group whose views in many respects most closely mirrored those of the Clinton Administration that first promulgated the policy of regime change in Iraq. Led by Rumsfeld, this group saw Saddam as a proven threat to the region, and international terrorism as a growing strategic threat to America’s interests. They viewed action in Iraq as imperative both to forestall further aggression by Saddam, and to prevent an alliance with terrorist groups that had declared war on America and the west years earlier.

For each group, the attacks on September 11th escalated the urgency of acting, and Tenet’s assurance that Iraq harbored WMD provided a compelling narrative for selling a war that each group believed critical to the nation’s interests. While Tenet blames Cheney for continuing with the public charade and hanging him out to dry, others across the political spectrum have found it useful to stick to the script. Among Democratic presidential aspirants who voted for the war, the formulation of blaming bad intelligence and manipulation has become the accepted route for appeasing the Party faithful. For his part, John Edwards has elevated apologizing to a central campaign theme as he expresses his regret for trusting the intelligence rather than his own judgment, while Hillary Clinton clings to the “If I knew then what I know today…” formulation.

Hillary Clinton continues to resist John Edwards full-throated apologia because she wants to be President more than she wants to be the Democratic nominee, and this chosen path grates against her––and no doubt her husband’s––instincts. From a strategic standpoint, the clamor for an exit from Iraq is fraught with risk for the nation and the region. While not necessary a neocon-petrocentric-militarist, she is probably closer to the Administration’s world view than Edwards––and no doubt shares Joe Biden’s assessment that he is “clueless” on matters of foreign affairs. She understands that the prospect of American disengagement from the Middle East is already creating fear across the region, and leading the Sunni states––among them Egypt, Jorden and Saudi Arabia––rushing to develop nuclear programs as a deterrent to growing Iranian and Shia power, and that the next President must have a mandate to build a new strategic framework for the region. Almost alone among the Democratic candidates, she embraces Anthony Zinni's view that no Democrat, if elected, will be able to deliver on the withdrawal commitments they are now so eagerly proffering.

Politically, Clinton views Edwards’ apology-as-job-qualification as suicide for a Democratic nominee come November 2008. Edwards’ account––that as a Senator, he trusted the CIA rather than his own judgment––is simply a more convenient history to embrace than the less convenient truth that he did trust his own judgment. In the toxic political climate of the day, with the drums beating and the rhetoric flying, when it came time to vote, it was easier to fly the flag and vote Aye than to vote Nay and risk the scorn that would ensue. For Edwards the Presidential aspirant, it is better now to plead guilty to having been duped than to face the far worse indictment of having lacked the courage to vote Nay, of having chosen to vote for war and to send soldiers to die, in order to preserve––in Bill Clinton’s words––his own future political viability.

When the general election rolls around 18-months from now, neither George Bush nor Dick Cheney will be on the Republican ticket, and while Iraq looms to be a central issue, the protagonists of that war will be leaving the theatre. It is notable that even as the Democrats are being pushed to the left by their base, the Republican field is notably lacking in fire-breathing partisans, and that the Democratic debate two weeks ago included more Senators who voted for the war than the Republican debate this evening. In a sense, the Republican field may actually be less captive of the war, and may be adapting more quickly to a new political landscape where a resurgent Independent center looms to be critical once again, comprising voters for whom apologies for bad judgment will do little to win votes for the highest office, and Out Now will not suffice for a strategic vision for America’s role in the world.

Hillary Clinton and Dick Cheney both understand what George Tenet seems to have missed, the WMD narrative worked––and it is still working. And Clinton and Cheney also understand that the longer it remains central to the Democratic campaign, the more it will weaken and diminish the ultimate victor, and the more likely it is that a Republican will the White House 18 months from now.

Reality Bites: Exhibit A

We have a problem accepting reality when it threatens our preferred historical narrative.

Exhibit A is Kirk Radomski.

As reported today above the fold in the New York Times, Radomski, now 37, has admitted in federal court to distributing a range of performance enhancing drugs––including anabolic steroids, amphetamines and human growth hormone––as a batboy and equipment manager in the clubhouse of the New York Mets during the period 1985-1995.

Perhaps Radomski’s admission can bring to an end the roiling debate over the use of performance-enhancing drugs in baseball, to say nothing of the rest of professional sports. If a 15-year-old batboy was distributing drugs in the Mets clubhouse to “dozens of players,” one can safely conclude that the practice was pervasive.

This is not a Claude Reins moment. Learning of Radomski’s admission, no one can reasonably be “Shocked, shocked, that there were illegal drugs being used in baseball.” After all, any baseball fan worthy of the name read Jim Bouton’s classic Ball Four, which exposed––among other crude habits––the widespread use of amphetamines––or “greenies”––in the Yankees clubhouse during the 1963 and 1964 seasons. And while Bouton’s revelations about America’s heroes earned him the enduring enmity of his teammates and the Yankees organization, no one seriously challenged the veracity of his claims.

Today, several years after the Senate charade that marched players before the cameras to buttress the careers of the Senators and destroy those of the players, Mark McGwire is still pilloried for declining to state what everyone knew, his bash-brother Jose Canseco is still shunned for stating what everyone knew and writing a book about it, and the Baseball Commissioner and team owners who deflected questions from the Senators with the skill of cigarette company executives, still invoke the name of Senate titan George Mitchell as their agent in their efforts to “get to the bottom of the situation.”

Well, maybe the image of the 15-year-old Radomksi offering up anabolic steroids and methamphetamines to Ray Knight and Mookie Wilson and David Cone will finally allow people to come to grips with the long history of drug use in Major League locker rooms, and cease the fatuous effort to lay baseball’s problem with performance-enhancing drugs at the feet of McGwire, Sammy Sosa and Barry Bonds. The impact of money on the purity of America’s Game dates back at least to the Black Sox scandal in 1919, and the casual use of illegal drugs in the clubhouse dates at least to the early 1960s. The advent of free agency, and the ensuing growth in player performance-based compensation, magnified the incentives for players to seek out ways to improve their performance. And as Radomski and Bouton both suggest, the teams were co-conspirators in the effort.

Radomski’s “revelations” are particularly timely, as the ongoing steroid drama is reaching its apotheosis. One day over the next few months, Barry Bonds will break Hank Aaron’s long-standing home run record, and Bonds pursuit of Aaron’s record has become a national morality play. Hank Aaron is an historic figure in American sports, a man who endured the barbs of the civil rights struggle, and yet remains a figure of stature and grace. In contrast, Barry Bonds is, well, Barry Bonds. Surly and aloof, Bonds is widely vilified as a cheater and remains the protagonist in the steroid controversy. Major League Baseball, which profited greatly from the race between McGuire and Sosa to break Roger Maris’ single season home run record, is at a loss about how and whether to recognize Bonds when he hits home run 756. Aaron himself refuses to acknowledge Bonds, and Aaron’s disdain supports those who view Bonds as the villain in the drama.

The fact is, however, that Barry Bonds is not destroying America’s Game. America’s Game is an American game, part of our commercial popular culture, with its rules and rewards. It is possible that Barry Bonds may have outstripped his peers in his use of steroids––as he has in all other aspects of the sport––and certainly today’s Barry Bonds physically bears little comparison with the Barry Bonds who came into the League. However, the same can be said of Roger Clemens, and other players whose records are steadily displacing those of players from earlier eras.

As one looks back over the past 40 years, it is impossible to know who benefited and who did not from performance-enhancing drugs, and therefore how their records should be compared. Bonds vs. A-Rod? Clemens vs. Maddox? Ricky Henderson vs. Maury Wills. In each case, the first player seems the more likely beneficiary than the second. We only know from the testimony of Radomksi, and the supporting observations of Bouton and Canseco, that the opportunity was there, and that many took advantage. Yet no player has been targeted, vilified and ostracized like Bonds.

