Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

29 October 2008

Immigrants, Alpha Males, and America’s Three Cultures


Among the occupational hazards of academics and bloggers are cloistering and solipsism. It’s good to get out once in a while. I did so about six weeks ago and came face to face with America’s future.

My wife and I are in our sixties. We’ve become friends with a much younger couple, who have an adorable four-year-old daughter. The father is an American minority, the mother an immigrant of Indian descent. They’re more sociable than we, and they invite us to many parties, often centered on milestones in their daughter’s life.

The latest party—a birthday—was large enough to require a rented room. The company looked like a miniature United Nations. The adults came from India, China, Korea, and Malaysia, among other places. In a crowd of some 100 people, I was one of a handful of native-born white males. It struck me how well the gathering foretold America’s future, and how far it diverged from the lily-white Republican convention only recently concluded.

The adults’ common connection was the children and their Montessori school, which the parents hope will give their kids a boost in global competition. The parents were mostly professionals: doctors, lawyers, teachers, and accountants. They included the school’s headmistress, a striking Indian woman dressed in a sari.

Two parents stood out as alpha males. They weren’t noticeably taller or stronger than the others. But they bore themselves and spoke with an easy confidence that betrayed success and affluence. One, with whom I had spoken before, is an Indian immigrant who runs an engineering design business. I’ll call him Al. The other, whom I met that night, is an Mideastern immigrant who runs several businesses, including health-care supply and real estate. I’ll call him Bob.

Although in entirely different lines of business, Al and Bob treated each other as friends and comrades. You could almost see the class distinction that separated them from the rest of us. Prior knowledge and hints in their conversation led me to guess that each earns between several hundred thousand and a million dollars a year.

When talked with them, I was careful to avoid politics. But before long they brought it up themselves, asking me whom I support. When I expressed enthusiasm for Obama, they chuckled and glanced at each other knowingly. When I asked whom they support, they said McCain. Almost simultaneously, each gave the same reason: McCain would lower their taxes while Obama would raise them.

Without using a word of Rebublican jargon or cant, both Al and Bob accepted Republican orthodoxy. They did so not as a matter of abstract theory. They claimed to live it.

Al explained how lower taxes help him expand his business. With earnest sincerity, he insisted the extra money would go into his business, not his pocket.

I believed him. After years of business success, he is just now building a new home in the better part of town. The building is going very slowly and is obviously not his first priority. As our conversation progressed, I discovered how ignorant he is about restaurants and other attractions in our common locale. He knew little even about restaurants near his office. For him, nothing exists but work and family. I had no doubt that his own business would be his first investment priority.

Bob revealed less about himself personally, and I had not known him beforehand. But he, too, had come upon Republican orthodoxy in his own way. He explained how he had offered his employees health insurance and health-saving accounts, but they had turned both down for higher wages. He jokingly reported how all his employees support Obama. He also told how he had warned them that, if Obama enacts health-care legislation that costs his businesses money, their raises might disappear.

Our conversation ranged widely. Both Al and Bob were smart, thinking men, well-informed about business and the economy, less so about politics. When I asked them whether they were satisfied with our national economy, infrastructure, energy policy, security, and so forth, both were genuinely troubled. Both were appalled by Dubya’s incompetence, but both hoped and expected that McCain would be better. Both praised Sarah Palin’s “leadership” without being able to articulate why.

Yet these “national” issues for them were bare abstractions, troubles in a world remote and viewed through a glass darkly. What was clear to them—and what mattered most—was the small worlds they had built with their own hands: their businesses. Taxes were first, foremost and always in their minds. Although neither used the term, both were utterly convinced of the correctness of “trickle down” economics and proud of their personal roles as instruments in it.

Despite Al’s dark skin and Bob’s Mideastern accent, I could easily imagine them rolling covered wagons across the prairie. I could see them fighting the natives, digging mines, building farms, and organizing neighbors to fence off rangeland to grow food for settlers and cattle. These are tough, smart, hard-working, self-reliant men. In any age, their like has been America’s backbone.

Though born in far corners of the globe, Al and Bob belong to one of America’s three distinct cultures. I call it the “Western” culture because our prairie migrations and the old Wild West best exemplify it. It is a culture of success and prosperity built on hard work and personal sacrifice, and most of all self-reliance, with little thought for one’s neighbors. The West grew such a culture because it was big and empty. Neighbors were often too far away or too occupied with their own troubles to help. It was and is a culture of sink or swim.

Today this “Western” culture is hardly confined to the West. It exists in myth and practice in every part of our land, even in our largest cities. Its rise is largely responsible for the Republican party’s political predominance over the last forty years.

Our second culture is our “Southern” culture. Unlike the rest of the nation, the South still has strong remnants of Europe, with all its social stasis and fatalism. Its best and most laconic description is Cole Porter’s immortal words: “Them that has, gets.”

Of course not all the South is this way. In-migration and demographic change have brought booming Atlanta, sophisticated Research Triangle Park, and Texas’ Silicon Gulch roaring into the twenty-first century. But outside these enclaves, in the backwoods and the small towns, the spirit of the Old South remains. It even remains in some big cities. It is no accident that our nation’s most fatalistic and tragic response to natural disaster occurred in New Orleans. Dubya’s ineptness was not the only cause.

It is also no accident that the South is by far the most religious part of our country and the primary source of the fundamentalist surge that has spread nationwide. For generations, both slave and master were trapped in a horrible social system from which there seemed to be no escape but God.

Slavery is now gone, but reliance on God remains. It survives in African-Americans, a legacy of their centuries-long struggle for freedom that is still not entirely theirs. It survives in many white Southerners, especially the poor, whose forebears had no recourse but God from the fetters of hereditary landed aristocracy, or from the destruction wreaked and dominance achieved by a more populous and more technologically savvy North with a better social system, which many Southerners still do not fully understand.

Our third culture—what I call the “New England” culture—is less well known and sometimes forgotten. David McCullough reminded us of it in his brilliant biography of John Adams and his wife Abigail, who personified it. Like Western culture, it a culture of Protestant hard work and self-reliance. But it is tempered by modesty, frugality, humility and assiduous caring for one’s neighbors.

McCullough has done us an enormous service by depicting this admirable culture in personal terms. John and Abigail Adams were first and foremost self-made people. Both were successful farmers who worked the land with their own hands. John became a successful lawyer on his own merit, working as an apprentice to learn his trade. Abigail worked and managed the family farms over many years while John was away. Until late in life, she churned her own butter, spun her own cloth, and made her own clothes.

Both she and John hewed to frugality and shunned ostentation. While serving as envoys in Europe, they were constantly chided and even ridiculed for living below their station, in smaller and less grand accommodations than their European counterparts. To avoid any pretense, John had Abigail paint over the family crest on their simple two-horse carriage, which they used for John’s inauguration as president.

But the story that stays in my mind is that of John before he became our second president. He had been a member of Congress, an ambassador to England, France and Holland, and a progenitor of many ideas underlying our government, including checks and balances. He was one of our most distinguished, accomplished and revered leaders. Yet when fire struck the home and business of a virulent political enemy, there he was in the fire brigade, fighting the flames with his own hands. Although a portly man of about sixty, made fun of for his girth, he kept himself fit by walking miles a day. No doubt that habit helped make him useful in the fire brigade.

The contrast with Thomas Jefferson could not be more striking. John and Abigail had hired help, but they never owned slaves, and they bought and freed several. They led frugal lives of cautious moderation. When they died, they left a large family well provided with huge holdings of land—far more than they had inherited—and a son who later became president.

In contrast, Jefferson, despite his facility with words and science, was an enormously self-indulgent man. He was born rich and consistently lived far beyond his means. Despite the ringing words of equality in his Declaration of Independence, he kept slaves all his life. He freed Sally Hemmings’ children, who many believe were also his own. But he freed no others. He built a huge estate that he could not afford and stocked it with opulent foreign purchases that he could not afford. When he died, he left enormous debts that much of his estate—and his slaves—had to be sold to pay off.

While living like an American aristocrat, Jefferson paradoxically supported the French Revolution, which cut off so many aristocratic heads. Adams was far more prudent and prescient. He accurately predicted, and bitterly lamented, the excesses and failings of the French revolutionaries. This difference of opinions, strongly held on both sides, was responsible for Adams’ and Jefferson’s estrangement of many years, despite a strong earlier friendship crucial to our nation’s founding. More than any other Founder, Jefferson personified the majesty, grandeur, absence of perspective and introspection, and social contradictions of our Southern Culture.

As successful foreigners like Al and Bob immigrate, settle down and grow roots here, what will they become? They are strong, capable alpha males. Doubtless they would succeed in any society. But they have better opportunity here, and they know it. Which of our three cultures will they and their children adopt?

Will they become Westerners, conquering new frontiers and building new industry with their skill and hard work, but heedless of the big picture and of those less fortunate? Will they become part of a new Southern aristocracy, proud of the fortunes they have built, jealous of their hard-won privilege, and fatalistic about their success and others’ hardship? Or will they follow John Adams’ New England lead, husband their wealth, suppress their pride and ostentation, help their neighbors, and build communities and a nation for the ages?

Those are the social questions before us in this election. Although not born into it, John McCain has wholeheartedly adopted our Western Culture. He now personifies it. So does Sarah Palin. Both rely heavily on the overlap between Western and Southern Culture—self-reliance, militarism, religion, and a bit of fatalism—and the Southern support that comes with the overlap.

In contrast, Barack Obama is heir to John and Abigail Adams and the New Englanders. His race is merely an interesting distraction.

To be sure, Obama attracts many voters who represent the African side of Southern Culture. But his own upbringing and family culture are pure New England. Hard work, modesty, humility, community and helping others are his values. He received them from a Midwestern mother and grandparents. He and his family transplanted them from Kansas to Hawaii to Indonesia and now Chicago.

