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.