As the Bonds drama unfolds, we will most certainly continue to recite the preferred narrative––that Barry Bonds is a unique villain in this saga, rather than just the most recognized actor in what has been a decades-long play in which many are complicit. New York fans will certainly prefer to cling to their image of Lenny Dykstra as a hard-scrapple, tobacco-chewing, throw-back player, and view today’s story as an aberration. Others will argue that unlike Bonds, Dysktra and the other heroes of summers’ past were the unwitting victims of team doctors and trainers, and perhaps even an occasional 15-year-old batboy, pushing their wares.

But as it ain’t so. It just ain’t so.

The Jazzman's Wife

Sitting alongside her husband in Alabama this week, Hillary Clinton looked small. Diminished.

This is, no doubt, why her strategists have been determined to keep the two apart in public appearances. Not because as the publicly cuckolded and humiliated spouse she must detest him, but because seeing her sitting alongside him evokes so many images––images that do not serve her well.

Hillary is small and diminished next to Bill exactly because he is large, and larger than life. He is a titanic political figure, and as much as she struggles to emit the intellectual grasp that was one aspect of his persona, she has none of his touch of the common man. She lacks any measure of his deeply felt empathy for the individual, whether in Appalachia, the inner ring suburb or the inner city. Sitting there, as much as we might feel her pain, we know that she does not feel ours.

Worse still, sitting next him, one knows that behind all of her pretenses to being the candidate with real experience in the world, she is a one-term Senator––much as Obama and Edwards––and two-term First Lady. Internationally, she is a rock star, but the image of her sitting next to her husband reinforces, visually and viscerally, that she is the first derivative of a powerful political figure, and that her rise to Senator, and any hope she might have of the Presidency, demands that he be at her side. She had no choice to leave him in the wake of his infidelities if she was to achieve her own ambitions.

And that is the other image that strikes the observer, for Bill is nothing if not authentic, while Hillary sits as yin to his yang, the candidate who is packaged and careful and whom one never really believes that one can ever know.

As George W. Bush settles in for his last two years with approval ratings below 30%, and with America’s image in the world lying in tatters at his feet, do we really want another President who is driven to define herself against someone else, or some image of whom people think them to be? The Bush Presidency was undone in the beginning by the President and team’s rejection of all things Clinton. From their rejection of the outgoing administration’s concerns over Al Qaeda to the dismantling of FEMA, decisions early on derived from a compulsion to reject any notion that their hated predecessor––the Slick Willy who continually confounded their best-laid plans––could have gleaned any wisdom about the world during his eight years in office. Then, as Iraq loomed, the Bush Presidency was further damaged by the President’s determination to turn away from his father’s path, and to reject the entreaties of his father’s advisors, from Scowcroft’s plea to stay out of Iraq early on, to the President’s skillful marginalization of Jim Baker and the Iraq Study Group just a few months ago.

Now, Hillary looms as a candidate similarly defined by the struggle to be her own self, even as the world knows that she would never be where she is but for Him. Her struggle against the shadow of the man sitting next to her in Alabama this week was demonstrated by her overreaction to David Geffen’s suggestion that lying comes too easily to the Clintons. Rather than simply suggest that Geffen never disparaged them when he was spending the night in the Lincoln Bedroom, or that his bitterness dated to Bill Clinton’s decision not to pardon American Indian leader and convicted murderer Leonard Pelletier, Hillary lashed out at Geffen and attacked him for engaging in the “politics of personal destruction.”

Of course, it wasn’t about personal destruction. But it was intensely political, as Hillary was stuck––as she often will be as she continues on the long sprint to Iowa and New Hampshire––between her desire to leverage the patina of the Clinton Presidency, while rejecting ties to its more sordid moments. She could not give a straightforward response to Geffen, because it suggest her complicity in the selling of the Lincoln Bedroom for campaign contributions, and worse, the selling of Presidential Pardons to the likes of Billionaire tax cheat Marc Rich.

Hillary’s over-wrought reaction to Geffen, and her subsequent appearance with Bill in Alabama, do not speak well for her ability to navigate her campaign through the long months ahead. Despite an overwhelming advantage in fundraising, name recognition and organization, there is a sense of incipient panic in the Clinton camp, and tetchiness in her public comments. On the fundraising side, the Clinton finance team has threatened that donors must get on board early, or lose any credit later on, and warned them against giving to “both sides.” On the political side, bringing Bill down to Alabama showed an inability to stick to the game plan, and an astonishing lack of confidence in the candidate to deal with the problem at hand.

And the problem, of course, is Barack Obama. For months, the question on the Democratic side was who would emerge as the anti-Clinton, and over the course of 2006, several candidates took their turn in the sun. First there was Gore, then Mark Warner and then John Edwards. Each star rose and then set as the media moved on. Now, it is Obama’s turn, and he has begun to separate himself from the pack. But the Clinton campaign was not content wait to see if he would stumble along the way in the face of public and media scrutiny, perhaps because of the threat he posed to Clinton’s African American base, or perhaps just because he is so comfortable in his own skin and as such looms as such a stark contrast.

The numbers are only just beginning to justify such a strong response on the Clinton side. On Intrade, the online trading site that has emerged as a force in measuring political trends, the odds of a Clinton nomination remains around 50%, though they dropped to 46% in the wake of the Geffen dust-up. However, Obama has emerged as the clear threat, rising to 25% as Edwards odds have dropped from 20% to below 10%, and he has been lapped by resurgent Gore speculation. Polling results, which measure popularity rather than expected outcome, have been worse for Clinton, with some showing the gap narrowing toward 10%, with Obama a growing favorite among Black voters. Clearly, whatever gauge one chooses, the aura of inevitability has been pierced.



Hillary Clinton’s struggles as a candidate are just beginning. As she sat in Alabama next to Bill, the comparison did not serve her will. Unlike Maggie Thatcher, who when shown the Bronze statue of her that was unveiled before Parliament last week, commented that she would have preferred Iron, but Bronze would have to do, Hillary’s problem is that she lacks authenticity, and without authenticity, how can there be trust? When she voted for the war, was it out of conviction, or because she believed that to win the Presidency as a woman she needed to be tough? If she declines to apologize, is it because her original vote was one of conviction, or because as a female candidate she has determined that she must show a steel backbone? When all that she does reeks of strategy and tactics, how does one know who she really is?

Or, as an observer had to wonder as she sat next to Bill this week, did she stay with him because she loves him and forgave him his faults, or because she knew that without him, and the embrace of his success and popularity, she had no chance to win the White House? Is it personal, or is it just politics. Just strategy and tactics, but for which she would just be another one-term Senator with big ambitions, or more likely another Wall Street banker dreaming dreams of what might have been.

Jim Baker's last dance

Has there been a commission that has risen to rock star status before? Certainly there have been some legendary commissions, and no doubt Arlen Specter can point to his deft presentation of the Single Bullet Theory as staff counsel to the Warren Commission as the launching point for his rise to the United States Senate. But in this era of the 24-hour news cycle, James Baker and the Iraq Study Group are riding high.

And riding for a fall.

Baker did well to time the release of his memoir––whose title touts the virtue of staying out of politics––with the President’s thumping in the mid-term elections and the imminent presentation of the Iraq Study Group recommendations to the President and Congress. Baker’s reputation has never been higher, as the wiley partisan who served in the administrations of Presidents Reagan and Bush ’41, and who led Bush ’43 to the White House through the swamp that was the 2000 election, is now seen by Democrats and Republicans alike as the Man on the White Horse who might yet bring the White House to heel and chart a new direction for America’s policy in Iraq.

While on his book tour in the weeks preceding the election, Baker offered an early glimpse into the direction that the Iraq Study Group was taking. Specifically, he suggested that the United States should bring both Syria and Iran into direct negotiations over the future of Iraq and the region, and described at length the successes he achieved as Secretary of State through determined negotiations with Syria. It is, he submitted, more important to negotiate with one’s enemies than with one’s friends.