The route was long, but the end is the same. Like Adams, Obama is a self made man in the law and politics. Like Adams’, Obama’s modest but sustaining personal wealth, achieved through royalties on his books, has little import in his personal universe. Like Adams, he is reserved, circumspect, prudent, humble, and outward-looking. Like Adams, he is acutely conscious of the dangers of arrogance, pride, self-interest and human fallibility and corruptibility. Like Adams, he sees our nation as a complex social mechanism, with lots of moving parts, which can be improved, with good will, through intelligent but gradual redesign. The community and how it works are his obsessions. The only significant difference in culture and upbringing between the Obamas and the Adamses is that neither Obama was ever a farmer.

So our choice is fourfold. It’s a choice between young and old. It’s a choice between change in and continuity of policy. It’s a choice between government by ideology and breaking down ideology to restore pragmatism. But most of all, it’s a choice between two of the historic strains of our American culture, with the third playing a subordinate but possibly decisive role.

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22 October 2008

Why McCain’s Foreclosure “Rescue” Won’t Work, and What Will


Introduction
Why McCain’s Plan Won’t Work
What Will Work
Conclusion

Introduction

In the second presidential debate [search for “bad home loan”], John McCain proposed a solution to our mortgage-housing crisis at the Main Street level. He wants the federal government to buy up distressed mortgages and renegotiate them with homeowners so they can stay in their homes.

Again and again, I’ve argued on this blog for addressing the mortgage housing crisis, as distinguished from the credit crisis it has caused. Yet so far our government has done absolutely nothing about the housing-foreclosure meltdown. So McCain’s proposal deserves careful analysis.

Analysis shows that his proposal would not work without imposing an enormous expense on taxpayers, paralyzing government during our economic crisis. It would also increase moral hazard by removing all market discipline from financial intermediaries, i.e., those culprits in the crisis below the level of Wall Street and the banks that Secretary Paulson is trying to rescue now. This essay explains why McCain’s proposal won’t work and what will.

Why McCain’s Plan Won’t Work

McCain has never explained at what price government would buy the mortgages. That’s a fatal omission, for price is the essence of the crisis. We have a crisis because markets cannot determine an agreeable price for mortgages that are delinquent (defaulted but not yet foreclosed) or in foreclosure.

These mortgages have no discernable market price for two reasons. First, the very fact of delinquency or foreclosure suggests that the homeowner can’t continue to make the agreed payments on the loan. So the loan is worthless and its terms are irrelevant. They can’t help determine either price or value because payments under the loan have stopped.

Second, once the loan terms are irrelevant, the only measure of price or value is that of the collateral: the home. But no one knows what home values are today. They’ve been in free fall for about a year with no end in sight. Worse yet, in neighborhoods hard hit by delinquencies and foreclosures, vacancy and resulting blight create an amplifying effect, deepening the downturn in home values. As the general economic recession deepens, this downward spiral will only worsen, especially in neighborhoods mauled by job losses and plant closings.

So no private party is willing to buy distressed mortgages at any price, because no one can determine what a fair price might be. In addition, everyone fears (with some justification) that prices and values will continue to go down. So few are willing to buy even at prices that seem “low” or “bargains” today.

That’s also why the home sale market is so stagnant. For the very same reasons that home sales are weak today, no one will buy mortgages or the securities that bundle them.

So in order for government to buy the mortgages, it will have to pay a price higher than any private party is willing to pay. In other words, it will have to take more risk of a loss than private parties (including the sophisticated folk who created this mess) are willing to take. If the government holds the toxic mortgages for the long run, the housing market may eventually turn around, allowing the government to sell them at a profit. Or the government may profit as homes appreciate and are sold and the loans are paid off (as long as the government includes appreciation-sharing clauses in its renegotiated deals with homeowners).

That sounds fine in the long run. But real estate prices take a long time to recover from a burst bubble—six years in California in the early nineties, and over a decade in Japan. In the meantime, enormous sums of taxpayer’s money will be tied up in illiquid assets, leaving nothing left over for investing in health care, energy independence, schools, roads, other infrastructure, or reducing the federal debt. McCain’s solution is thus a recipe for federal fiscal paralysis during most, if not all, of the next administration.

Moreover, McCain’s plan would drastically increase the problem of moral hazard. By relieving the private parties who created and packaged the toxic mortgages in the first place, it would immunize them from the full force of the losses that they so richly deserve. His plan is a piece with Secretary Paulson’s “Lake Woebegone” approach to bailing out banks. It gives no play to much-needed market discipline.


What Will Work

Any realistic solution to the foreclosure crisis must meet three tests. First, it must set a realistic price for distressed mortgages that has reasonable validity now, not years from now when expectations of a housing recovery may or may not be fulfilled. Second, it must act quickly before our economic collapse traps millions more homeowners in foreclosure and destroys thousands more neighborhoods. Third, it must not tie up enormous amounts of federal capital for years to come, because we need that money to (1) fight the credit-banking crisis, (2) invest in infrastructure, (3) solve our many other problems, and (4) reduce the federal debt.

John McCain’s solution fails the first and third tests. It has no price setting mechanism, and it would tie up huge sums of federal money in illiquid mortgages for years.

Barack Obama has proposed a better solution: allowing homeowners to modify the terms of their mortgages in bankruptcy. That solution would satisfy the first test: the bankruptcy court would, in effect, set the value of each mortgage (individually) based on the homeowner’s ability to pay. That solution would also satisfy the last test. It would require no federal investment at all, other than in the administrative expenses of bankruptcy courts.

However, the Obama solution would hardly act quickly. Bankruptcy proceedings are notoriously slow, and they would become much more so as millions of homeowners’ cases clogged the bankruptcy courts.

Obama’s solution also has another disadvantage. It would impose an unfair burden on the subprime prey—the people whom predatory lenders trapped in unsustainable mortgages. It would require them to seek and retain competent bankruptcy lawyers and endure the expense, tedium and suspense of bankruptcy proceedings.

What if an economically similar proposal could put the shoe on the other foot, requiring the predators and their successors, not the prey, to initiate and conduct litigation? There is such a solution, and here’s how it would work.

Congress could pass a new law allowing federal authorities to condemn (confiscate) any distressed mortgage at a price specified by a formula. For homeowners who still have income, the formula price would be what I call the “prudent value”—the present value of thirty years’ worth of level monthly payments at one-third the homeowner’s gross monthly income. (That’s the highest actual payment most prudent lenders would allow before all the subprime silliness started.)

The new law would allow the government to condemn and acquire any distressed mortgage and the related loan in exchange for this prudent price. Then it would revise their terms to allow the lender to recover, on any later sale of the home at a profit, a retroactive 10% down payment (based on the prudent price), plus 50% of any additional price appreciation.

For reasons explained in an earlier post, this plan would clear the toxic-asset logjam quickly. As soon as the government had revised its terms, each mortgage would be worth more than the government had paid for it, due to the retroactive down payment and the appreciation sharing. A private market would develop, speculating on this upside, so the government could quickly unload—at a profit— the mortgages it had condemned and revised. By turning over the revised mortgages to private investors in this way, the government could manage the program with a modest investment of start up funds—far less than the amounts needed to buy all distressed mortgages outright (at inflated prices) and hold them for the long run.

Congress could pass such a law because the Constitution allows government to take private property (the mortgages and loans) for any public purpose with “just compensation.” Surely saving neighborhoods from destruction and the economy from collapse are public purposes.

Maybe some—maybe many—mortgage holders would consider the “prudent value” price “just compensation” and be content. Those that didn’t would have the same option that owners whose land is condemned for schools or roads now have: they could take the government to court, challenge the prices paid for their mortgages, and claim any additional amounts they could prove necessary to provide “just compensation.”

The same rule would hold for homeowners who didn’t like the revised terms, i.e., the retroactive down payment and appreciation-sharing on sale of the home. Homeowners who wanted better terms could also sue for “just compensation” for their confiscated financial interests. Likely far fewer of them than lenders would take this option. Most would likely accept the revisions as the price of staying in their homes for sustainable payments.

This plan would meet all three tests. It would immediately establish a price for each distressed mortgage, based only on the homeowner’s income. Since the revised payments would be sustainable, the revised loan would have value again, independent of the collateral’s uncertain value. The plan would act quickly, as it would require no bankruptcy or other legal proceedings. Lawsuits would come later; they would succeed only to the extent that interested parties could prove deprivation of “just compensation.” A single Supreme Court decision holding the price and revised terms “just” (or explaining how they could be made “just”) would forestall further litigation. And this plan would need no more than “seed capital” to start the acquisition process. Government could recycle that seed capital many times by selling successive groups of acquired and revised mortgages to the private market that would arise.

In addition to meeting the three tests for a good solution, this solution would have two other advantages. First, by putting a floor under mortgage pricing (the “prudent price” the government paid) and allowing an upside from that floor (the retroactive down payment and appreciation-sharing on sale), it would create a private market in revised mortgages. Second, it would be fairer and simpler for homeowners facing foreclosure, most of whom are financially and legally unsophisticated.

Homeowners would have the opportunity to challenge the revisions of their mortgages as depriving them of “just compensation.” So, too, would the lenders or present holders of the mortgages be able to challenge the acquisition price. But in practice the latter would most likely take that option, relieving the hapless homeowners of the burden of filing for and maintaining bankruptcy proceedings.

Thus the predators, not the prey, would have to deal with courts and lawyers, while simple administrative procedures could keep people in their homes and create a private market in revised distressed mortgages. Similar procedures might even put people back in their homes (if still vacant, and if the former owners still have income) after foreclosure and eviction, thereby helping to restore distressed neighborhoods.

