The Candidates and the Asian Century
By Richard HalloranSometimes people from outside the United States have views of American elections that are, at the least, different those of Americans and, more often, illuminating.
So it was this week with Kim Beazley, Australia's onetime defense minister, deputy prime minister, and leader of the Labor Party now in power under Prime Minister Kevin Rudd. Beazley said that Senator John McCain, the Republican candidate for president, and Senator Barack Obama, his Democratic opponent, might use similar words on US foreign policy but "the underlying premises and approaches might not be exactly the same."
In an address at the East-West Center, Beazley asserted that McCain's view "is an extension in the new era of essentially the Cold War approach. That approach was about building structures to advance Western interests and contain potential military and ideological threats."
In contrast, Beazley told a luncheon audience at the research and educational center in Honolulu, "Obama is the first presidential candidate free of intellectual involvement in that world [of the Cold War]." Beazley, who spoke before the scheduled McCain-Obama debate on foreign policy, suggested that Obama was problem-oriented, identifying an issue, then engaging partners to find a solution.
For Australia, long an ally of the US, the distinction was important, Beazley said. "Australia wants the US to extend priority to engaging the challenges by what is undoubtedly the Asian century," he said. A McCain presidency would accept Australia for the ally it has been. An Obama presidency would require Australia to work harder to demonstrate its relevance to resolving problems.
Beazley, a jovial, outgoing politician who was careful not to take sides in the American election, said both candidates gave priority to the struggle with Islamic fundamentalist terror. Moreover, "the new president will confront massive fiscal issues," regardless of who is elected and that may require that budgets for defense capabilities be cut.
Beazley was in Honolulu for the Australian American Leadership Dialogue, an off-the-record gathering of political leaders, defense and foreign policy specialists, and scholars who advocate close relations between the two nations. He is slated to become chancellor of Australia National University in January.
"Both candidates have said things about the Australian relationship we couldn't fault," Beazley said. In foreign policy objectives, he said, they "have reached toward the views being put forward by elder statesmen such as George Schultz, Henry Kissinger, William Perry and Senator Nunn." Schultz and Kissinger were Republican secretaries of state, William Perry a Democratic secretary of defense, and Sam Nunn a leading Democratic authority on defense.
Beazley contended, however, that Secretary of Defense Robert Gates had recently set "a subtle new direction" in security posture that McCain or Obama would inherit as president. "The strategic dynamic of the Asia-Pacific region is being driven by the ways in which the previously dominant power, the US, and the rising powers of China, India, and Japan are educating each other," Beazley said.
The Australian said he was fascinated by Gates's claim that the US has become a "resident power" in the western Pacific. He quoted Gates as saying "there is sovereign American territory in the western Pacific from the Aleutian Islands all the way down to Guam," the island 1800 miles east of China, a potential rival of the US in that region.
Officers at the US Pacific Command's headquarters in Honolulu said senior Chinese naval officers have told Admiral Timothy Keating, the Pacific Commander, that they planned to build aircraft carriers in the near future. When those warships are ready for sea duty, the Chinese said, perhaps the US should withdraw to the eastern Pacific while China patrolled the western Pacific.
Keating, the officers said, politely but firmly responded that the US would not retire from the western Pacific.
Beazley did little to conceal an Australian fear, one shared by most American allies in Asia and the Pacific, that the new administration in Washington would turn its back on them in favor of Europe and the Middle East. "It behooves Australia," Beazley said, "to devote particular intellectual effort to ensure that the increasing value of the alliance to its partner is not unnecessarily diminished."
He took heart in that "McCain and Obama are men of the Pacific." Beazley noted that Senator Obama was born in Hawaii and spent his childhood here and in Indonesia. For Senator McCain, "Hawaii was a staging point for the toughest conceivable crucible of an education in the region's affairs as a fighter and prisoner of war in Vietnam."
Bailout Negotiations Enter Evening Session
Progress in Talks Creates Optimistic Mood; A Phone Call to Warren Buffett
COREY BOLES
WASHINGTON -- The idea of charging large financial firms fees to set up an industry-funded rescue insurance fund was gaining momentum as key House and Senate negotiators continued to meet Saturday evening to iron out the final details of a $700 billion rescue package for Wall Street.
Lawmakers and staff reconvened their meeting around 7:30 p.m. EDT in the offices of House Speaker Nancy Pelosi (D., Calif.), hopeful they could broker a deal on the much anticipated but exceedingly difficult-to-negotiate legislation that would have the federal government buy up billions of dollars of soured assets.
![[Sen. Charles Schumer, left, Sen. Max Baucus and Sen. Jack Reed take a short break during ongoing negotiations on Capitol Hill on Saturday.]](http://s.wsj.net/public/resources/images/OB-CK612_bailou_D_20080927205621.jpg)
Associated PressSen. Charles Schumer, left, Sen. Max Baucus and Sen. Jack Reed take a short break during ongoing negotiations on Capitol Hill Saturday.
The mood was said to be "optimistic" entering the evening talks, according to a Senate aide familiar with the talks, after policymakers -- including Treasury Secretary Henry Paulson -- made progress during an afternoon negotiating session. Staff predicted a long night of negotiations, however, an observation backed up by the delivery of food from sandwich shop Cosi to Ms. Pelosi's office just before 8 p.m. EDT.
Congressional negotiators have been consulting with outside experts including billionaire investor Warren Buffett amid a focus on market reaction to the plan.
"We've had Warren Buffett on the phone tonight, other experts that we've been consulting," Sen. Kent Conrad (D., N.D.) told reporters as he walked through the U.S. Capitol. He declined to identify other people with whom lawmakers have consulted.