Since the election, events have proceeded at a furious pace. First, Secretary of Defense Donald Rumsfeld––viewed as a key roadblock to any recommendations that the Iraq Study Group might present––was jettisoned by the President, and former Baker aid and Study Group member Robert Gates was nominated to be his successor. Rumsfeld’s departure was immediately heralded as a victory for Jim Baker and his circle of foreign policy Realists over the Vulcans––the coterie of Cheney, Rumsfeld and Neocons––who have held Bush ’43 in thrall and led the nation into Iraq.

Then, over the past several days, Iraq Study Group members met with the President and Congressional leaders to discuss the Group’s work and to solicit ideas. The meetings and the press conferences that followed could not have been staged to provide a more deliberate contrast to the administration’s own conduct of foreign policy, as leaders from both parties praised the commission for its openness to new ideas.

Lost in all of this excitement, however, was the President’s own notable lack of enthusiasm. Speaking before the cameras, the President would only offer that he was impressed with the membership of the Iraq Study Group––which incidentally he had approved in advance––and that they asked good questions. Perhaps a stronger statement that he was growing weary with being bullied in public by his father’s team came later, when during a meeting with visiting Israeli Prime Minister Ehud Olmert the President called for greater international isolation of Iran.

Unless Jim Baker has lost the political instincts that have served him so well over the years, he must know that he is at risk of having overplayed his hand. Coming on the heels of a massive public rebuke at the polls, the performance of the Iraq Study Group prancing before the cameras and Baker’s own public admonishments on matters of diplomatic strategy have publicly embarrassed the President. Since the election and the dismissal of Rumsfeld, President Bush has been stripped bare by the media and presented as an errant child turning to his father to be bailed out of a terrible mess, and Jim Baker has been the lead agent of the President’s humiliation.

Baker’s challenge is to clean up the mess that he himself has made. President Bush ’41, who has remained silent throughout his son’s presidency, must by now have taken Baker to the woodshed. After all, it is not just the public humiliation that Baker has visited on his son, but the damage that Baker and his group have done to the nation’s interests. After all, success in foreign policy and diplomacy are rooted in credibility and leverage, and the events of the past two weeks have weakened the President’s hand considerably. Now, the President is being pushed into negotiations that he has demurred at the moment when his position is weakest, and the perception of weakness has been exacerbated by every action Baker has taken.

No one has provided more explicit testimony to the damage Baker has done to the President, to the nation and to his best friend’s son than Iranian President Mahmoud Ahmadinejad, the leader who has gained the most through the course of the Bush’s presidency. Seizing on his adversary’s weakness, Ahmadinejad announced this week that his nation is prepared to enter negotiations with the United States––as Baker has proffered––but only after the Bush administration corrects its bad attitude.

Since the outset of the Iraq war, the damage to the United States has been severe. Our military has been weakened, our treasury spent, and our credibility and moral standing in the world undermined. With the creation of the Iraq Study Group, Baker took on the challenge of fixing the mess that Iraq had become. Baker is no doubt correct in his stance on negotiations and building bi-partisanship, but he should have remembered that his job was to garner results, not accolades, and that at the end of the day his group had an audience of one. For two more years, President Bush will continue to be the arbiter of American foreign policy, and if Baker’s work does not convince him, it will be for naught.

The least Jim Baker and his Iraq Study Group could do is do no harm. But apparently, that moment is past. Unless he can pull a rabbit out of the hat––or perhaps produce the long-sought grand bargain that the Iranians proposed just three short years ago––Baker will only have book sales to show for his last foray into the public square.

When the election is over

The evangelical Christian community has been down this road before.

As Kevin Phillips writes in American Theocracy, at several moments in our history the nation’s large evangelical Christian community has been drawn into the political arena by politicians seeking to harness their numbers for their own political ends. Each time it has ended badly, and, with their spiritual mission compromised and their leaders seduced by power, they have withdrawn from the public square.

Once again, it is ending badly.

With only hours remaining before voting begins, President Bush is winging across the American heartland, touching down in districts that have no business requiring his attention. Long gone is the rhetoric of compassionate conservatism at home and humility abroad that he rode to the White House six years ago. Now he is the American Nativist reborn, railing against gay marriage, illegal immigration and the Democratic Threat to America’s Future.

Just weeks ago, in the wake of the 9/11 anniversary, the Republican message of Fear––Fear of Terrorism, Fear of Tax Increases, Fear of Nancy Pelosi with a Gavel and Henry Waxman with a Subpoena––seemed destined to deliver an electoral victory. In that optimistic moment, Party strategists even envisioned the war in Iraq as an issue that would play to Republican advantage.

The political ad that had been prepared––entitled The Stakes––loomed to be a centerpiece of the tri-part Fear campaign. A post-modern inversion of the famous Daisy ad that suggested to voters that the world risked nuclear war if Barry Goldwater elected without ever mentioning him by name, The Stakes showed only the face of Osama bin Laden, while in silence his words of hatred for America scrolled down the screen, followed by the words These are the Stakes. The Stakes was intended to remind voters that war is upon us and that Democrats lack the stomach to take on the threats that we face.

But few people have ever seen The Stakes. Perhaps that is because Republican strategists realized that it is hard to watch The Stakes and not question why our focus has been on Iraq all this time rather than on bin Laden, and why after all the hyperbole, the man who attacked us on 9/11 has drifted from our radar screen. Or perhaps that is because the Republican campaign came unglued in the wake of the relentless cascade of events––from Iraq to North Korea to Iraq to Mark Foley to Iraq––that left it playing defense for weeks, until John Kerry stepped in to draw the media fire.

In these last days, the President has turned his back on the political center and has focused his message at the right wing of his party. Instead of the campaign of Fear that was designed to move the votes of Americans of all stripes, he has returned to the social issues that he hopes once again will energize the evangelical Christian community that has twice supported his election and that remains his sole source of positive approval ratings.

And as the prospects for victory deteriorated, the President’s rhetoric escalated. He had no choice. From that bright morning back in Texas, when Karl Rove and Matthew Dowd charted a political strategy that eschewed the political center in favor of a strategy built around motivating the evangelical Christian community, the President was committed.

But as the President comes to them again for their support, for the evangelical Christian community the President’s words must ring hollow. For six years, the President has had total control over the levers of power, and yet his stump speech is largely about what needs to be done rather than about what he has accomplished. Like his recent strategy of quoting Osama bin Laden to engender support for the war in Iraq, his stump speech has in an odd ways become less a testament to his principles than to what he has failed to accomplish.

But worse than the lack of results has been the corruption of the movement itself, as Phllips suggested. Beginning with the Shiavo tragedy, the deeply-rooted sentiments of the evangelical community have been manipulated for personal and political gain. The wave of scandals, including Enron and Abramoff and Foley and Haggard, have each involved personalities who moved easily from piety to power to wealth to disgrace. And in the wake of each scandal, the moral clarity of the leaders of the evangelical Christian community has been further undermined, as they rose to the defense of people who did not deserve defending.

Finally, the corrupting influence of politics on the evangelical leadership was laid bare in the Foley scandal. Faced with evidence that Republican leaders had failed in their duty to protect House pages from a predatory member, evangelical leaders cast away any remaining claim to moral clarity as they blamed gay Republican staffers rather than call the House leadership to account for their failure to protect the children in their care.

If Karl Rove is wrong, and the polls and pundits have it right this time, tomorrow the President’s base will hold him accountable. He has used them and he has failed them, and he has failed the nation. At a time when unemployment has hit historic lows and the stock market has hit historic highs, the President has a better case to make than the demonization of gays, Mexicans, judges and Democrats. But instead he will go to the well one last time. And when it is over, the evangelical community will, as Phillips suggests, retreat back to their spiritual mission of conversion and personal salvation.