Conclusion

There is a real and workable solution to the mortgage-housing part of our financial crisis. It is not John McCain’s solution. His would explode the national debt and create fiscal paralysis by requiring the government to buy and hold mortgages for the long term at inflated prices. Nor is it Barack Obama’s current solution, which would require millions of homeowners to file for bankruptcy and overload our bankruptcy courts.

A better solution is having the government condemn and acquire mortgages at a reasonable, prudent price and revise their terms, forcing mortgage holders to sue for more just compensation if they don’t like the price, or homeowners to sue if they don’t like the revised terms. This solution would clear the assets logjam quickly, with lower and more sustainable cost to the government. It would also put the burden of dealing with courts and lawyers on those who most deserve it: the folks who created this mess.

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20 October 2008

Barack Obama’s Good Weekend and Sterling Endorsements


Barack Obama had a good weekend. On the weekend or the Friday before, the following things (in no particular order) went his way:

Most Single-Month Contributions in U.S. History. Obama’s campaign tallied a total of $150 million in donations for the month of September, including contributions from 632,000 new donors. That was the largest single-month total for any candidate in U.S. history, although the average donation was less than $100.

Huge Crowd in St. Louis. Appearing before the “Gateway to the West” in St. Louis, Obama drew a crowd of over 100,000 people. The sight from the podium was so impressive [see photo in linked article] that Obama momentarily lost his legendary unflappability.

Colin Powell Endorsement. General Colin Powell, former Secretary of State, former Chairman of the Joint Chiefs, a lifelong Republican, and a man with an extraordinary record of good judgment on foreign policy, endorsed Obama and said he would vote for Obama.

Washington Post Endorsement. The Washington Post, the most independent and centrist of our three great national newspapers, endorsed Obama in an extraordinarily balanced and thoughtful editorial.

Chicago Tribune Endorsement. The Chicago Tribune—a conservative newspaper that had never endorsed a Democrat for president in its entire century-and-a-half history endorsed Obama.


These endorsements augmented many earlier endorsements of prominent figures in both parties, including the following [links are to the endorsements or reports on them]:

Senator Edward Kennedy (D., Mass.), the Lion of the Senate and for 45 years the conscience of the Democratic Party

Chistopher Buckley, a leading conservative and the son of William F. Buckley, the intellectual founder of modern conservatism

Ken Burns, video historian and expert on the Civil War, who compared Obama to Lincoln

Zbigniew Brzezinski, former National Security Advisor, who praised Obama’s judgment in matters of foreign policy

Ted Sorenson, friend of and close advisor to President Jack Kennedy and chronicler of the Kennedy “Camelot,” who compared Obama to JFK

In addition, the following consistently and adamantly conservative columnists, although not going so far as to endorse Obama, have praised him and his candidacy:

David Brooks, conservative commentator for the New York Times and the Lehrer News Hour, who wrote of Obama:
“[I]t is easy to sketch out a scenario in which he could be a great president. . . . He could gather—already has gathered—some of the smartest minds in public policy, and, untroubled by intellectual insecurity, he could give them free rein. Though he is young, it is easy to imagine him at the cabinet table, leading a subtle discussion of some long-term problem.”

Charles Krauthammer, conservative columnist for the Washington Post, who said of Obama, “he’s got both a first-class intellect and a first-class temperament. That will likely be enough to make him president.”

When a candidate garners endorsements from the most widely respected public figures of both parties (Colin Powell for the Republicans and Ted Kennedy for the Democrats), and when his natural opposition begins to praise him, you know that something unusual is going on.

Many of the opposition are scared to death that Sarah Palin might actually succeed to the presidency. But that was only part of it. Every one of the endorsers and near-endorsers praised Obama’s intellect, judgment, or temperament (or all three), and all thought he could be a great president.

Now if we could just break through the McCain campaign’s “demagoguery” (Colin Powell’s term [search for “demagoguery”]) and make Joe and Mary six-pack understand.

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18 October 2008

Our Woebegone Banks

NEWS FLASH: COLIN POWELL—A REPUBLICAN AND ONE OF THE MOST RESPECTED PUBLIC FIGURES IN AMERICA—ENDORSES BARACK OBAMA AND WILL VOTE FOR HIM. POWELL LAUDS OBAMA’S “INTELLECTUAL CURIOSITY,” “INTELLECTUAL VIGOR,” STEADINESS AND “DEPTH OF KNOWLEDGE” AND SEES HIM AS A “TRANSFORMATIONAL FIGURE” WHO WILL BRING REAL CHANGE. POWELL CRITICIZES MCCAIN FOR BEING “UNSURE” ON THE ECONOMY, CHANGING POSITIONS OFTEN, AND GOING “TOO FAR” WITH DIRTY POLITICS. HE SEES MCCAIN’S CAMPAIGN AS ENGAGING IN “DEMAGOGUERY.” WATCH THE KEY PORTION OF THE INTERVIEW HERE.]

[To see why Powell’s endosement rates a news flash, click here.]

Coddling Bad Management
The Low Interest Rate
Treating All Equally
Encouraging Concentration
Conclusion

Remember Lake Woebegone? That’s Garrison Keillor’s fictional Minnesota plains town, where “all the children are above average.”

With a stroke of their pens, the bailout geniuses in the Bush Administration have converted our financial sector into the economic equivalent of Lake Woebegone. In the world that they have made, there are no consequences for failure, the government gives money away, all our bankers are above average, and all are bailed out equally, regardless of their success or failure.

We were all so thrilled that our glorious followers accepted Britain’s decisive leadership that we failed to notice the difference in details. We cheered, and markets rose, as they pledged to inject much-need new capital into our rotten financial sector. But as we should know by now, in finance (as in most things) details matter. The details of our own brand of bailout, which differ strikingly from those in Europe, make it look much more like socialism for the rich.

Coddling Bad Management

In Britain, the government took power to appoint board members and limit dividends, causing the resignation of top management of several banks. Our own bailout did little to remove or limit the options of our failing banks’ top management, which remains in place.

So much for cleaning house. You would expect as much from an administration that gave George Tenet the Medal of Freedom for presiding over 9/11 and That Idiot Rumsfeld fulsome praise, upon his grossly belated firing, for presiding over the debacle in Iraq.

No doubt there are some smart men and women among the managers thus spared unwanted scrutiny by markets or shareholders. But they also include the very folks whose greed, stupidity and denial of reality created the problems we are trying desperately to solve.

Keeping top management of failing institutions in place and unrestrained has three undesirable consequences. First, it allows bad actors to continue to draw outsized compensation for failure. Every sophisticated analyst expects CEOs to circumvent whatever rules again excessive compensation the government puts in place. But they can’t draw undeserved compensation if they’re no longer there.

Second, failing to remove or limit bad managers missed a golden opportunity to build political support for the bailout. As members of Congress know full well, the public is rabid for heads to roll. The government could have garnered immense political good will just by making a few examples.

But Paulson & Company didn’t do that. Maybe they wanted to give the next administration (probably Obama’s) the stinky “gift” of a still-rabid public. Maybe they just couldn’t stand to humiliate their buddies and members of their own social class.

Finally—and most important—failing to curb bad actors missed a chance to reduce moral hazard. Merely by aping the British, Paulson & Company could have gone a long way toward re-establishing a business culture in which failure has consequences for the people causing it, not just for others. But they didn’t.

The Low Interest Rate

The second important detail is the dividend rate on preferred shares the government gets in exchange for its injections of capital. Warren Buffet got 10% for his $ 3 billion investment in GE. The British charged 12% for their bank bailout. Here in the supposed home of muscular capitalism, the taxpayers get 5%.

Why did Paulson & Company secure for our taxpayers half (or less) of the going rate of return? There are two possible reasons. First, Paulson was uncomfortable with a true (albeit partial) government takeover of private enterprise. The purpose of the exercise was to avoid a Great-Depression-style meltdown at all costs. But apparently Paulson had a higher goal. He wanted to preserve the illusion of a free market based on voluntary transactions among free capitalists. Denial continues apace, even at our government’s highest levels.

So Paulson balked at injecting capital and imposing harsh terms by fiat in exchange. Instead, he tried to cajole our Masters of the Universe, including the idiots among them, to do a “voluntary” deal.

By interviews after the fact, the Wall Street Journal managed to crack the door [subscription required] to the extraordinary meeting in which Paulson presented the bailout terms to CEOs of nine of our biggest financial institutions. Expecting resistance, he had scheduled a possible second meeting. But when he presented his plan in a termsheet, there was quick acquiescence after a little grumbling. There was no need for the scheduled follow-on meeting or any real arm twisting.

At the time of the meeting, the LIBOR (London Interbank Offered Rate) was hovering around 4.5%—an extraordinarily high figure by historical standards. The LIBOR is supposed to be a nearly risk-free rate, the rate sound banks charge each other for short-term loans. Here institutions that might have been failing (some of which were not banks) were “ordered” to accept a rate about half a percentage point higher for an infusion of capital of indefinite duration. Any self-interested commercial party (such as Warren Buffet) would have charged a much higher rate based on the longer term of the “investment” and the increased risk of default.

So Paulson’s was an “order” the CEOs could hardly have refused. That’s why, when he called the meeting, he had told Morgan Stanley’s CEO, “I think you'll be pleased.”

The second possible reason for the low rate is a bit more complex. Paulson & Company might have intended the low rate to provide a less transparent taxpayer subsidy for shaky institutions. It doesn’t take much skill as a banker to make a profit on the virtually free money that Paulson was providing long term. The low interest rate helped the banks beyond the face value of the bailout, thereby encouraging them to lend, since virtually any borrower would pay a higher interest rate for loans of any similar term.