Senate Majority Leader Harry Reid (D., Nev.), in an appearance on the Senate floor earlier Saturday, said there are only a "handful of issues still lingering" for lawmakers to finalize. He said his goal was for the Congress and the Bush administration to at the very least release an outline of the bailout plan before Asian markets open Sunday evening.
The Senate aide said a number of specific ideas appeared to be gaining traction Saturday evening, most notably the concept of creating a "financial stability" fund financed by Wall Street and styled in the mold of the deposit insurance program run by the Federal Deposit Insurance Corp. Lawmakers had considered levying a tax on some securities transactions to help offset the cost of the $700 billion rescue plan, but the idea of assessing fees on a wide swath of financial firms to help pay for current and future government bailouts had its proponents.
The aide said specific language was still being worked out, but that negotiators were deliberating whether to assess the fees on all types of financial firms -- including possibly hedge funds and other nontraditional institutions -- and whether to put the fund in place now or in the future depending on the eventual cost to taxpayers from the current rescue plan. The fees and the fund would likely only apply to larger firms over a certain asset size.
A draft of the financial stability fund language suggest it would apply to financial firms, "the failure of which would result in direct pecuniary losses to the Federal Government, due to reliance upon Federal loans, advances, or other provisions of financial instruments or securities."
![[bailout]](http://s.wsj.net/public/resources/images/OB-CK611_gregg_D_20080927135502.jpg)
Associated PressSenate Republican Leader Mitch McConnell and Sen. Judd Gregg speak on the financial crisis Saturday.
Also gaining steam was a proposal to eliminate the tax deductions for companies on executive compensation for top officers that is above $400,000. Eliminating so-called "golden parachutes" and excessive executive pay-outs for firms that sell toxic assets to the government has been a key issue for lawmakers on both sides of the aisle in their deliberations with the Treasury Department.
Lawmakers were also said to be making headway on their insistence that the government receive mandatory warrants in firms that sell directly or auction their bad assets to the government.
"We're just shopping language right now and it's going back to have some lawyers look at the latest offer," said Mr. Conrad (D., N.D.), the chair of the Senate Budget Committee, as he was heading back into the evening session.
One issue still to be resolved was how the $700 billion authority to Treasury to buy up toxic assets will be meted out.
Lawmakers want Treasury to receive the authority in tranches, receiving $250 billion immediately and another $100 billion if needed as certified by the president. The remaining $350 billion would be subject to a Congressional vote, giving lawmakers the opportunity to vote to rescind the funds.
But a Senate aide familiar with the discussions said Treasury is pushing for a larger initial authority, likely around $500 billion.
Lawmakers appeared to have the advantage on the issue ahead of the evening talks, the Senate aide said, though no part of the deal had been completely finalized.
Congressional and Treasury staff members have been trying to resolve the various issues related to the Wall Street bailout plan all week, and staff discussions lasted all day Friday and extended into the wee hours of Saturday morning to no avail.
Rep. Roy Blunt (R., Mo.), one of the negotiators, said that progress was being made but he wouldn't discuss specifics.
The bailout negotiations took a step forward Friday, when Senate Democrats agreed to include an insurance-based scheme as an option as part of the Wall Street bailout package in a bid to win support of House Republicans, who have been the main obstacle to reaching an agreement.
Sen. Charles Schumer (D., N.Y.) said that while Democrats would allow the insurance idea to be included, he didn't think that any financial firms would choose to take part in such a scheme. "I offered on behalf of Sens. (Christopher) Dodd and Reid that we would put their proposal in as an option," said Mr. Schumer. "No one would have to use it, but it would be there as an option."
According to lawmakers on both sides of the aisle, the plan proposed by Mr. Paulson, which would see the federal government buy up to $700 billion in toxic mortgage-linked assets, will form the core of any solution.
Sen. Judd Gregg (R., N.H.), one of the lawmakers taking part in the talks to thrash out an agreement, said Saturday morning that the negotiators would stay in the meeting until an agreement is reached. "The basic understanding is once we get into that room we are going to stay there until we have an agreement," he said.
Senate Minority Leader Mitch McConnell (R., Ky.) said he hoped that if a deal could be reached Sunday, then lawmakers could vote on it Monday.
Initially there were to be four lawmakers -- one representing each party in both houses of Congress at the talks. They were Messrs. Gregg and Dodd in the Senate and Reps. Barney Frank (D., Mass.) and Blunt in the House. Mr. Frank is the chairman of the House Financial Services Committee, Mr. Blunt is the Minority Whip, while Mr. Dodd is the chairman of the Senate Banking Committee hearing, and Mr. Gregg is the ranking member on the Senate budget panel.
But they were joined by several other senior Democrats, and there are as of late Saturday nine Democrats in the room compared with just the two Congressional Republicans, and Paulson.
After an apparent agreement was announced by lawmakers Thursday, House Republicans threw a wrench into the process by saying they would not support the deal, proposing instead their own alternative plan.
That plan would be based around the idea of an industry-funded insurance pool to provide certainty to the markets, rather than a taxpayer-funded scheme.
Mr. Conrad, the chairman of the Senate Budget Committee, said the insurance proposal had come up earlier in the negotiations, but that Treasury and the Federal Reserve rejected it.
Mr. Schumer said it could end up bankrupting firms, given the premiums would be so high.
House Republicans appeared to be conceding the point that the insurance scheme wouldn't replace the asset purchase plan as they had previously insisted.
The Republicans' priority is "making sure there is an insurance program in there in the tool kit of the secretary," said Rep. Adam Putnam of Florida, the chairman of the Republican House Conference.