When George Bush embraced the strategy that Rove and Dowd suggested could build a permanent Republican majority, he fell prey to hubris. Rove provided a strategy for winning elections that was fundamentally flawed as a strategy for governance. The use of demonization as an electoral strategy undermined the President’s ability to build governing coalitions, and the paradigm of good vs. evil that suits the President so well quickly migrated from electoral strategy to the halls of Congress to civil society.

Today, Dowd’s new book Applebee's America suggests that the strategy Bush embraced may have run its course. Fully half of those in each political party are voicing disgust with the tenor of political dialogue as it has evolved and are looking for a politics of compromise and conciliation. If Karl Rove and Ken Melman are not successful in generating the turnout from their base that is the core of their strategy, the political implications will be significant for 2008 and beyond.

For the Republican Party, which has alienated New England moderates, old-school fiscal and small government conservatives, gay and pro-choice party members, changing course to tack back to the political center is unlikely. The Party is now firmly in the hands of the right wing, as there are few moderates left in the Senate or the House, and after tomorrow, Maine’s women Senators and Arlen Specter may be all that is left of the Republican Party along the long moderate arc that once stretched from Ohio through New England.

The challenge for Democrats will be to resist a move to the left just at the moment when the political center has been abandoned by the Republicans. As anti-war sentiment has taken center stage, the Democratic left is feeling its oats, and can fairly argue that it was the centrist Democrats who folded under Republican pressure. For those on the left who for years have lusted for a Rovian move to the left and argued that such a strategy would mobilize voters who now stay home, the thought of moving toward the center is anathema. At the same time, the new voices in the party may include the staunch centrists recruited to run this year by Rahm Emmanuel, people like Jim Webb, Jon Tester, Heath Shuler and Bob Casey will likely push back against a move to the left.

Such is the illogic of the moment, and the political forces that may be put into play as the polls close tomorrow. The activists in each parties will likely lay claim that the future of their party, leaving a void in the political center. Ironically, the President who embraced a strategy for victory that proved toxic for governance may have produced a political landscape where neither party is eager to embrace the large core of voters who are ready for a breather from the partisanship that has racked the nation.

And then, of course, there is the prospect that the pundits are wrong and that Rove is right. If the evangelical community that he and the President have cultivated come out tomorrow and deliver the goods for the Party, and the House and Senate stay in Republican hands, the long-term outcome is even more certain. The Republican move to the right will be vindicated, and a Democratic move to the left will be inevitable. And the paradigm of blue vs. red, and good vs. evil that have riven the nation will likely continue.

Curt Weldon's truth

Curt Weldon (R-PA) wants his race to be run on the merits of his service to his constituents and to the country. The Congressman from Delaware County, Pennsylvania, is being railroaded from the seat he has held for almost twenty years. The problem is that he cannot tell who is leading the charge, or if it is just a bipartisan gang-bang.

Weldon is an old-school politician. Weaned as a pup from his days as the Mayor of Marcus Hook in John McNichol’s Delaware County Republican machine, Weldon built a political base beginning with the support of volunteer firefighters to win a seat on County Council. When Bob Edgar––the Democratic minister-turned-politician who won the historically Republican 7th Congressional seat as part of the 1974 post-Watergate deluge and held it for six terms––decided to leave Congress, Weldon stepped in and won the seat with McNichol’s blessing. That was twenty years ago.

Like Weldon, Delaware County is old school. For more than a century, the County has been a Republican stronghold. But shifting demographics have led to changes in Pennsylvania politics, and its traditional urban vs. rural tensions have given way to divisions between the Democratic east and the Republican west. These changes are reflected in the governor’s race where the incumbent Democratic Governor and former Philadelphia Mayor Ed Rendell is facing the Republican and Pittsburgh Steelers legend Lynn Swann. For Weldon, Rendell’s enormous popularity in the Philadelphia suburbs––he won Delaware County 2-1 in his first race for Governor––illustrate the ebbing of Republican control in its long-time bastion and the erosion of Weldon's traditional base.

As Weldon faced the media this week, he was struggling to grasp what led to the FBI investigation coming to light just three weeks before Election Day. His public response was to lash out at his Democratic challenger, Joe Sestak, a well-spoken Admiral with thirty years of service in the Navy. The race is a dead heat, but even so, attacking Sestak directly is not easy for Weldon, who if reelected is in line to become the Chairman of the powerful Armed Services Committee. He is not vitriolic by nature and holds those who serve in the armed forces in high esteem.

But inside, Weldon must suspect that the FBI investigation and the timing of the leak come from a different source. Despite his prominence on the Armed Services Committee, Weldon has been a vocal critic of the Defense Intelligence establishment, and led investigations into the controversy surrounding the classified Able Danger military intelligence program. Able Danger, Weldon argues, proved the complicity of the government in enabling the 9/11 attacks by hiding evidence of the plot as it was unfolding. He was bi-partisan in his attacks, and unrelenting in his accusations.

Weldon believes that the public never grasped the significance of Able Danger. He followed the facts where they led and refused to give the Bush administration a pass. The administration responded to his assault by working the media to spread the notion that Weldon was a “whack job” and successfully undermined the credibility of the story. As a result, Able Danger became just became one more 9/11 conspiracy theory.

For Weldon, the pay-back for his disloyalty to the administration came this week. Somewhere, deep in Republican Washington, whether in the offices of Karl Rove at the White House, Ken Mehlman at the RNC or Donald Rumsfeld at Defense, calls were made. Even if his defeat means the loss of the House, for Rove et al Weldon had gone rogue and they would make him pay. Kim Jong Il may get away with embarrassing the administration, but not some out-of-control, volunteer firefighter from a working class family in Marcus Hook.

So here Weldon is, with three weeks left until Election Day, fighting for his political life. He is forced to stand outside in a strip mall and defend himself against the charges leveled by the FBI that He used his influence to help his daughter.

He used his influence to help his daughter? He stands in front of Kinkos and declares his innocence. There is no truth to the charge. He pleads. Funny isn’t it, these charges coming out three weeks before an election?

He has to attack the Sestak campaign, because it is what he is expected to say. He has to decry his innocence because in this new world of political correctness, faced with reporters who see taking him down as their own ticket to the big time, it is what he is expected to say.

He can’t stand there and tell the truth––that he is being railroaded by his own party because he is an honest man from Marcus Hook whose only crime is that he has been telling the truth. He can’t stand there and tell the truth because in this caustic political age and faced with the shifting politics of suburban Philadelphia, he cannot win without the voter profile database in Ken Mehlman’s computer, and Karl Rove’s micro-targeted, get-out-the-vote effort that is the key to Republican hopes on November 7th.

But as a politician of the old school, and as a father, what Curt Weldon most regrets is that he can’t stand in front of the cameras, and all those reporters with their pads and self-righteous questions, and say what he really wants to say: Did I use my influence to help my daughter? Hell yes. Hell yes I did. And I’d do it again. What father worth his salt wouldn’t?

Curt Weldon would stand there and say, in the words of Chicago Mayor Daley when accused during an election campaign of steering an insurance contract to his son If a father can’t help his son, what is America coming to?

That is what he wanted to say to the voters of Delaware County, to his friends and neighbors who have known him all his life, to the people of Marcus Hook who gave him his start, to families across the County who elected him to Council to bring jobs to their row-house neighborhoods and who then sent him to Washington to be their voice in a city corrupted by the Bushes from Yale and the Rumsfelds from Princeton––none of whom would be where they are today without the influence of their fathers. He would stand proudly before them and say, Damn right. I did what I could to help Karen. And for twenty years I have done everything I could to help each of you. That is what he wanted to say. It was the truth. And for those from the old school in Delaware County, those are they words they would want to hear.

A Doctrine undone

Five years and twenty-seven days. From birth to death, the life span of a Doctrine.