Although rationally related to the main goal of financial stability, these effects, too, increased moral hazard. Applied indiscriminately to strong and weak recipients alike, they reinforced the immunity of bad management.

Treating All Equally

One of the key characteristics of socialism is treating everyone the same. It’s the thing that free marketers and conservatives rail against. If everyone gets the same reward, regardless of skill or effort, there’s no incentive to succeed, or even to work hard. Society devolves to its lowest common denominator, and the laziest and least skilled among us sets the pace of progress. That’s pretty much what happened in the Soviet Union.

The railers are right about this. The great dilemma in our mixed economy is how to provide a safety net and a reasonable standard of living for all while maintaining the enormous economic incentive that private markets provide. Treating everyone the same is not the answer, although treating everyone with a minimum level of decency and humanity undoubtedly is.

Paulson’s bailout was not precisely equal, but nearly so. Of our four biggest banks—Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo—each got $25 billion, except for Wells Fargo, which got $20 billion. The two big investment banks, Goldman Sachs and Morgan Stanley, each got $10 billion, although Goldman is far healthier. Two smaller banks—State Street and Bank of New York—each got $3 billion. Apparently there was no attempt to calibrate the amount of each bailout to the recipient’s strength, need or quality of management.

For the two investment banks, Paulson may have pleaded insufficient information to discriminate, as some of their activities are unregulated and opaque. But national banks? All of the five biggest banks are national banks regulated and regularly examined by the Comptroller of the Currency, a Treasury Official who reports to Paulson. Surely with a little effort Paulson could have determined which banks were better managed, whose borrowers had fewer existing and imminent defaults, and (perhaps) which had fewer toxic assets. Similar analysis applies to the two smaller banks, which are regulated by the FDIC. Yet Paulson treated them all the same, except for size, just like the most doctrinaire Soviet commissar. It was a puzzling and anomalous performance.

Encouraging Concentration

As I’ve outlined in another post, the corporation is one of the greatest social inventions in human history. It diversifies and decentralizes economic activity, economic power, and economic decision making. It weakens the grip of political and central authority on a nation’s commerce and industry.

Human history over the last 400 years (the era of corporate activity) confirms this point. Societies with robust corporate spheres (Holland, England, the United States and more recently China, Germany, Israel and Japan) have succeeded far better than societies characterized by centralized power.

This is so no matter what the excuse or goal of centralized authority. It applies to authoritarian regimes based on religion, such as Italy, Spain and Latin America during their colonial periods and Iran today. It applies to left-wing authoritarian regimes, like the Soviet Union, former “Red” China, Cuba, and Venezuela today. And it applies to right-wing authoritarian regimes like Nazi Germany, Fascist Spain and the various, now mostly vanished fascist regimes of Latin America. The most dramatic example is China, whose economic miracle began when it forsook central control over its entire economy for its present regime of weakly authoritarian capitalism. Human beings simply do better when they can work, build, create and innovate without asking permission from central power. The same rule even applies in our computer industry.

Until recently, one of our secrets as a nation was that we understood this truth better than most. Our free-market economy recognized the power of diversification and decentralization and discouraged concentration. Whether under “conservative” or “liberal” government, Republicans or Democrats, we never lost our basic faith in the corporation, large or small, as the fundamental and autonomous unit of economic activity.

Our antitrust laws—once the most robust in the world—reinforced this trend in the private sector. They kept us free from excessive concentration of economic power wrought by private, nongovernmental means. As a result, our banking sector is the most diversified and decentralized in the world, with over 9,000 separate banking entities [Figure 4]. Up to now, those features have made it the most efficient and effective financial sector in the world.

So why in hell did Paulson & Company give half the bailout money to nine of the largest financial institutions in the nation, including some that should have been allowed to fail? Why did they “invest” $ 10 billion in Morgan Stanley just so Japan’s biggest bank would buy a roughly equivalent share? They missed a golden opportunity to strike a blow for deconcentration and reverse (at least in part) the strong recent trend toward mergers and consolidation that is rapidly making our financial sector more like Europe’s and Japan’s.

That failure was a huge step backward. It is ludicrous to argue that even financial wizards sitting on the forty-second floor of an office tower in Manhattan can do a better job of lending to small business in Portland and Peoria than bankers in those towns. The locals know the communities, the local business environment, and the businesses themselves. They regularly socialize with local business leaders. They have a chance to observe character and management style up close and personal, not just balance sheets. Their social and professional reputations, as well as their economic success, are on the line every time the make or don’t make a loan. And if they fail, it won’t be long before another local institution will pick up the dropped ball. So why not use this crisis to strike a blow for diversification and decentralization, rather than consolidation?

Conclusion

Those of us of a certain age remember how long, hard and often Republicans railed against the welfare state and every attempt to create a safety net for the least among us. Life is a Darwinian struggle, they said. Only the strong survive. We can’t treat common people equally (or even humanely), lest they grow weak and lazy and their weakness and laziness infect us all.

Yet when time and chance—even gross incompetence— threaten their rich buddies, they treat them all equally, regardless of brains or strength, just like the socialist government in Animal Farm. The irony would be hilarious if the policy weren’t so dishonest and dangerous.

Not only does our bailout treat all banks of similar size much the same. It gives even the little banks no risk, no reward, and no incentive to improve. Our government could easily have applied market incentives to them, without any direct investment of taxpayers’ money. As I’ve suggested in another post, it could have published their reserves, financial health, and percentage of tainted assets on the Internet, thereby encouraging depositors whose money was not insured to move it from weak and silly banks to strong and sound ones.

Most money would not have moved, because the government already had insured accounts up to $250,000. But some larger business accounts would have moved, providing a gentle and gradual reward for sound management and an incentive to replace bad managers.

Sure, some banks might have failed, wiping out shareholders, depleting the FDIC fund, and perhaps causing FDIC insurance rates to rise. But we’re talking about little banks here, not the behemoths “too big to fail.” Failure of a few dozen additional small banks, coupled with a general increase in insurance rates, might have given all bankers a salutary reminder the reality of risk in their profession and the problem of moral hazard.

Instead, our government opted for socialism for the rich. It guaranteed all non-interest bearing accounts (mostly checking accounts), regardless of size, thereby removing any incentive for small business to move its money.

It remains to be seen how the government will apportion the remaining $125 billion of the first $250 billion tranche, which is reserved for little banks. Will it attempt to reward sound management and punish idiots? Or will it treat the little banks, like the big ones, as if they were all above average?

I don’t mean to belittle the complexity of what Paulson & Company are attempting. Their work is complex, time is short, and some relevant data have yet to be collected. But no serious person expects the so-called limits on executive compensation or “golden parachutes” to have any real effect. At most, bad managers will suffer a slap on the wrist for a few months or a year while their lawyers figure out how to circumvent the limitations or challenge them in court.

The next administration may make examples of some. But, as always happens, most will escape punishment as our government rightly turns its attention to more urgent matters. Being momentarily humiliated in grandstanding congressional hearings is no incentive for proper conduct when applied to people making tens or hundreds of millions a year. Offer me that kind of money, and I’d be happy bear similar humiliation once a month. Meanwhile, the underlying housing-mortgage meltdown still smolders, with no solution in sight.

It’s hard to avoid the conclusion that the details of our bailout reflect a desire to preserve the status quo and Wall Street’s predominance as much as a desire to get credit moving again. But a sector of our economy based on the values of Lake Woebegone will not long survive harsh global competition, let alone the harder times yet to come.

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16 October 2008

Soothing: The Last Debate


NEWS FLASH I (10/17/08): In a balanced and candid editorial, the Washington Post has endorsed Barack Obama for president. The Post is the only one of our three great national newspapers that is ideologically neutral, so its endorsement carries special heft. (The New York Times is generally seen as having a “liberal” orientation, while the Wall Street Journal is generally seen as “conservative” and pro-business.)

NEWS FLASH II: Colin Powell, former Chairman of the Joint Chiefs and former Secretary of State, will appear on Meet the Press this Sunday, October 19. No doubt he will have something to say about the presidential election. Check the MSNBC Website for your local time and channel.
[For speculation on a surprise John McCain still might have in store, click here.]

Despite John McCain’s relentless attacks—on both distractions and things that matter—I found last night’s last debate strangely soothing. Barack Obama repelled the attacks with equally relentless imperturbability. He showed calm reason, patience and occasional wit. With quiet determination, he kept control of himself and the situation. He deftly extinguished the fighter pilot’s fires in the cockpit.

We haven’t seen that kind of calm, deliberate and unflappably confident leadership for a long, long time. And Obama showed it without demonizing his opponent, the opposing party, or any person or ideology. He didn’t just claim he knows how to fix our broken system and mindless partisanship. He showed how, in the face of direct and sometimes personal attacks.

In an unguarded moment, McCain seemed to foresee his defeat. The mikes were still open after the debate, and McCain could be heard telling Obama loudly, “Good job! Good job!”

I think he meant it. His outburst was an acknowledgement, by a man who still knows how to talk straight when not scripted, of Obama’s unimaginable talent. It was a replay of Hillary Clinton’s “whatever happens” swan song from the Texas debate. Deep down, McCain knows that it’s no shame to lose to the most talented politician we’ve seen in 40 years, maybe since Lincoln.

The most important thing to come from the debate was Obama’s hints about his Cabinet. As I had hoped he would do, he named names. He mentioned Warren Buffet and former Fed Chairman Paul Volcker as economic advisers. On foreign policy—besides his running mate Joe Biden—he named Senator Dick Lugar (R., Ind.) and General Jim Jones, NATO’s former Supreme Allied Commander (Europe).

Can you imagine Warren Buffet as Secretary of the Treasury? We would have a man in that office who understands both finance and industry. He might teach us how much more we need real innovation in industry, like good batteries, than yet another new and poorly understood financial instrument.