Welcome To The Socialist States Of America
It's an outrage that cannot be denied. The government will save those reckless, greedy gangster bankers that walked away with hundreds of millions of dollars, and stick it to the little guy who will bear the burden for years to come. Sacrifice the many at the altar of the few, and do it now! Immediately! It's an emergency that if we don't act NOW the world as we know it will come to an end. Well,hello--WAKE UP AMERICA! Where is the outrage? Where are the perp walks? We are about to turn over 700 million ( likely over 1 BILLION) dollars of our hard-earned money to people that appear to be unable to punch their way out of paper bags. The same people that got us into this mess are not going to get us out of it. If you believe that, I have a couple of bridges to sell you.
The lame stream media will tell you that this is good for you, that the government will protect you and take care of you and save you from yourself. For this privilege of having the hen house guarded by the foxes---you will pay. You will pay something and you might get back part of it. How totally ridiculous is that anyway?
For those who have not followed The Big Rollover thesis that Nick Russo and I have been presenting since 2005, you have just been hit upside the head with a very sharp object and concussion is the least of your worries.
King Henry Will Run the United States of America as Dictator - If you think you're hearing the truth in the media, think again. The fact is, King Henry is demanding complete control and he can never be questioned or prosecuted for anything he does. Here is a section direct from his proposal . . .
Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
The king is dead. Long live the king!
Check out the 2 hour seminar I gave yesterday ( link below!)
It is not too late to save yourself and every bit of money you have worked for your entire life. Do not listen to the mainstream media, Bill Gross, Warren Buffett or anyone with the agenda to line their pockets at the expense of yours.
Listen to Ron Paul and the voices of reason for free market capitalism.
America’s bail-out plan
The doctors' bill
The chairman of the Federal Reserve and the treasury secretary give Congress a gloomy prognosis for the economy, and propose a drastic remedy
AMERICAN congressmen are used to hyperbole, but they were left speechless by the dire scenario Ben Bernanke, the chairman of the Federal Reserve, painted for them on the night of September 18th. He “told us that our American economy’s arteries, our financial system, is clogged, and if we don’t act, the patient will surely suffer a heart attack, maybe next week, maybe in six months, but it will happen,” according to Charles Schumer, a Democratic senator from New York. Mr Schumer’s interpretation: failure to act would cause “a depression”.
Mr Bernanke and Hank Paulson, the treasury secretary, had met congressional leaders to argue that ad hoc responses to the continuing financial crisis like that week’s bail-out of American International Group (AIG), a huge insurer, were no longer sufficient. By the weekend Mr Paulson had asked for authority to own up to $700 billion in mortgage-related assets. By the time The Economist went to press, Congress and Mr Paulson appeared to have agreed on the broad outlines of what is being called the Troubled Asset Relief Programme, or TARP.
However, passage was not assured as rank-and-file congressmen, in particular Republicans, balked. Uncertainty over the outcome rattled credit markets: three-month interbank rates jumped and Treasury yields fell on September 24th. In a prime-time address that evening to rally support, George Bush warned of bank failures, plummeting house values and millions of lost jobs if Congress did not act.
Both the crisis and the authorities’ response have been called the most sweeping since the Depression. Yet the differences from that era are more notable than the similarities to it. From the stockmarket crash of 1929 to the federally declared bank holiday that marked its bottom, three and a half years elapsed, and unemployment reached 25%. This crisis has been under way for a little over a year and unemployment is just over 6%, lower even than in the wake of the last, mild recession. More than 4% of mortgages are now seriously delinquent (see chart 1), but the figure topped 40% in 1934.
The scale of the American authorities’ response reflects both the violence with which this crisis has spread, and the determination of the American authorities, most importantly Mr Bernanke, to learn from the mistakes that made the Depression so deep and long.
In responding with such speed and vigour, they run several risks. One is that they overdo it, paying far too much for assets, sending the deficit into the stratosphere and triggering a run on the dollar. The risk of underdoing it may be even greater. Politicians, determined not to be seen as doing favours for Wall Street, might blunt the programme’s effect in the name of protecting the taxpayer. Then there’s the logistical nightmare of fixing a market whose very complexity is central to the crisis.
Experience, at home and abroad, is a poor guide. In past episodes authorities have typically not committed public money to their financial systems until bank failures and insolvency have become widespread. The first wave of savings-and-loan failures came in the early 1980s; the Resolution Trust Corporation was not created to dispose of their assets until 1989. Japan’s banks began to fail in 1991, but a mechanism for taking over large, insolvent banks was not set up until 1998. Mr Paulson and Mr Bernanke are attempting to prevent the crisis from reaching that stage. “The firms we’re dealing with now are not necessarily failing, but they are contracting, they are deleveraging,” Mr Bernanke told Congress. They are unable to raise capital and are refusing to lend, and that, he said, is squeezing the economy.
One risk with such a pre-emptive bail-out is that to congressmen the benefits are hypothetical whereas the fiscal and political costs, five weeks before an election, are all too real. In polls voters waver between opposition and support depending on how the question is asked.
In spite of these risks, the odds seem to be in favour of both political passage and success. America has owned up to its mistakes with exceptional speed, and pulled out the stops to correct them.
After the crisis first broke in August last year, the Fed pursued a two-pronged strategy. The first element was to lower interest rates to cushion the economy. The second was to use its balance sheet to help commercial and investment banks finance their holdings of hard-to-value securities and avoid fire-sales of assets. Behind this approach lay the belief that the economy and the financial system were basically solid. Yes, too many houses had been built and prices were too high, but a return to more normal levels would be manageable if stretched over a few years. And banks in aggregate had entered the crisis in good shape, with much more capital this June than in 1990. The Fed saw their problem essentially as illiquidity, not insolvency. The Bush administration broadly shared this diagnosis—and an aversion to using public money to help overextended borrowers.