The Bush Doctrine was born on September 11, 2001 and died on October 8, 2006. Rest in Peace.

History will judge the damage that was done to our nation in the intervening years through our determined unilateralism, our righteous castigation of any nation not heeling to our lead, and our arrogation unto ourselves of the right to interpret international law.

Perhaps, as Dick Cheney suggests, history will judge he and the President as visionaries, who unique among the leaders of the western nations understood the threats of our time and stood their ground. Or perhaps this will be judged as an era when America’s most cherished principles were not lived out in our politics, and when the American people failed the American purpose.

The irony of the Bush Doctrine, however, is not that it sidestepped democratic principles even as it claimed to build democracy in the world, but rather that for all of its unapologetic assertion of military power––of the using America’s might to rid the world of the terrorist scourge––it was a strategic failure. If the televised images New Orleans after Katrina pulled back the curtain and exposed the domestic failures and indifference of the administration, North Korea’s dramatic entry into the elite club of nuclear nations gave the lie to all of the muscular rhetoric that has characterized the Administration’s foreign policy.

Since its designation as a Charter Member of the Axis of Evil, North Korea has sat in the cross-hairs of American strategic rhetoric. The President, commander-in-chief of a massive military machine and possessed of a proven willingness to pull the trigger, set forth his strategic doctrine in no uncertain terms: It was unacceptable for North Korea to continue with its nuclear program and it would be intolerable for North Korea to become a nuclear power.

For his part, faced with the prospect of becoming the next Axis power to be crushed in the name of the Bush Doctrine, Kim Jong Il pushed his nuclear program forward. Then, last week––undoubtedly emboldened the President’s diminished political support and seeing the American military straining at the combined demands of the wars already on its plate––Kim pushed all of his chips into the center of the table and called the President’s bluff.

Surely, it was a moment for which the administration had prepared. Surely, after years of beating the drums of regime change, they understood that developing a nuclear capacity was the sole deterrent to American power for regimes under threat. Surely, after years of forswearing direct negotiations with North Korea as a high-stakes strategy to force concessions, the Bush administration had a Plan B in mind in the event that Kim declined to blink.

Surely not, as it turned out. Within one week of the nuclear detonation, the Bush Doctrine unraveled before the world. Faced with a real weapon of mass destruction, held by an unstable regime starved for cash and with a proven willingness to proliferate, there were no calls for a new coalition of the willing. The Secretary of State did not travel to the capitals of power in Paris, London, Berlin or Moscow, or to the front-line capitals in Seoul, Tokyo or Peking as Plan B was put in place. There was no Plan B. Instead, President Bush stood before the world and did what those Democratic leaders his supporters so despise might do: he took the military option off the table and hailed United Nations sanctions as the appropriate response to North Korea’s formal arrival as a nuclear power.

Within one week, the unacceptable was accepted, and the intolerable became tolerated. Within one week the Bush Doctrine of forward defense, preemptive war and aggressive unilateralism was replaced with what can at best be described as a new commitment to Containment, the oldest of doctrines of the nuclear world. One week and one bomb later, the President’s once-strident Neoconservatism gave way. Now, the President praised the United Nations and the value of collective action. He lauded the importance of tough diplomacy. He eschewed suggestions of a military response. And he embraced sanctions.

After all of the threats, after all of the posturing, after all of the swaggering cowboy rhetoric, the question was called, and the American response was…. Sanctions.

The rhetorical urges that were part and parcel of the Bush Doctrine die hard, however. Two days after the North Korean test, Condi Rice was at it again. Visibly angry as she stood before the gathered media, Rice conceded that the United States did not intend to attack North Korea, but insisted that they now faced “international condemnation and international sanctions unlike anything that they have faced before.” She then turned her verbal rapier toward Russia and China, insisting on what they must now do in the face of North Korea’s intransigence.

But Rice was flailing. The days of unilateralism are over, but her rhetoric has not yet adjusted to the new reality. The reality is what it has always been. Russian and China, like North Korea––and every other state for that matter––will pursue the path that they believe serves their own self-interest. The sooner she stops talking and starts listening, the sooner a new strategic doctrine can emerge that might enable American leadership to once again have meaning in the world.

What we are left with is worse than just a failed strategic doctrine, for today the world is a far more dangerous place. Just as the credibility and capacity of America’s military as a deterrent force in the world has been degraded by the war in Iraq, America’s credibility and capacity to lead in the world has been diminished by five years of hectoring and self-righteous leadership. Iran, on the one hand, looms as a far greater threat than North Korea to our strategic interests, and they well understand that the bankruptcy of the Bush Doctrine leaves them with far greater latitude to pursue their own nuclear and regional ambitions. Al Qaeda and the Sunni Jihadists, on the other, continue to benefit from the images televised across the Islamic world of American troops at war in a Muslim land.

Meanwhile, the rest of the world, beginning with our allies and extending to those such as Russia and China, whose support is critical to our political and economic future, must be waiting with great interest and anticipation to see how our national leadership responds in what may be an historic opportunity. Will we embrace the opportunity to reach out and rebuild our alliances? Will we show some of the humility in the world that Candidate George Bush suggested six long years ago? Will we return to our isolationist tendencies and withdraw from the world? Or will our President push ahead, his rhetoric intact, his spirit undaunted, but as an emperor unclothed before the world?

Unfortunately, this President has not proven to have great insight into when things are not going well, and deplores admissions of failure. But there is hope. Jim Baker has begun to assert himself into the national scene, and in the weeks following the November election we may yet see the elders of the Bush clan finally wake up, before the New World Order that the President’s father proclaimed not so very long ago is completely undone by the messianic and misguided ambitions of his son.

Take a bow for the new revolution

It will be no surprise if the current era of Republican dominance in Washington, D.C. falls on the predations of Mark Foley and the failures of Republican leaders to respond appropriately or in time. After all, nothing falls the righteous like hypocrisy, nothing hits the news cycle like sex and nothing deepens the wound like a good cover-up.

In a moment when the President has become the very embodiment of steadfastness, House Republicans have shown no such spine. With the warrior caste of Gingrich and DeLay banished for lesser crimes, the current leaders sprinted for the exit even as the House burned around them, stopping only to implore Speaker Hastert to sacrifice himself that they might be saved.

The Foley fiasco––the first Instant Messenger-enabled political scandal––has achieved the White House objective of changing the subject, but in an unforeseen direction and with unimaginable force. For an electorate riven between anger over an unpopular war and the liminal anxieties of living in a Jihadist’s world, the turmoil in the House can tip the scales.

And for good reason.

The political turmoil and rancor that defines this political season has reached a fever pitch in part because the problems lack definition, much less simple solutions: The war in Iraq, the Jihadist threat, inter-religious tensions, the decline of American economic and political leadership, declining real incomes, growing debt, a declining dollar, volatile energy markets, a nuclear North Korea, an emboldened Iran, looming war between Russia and her near-abroad nascent-states…

But the Foley fiasco is different. People understand sex and power. Not sex in the prurient sense, but sex as a human motivation and power as the brass ring of the political class.

And that is the essence of the Republican denouement. The current cycle of Republican dominance began with a Contract with America that promised fiscal responsibility and political accountability, solidified its base through the assertion of family values in the wake of the Clinton impeachment, and achieved complete control over the government with the inauguration of George W. Bush, who had campaigned on a platform of fiscal conservatism and tax cuts at home, and humility in the world. In short, Republicans promised a government more limited in scope, a political class more limited in ambition, and a national interest defined by values, at home and abroad.

Twelve years since the contract with America, and six years since the consolidation of power in Republican hands, these central arguments are a distant memory. Our fiscal house lies as burnt embers at our feet, notions of humility in the world have been replaced with a muscular unilateralism, and fear has become the tool of maintaining the power of the new, dominant political order.