And what a stylistic change Buffet would make from Secretary Paulson! Paulson reflexively favors Wall Street, where he spent his entire career. He often speaks as if he’s having a difficult bowel movement. In contrast, Buffet is everybody’s favorite billionaire. He’s a natural, plain spoken, honest and likeable man. His word is his bond, and he bases investing judgments on people’s character as well as balance sheets. Everything he does, he does for the long haul.

Buffet is the very model of the spectacularly successful businessman. He deserves his success and would bring honesty, competence and foresight back to American finance and industry. He’s a perfect role model for a disillusioned nation at a difficult time.

Lugar is one of the very few honest, smart and courageous Republicans left in Congress. He stood up to his president and his party on Iraq, climate change, and energy. I had hoped he would become Energy Secretary, but perhaps Obama sees a foreign policy role for him. Whatever role he plays, he will bring a deep intellect, honesty, independent judgment and bipartisanship to Obama’s Cabinet.

Paul Volcker was a good Fed Chief, but at 81 he’s a bit old for a front line job. He could serve as advisor, either informally or on the Council of Economic Advisers. Like Paul Krugman, who just won the Nobel Prize for path breaking (and conventional wisdom busting) research on international trade, Volcker is an expert on globalization. Both he and Krugman have Princeton connections, so perhaps Volcker can help Krugman secure a place at the Cabinet table, where he ought to be.

Jim Jones is hardly a household name. My first choice for Secdef is still Colin Powell, whose record of sound judgment on the crucial issues of our age is unmatched. At 71, he’s a year younger than John McCain. But if Powell is not chosen or declines to serve, Obama could do worse than keeping Secretary Gates in place, as least for an extended transition period.

Besides Obama’s names, last night’s debate covered no new ground. Both candidates still adamantly refused to say (in any way that makes sense) how they would pay for all their goodies in the midst of the greatest financial crisis since the Great Depression. McCain still pushed the tired Republican orthodoxy that got us in this mess: lower taxes, smaller (and less competent) government, and heavy reliance on the private sector. He still touted buying up and renegotiating mortgages. But he still refused to say at what price—the crucial issue that will determine whether the plan is a bailout of Wall Street or a hand up for Main Street.

Both candidates still lauded so-called “clean coal,” although no such thing exists. Obama still downplayed nuclear energy, which does exist (more abroad than here), refusing even to mention it in his list of means of securing energy independence. No doubt he hopes to win Nevada’s five electoral votes by pandering to last-minute morons, now tuning in for the first time, who want to exclude spent nuclear fuel from their sparsely populated state at any cost, even if it’s national energy and climate suicide.

For those of us who’ve followed this exhaustive and exhausting campaign from the beginning over eighteen months ago, it has been a long, long haul. Even Gail Collins couldn’t overcome her ennui and fatigue enough to maintain her usual sprightly humor.

Maybe some day we’ll limit our campaigns to a reasonable period, like the 30 days of Canada’s campaign just concluded. Then those of us who care deeply and keep informed can tune in at the same time as those who wait until the last minute, treat the campaign like an episode of American Idol, and ultimately pick our president.

Anyway, it’s now pretty clear who is our collective choice and why. All Obama has to do—skilled politician and basketball player that he is—is run out the clock.

P.S. McCain: Dying Gasp or Strategic Retreat?


More than McCain’s post-debate “Good job!” outburst suggests he knows he has lost. In the debate he “took the gloves off” as promised. He revived the old smear relating to Bill Ayers and started a new one, based on alleged “voter fraud” by ACORN, a voter rights organization.

His attacks posed two problems for his campaign. First, ACORN is an obscure organization. Few know it exists, besides its own members and fans of the right-wing talk shows that demonize it. McCain tried to explain the complex charges of “voter fraud” against it, but his explanation was incomprehensible. So he must have been speaking to his own base alone.

The attacks in general confirmed that point. Every recent poll shows McCain’s “attack mode” losing him independent and moderate voters, although perhaps energizing the Republican base. So it seems that McCain (or the dominant faction of his campaign staff) has concluded that he no longer has any hope of winning over undecided voters, most of whom are independent or moderate. He can only move more of his own base to vote.

Energizing the base might seem a strategic retreat, but this year Republicans have a distinct disadvantage in both absolute numbers and new registrations. McCain simply can’t abandon independents and moderates and hope to win.

So what is going on? Assuming that McCain or his campaign has not become irrational, this feint to the right wing may presage a surprise last-minute lurch toward the center.

One pro-McCain blog commenter suggested ditching Palin and selecting Mitt Romney instead. At first, I discounted the idea, both because I think McCain detests Romney and because Romney is a jerk who repels moderate voters. But that tactic might make some headway, and it needn’t involve Romney. Anyone with arguable qualifications to be president and a credible claim to economic expertise would do. The bait-and-switch tactic could even confuse the religious right’s rank and file (not always the brightest bulbs in the marquee) by having Palin continue to campaign although no longer the vice-presidential nominee. (McCain might secure her aid by promising her an ambassadorship or minor cabinet post, or campaign help in Alaska, if elected.)

Hillary didn’t give up until long after her “whatever happens” concession. I don’t expect McCain to do give up easily either, even if he knows deep down that he’s already lost. The fighter pilot will still do what fighter pilots do—that is, the unexpected. I don’t think it will change the result, but it may provide some nervous moments and dispel the tedium of a campaign that already has run on far too long.

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15 October 2008

The Fighter Pilot


John McCain is a fighter pilot. He began adult life as one, and he’s still one today. At 72, he can’t raise his arms over his head. But he wants to govern our country like a fighter with an enemy on its tail.

Fighter pilots have a job like no other in civilian or military life. When they’re up in the air in a dogfight, ultimate freedom is theirs. No one controls them. Their will and skill—and theirs alone—determine whether they win or lose, live or die.

There are orders from below, but they’re up their all alone. No one has time to listen to orders in the midst of a dogfight. And no one below really cares. If fighter pilots disobey orders and get killed, they’ll still have heroes’ funerals. If they disobey orders but bring back their planes and victory, they’ll get a slap on the wrist and a medal, not a court martial. Everyone knows this, including the pilots and their commanders. Extreme self-reliance is part of the job.

John McCain was a roustabout, a cut-up, and a failure in school. No one could give him discipline, and he ranked 894 out of 899 in his class at Annapolis. But he found his calling as a fighter pilot, which is way beyond “maverick.” It was the only place (besides Congress) he could fit in.

When you’re a fighter pilot with an enemy on your tail, you do the unexpected. You jerk the stick up and down, from side to side. You test the design limits of your aircraft. You push your own ability to suffer large G forces and not black out. You try to stall the aircraft and regain airspeed, hoping your enemy will rush by and set you on his tail.

Fly like a crazy person, and you might survive and conquer. Fly cautiously and by the book, and in a real war you’ll be dead for sure. Breaking rules is part of your job.

The only things that matter are shooting the enemy down and bringing yourself and your aircraft back home again. These are goals without subtlety or nuance. As one of his closest friends at the Naval Academy recalled about McCain, “Consequences didn’t scare him. ”

A brief look at McCain’s life and campaign shows just how well he fits the stereotype.

His entire public persona is built upon his heroism forty years ago. I don’t for a moment take anything away from him on that; I’ve praised his courage repeatedly on this blog.

McCain’s courage was exemplary. We don’t really know how good was his judgment when he got shot down. We don’t know whether he was brilliant and unlucky, or hasty and stupid.

But we do know one thing. Like any good fighter pilot, he did the unexpected. Once his North Vietnamese captors learned he was descended from two famous admirals, they wanted to squeeze him. They tried to use him for propaganda, offering to release him before his fellow prisoners as a “good will” gesture.

McCain would have none of that. In an heroic and unexpected move, he refused early release. His angry captors tortured and abused him. They nearly killed him. As McCain himself says, they “broke” him.

But McCain was a true fighter pilot. He had jerked the stick upward, and his personal plane had crashed and burned as a result. So he lived with the consequences. You can see them in his broken body to this day.

His fighter-pilot instincts didn’t end with his capture, heroic decision, torture and release. At every crucial turning point in his public life, McCain has played the fighter pilot the same way.

In the 1980s, he helped start the savings-and-loan crisis by jerking the stick to the right. He relentlessly pushed for the deregulation that allowed the crisis to happen. He intervened in the regulatory process to help his friend Charles Keating, a crooked savings and loan magnate who went to jail for his part in the crisis. That broke the rules, let alone common sense. So McCain got his reprimand, for “poor judgment,” from the Senate ethics committee.

But next he did the unexpected. He jerked the stick to the left. He broke with his party and supported campaign finance reform, earning the respect of his countrymen and his own party’s distrust and suspicion, which haunts him to this day. It was that jerk of the stick, more than any other, that gave him his “maverick” reputation, allowing him to run credibly against a party (his own) that has nearly destroyed the country.

McCain’s pick of Sarah Palin was just more of the same. Although a champion of human rights for captured warriors like himself, McCain has never championed civil rights for marginalized groups. For years he fought against a holiday for the Reverend Martin Luther King, Jr.—a huge failure in judgment for which he recently apologized. Like most fighter pilots his age, McCain grew up in an all male, all white environment that shaped his character. On women’s rights and racial equality, his stick was gently but firmly stuck to the right.

But fighter pilots are nothing if not opportunists. With Barack Obama’s primary win over Hillary Clinton, he saw a parting in the clouds. Hillary’s supporters were angry and disappointed and ready to be courted. At the same time, he could burnish his “maverick” image by refusing conventional wisdom and selecting a complete unknown with no national experience whatsoever. As an utter ingénue, Palin could give credibility to a 26-year insider’s claim to be an outsider.