The intensification of the crisis came not from the banks but the “shadow banking system”: the finance companies, investment banks, off-balance-sheet vehicles, government-sponsored enterprises and hedge funds that fuelled the credit boom, aided by less regulation and more leverage than commercial banks. As home prices fell and loan losses mounted, more of the shadow system became insolvent.
Insolvency cannot be cured with more loans, no matter how easy the terms. It requires more capital, which in deep crises only the government can provide. Mr Bernanke’s groundbreaking paper on the Depression, published in 1983, noted that recovery began in 1933 with large infusions of federal cash into institutions, through the Reconstruction Finance Corporation, and households, through the Home Owners’ Loan Corporation. They were, he wrote, “the only major New Deal programme which successfully promoted economic recovery.”
A month ago Mr Bernanke and his closest aides began to think something similar might now be needed. The Fed and the Treasury had already drawn up contingency plans, thinking it would be months before a need arose. Then the financial hurricane blew up over the weekend of September 13th and 14th. That is when Mr Paulson, Mr Bernanke and Tim Geithner, president of the Federal Reserve Bank of New York, decided not to commit any public money to a bail-out of Lehman Brothers. They reasoned, wrongly, that the financial system was adequately prepared. The company’s failure, coupled with the near-bankruptcy of AIG, threw the safety of all financial institutions into doubt, causing their stocks to plunge and borrowing costs to soar.
Several money-market funds that held Lehman debt reported negative returns, sparking a flight of cash to the safety of Treasury bills that briefly pushed their yields close to zero. On September 18th companies could no longer issue commercial paper. Banks, anticipating huge demands from companies seeking funds, began hoarding cash, sending the federal funds rate as high as 6%. That week, no investment-grade bonds were issued, for the first time (holidays aside) since 1981.
Conceivably, the Fed could have contained the damage by supplying lots of cash. But that would have meant ever greater and more creative use of its balance sheet. By September 17th it had grown to $1 trillion, up by 10% in a fortnight, with most of it tied up in loans to banks, investment banks, foreign central banks, AIG and Bear Stearns (see chart 2). It was becoming the lender of first resort, not last.
Such steps were also courting political risk. After the rescue of AIG, Nancy Pelosi, speaker of the House of Representatives, demanded, “Why does one person have the right to grant $85 billion in a bail-out [to AIG] without the scrutiny and transparency the American people deserve?” Mr Bernanke later acknowledged that the Fed wanted to get out of crisis management, for which it lacked authority and broad support. “We prefer to get back to monetary policy, which is our function, our key mission,” he told Congress this week.
The Fed chairman told Mr Paulson on September 17th that the time had come to call for a big injection of public money. By the next day Mr Paulson was in agreement and the two men, after getting Mr Bush’s approval, approached Capitol Hill.
Mr Paulson’s first proposal left Democrats cold: it would give the Treasury virtually unchecked authority for two years to spend up to $700 billion on mortgage assets or anything else necessary to stabilise the system. It looked like a power-grab. Democrats countered with several conditions: troubled mortgages would be modified where possible to keep homeowners in their homes; an oversight board would watch over the programme; taxpayers would share any gains for participating companies via shares or warrants; and executives’ compensation would be capped. By September 24th, Mr Paulson seemed to be bending to all these conditions. For its part, the finance industry is ready to yield to all of these conditions in order to get something done. “It was a gargantuan abyss that we faced last week,” says Steve Bartlett, chairman of the Financial Services Roundtable, which represents about 100 big financial firms.
Assuming it comes into existence, there are still numerous risks surrounding the TARP. The first is that it does too much. At $700 billion, the amount allocated to it easily exceeds the Federal Deposit Insurance Corporation’s (FDIC) estimate of roughly $500 billion of residential mortgages seriously delinquent in June, out of a total of $10.6 trillion, though that figure will rise. The Treasury has sought broad authority to buy not just mortgage securities but anything related to them, such as credit derivatives, and if necessary equity in companies weakened by their bad loans.
The arithmetic of crisis
When the loans to AIG and Bear Stearns assets are added in, the gross public backing so far approaches 6% of GDP, well above the 3.7% of the savings-and-loan bail-out in the late 1980s and early 1990s (see chart 3). That would still be much less than the average cost of resolving banking crises around the world in the past three decades, which a study by Luc Laeven and Fabian Valencia, of the IMF, puts at 16%. One reason why bail-outs, especially in emerging markets, have been so costly is inadequate safeguards against abuse, says Gerard Caprio, an economist at Williams College. “There was a lot of outright looting going on.”
The Congressional Budget Office had pegged next year’s federal budget deficit at more than $400 billion, or 3% of GDP. Private estimates top $600 billion. Tack on $700 billion and various other crisis-related outlays and the total could reach 10% of GDP, notes JPMorgan Chase, a level last seen in the second world war. On September 22nd the euro made its largest-ever advance against the dollar on worries that America might one day inflate its way out of those debts. Such fears are compounded by the expansion of the Fed’s balance sheet. Some even think that the burden of repairing a broken financial system could place the dollar’s status as the world’s leading reserve currency in jeopardy.
The consequences will probably not be so far-reaching. The true cost to taxpayers is unlikely to be anywhere near $700 billion, because many of the acquired mortgages will be repaid. The expansion of the Fed’s balance sheet reflects a fear-induced demand for cash, which drove the federal funds rate above the 2% target.