The Foley fiasco has provided the electorate with a means for understanding their fundamental discontent. Across the electorate, people are disgusted by the conduct and by the hypocrisy. They have long experience with cover-ups, they fiercely defend their children, and most of all they deplore politicians who value keeping power over proper conduct and decency.

Even as the usual array of partisans––from Sean Hannity to Katherine Harris to the Family Research Council––have sought to deflect blame for the affair to Democrats, homosexuals or George Soros, the public reaction has deepened. The Foley fiasco has now entered the realm of metaphor, reminding the electorate that democracy demands the vigilance of the governed, and that any party, whatever they promise, whether in fire-side chats or contracts on the Capitol steps, ultimately becomes corrupted by power and tenure alone.

Ultimately, as the Who suggested in their anthem from a prior era, “Won’t Get Fooled Again,” each new revolution comes to its moment of reckoning, as people look at their leaders and cry in disgust:

“Meet the new Boss,
Same as the old Boss.”

As George Bush and Karl Rove look down the road at the train wreck that looms, more than ever they need to change the subject. “If the election were held today…” they would be facing the worst possible outcome. Republican control of Congress would be rejected not through a referendum on the war in Iraq, not through the conduct of the war on terror, and not even as a referendum on the handling of Mark Foley’s reprehensible contact, but rather as a fundamental statement that it is time for a change.

However, even in the face of this possible outcome, they must pause and smile, if only for a moment. For on the Democratic side, there is no Gingrich, no Robespierre, and apparently not even a Clinton, prepared to feel the pain of the electorate, and become the face and the voice of a new political order.

Time to stop

At the inception of the Lebanon crisis, American intelligence analyst George Friedman observed:

“From an international standpoint, the Israelis expect to be condemned. These international condemnations, however, are now having the opposite effect of what is intended. The Israeli view is that they will be condemned regardless of what they do. The differential between the condemnation of reprisal attacks and condemnation of a full invasion is not enough to deter more extreme action. If Israel is going to be attacked anyway, it might as well achieve its goals.”

Then a funning thing happened on the way to the front: international condemnation did not fall on Israel as it had in the past. Across the international community, Israel’s right to defend itself was affirmed and blame instead was heaped upon the Hezbollah for its instigation of the crisis. Sunni Arab leaders across the region attacked the needless provocations.

Even from the beating heart of the Axis of Evil, comment was muted. Iran, whose interests were being directly served by the Hezbollah action, only cautioned Israel not to attack Syria. Meanwhile, junior Axis partner Syria was quiet, as Syrian President Assad shared with Israel the desire to keep his regime in power and not see it replaced by Islamists were Israel to attack his country and topple his regime.

Iran’s ability to manipulate events on the ground in the Middle East through its proxy forces is impressive. In Iraq, it was an Iranian “agent of influence,” Ahmad Chalabi, whose manipulation of intelligence, Neocon fantasies and Dick Cheney’s oil lust helped instigate an American invasion that is well on the way to securing Iranian control over the largest remaining oil reserves in the world. In Lebanon, another Iranian agent, Hassan Nasrallah, led Hezbollah––itself a creation of the Iranian Revolutionary Guard Corps––to attack on Israel on the same day Iran was due to report back to European negotiators on its nuclear program.

In one fell swoop, Iran was off the front pages and its proxy forces had displaced Hamas and Fatah as the vanguard of the Palestinian struggle against Israel.

In Lebanon, the United States is once again playing patsy to Iranian manipulations. From the beginning of the current crisis, the United States gave Israel the green light to pursue its goal of inflicting maximum damage on Hezbollah. From the Right in the United States came cries of glee that someone was taking the fight to a real terrorist organization, while from the Far Right dreams that the launching of the Hezbollah missiles might have been the first shot in the Battle of Armageddon.

Even as the casualties mounted, President Bush proclaimed the righteousness of the Israeli cause and failed to utter even a word of sympathy to those dying on the ground. On the same day that he vetoed funding of embryonic stem cell research––taking a firm moral stance against the taking of potential life––he failed to offer a word of concern for the loss of actual life in the ongoing battle.

Israel must take note of the evolving situation and not fall prey to following for too long the encouragement of its American ally. Despite its self-proclaimed leadership in the Global War on Terror and of the Greatest Military Force in History, the Bush Administration never seems to have grasped the central lesson of asymmetric warfare, which has been born out in the GWOT, but that dates back to Vietnam, the American Revolution and Scipio Africanus’ pursuit of Hannibal: the dominant force loses if it fails to win, while the overmatched force wins as long as it continues to fight.

Israel’s challenge is not to destroy Hezbollah. Despite Israeli hubris, it cannot achieve that goal. Instead, Israel’s objective must be to achieve the optimal leverage for a ceasefire that includes international commitments to change the conditions on its border with Lebanon in as enforceable a manner as possible.

Over the past week, the international consensus reflected the need to achieve just such an outcome. However, the United States was pushing to delay an end to the fighting. Condi Rice postponed a trip to the region, while U.N. Ambassador John Bolton offered the specious rationale that in a fight with a terrorist organization there is no one to negotiate with, no “head of state.” The Bush Administration, supported vocally by Pat Robertson and his 700 Club minions, continued to cheer Israel along, singing in one voice an odd rendition of “Onward Hebrew Soldiers.”

But Israel is overplaying her hand. The longer the fight ensues, the stronger Hezbollah becomes simply by surviving the confrontation with the larger Israeli force. The longer the fight ensues, the more it will undermine the willingness of Arab states in the region to support the realignment of power within Lebanon that Israel truly seeks. And the longer the fight ensues, the more international public opinion will weigh the loss of human life and Lebanese sovereignty against the initial wave of support for Israel.

As the ground war begins, Israel should pause and reconsider. At this moment, Israel should perhaps give more heed to Iran’s 3,000 years of experience in navigating Middle East conflicts, and a little less to the hubris and encouragements of its far less experienced American ally.

L'Enfant President

Generals criticize Donald Rumsfeld and he doesn’t blink. People take shots at Dick Cheney, he shoots back. Why then do Republican Wise Men continue to treat the President as if he is a china doll?

With his popularity at its lowest point and turmoil in the ranks of Republicans who fear the loss of Congress in the fall elections, George W. Bush has agreed to bring in his father’s long-time consigliere, former Secretary of State James Baker, to embark on a fact-finding mission and advise the President on Iraq. Apparently, the decision to bring in Baker––the ultimate fixer whose last and only role in the Bush 43 presidency was to lead the successful Florida recount war in 2000––was a touchy one agreed to collectively by the father, the son and Condaleeza Rice. According to the New York Times, Baker accepted the charge reluctantly, as he was concerned that any criticism of Bush’s Iraq policy could be seen as second-guessing the President. Accordingly, his recommendations will focus solely on how to move forward, and not touch on the past.

How did we come to this? President Bush is now well into his second term––an accomplishment that eluded his father––and yet his father’s advisors continue to view him as the son whose independence needs to be nurtured along. Worse yet, these advisors––truly some of the political wise men on the American scene––feel more duty bound to protect the son’s ego than the nation’s future.

George W. Bush continues to struggle to escape from the shadow of his father. There is some irony in this, as George H. W. Bush himself struggled with the shadow of his own powerful father, Republican heavyweight and Senator Prescott Bush. President Bush 41, who had served in Congress, had run the CIA, and served two terms as Vice President––and by most measures had little left to prove––reportedly thought to himself upon taking the Presidential oath of office, “I wonder what the old man would think of his boy now?”

Like the protagonist of a Shakespearean tragedy, George W. Bush has defined his political persona in direct contrast to his father. He eschewed the family’s core political values of fiscal discipline, internationalism and quiet religious faith as he embraced the evangelical constituency new to the Republican Party, threw fiscal caution to the wind, promulgated a doctrine of unilateral war, and pronounced his direct and personal relationship with a God who he suggested put him in the White House to lead the millennial struggle with the evil forces besetting America.