Not only that. Palin was “right” on the irrelevant right-wing issues that his party had demagogued relentlessly in its climb to national power over the last three decades. She’s “pro-life,” pro-guns, and a macho female. She believes that our “task” in Iraq “comes from God.” Palin has never flown a plane and never served in our armed forces, but in her heart she’s a fellow fighter pilot just the same. For John McCain, picking her was a trifecta of the unexpected.

So McCain jerked his stick to the right and down, running his campaign right into lipstick, pigs, ignorance, slander and slime. Sarah Palin, as it turned out, didn’t even know about the Bush Doctrine that got us mired in Iraq for over five years and counting. Picking her was a good tactic for a fighter pilot struggling for his life, but was it good for the country?

In the last week or so, McCain evidently saw another shadow pass overhead. So he jerked his stick, down, down, down, descending into veiled racial innuendo that recalls the “Willie Horton” ad. “Who is Barack Obama?,” he coyly asks, as if anyone who can read, see or hear doesn’t know after eighteen months of continuous campaigning. He allows his ingénue to associate Obama with terrorism and to whip crowds up to such a frenzy that they begin to resemble lynch mobs.

Then, like Mr. Hyde relapsing into Dr. Jekyll, he suddenly jerks the stick up. Remembering his manners (and the polls saying voters want solutions, not trash talk), he calls for decency and respect for Obama, leaving his angry crowds confused.

Finally, there’s that minor issue, the economy. All his life, John McCain’s stick of economic policy tilted to the right. He consistently supported deregulation, smaller government, lower taxes, unfettered markets and private enterprise. If his policies were an aircraft, he would have been flying in circles, spiraling constantly to the right.

But circling in the same direction is not an effective fighting tactic. Now a new enemy is on our tail. Our leaders’ collective greed, stupidity and selfishness is catching up with us. We need to make an unexpected move.

So John McCain, fighter pilot, once again jerks the stick to the left. In just a few hours, after a lifetime of right-wing orthodoxy, he lurches from Dubya’s mantra “the fundamentals of our economy are strong,” to calling for more regulation, cursing his fellow Republicans for inaction in battle, and calling for the head of Christopher Cox, the SEC Chief. In the second debate, he calls for a government buy-up of bad mortgages, but he won’t tell us enough detail to know whether it will spare predators (lenders) or their prey (borrowers) financial loss. His populist railing against Wall Street has become so strident that he’s having trouble raising money [subscription required] from the Masters of the Universe, who have plenty of it and have always supported his party.

If John McCain were John Kerry, half the country would be wearing flip-flops and laughing uproariously. No one would take him seriously. But McCain gets away with it. Why? Because it’s all perfectly in character. Everyone expects erratic and unexpected moves from a fighter pilot.

The fighter pilot is a romantic figure, the subject of many books and movies. He (or now she) is the modern version of the cowboy. One of our many existential questions in this election is whether we want to transplant a hero of romantic myths from the cockpit to the Oval Office.

It’s not as if we haven’t had a foretaste of that sort of governance. Dubya is not the fighter pilot John McCain is. He may have shirked his duty in the Texas Air National Guard. He never served in combat. He was never shot down. And he never showed one-tenth the courage—physical or moral— that McCain did in refusing early release from the “Hanoi Hilton.”

But aren’t they both fighter pilots to the core? Don’t they both have the same style of governing? Don’t they both jerk the stick from side to side, trying to elude an enemy that only they can see? Don’t they both disappoint their party and their country by taking impulsive, opportunistic action without weighing long-term consequences? Didn’t Dubya, like McCain, disappoint his party, in his case with a reckless, interventionist foreign policy and fiscal abandon utterly heedless of the national debt?

Isn’t fighter-pilot governance precisely what happened in invading Iraq? In hollowing out FEMA before Katrina, despite the searing lesson of 9/11? In trying to “privatize” a part of Social Security in the brief interlude between two economic downturns? In trying to enact sensible immigration reform while creating, encouraging and exploiting a phalanx of right-wing bullies crying for illegal immigrants’ heads?

When Barack Obama says that John McCain would bring us a third term of Dubya, he doesn’t mean they are the same men. McCain is a better man than Dubya in almost every way. But both think and act like fighter pilots. Both are from our mythic Southwest, where “shoot first and ask questions later” was once a way of life. Both act without considering consequences, such as the effect of Palin’s lynch-mob crowds on the ability of any president to govern. Dubya actually governed like a fighter pilot, and McCain’s every move in his campaign suggests that he will, too.

Even the best of us, in unguarded moments, wish that life in the twenty-first century were that simple. But we have three weeks to think. We have before us crucial questions of judgment, leadership style and character. Do we want that sort of leadership for yet another four years? Do we want another fighter pilot in the White House, even a better one, after the first one caused just about everything in our national life to fail?


Credit. This post was inspired by a remark of Norman Ornstein during a feature by Judy Woodruff on the Lehrer News Hour, which sketched John McCain’s character using interviews of people who know him.

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13 October 2008

The Right Kind of Decoupling


[For a handy chart comparing John McCain and Barack Obama, click here. For comment on Paul Krugman’s Nobel Prize, click here.]

Up to now, the term “decoupling” has meant isolating foreign economies from the “American contagion” of toxic mortgage-related assets. As the G7 ministers just recognized in their extraordinary meeting, that kind of decoupling is a fool’s errand. Our global economy exposed every nation’s financial institutions to the disease. If world leaders do nothing and wait for the incubation period to end, the whole globe will get very sick. That end is coming nigh.

But an entirely different kind of “decoupling” may be possible. Toxic mortgage disease directly threatens only financial institutions, not other businesses, far less industrial companies. There is nothing fundamentally wrong with Apple Computer, Boeing, Caterpillar, Cisco, General Electric, Google, Hewlett Packard, Procter & Gamble, or 3M—to name just a few. (If I thought for a while, I could probably come up with dozens of similar names.)

The current financial crisis need not take down these healthy giants. It threatens them only if it deprives them of the capital they need to operate, or if it causes such a severe depression that it kills off their customers and suppliers. A key goal of government “rescue” efforts therefore should be to “decouple” these and other healthy businesses from the financial crisis as much as possible.

For big businesses like the companies named, the government’s entry into the commercial paper market can serve this purpose. As I’ve outlined in another post, the government can recycle money fleeing the stock market for the safety of Treasury bills. By diverting that flow of funds into the commercial paper market, it can keep big business afloat. The stock market’s collapse can provide literally trillions of dollars for this purpose. The government can even make a small profit for the taxpayers, since these companies are sound and the fleeing capital is available at rock-bottom interest rates.

But what about small business? One of our nation’s great strengths is its vast diversity of small business. As I’ve outlined in another post, the corporation is one of the greatest social inventions in human history because it diversifies and decentralizes industrial activity, economic power, and economic decision making. In our nation, small business is where that theory meets real life. Yet small business doesn’t get its working capital from the commercial paper market. Can we decouple it, too?

There may be a way. Our financial system is incredibly diverse, with over 5,000 separate banking entities. Not all of them are in trouble, and many have not been exposed to toxic mortgage disease. The federal government knows (or should know) which of these banks are healthy, because it regulates commercial banks heavily (unlike investment banks) and regularly examines them. What if the federal government set up a website, organized by community, revealing which banks in each community have the soundest capital structure, the biggest reserves, and the least toxic mortgage contagion?

Individuals’ money probably wouldn’t move much. Inertia and the new FDIC guarantee of $250,000 per account would probably keep most individuals’ money in place. But many small businesses have larger accounts. Many would move their accounts from shaky institutions to sounder ones. The new money would be available, under sound, local management, for small businesses in the sounder institutions’ communities. (The Washington Post recently published a heart-warming article about just such a local bank.)

One thing about the current crisis that sticks in everyone’s craw is moral hazard. The solutions suggested so far don’t force stupid and greedy people to suffer the consequences of their poor character and bad decisions. Nor do they reward folks who acted soundly and prudently while enduring the scorn of the know-it-all Masters of the Universe for earning much less money. Indiscriminately guaranteeing bank loans and buying up financial institutions’ stock are in that category. Unless managed extremely carefully (mostly with information about toxic assets and credit-default swaps that doesn’t yet exist) these “solutions” won’t reward prudence or punish stupidity.

“Decoupling” shaky financial institutions (temporarily) from the healthy business community that depends on them would. For big business, the government could bypass the big banks and investment houses by taking over (temporarily) the commercial paper market, using the vast hoard of wealth freed up by the stock-market collapse. In the process, it would force the Masters of the Universe to begin cleaning up their mess, privately and on their own initiative, lest they have no business to do and no way to survive. Some of them might even consent voluntarily to sell their toxic mortgages (and related assets) at what I call the “prudent” value, based on payments of one-third the homeowner’s gross income, with a retroactive 10% down payment and equity sharing on sale.

As for small business, decoupling also would serve it well. Strengthening prudent local banks would strengthen communities, provide locally controlled, non-government capital for small business, and help restore the diversification and decentralization that the last wave of financial-industry mergers reduced. It would also help replace arrogant and remote Masters of the Universe with prudent local lenders who know their communities and are there for the long haul.

As these solutions began to work, the Masters of the Universe would become isolated (temporarily) in their ivory office towers and cut off from the day to day operation of the American economy. There they would have time to reflect upon their sins, start cleaning up the mess they made, and get real about the value of their toxic assets.

In the process, they might reconsider how to make themselves useful to society, besides dreaming up “innovative” toxic assets that no one, including they, can keep tabs on or understand. They might begin to think about supporting real, i.e., industrial, innovation. Venture capital for good batteries, anyone?