It is more likely that the programme will not go far enough. Conscious of the public’s deep antipathy to anything that smacks of favours for Wall Street, politicians from both parties have insisted that the protection of the taxpayer be paramount. Yet the point of bail-outs is to socialise losses that are clogging the financial system. If taxpayers are completely insulated from losses, the bail-out will probably be ineffective. “The ultimate taxpayer protection will be the market stability provided,” Mr Paulson argues.
This is especially critical in deciding how the government will set the price for the assets it purchases. An impaired mortgage security might yield 65 cents on the dollar if held to maturity. But because the market is so illiquid and suspicion about mortgage values so high, it might fetch just 35 cents in the market today. Recapitalising banks would mean paying as close to 65 cents as possible. Those that valued them at less on their books could mark them up, boosting their capital. On the other hand, minimising taxpayer losses would dictate that the government seek to pay only 35 cents. But this would provide little benefit to the selling banks, and those that carried them at higher values on their books could see their capital further impaired.
To some, that would be fine. “If they choose to fail rather than sell their debt at its real market value and record the loss on the books, they should be free to take that option,” said Michael Enzi, a Republican senator from Wyoming. The failure of smaller regional banks may be tolerable. The FDIC offers a proven system for coping with failed entities (although it too may need a loan from the taxpayer) and other banks are keen to snap up their deposits. But the final result of big-bank failures would be a deeper crisis and a bigger cost in lost economic output.
Similarly, requiring participating banks to give the government warrants or cap their executives’ salaries might make them less willing to take part. Veterans of the emerging-markets crises of the 1990s say their effectiveness would have been crippled had their ability instantly to deploy cash as they saw fit been compromised. “There is far more risk that the authorities will have too little flexibility…than there is risk that they will have too much authority,” says Lawrence Summers, a former treasury secretary.
A more serious criticism is that buying assets is an inefficient way to recapitalise the banking system. Better, many argue, to inject cash directly into weakened banks. A dollar of new equity could support $10 in assets, reducing the pressure to deleverage. Moreover, since the price of banks’ shares are less arbitrary and more homogeneous than those of illiquid mortgage securities, the process would be far more transparent, says Doug Elmendorf of the Brookings Institution. But banks might not volunteer to sell equity to the government before they reach death’s door; and the prospect of share dilution could discourage private investors. In any event, the Treasury plan could be flexible enough to permit such capital injections.
But will it work?
Time to mend the marketThere have been several false dawns since the crisis began in August of last year. This could be another. The TARP may address the root cause, namely house prices and mortgage defaults, but the crisis has long since mutated. “The same underlying phenomenon that we saw in housing we’re seeing in auto loans, in credit-card loans and student loans,” says Eric Mindich, head of Eton Park Capital Management, a hedge fund. The crisis could claim another institution before the TARP’s effect is felt.
The TARP could conceivably slow the resolution of the crisis by stopping property prices and home ownership falling to sustainable levels. Some homeowners who are up-to-date with payments but whose home is worth less than their mortgage may stop paying, betting the federal government will be a more forgiving creditor. The Treasury is considering using the TARP to write down mortgages to levels that squeezed homeowners can afford. But in the meantime, buyers might be reluctant to step in while a big inventory of government-owned property hangs over the market. That’s one reason Japan’s many efforts to bail out its banks failed to revitalise its economy: the institutions that took over the loans were hesitant to dispose of them for fear of pushing insolvent borrowers into bankruptcy, says Takeo Hoshi of the University of California at San Diego.
All the same, the TARP is likely to mark a turning-point. “It promises to break the vicious circle of deleveraging in the mortgage market,” predicts Jan Hatzius, an economist at Goldman Sachs. This does not mean the economy will soon rebound, but it does suggest the worst scenarios will be averted. If the TARP helps banks and investors establish reliable prices for mortgage securities, it could restart lending and help bring the housing crisis to an end.
This will not come without a price. The unprecedented intrusion of the federal government into the capital markets seems certain to be accompanied by a heavier regulatory hand, something on which both Barack Obama and John McCain now agree.
Even without new rules, more of the system will be regulated because so much of it has been absorbed by banks, which are closely overseen. Sheila Bair, chairman of the FDIC, thinks this is a good thing. Banks were relative pillars of stability because of their insured deposits and the regulation that accompanied it. Although some banks have failed, she notes that other banks, not taxpayers, will pay the clean-up costs. Now that institutions like money-market funds are caught by the federal safety net even though that was never intended, they can expect to pay for it.
Yet predictions of a sea change towards more invasive government are premature. The Depression witnessed a pervasive expansion of the federal government into numerous walks of life, from trucking and railways to farming, out of a broadly shared belief that capitalism had failed utterly. If Mr Paulson and Mr Bernanke have prevented a Depression-like collapse in economic output with their actions these past two weeks, then they may also have prevented a Depression-like backlash against the free market.
Presidential debate
Honours even
A sharp first debate between Barack Obama and John McCain
ON THE the morning of Friday September 26th it was still not clear that the first presidential debate of this election would happen. But it did, and it was a barn-burner. John McCain, the Republican candidate, had threatened to skip it to work on getting Congress to pass a deal to tackle the financial crisis. Eventually he agreed to make his way to Mississippi.
Such debates are often remembered more for gaffes—linguistic mistakes or physical tics—than for their substance. This time the performances were without blemishes. Barack Obama, in contrast to his halting performances in the Democratic primaries, was focused and direct. Mr McCain was pugnacious, as he had been in his own primaries. He suggested that Mr Obama had confused the meaning of strategy and tactics. He also accused Mr Obama of making “unpresidential” comments (the Democrat had said that he would order attacks on terrorist targets in Pakistan, if the Pakistanis themselves would not). Mr Obama, in turn, pointed out that his opponent had joked about bombing Iran and had threatened not to talk to Spain.