For his own part, Bush 41 has made every effort to stay in the background. Even as Bush 43 publicly embraced his father’s rival and predecessor, Ronald Reagan, evinced barely concealed contempt for his father’s politics and presidency and wielded his religion as a rapier in political debate, the elder Bush bent over backward to be supportive of his son.

The tension between the two Bush camps only briefly came into public view during the run up to the Iraq war, as the elders of the former Bush administration opposed the direction of the new administration’s foreign policy and march to war in Iraq. Within the new Bush administration, only Bush 41 holdover Colin Powell argued the internationalist stance in opposition to the rising tide of unilateralism, until he finally played the good soldier and made his ill-fated presentation to the United Nations Security Council––a presentation that drew down the last reserves of his hard-earned credibility and effectively marked the end of his public life.

The final effort of the Bush 41 inner circle to forestall the Iraq invasion came as Bush 41 alter ego––and Condi Rice mentor––Brent Scowcroft published an op-ed in the Wall Street Journal that argued against the looming war and the notion that Saddam was an imminent threat or linked to the 9/11 attacks. Immediately following the publication of that piece, however, Scowcroft and the Bush 41 posse went silent, as the word came down that the former President was concerned that they had overstepped and would be seen as undermining his son’s presidency.

By all accounts, Bush 43 gave little heed to his father’s views. Asked later by Bob Woodward if he had consulted with his father––a man of experience and wisdom––as he contemplated an invasion of Iraq, the President demurred and suggested that he had looked instead to “a higher father.”

What is James Baker to make of this? In defiance of the better judgment of his father’s inner circle, George W. took the nation to war, and the outcome that they foresaw came to pass. But there are no judgments to be made on the decision itself, as that might undermine the President’s credibility and damage his presidency.

Undermine the President’s credibility? Damage his presidency?

The President is at 33% in the polls. He took the nation into an unnecessary war that has cost hundreds of billions of dollars and cost thousands of lives. His administration is scorned internationally and has destroyed America’s credibility in the world. The Iranians are effectively calling his bluff as they seek to become a nuclear power. Gasoline is heading over $3.00. He has lost control of the Republican Congress, foresaken his second-term agenda, bankrupted the nation’s treasury and destroyed the last vestige of fidelity of the Republican Party to its own core principles. Somewhere in a dark cave in Waziristan, Osama is laughing, and James Baker is concerned that he might undermine the credibility and stature of his friend’s son?

The President made a mockery of himself this week when he went before the cameras and claimed, “I am the decider, and I decide what is best.” Like a parent scolding a child, he asserted his authority. But that authority ultimately rests on the consent––and the respect––of the governed, and that assertion quickly became fodder for late-night comics.

James Baker’s challenge is a tough one. Presidents can recover from bad decisions and from political hostility, but ridicule and contempt are tougher. The President's problem is not that he has failed to win the respect of his father, but that he has lost the respect of the nation. James Baker is a tough and smart man, and there are three long years left in this presidency. It is time to take off the kid gloves, stop thinking about protecting the son and worry instead as Brent Scowcroft did four years ago about the interests of the nation.

Odd man out in a three-hand game

In the Jihadist world, once you declare war on Israel, everyone wants to get in on the action.

Hamas’ tightrope walk just got dicier, and soon they will be looking for a net. In his new tape broadcast today on Al Jazeera, Osama Bin Laden embraced Hamas as a rallying cry for his Sunni Muslim Jihadist movement. By framing the freezing of aid to the Palestinian Authority by the west as proof of a “crusader war” against Islam, Bin Laden sought to reassert himself and his Al Qaeda movement onto the international scene.

Can it be a coincidence that Bin Laden felt compelled to go public just one week after Iran convened a conference on Palestine and committed funds to Hamas? Bin Laden, after all, is struggling to maintain the supremacy of his Al Qaeda movement as the vanguard of the Jihadist struggle in the face of Iran’s successful efforts to encroach on Al Qaeda’s––and Bin Ladin’s––turf.

In the Jihadist universe, Iran’s President Ahmadinejad brings strong credentials and troops to the Jihadist cause. After all, he is a product of Iran’s Islamic Revolutionary Guard Corps––the Pasdaran––that was founded by Ayatollah Khomenei in the wake of the Iranian revolution, and that has grown to rival the Iranian military in size and counts the home-grown international terrorist groups Hizbollah and Islamic Jihad among its assets.

The battle for Jihadist hegemony between Iran and Al Qaeda is just the latest chapter in the thousand-year struggle between the Shi’a and Sunni for the mantle of the Prophet. Since their rejection of the Caliphate in the formative years of Islam, the Shi’a have struggled under the thumb of Sunni rule, and any temporal alliance between the Shi’a and the Sunni––such as their apparent alliance in opposition to the west––is only a tactical detour from their doctrinal wars. The Shi’a hold fast to their opposition to the Sunni ecclesiastic and legal order, while Sunni fundamentalists, including Al Qaeda and their Taliban sponsors, view the Shi’a as apostates to be beheaded in traditional fashion.

Since his election just nine months ago, Ahmadinejad has swiftly displaced Bin Laden as the poster boy for the Global War on Terror as he has pushed Iran’s nuclear program forward. Faced with international consternation over the prospects of a nuclear Iran, Bin Laden has found himself struggling for airtime.

Bin Laden’s audio tapes seem almost quaint in a world where the GWOT has been escalated to the nuclear stage. Trapped in the mountains of Waziristan, Bin Laden has become a bystander in the continuing international drama that is 21st century Islam. Faced with the prospect of withering into irrelevance, he did the only thing struggling Arab leaders seem to be able to do in such circumstances––he played the Palestinian card.

But a sign of how things have changed in the miasma of Middle East politics can be seen in the Hamas reaction to Bin Laden’s tape. In the wake of the first airing of Bin Laden’s latest recording on Al Jazeera, Hamas leaders took no time in distancing them from the former top dog in the Jihadist struggle. Appealing directly to the western audience, Hamas spokesmen Sami Abu Zuhri declared Hamas’ philosophy to be "totally different" from Bin Laden’s and that Hamas was "very keen to have good relations with the West."

Hamas is trying to avoid becoming a pawn in a game that it surely wants no part of. They might share Shi’a Iran’s dream that Israel be wiped off the face of the earth, as they also share Al Qaeda’s Sunni Islamist orientation. But Iran and Al Qaeda’s antipathy is deeply rooted, and their interest in Hamas is purely tactical and self-interested. Hamas will only lose if it becomes embroiled in the tug of war between Iran and Al Qaeda, particularly at a time when it is trying to shed its Jihadist mantle for a cloak of statesmanship in hope of finding a middle ground that wins it western acceptance without totally neutering its Islamist politics.

In decades past, the Palestinian leadership––a term whose oxymoronic essence Hamas is struggling to shed––bartered its services between competing patrons. But in the wake of tactical missteps at Taba and Wye River, support for the wrong side in the Gulf War, and images of cheering masses on 9/11, the Palestinians may finally have seen the folly of hooking their star to patrons seeking to rally the Muslim world on the aching Palestinian backs. In a matter of minutes following the Al Jazeera broadcast, Hamas spoke out and declined Bin Laden’s advances, and the audience whose approval they sought were Bin Laden’s western adversaries in the Battle of Civilizations.

There remains for Hamas to address the matter of Israel. The future of the Palestinian people lies in partnership with Israel, the single economic engine of a region bereft of economic life. Perhaps their evident fear of Bin Laden’s embrace will open Hamas’ eyes before they continue their march down a road that leads nowhere.

Solving social security

One tall red-eye* and a scone. That will be $4.13.

Can it be that simple? The retirement security of the average American coffee drinker has been undermined by Seattle’s greatest export, the Starbucks Culture. Not to take anything away from Boeing––Seattle’s other export engine––but even as it flies below the radar screen of the average American’s budget, the cost of coffee in the morning has become significant.