P.S. Paul Krugman’s Nobel Prize

Today economist and New York Times columnist Paul Krugman won the Nobel Prize for economics. Along with millions of Americans who crave rational economic policy and rational government, I congratulate him. The Nobel Committee made a good choice, especially at this turning point in our history.

Last year I criticized Krugman harshly for his over-the-top partisanship for Hillary Clinton on the issue of health care. This year I dinged him for his unwillingness to appreciate the presence and promise of a new generation of leadership in the Democratic party.

But no one is perfect. Those faults are peccadillo compared to Krugman’s contributions. When he sticks to his field of economics, he has no peer in explaining the practical side of that complex science to policy makers and general readers, who desperately need the insight he provides.

Krugman has a virtue rare among economists. He never loses sight of the fact that economic science is not primarily about mathematical or social abstractions, but about people. He sees economists’ role as more than creating the world’s prettiest abstract theory. He wants them to make life better and more predictable for the average Joe and Mary. As we emerge from a disastrous era of simplistic ideology, his path of people-centered pragmatism is the one to follow.

I read every column that Krugman writes. As our economic crisis deepened, he wrote some wonderful pieces, explaining complex ideas with good writing and insightful simplicity. Among his recent best are “Health Care Destruction” (10/6), about Republicans’ multi-generational assault on government-assisted health care, “The 3 A.M. Call” (9/29), comparing Barack Obama’s economic prowess with John McCain’s, and “Cash for Trash” (9/22), brilliantly explaining the origins of the mortgage meltdown and criticizing Secretary Paulson’s initial plan to resolve it.

I’d been meaning to write a separate post about these columns and congratulate Krugman for them. But I got sidetracked by the presidential campaign and the crisis. Now is a good time to join the general admiration for a man who has worked hard to promote rational government based on economic science.

I hope and expect that he will play an important role in any Obama Administration. With the extra credibility that his Nobel Prize now gives him, the independence that his former Hillary partisanship suggests, and his unusual ability to explain complex ideas simply to a general audience, he would make a good addition to the Dream Team.

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09 October 2008

McCain and Obama: A Handy Comparison Chart


Notes to readers: During the primary campaign, one of my most popular posts was a chart comparing Hillary Clinton and Barack Obama. This post provides a similar chart for the general election, with several new categories added. It begins with war and foreign policy because they are presidents’ special field of action. Most links are to primary source material, not blogs. For a much shorter comparison of Obama and McCain penned just before the election, click here.

Wars In Iraq and Afghanistan
Planning for Conflict and Strategic Vision
Diplomacy
Decorum and Self-Restraint
Openness in Foreign Policy
Understanding of Economics
Economic Advisors
Energy Policy
Health Care
Education and Training
Bipartisan Initiatives
Work Experience
Notable Books
Money and Politics

Wars in Iraq and Afghanistan
    John McCain:

      (2002) Supports war in Iraq from beginning and votes to authorize war

      (2002-2003) Accepts and repeats Bush Administration’s claims that Iraqis will receive our troops as liberators and that war will be quick, easy and cheap

      (2004-2006) Works behind scenes, in secret, to remove Donald Rumsfeld as Secretary of Defense

      (2006-2008) Supports “surge” and “winning” in Iraq

      (2008) Supports staying in Iraq, in full force, without a timetable, and regardless of developments in Afghanistan or elsewhere, until commanders say we’ve “won”

    Barack Obama:

      (2002) Opposes war from beginning, based on own judgment, while supporting war in Afghanistan

      (2003-2006) Supports troops and war in Iraq once begun

      (2006-2007) Opposes “surge” in troop levels but supports change in strategy

      (2007-2008) Recognizes success of “surge,” change in strategy, and Sunni Awakening in reducing violence in Iraq

      (2008) Supports withdrawing combat troops from Iraq on flexible sixteen-month timetable, in order to: (1) pressure Iraqis to take over, (2) force political reconciliation among Iraqi factions and (3) shift combat emphasis to Al Qaeda and Taliban in Afghanistan and Pakistan

Planning for Conflict and Strategic Vision
    George W. Bush: (2002-2006) has no plan for aftermath of Iraq invasion

    John McCain:

      (2001-2007) States no plan to fight Al Qaeda in Pakistan

      (2007-2008) Promises to let commanders decide when war in Iraq has been “won”

      (2008) Proposes to use same strategy in Afghanistan and Pakistan as in Iraq, and to shift forces only after “winning” in Iraq

      (2008) Has no plan to relieve exhausted and overextended military other than “winning” in Iraq

    Barack Obama:

      (2007, August) announces and publishes comprehensive plan to fight terrorism, including Al Qaeda and Taliban in Afghanistan and Pakistan

      (2006-2008) Proposes careful drawdown of troops from Iraq as means of relieving overextended “voluntary” military and providing for contingencies, including difficulties in Afghanistan/Pakistan

      (2007-2008) Proposes to shift forces from Iraq to Afghanistan immediately upon taking office, to meet urgent need for more troops there

      (2008) Proposes intensive diplomacy with allies in Europe and Middle East to encourage greater contribution by others to military and economic efforts in Iraq, Afghanistan and Pakistan

Diplomacy
    John F. Kennedy:


    Lyndon B. Johnson:


    Richard M. Nixon:

      (1969-1974) Continues negotiations with Soviet enemy without preconditions

      (1972) Begins talks with “Red” Chinese without preconditions, which world hails as breakthrough in diplomacy and Nixon’s greatest foreign-policy achievement

      (1972) Begins first round of Strategic Arms Limitations Talks (SALT I) and achieves Ballistic Missile Treaty

      (1972) Begins Salt II Talks immediately after success of SALT I

    Gerald R. Ford: (1974-1976) Continues SALT II talks with Soviet enemy and normalization discussions with China without preconditions

    Jimmy Carter:

      (1976-1980) Continues negotiations with Soviet enemy and China without preconditions

      (1976) Normalizes diplomatic relations with China

      (1977-1978) After intensive involvement in personal diplomacy, secures Camp David Accords, which achieve peace between Israel and Egypt and provide framework for all subsequent diplomatic effort to resolve Israeli-Palestinian dispute

      (1979) Achieves SALT II agreement which, though never ratified, sufficiently reflected both sides’ strategic interests that both sides adhered to it as if ratified

      (1979-1980) Talks with Iran after Islamic revolution without preconditions and secures release of American hostages without war or loss of any hostage

    George Herbert Walker Bush: (1991) Talks with Saddam’s Iraq before, during and after Gulf War to set conditions for Iraq’s withdrawal from Kuwait and for arms inspections under UN auspices

    Bill Clinton:

      (1994) Negotiates with North Korea without preconditions and achieves agreement freezing nuclear enrichment

      (1993-1995) Negotiates with Serbia, without preconditions, including during NATO bombing of Serbian troops

      (1995-1997) Normalizes relations with former enemy Vietnam and establishes embassy there

      (1995-2000) Assists Great Britain in talking with terrorist organization (Irish Republican Army) without preconditions; talks later produce peaceful resolution of decades-long conflict in Northern Ireland

    George W. Bush:

      (2001-2003) Refuses to talk with Hezbollah, Hamas, Iran, North Korea or Syria without preconditions

      (2002) Identifies Iran and North Korea as members of “axis of evil”

      (2003) Cuts short diplomacy and arms inspections to invade Iraq

      (2004–2008) Begins multilateral talks with North Korea and makes progress on nuclear disarmament

      (2008) Makes low-level unofficial contact with Iran in third-party talks

      (2008, October 12) Takes North Korea off list of state sponsors of terrorism in exchange for its dismantling its main nuclear weapons site under limited verification program

    John McCain:

      (2003-2006) Supports George W. Bush’s identification of Iran and North Korea as “axis of evil”

      (2006-2008) Throughout presidential campaign, insists on policy of refusing to negotiate with adversaries without preconditions

    Barack Obama:

      (2007) Observes that “[n]ot talking doesn’t make us look tough, it makes us look arrogant”

      (2007-2008): Proposes talks with adversaries, including Iran, North Korea and Syria, without preconditions but with proper preparation

Decorum and Self-Restraint
    John McCain:

      (2007) In public forum, jokingly sings “Bomb, Bomb Iran”

      (2007) When a questioner complains about staying in Iraq for fifty years, cavalierly replies “Make it 100”

      (2008) In general election debates, calls opponent “naïve” and “dangerous” and claims opponent “doesn’t understand” disputed issues

    Barack Obama: (2007-2008) In primary and general election campaigns, uses no language stronger than “inaccurate” and “not true” to describe opponents’ claims and positions; refrains from negative comments on opponents’ character, abilities or motivation

Openness in Foreign Policy
    John McCain:

      (2004-2006): Fights mismanagement of War in Iraq and calls for Rumsfeld’s removal behind scenes, in secret

      (2008) In presidential debate, insists that our intentions to fight Al Qaeda and Taliban inside Pakistan, and not just our strategy and tactics, remain secret

    Barack Obama:

      (2007, August): Makes public comprehensive strategic plan to fight Al Qaeda and Taliban, including strikes against bin Laden inside Pakistan

      (2007) Recommends that U.S. support democracy in Pakistan and reduce support for dictator Musharraf

      (2008) While leaving military option vis-à-vis Iran “on the table,” avoids discussing preparation for war with Iran as “inappropriate” for one of two presidential candidates

Understanding of Economics
    John McCain:

      (1980-1982) Supports Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 and Garn-St Germain Depository Institutions Act of 1982, which set stage for savings-and-loan meltdown by allowing savings-and-loan companies to compete with commercial banks, encouraging them to take on imprudent risk

      (1982-1988) Continues to push for deregulation as savings-and-loan crises arises and deepens, eventually costing taxpayers $ 124.6 billion