On substance the two men gave as good as they got. The debate was supposed to be about foreign policy, but for the first 30 minutes the focus was on the economy. Neither man offered anything of great significance on the subject. Instead, each reverted to old talking points about the economy more broadly, avoiding the market crisis. Both love Main Street and oppose greedy Wall Street, it seems. To some effect Mr McCain spoke about his longstanding opposition to wasteful spending. Mr Obama, also with some success, talked of his tax plan which heavily favours the middle class.
Once the two were brought to foreign policy the discussion heated up. Only one candidate made real news: Mr McCain said at one point that he would “sit down with anybody.” This was in reference to the question of when to talk to leaders of countries opposed to America, specifically Iran. There ensued a back-and-forth discussion about “preconditions” versus “preparations” before talks with Iran. Mr Obama has largely endorsed the idea of talking to Tehran; Mr McCain usually disdains the approach. Mr McCain said scornfully that Mr Obama would answer threats by Iran to destroy Israel with mere words. Mr Obama responded that five secretaries of state, of both parties and including Henry Kissinger, a McCain adviser, have endorsed the idea of talking to Iran without preconditions.
On Iraq, the two resorted to well-worn talking points. Mr McCain pointed to Mr Obama’s opposition to “the surge”, saying that nothing would make the Democrat acknowledge that things had improved in Iraq. Mr Obama restated his original opposition to the war, repeatedly saying “you were wrong” when referring to Mr McCain’s judgments on Iraq. Neither man obviously had the upper hand on this issue. Americans now think it was wrong to go into Iraq, but they do not want to see the war lost.
The biggest difference between the two men was in the tone that each used. Mr McCain repeatedly offered some version of the phrase “Senator Obama doesn’t understand”. He presumably hoped to emphasise that Mr Obama lacks foreign-policy experience. He may have scored points by criticising Russia while emphasising his longstanding support for Georgia. But he sometimes seemed to sneer. Mr Obama, although he sharpened his tone from the Democratic debates, was the calmer of the two. When he felt criticised unfairly, he would often smile. He gently needled Mr McCain but he did not savagely lay into his opponent. Mr Obama is an articulate advocate of his foreign-policy views, in command of detail. That he avoided any gaffes may have been enough to reassure many voters. But foreign policy is generally considered a strength for the more experienced Mr McCain.
Round One
The first Presidential debate last night was notable for playing to type. Neither candidate broke from talking points, neither one made a gaffe, and both men won on the grounds where they are most comfortable -- John McCain on foreign policy, and Barack Obama on domestic issues.
The debate took place amid the backdrop of the financial crisis, and perhaps most disappointing was how neither man seemed to have anything useful to say about it. Mr. Obama played his familiar tune about deregulation being the root cause of it all, and both men dared to denounce "greed" and promise to protect the taxpayers. Then each veered into their favorite economic themes of spending restraint for the Republican, and eight years of "trickle down" for Mr. Obama.
![[Round One]](http://s.wsj.net/public/resources/images/OB-CK559_oj_3de_DV_20080926234056.jpg)
APWhat neither man showed was any real insight about our financial market issues, or any political courage in offering a solution. Perhaps this is rooted in the traditional calculation not to make a mistake in a close race. But if Americans were looking for guidance on how we got here and where to go from here, they didn't find it last night. The current, and much-maligned, occupant of the White House did much better on Wednesday night on that score.
As planned by the commission on debates, most of the night was devoted to foreign policy and there we give the clear edge to Mr. McCain. This is the ground where the 72-year-old is most comfortable, and you could see it in his self-confidence, as well as his command of history and facts. He showed it too in the specificity of his answers, notably on Russia: Watch Ukraine, he said, and "the Crimea," because Vladimir Putin's Georgian expedition is a prelude to Russian adventurism there.
By contrast, Mr. Obama was well briefed, but almost in the way a Ph.D. candidate gives his dissertation defense. He knew the subject but without the conviction or detail that comes from wide experience. One surprise: Mr. Obama declared that both Georgia and Ukraine should get an immediate action plan to enter NATO. This is welcome as a policy matter, though we have our doubts how much this conviction would hold up in an Obama Administration as Mr. Putin growled and made trouble for the U.S. in Iran and Eastern Europe.
Every Presidential race is a decision on Commander in Chief, and this election more than most. Americans will have to decide if they can trust Mr. Obama's assertions that he'd combine a desire for diplomacy with toughness when it counts. Our own sense is that Mr. Obama sometimes seemed flustered by Mr. McCain's attacks on his foreign policy "naivete," in particular on Iraq and his failure to support the "surge."
The Democrat tried to turn the Iraq debate back to the original decision to go to war in 2002, and that will play well with those who are decidedly antiwar. We doubt it will play with voters who want to make sure we don't squander the gains of the last year.
Where Mr. Obama did score better was on the domestic front, where he tried repeatedly to link Mr. McCain to President Bush and to what he called a failed "economic philosophy." We don't agree with most of his ideas, but amid the current economic unease Mr. McCain is going to have to do much better than falling back repeatedly on spending cuts. Voters want fiscal discipline, but they also have a certain deserved skepticism that anyone can restrain Leviathan.
What they really want to know is who has a plan for renewed prosperity. Mr. McCain needs a better response to Mr. Obama's attack on his tax and health care policies, as well as a riposte to the Democrat's claim that he'll cut taxes for 95% of Americans. We look forward to Round Two.