Do the math. $4.13 per day. Assume cost inflation at 3% per year––modest for coffee, but let’s be conservative––put that together with stock market returns that have averaged 12% per year over the past 30 years. What do we get?

Retirement security. Or lack thereof.

Here is the choice. Coffee and a scone each morning beginning at age 25, or take the same amount each day and invest it in an index fund a retirement fund until age 65. 40 years later, the Starbucks Investment Program––“Your retirement security is just a SIP away”––produces a nest egg of just under $2 million, or a monthly annuity approaching $10,000 for life.

That amount, it is worth noting, is anywhere from one and one-half to two times the monthly benefit that the Social Security Administration projects for a worker who enters the workforce at age 25 with a salary of $40,000 to $60,000 and retires 40 years later.**

So, drink up America. That coffee is more expensive than you can imagine.

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Notes:
* The drink of a real coffee drinker. A cup of coffee with a shot of espresso.
** For a $40,000/year beginning salary, the projected monthly benefit at age 65 is $5,160. For a $60,000/year beginning salary, the projected monthly benefit at age 65 is $6,569. (www.ssa.gov)

Failure of imagination

In politics––as in most other areas of life for that matter––credibility is everything. Why is President Bush in such trouble? Loss of credibility. Why are the Democrats unable to do much about it? Lack of credibility.

In their first week in office, the newly elected Hamas government blundered mightily. Faced with international demands that they accept Israel and recognize prior agreements––demands that are anathema to all that Hamas stands for––newly installed Foreign Minister Mahmound Zahar a wrote a letter to U.N. Secretary General Kofi Annan with a sentence suggesting the possibility of recognizing Israel.

A furor arose when it became apparent that the letter sent to Annan differed substantially from the copy of the letter made public in Gaza. Specifically, the letter made available for local consumption omitted the offending sentence.

Caught in an act of duplicity, a Hamas spokesman insisted that they had sent an early draft of the letter to Annan by accident, and that the Gaza draft was the final draft.

Funny how that happens.

Zahar, Prime Minister Ismail Haniya and some others get together. Someone writes a draft letter to Kofi Annan with a sentence that essentially reverses the central position of Hamas. Then they argue back and forth. Ismail says no. Mahmoud says we have to. Ismail finally says no way. OK, they agree, let’s remove that sentence. So, who is going past the post office?

Oops, they sent the wrong letter.

In the meantime, Annan’s office insists that they have not received a revised letter, or any communication from Zahar suggesting an error was made.

But none of that really matters. The notion that Palestinian leadership would say one thing for world consumption and another to the Palestinian street is not news. Dog bites man, so to speak.

The election of Hamas upset the status quo in the Israel-Palestine conflict. Faced with the prospect of an unraveling of the peace process, the quartet of nations overseeing the “roadmap” moved quickly to demand that Hamas come into the tent. Demands were made that Hamas must recognize Israel. Threats were made that aid would be cut off. In the early, panicked moments, no thought seemed to be given to the fact that recognition under duress was meaningless.

In one sense the election of Hamas was a breath of fresh air. At least they were honest and said what they believed at home and to the world at large. At first blush, they appeared to bring a sense of integrity and credibility to the process.

But with the duplicity surrounding the U.N. letter, it appears that not much has changed. The fact is that there has not been a peace process and cannot be one in a situation where one letter is sent to the international community, while another version is circulated at home––an apt metaphor for the long-time practice of the Palestinian leadership of saying the right things in diplomatic circles while stoking the fires of hatred at home.

Even as there has been a sea change with the Palestinian election of Hamas, the politics of peace in Israel have been transformed. According to Yoram Peri, Director of the Chaim Herzog Institute for Media, Politics and Society at Tel Aviv University, Arik Sharon’s great insight in forming Kadima was his early recognition that the Israeli landscape has fundamentally evolved with respect to the peace process.

As Peri describes it, Sharon recognized that even as 70% of Israelis indicate that they are prepared to make significant sacrifices for peace, they have also come to accept the likelihood that peace will not be achieved in their lifetime. An Israeli electorate that was long defined by the division between the “Land for Peace” camp on the left and the “Peace for Peace” camp on the right was ready to move on to other issues. The success of Kadima reflects a fundamental redefinition of the nation’s politics around issues of wealth, poverty and national prosperity. The withdrawal from Gaza and construction of the separation barrier on the West Bank are the physical manifestations of a politics and psychology of separation, of a people who are reconciled to move on.

Hamas has stepped to the fore just as Israeli is walking away. It is ironic that even as Hamas is steadfast in their commitment to the destruction of the State of Israel and rejection of the Oslo accords, they continue to assert their demands for what Israel and others must do for them. From the Israelis whom they are sworn to destroy, they demand continued services as provided under accords they now reject. From the international community, they demand continued aid that was agreed in the wake of these same accords. From the Arab League they demand aid to insulate the Palestinians from the consequences of their own decisions.

One week in office and the Hamas that promised new leadership has become just more of the same. Unfortunately, the failure of Hamas goes beyond a loss of credibility, but reflects a failure of imagination, an inability to imagine a future different from the past.

The peace process is over, for no Palestinian leadership will now be able to accept what the Israelis might be prepared to offer. But in fact, the Palestinians and Israelis do not need a peace agreement, a long-term truce in the model of Korea will do just fine.

But what the Palestinians desperately need, and what Hamas has been unable to offer, is a vision of the future. And for this the Asian model of note is Singapore. Founded as an independent nation forty years ago––one year after the creation of the PLO––Singapore was a tiny, crowded, impoverished nation with no resources. In the ensuing decades, based on a national strategy centered on foreign investment and education, they have built one of the most successful economies in the world.

Singapore has become the model for national development, as other nations are learning. Earlier this year, Intel announced plans to build a major chip plant in Ho Chi Minh City, Vietnam as part of a network of seven plants including ones in Malasyia, Costa Rica and China. Ismail Haniya and Mahmoud Zahar should have greater things on their mind than wordsmithing letters to Kofi Annan. Instead, they should be asking “Why not Gaza City?” The Palestinians, whose population is educated and a stone’s throw from Intel’s operations in Israel, should be ready to embrace a vision of the future that is different from the past. But that would require two new things from the Palestinian leadership: imagination and an end of the politics of dependency.

Now that would be news. Man bites dog, as they say.

A day for the ages

On one day, three stories.

First, a story of truly Biblical proportions. The Gospel of Judas Iscariot has emerged. The papyrus manuscript was discovered in the Egyptian desert and today the National Geographic Society announced the publication of the first translation of the Coptic text of the Gospel of Judas.

And what a story it tells. Judas, it seems, was not a Judas at all. Rather, in betraying Joshua ben Joseph to the Romans, Judas was literally doing the Lord’s work. The section of the gospel beginning "The secret account of the revelation that Jesus spoke in conversation with Judas Iscariot during a week, three days before he celebrated Passover" relates how Jesus asked Judas to betray him and turn him over to the Roman authorities.

Jesus understood what he was asking of Judas, who he said would “be cursed by other generations” for his actions, and explained to Judas that he was asking of him an act of devotion over and above the other disciples. “You will exceed all of them. For you will sacrifice the man that clothes me."

What does it mean that the story that has been passed down for 2,000 years appears to have gotten it wrong? Judas did not sell out Jesus for a fistful of dollars? Jesus’ prophesy that one of his disciples would betray him was not prophetic at all? How then does one view Jesus’ condemnation of the friend who was actually doing his bidding?

How do our stories change when the facts that first supported them grow less certain in the face of new information? Do we reconsider Judas now?

Second, a more mundane story. Scooter Libby––unlike Judas as we may now have to understand him––is not inclined to take one for the team and keep his conversations with his boss quiet for 2,000 years.

Libby’s testimony to the Grand Jury inv