      (1987-1990): Intervenes in regulatory process on behalf of Charles Keating—a campaign contributor and savings-and-loan executive who later served jail time for fraud and became symbol of savings-and-loan crisis—and is criticized by Senate for “poor judgment”

      (1999) Votes for Gramm-Leach-Bliley Act, which deregulates financial industry by (among other things) repealing Depression-era prohibition against combining commercial and investment banking

      (2000) Votes for omnibus bill containing Commodities Futures Modernization Act of 2000, whose “Enron loophole” encourages unregulated trading in energy that led to Enron’s collapse and energy crisis of 2001

      (2007, March) Appoints former Texas senator Phil Gramm, co-author of Gramm-Leach-Bliley and prime mover of Commodities Futures Modernization Act of 2000, as campaign co-chairman and principal economic advisor

      (2007) Admits that the “issue of economics is not something I’ve understood as well as I should”

      (2008, January) When asked what qualities he would seek in a running mate, replies, “Uh, maybe I shouldn’t say this, but, somebody who’s really well grounded in economics"

      (2008, July) Fires Phil Gramm after Gramm calls stalled economy a “mental recession,” disdains people complaining of economic hardship as a “nation of whiners,” and repeats those comments the next day

      (2008, August) Appoints as his running mate Governor Sarah Palin of Alaska, a person with no economic training, experience or expertise

      (2008, September 15) After Wall-Street meltdown begins, insists that “the fundamentals of our economy are strong”

      (2008, September) After supporting deregulation all his life, calls for better regulation of financial markets and for firing SEC Chairman for lax market oversight

      (2008, October) Less than four weeks before presidential election, proposes government buy-up and renegotiation of troubled mortgages, without details or specifics

    Barack Obama:

      (2007): proposes health-care plan based on market incentives, limited government subsidies and competition

      Barack Obama (2008): proposes mortgage-crisis solutions, including regulation of subprime lending and financial markets, and subsidies and other relief for suffering homeowners, but no price controls

Economic Advisors
    John McCain:

      For decades and until recently, Phil Gramm

      Carly Fiorina, the failed and fired ex-CEO of Hewlett Packard, whose education was in medieval history, philosophy and business

      Douglas Holz-Eakin, former head of the Congressional Budget Office and former chief economist for the president’s Council of Economic Advisors under the junior and elder President Bush, respectively

    Barack Obama:

      Robert Rubin, former Secretary of the Treasury under President Clinton, first director of the National Economic Council, and former Co-Chairman of Goldman Sachs

      Lawrence Summers, former Secretary of the Treasury under President Clinton, former president of Harvard University, and winner of the John Bates Clark Medal for outstanding research in macroeconomics (the theory of regional and national economies)

      Donna Shalala, President of the University of Miami, former Secretary of Health and Human Services under President Clinton, and professor of political economy, now at the University of Miami, formerly at Columbia University, the City University of New York, and the University of Wisconsin

      Robert Reich, former Secretary of Labor under President Clinton, recipient of the Vaclav Havel Foundation Prize for pioneering work in economic and social throught, and professor of public policy at the University of California, Berkeley

      Jason Grumet, Founder and President of the Bipartisan Policy Center and director of the National Commission on Energy Policy since 2001

Energy Policy
    John McCain:

      (1996-2007) Over more than a decade, consistently votes against start-up subsidies for alternative and renewable energy and underestimates their enormous potential

      (2007-2008) Makes “Drill here, Drill Now!” the centerpiece of his energy campaign, although experts concur that new drilling will produce no new oil for at least seven years and will have negligible, if any, effect on gas prices later

      (2007-2008) Late in presidential campaign, offers verbal support for renewable energy, after drilling for oil, nuclear energy, and so-called “clean coal” (a nonexistent technology that is a goal of future research).

      (2008) Calls for 45 new nuclear power plants and “all of the above” approach, without emphasis or priority, except for drilling

      (2008) Proposes $ 300 million prize to encourage development of good batteries—one path to energy independence

    Barack Obama:

      (2007-2008) Makes renewable, carbon-neutral energy (wind, solar, tides, and biofuels) centerpiece of his energy policy

      (2008) After renewables, supports so-called “clean coal” (a nonexistent technology that is a goal of future research), drilling for domestic oil and nuclear energy

      (2008) Calls for $15 billion annual investment, for ten years, in research and start-up subsidies for modern energy technology, including good batteries

      (2008) Supports legislation that permits new drilling as part of comprehensive plan, including subsidies for renewable energy; legislation passes as part of recent financial rescue act

      (2008) Calls for eliminating oil imports from Middle East in ten years

Health Care
    John McCain:

      (2008) Proposes [subscription required] taxing all employer-provided health benefits as income and providing a $2,500 per individual and $5,000 per family tax credit ( as compared to $12,000 annual cost of good family health-care plans)

      (2008) Proposes [subscription required] to pay for tax credits by cutting Medicare and Medicaid by 1.3 trillion over ten years

      (2008) Proposes changing federal law to eliminate state-by-state consumer protection, including minimum requirements for insurance and coverage of pre-existing conditions

    Barack Obama:

      (2007-2008) While praising efficiency and effectiveness of government-run Medicare, proposes continuing existing system of private insurance, with subsidies for the poor and regulation to force coverage of pre-existing conditions and prohibit insuring only healthy people

      (2007) Proposes comprehensive steps to: (1) reduce costs through reinsurance for catastrophic events; (2) require public disclosure of providers’ quality ratings and medical errors, (3) jump-start use of electronic records, (4) permit group bargaining with insurance and drug companies and (5) force competition among insurance and drug companies

Education and Training
    John McCain:

      (1954-58) Is nearly expelled from the Naval Academy at Annapolis for insubordination, fighting, partying and breaking rules

      (1958) On graduation ranks 894 out of 899 in his class

      (1974) Attends National War College, military’s elite school to groom officers for command

    Barack Obama:

      (1988-1991) Attends and graduates from Harvard Law School

      (1990) Is elected president of the Harvard Law Review, our nation’s oldest and most prestigious legal journal, becoming first African-American to achieve that honor

      (1991-2003) Spends twelve years teaching constitutional law part time at the University of Chicago School of Law, one of the nation’s top three schools in that field, consistently receiving outstanding evaluations from his students

      (2007) Is described as “certainly the most all-around impressive student I had seen in decades,” by Professor Laurence Tribe, one of the nation’s top constitutional scholars and Supreme Court attorneys, for whom Obama served as a research assistant

Bipartisan Initiatives
    John McCain:

      (2001-2002) Co-authors Bipartisan Campaign Reform Act of 2002 (McCain-Feingold Act), most recent and most ambitious legislation to reform campaign financing

      (2005) With Joe Libermann (then D., Conn., now I., Conn.), co-sponsors bipartisan energy-independence legislation, emphasizing coal and nuclear power, which does not pass

      (2005-2006) With Ted Kennedy (D., Mass.) co-sponsors comprehensive immigration reform, which does not pass

    Barack Obama:

      (2004) Receives praise from leaders of both parties for keynote speech on national unity at Democratic National Convention

      (2006) Analyzes historical and social reasons for excessive partisanship, and how to correct it, in second book, The Audacity of Hope

      (2006-2007) Co-sponsors and pushes to strengthen successful bipartisan reform of Senate’s ethical rules and procedure, curtailing gifts and free travel from contributors and lobbyists

Work Experience
    John McCain: after serving as fighter pilot in Navy (including 5.5 years as prisoner of war), enters politics; serves 4 years in U.S. House and 22 years in U.S. Senate—a total of 26 years in Congress; has no executive experience in private or public sector

    Barack Obama: runs successful organizing effort in Chicago; as civil rights lawyer, represents ordinary people abused by system; teaches constitutional law at University of Chicago part-time for 12 years; serves 8 years as state Senator in Illinois and 4 years as U.S. Senator—a total of 12 years in elective office; has no executive experience in private or public sector

Notable Books
    John McCain:

      With Mark Salter, Faith of My Fathers, an account of McCain’s military family background, troubled naval education, military service and suffering as prisoner of war

      With Mark Salter, Worth the Fighting For, an autobiographical account of McCain’s political career and beliefs, from his return as former POW to his losing 2000 campaign

    Barack Obama:


Money and Politics
    John McCain:

      (1980) Marries woman with a fortune now estimated between $ 37 and 53 million, ruling out personal venal motives

      (1990) Is criticized by Senate ethics committee for “poor judgment” for intervening in regulatory process on behalf of friend and campaign contributor (Charles Keating) who became symbol of savings-and-loan crisis and later went to jail for his part in it

      (2000-2005) Rick Davis, McCain’s current campaign manager, receives $ 2 million as head of coalition lobbying for lax regulation of Freddie Mac (then a quasi-federal mortgage lender, now nationalized and at the heart of our mortgage meltdown)

      (2002) McCain co-leads Senate push for campaign finance reform that produces McCain-Feingold Act

      (2003-2004) Mark Buse, now chief of McCain’s senate staff, gets $460,000 lobbying for lax regulation for Freddie Mac

      (2006) McCain pushes for stricter capital-reserve requirements for Freddie Mac and Fannie Mae, which are adopted

      (2007-2008) McCain accepts federal campaign financing, with limits on direct campaign spending but no limits on spending by party or unaffiliated political-action committees (PACs)

    Barack Obama:

      (2007) Earns $ 3.9 million in royalties on books, ruling out personal venal motives

      (2007) Instructs campaign not to accept money from lobbyists or PACs

      (2008, June) As presumptive nominee, instructs Democratic party not to accept money from lobbyists or PACs


Footnote: As this article [subscription required] explains, the effect of any mortgage buy-up depends on the details, which McCain had failed to clarify as of October 9, 2008.

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