TALKING ABOUT BAIL OUTSMEXICO 1995
DR. ERNESTO ZEDILLO
PRESIDENT OF MEXICO
LOS PINOS, MEXICO, DF
MR. PRESIDENT, SELL PEMEX “NOW”
RICARDO VALENZUELA
LIBERTY AMERICAS FOUNDATION
MARCH, 1996
Mexico is at the greatest and most dangerous crossroads of its history. The political problems have disgorged an economic depression without precedent that is, as well, about to annihilate the spirit of the Mexicans, the soul of the nation. Beginning with the devaluation in December 1994, the country’s GNP has shrunk ridiculously, beyond description, the per capita income has fallen to the level of the 50’s, and the poverty level is indescribable.
Mexico is in this serious situation without the participation of the average
The global financial markets are currently adjusting and accommodating a great number of New participants. The international monetary market is, basically, under great pressure due to the increase in commerce among the countries of the world, in this digital universe, in this New market without barriers. Mexico will not be able to successfully face the New challenges on the horizon of the almost-present Twenty First Century, if courageous and responsible decisions are not taken to solve its problem. Mexico requires aggressive, daring, bold and responsible solutions. Mexico requires a Marshall Plan such as the one that lifted Europe from its deathbed after the Second World War.
What our country does not need is the socialist, keynesian, anti market shock treatments prescribed by the IMF, much less the prescriptions of the political parties that would return to our nationalistic and revolutionary past and which got the country in the mess we have been living for the past 25 years. The core structure of our country is mortally injured and only the intrepid actions of honest and visionary leaders can save it. Private enterprise and the structure of the country is slowly expiring and with it the faith, hope and the future of Mexicans.
Mexican enterprise is agonizing because of the distorted and disfigured
Mexico needs a general recovery plan, Mexico needs a "New Deal", but using the experience derived from the history of the US, it must not be Keynesian, statist, or paternalistic, much less should it be nationalist or revolutionary, because we already know that, it does not work and the best proof of its failure is the totally dependent and unproductive social layer in the US and Mexico.
Mexico needs a New Deal but with market overtones or true promotion of
The business problem is a financial one, from this derive the greatest number of the country’s misfortunes; unemployment, poverty, bankruptcies, lack of faith and mistrust among citizens, loss of security with an increase of criminal activities, massive emigration caused by lack of opportunity, capital flight, and general despair.
The time has come that we, as Mexicans, find and implement a solution to the problems of our country through the effort of the civil society and not continue depending on the decisions of a centralist government that has
Although our proposal to the civil society is very specific with reference to
Mexico needs to start a serious process of deregulation of the economy, a true liberalization. Mexico needs to continue its process of privatizing state enterprises that have not yet been put up for sale such as Federal Commission of Electricity, Railroads, and, very specially, conclude the true privatizing of the ejido (community land own by the government) to make it finally productive. A drastic and total reform of our Federal Labor Law is required that will really allow development without affecting the worker, and more importantly, we need to reform our constitution, we don’t need a socialistic constitution any more, a constitution which design the State as the rector of the economy and do not protect private property. Finally, we need to reform our very corrupt judicial system.
PEMEX ranks tenth among the world’s business, but it is also one of the most inefficient, and above all, one of the greatest sources of corruption in the country. The government has resisted any type of reform of this monopoly for political reasons and, in a subliminal way, has identified it for Mexicans as a symbol of our national sovereignty as well as the most important achievement of the already monotonous Mexican revolution. Every year we Mexicans celebrate the expropriation of the oil industry, without realizing that that is the cause of its demise.
Nevertheless, only through privatizing can the problems of corruption, inefficiency and the enormous losses that are affecting it be resolved. If, in the coming years, large investments in exploration and modernization are not made, this monopoly will not be able to satisfy the increased internal demand of the next five years. This means that Mexico, among the leading countries in the world with proven oil reserves, will become an importer by the year 2,005. The country is already importing close to three billion dollars of refined products, natural gas and gasoline.
Despite the fact that PEMEX has become, in the eyes of the Mexicans, a symbol of our sovereignty, it is currently developing a process to obtain foreign capital on the order of 20 billion dollars, which leads us to think of the irony of the situation: "Our national symbol of sovereignty requires foreign capital to survive". This is one of the sources of the country’s debt that has
trapped and asphyxiated it during the past 20 years and converted Mexico in the greatest debtor country in the international capital markets of the world (170 billion dollars), and now our “political leaders” want to ad 70 billions to that already monstrous debt with the FOBAPROA project.
I, as a Mexican concerned for my country, propose to the civil society of Mexico and to the international community for their support, a plan to raise it from its convalescent bed:
1. The sale and privatizing of the assets of PEMEX, with an appraised value of more than 150 billion dollars, through a clear and transparent auction in full view of the world and in which nationals and foreigners can participate; should take place with the same plan applied by Argentina: on Wall Street, through a public offering on the international financial markets.
2. The creation of the Mexican Reconstruction and Promotion Bank, contributing those 150 billion dollars as capital for the institution, controlling the flow of that money using one of the foremost international accounting firms and an audit committee comprising prominent and representative members of the civil society, businessmen, workers, community and religious leaders, etc.
3. The creation of a Board of Directors and a management team for the Bank with honest, professional and apolitical individuals with the responsibility to administer the institution with clear and measurable objectives; to save the Mexican economy, that must perform their tasks with a clear plan and in full view of the nation. This team must include the participation of the best individuals in the world, without reference to their nationality, simply in their professional capacity and their honor — including controversial individuals such as Mike Millken, Domingo Cavallo, Pedro Aspe, Warren Buffet Luis Pazos, Alan Greespan, Art Laffer and the like.
4. All Mexican businesses would issue bonds for the full amount of their debt for terms up to 30 years, these would be purchased by the Reconstruction and Promotion Bank at the current prices, thus consolidating the business debt that is currently estimated at 70 billion dollars. The Mexican Banks would thus be freed from this problem and, above all, be totally free to initiate the true promotion of New projects.
5. The bonds issued for the all of Mexican businesses would yield an interest of Libor +1 and would have a five year grace period for capital payment and, in cases that justify it, the grace period could be extended.
6. Part of the consolidation for businesses that, because of their precarious situation require it, could take place through an infusion of risk capital (equity) represented by convertible stock, redeemable in a reasonable period, providing the alternative for the owners to rebuy or convert to debt the original equity contributed.
7. Reduce the income tax to 20% and in this way energize the recovery of
8. Negotiate with Canada and the US the immediate and total abolition of taxes and tariffs in trilateral commerce, formalizing not a Free Trade Agreement, but rather a Common Market among the three countries, similar to the European model in which free immigration is included and, in this way, relieve the potential problem so feared by the US as a detonator of inflation, the pressures in the labor market because of full employment of its economy.
9. With a part of the 150 billion dollars derived from the privatization of
10. Use this paper to liquidate the business debt with the Mexican Banks
11. Use the remainder of the 150 billion dollars to recapitalize the Mexican
12. Upon the conclusion of the process, sell (liquidate) the Bank portfolio in the International secondary Capital Markets, including the already recapitalized Mexican Banks, and having freed (purchased) its assets, it would have enough resources to compete and invest, with the ability to offer products similar to those offered by the international Banks, but above all, it would provide a situation of extreme liquidity to resolve the financial problem of individuals and support New productive activities that definitively would be generated with this New plan. With the capital out of the sale of the portfolio of the new Bank, proceed to liquidate the whole foreign debt of the country.
13. Promote with US and Canada the establishment of a common monetary system based on the dollar that, in turn, must be backed totally with a gold reserves and would definitively end the speculative market, inflation, devaluation, manipulation of interest rates, etc. Managed as a second alternative, establish a monetary management plan similar to Argentina with the creation of a Currency Board and a strong tie to the dollar.
To implement this program, we need in Mexico a very brave leader, we need a real patriot and bold man as the next president. We need that man to became president in the year 2000.
PD. This plan can also work for the USA selling the land that the government own in the west of the country. (90% of the land)
Lawmakers Burn Midnight Oil in Bailout Deal Talks
WASHINGTON — Congressional leaders worked well into the night Friday trying to quickly hammer out a deal on a massive economic bailout plan by the time markets open on Monday.
Negotiators broke past midnight without an agreement. The House is scheduled to be in session at 10 a.m. Saturday, but action on the bailout plan is expected to be focused on the Senate side, where the bipartisan, bicameral negotiations are taking place.
The lawmakers say they're making progress and hope to reach an agreement over the weekend on the $700 billion government bailout to rescue Wall Street bankers from the bad loans that threaten to derail the economy and send it into a deep and long depression.
In a sign of movement, House Republicans dispatched their second-ranking leader, Rep. Roy Blunt of Missouri, to join the talks after their objections to an emerging compromise had brought negotiations to a standstill.
Negotiators were pushing for a deal before Asian markets open Monday.
"I'm convinced that by Sunday we will have an agreement that people can understand on this bill," said Massachusetts Rep. Barney Frank, a key Democrat in eight days of up-and-down talks designed to stave off an economic disaster.
House Speaker Nancy Pelosi added that "progress is being made," although Friday came and went without senior lawmakers from both parties sitting down together. Talks were to resume Saturday.
Neither she nor Frank divulged details at a late-afternoon news conference in the Capitol, though there was word of a large Democratic concession.
Pelosi told fellow Democrats during a closed-door meeting that the idea of letting judges rewrite mortgages to help bankrupt homeowners avoid foreclosure won't be a part of the emergency legislation. That provision would be a deal-breaker for Republicans whose votes are needed to pass the measure, she said, according to lawmakers at the meeting.
Democrats and Bush administration officials also said they were willing to include House Republicans' idea of having the government insure distressed mortgages — but only as an option, rather than a replacement for the administration's more sweeping approach.
Democratic and Republican staff aides met into the night on Capitol Hill, going line by line through legislative proposals in an attempt to clear the way for lawmakers to bargain over the weekend.
The major party presidential contenders — Republican John McCain and Democrat Barack Obama — agreed during their debate Friday that Congress must act soon.
Meanwhile, new details emerged of a remarkably tumultuous White House meeting on Thursday. With the session breaking up in disarray, according to two participants, President Bush issued an appeal, saying, "Can't we just all go out and say things are OK?" The group around the table, congressional leaders as well as McCain and Obama, spurned the presidential request for a publicly united front.
Earlier in the White House meeting, Democrats peppered House Republican leader John Boehner of Ohio with questions about the details of an alternative he was backing. "I don't know what the hell they are," Bush said at one point," recalled one person who was in the room. All the participants spoke on condition of anonymity, saying the meeting was private.
The legislation the White House is promoting would allow the government to buy bad mortgages and other sour assets held by investors, most of them financial companies. That should make those companies more inclined to lend and lift a major weight off the national economy that is already sputtering.
But a significant number of lawmakers, including many House conservatives, say they're against such heavy federal intervention. Under the GOP plan, the government would insure the distressed securities rather than buy them. Tax breaks would provide additional incentives to invest.
In an Associated Press-Knowledge Networks poll, only 30 percent of those surveyed expressed support for Bush's package. Forty-five percent were opposed, with 25 percent undecided. The survey was conducted Thursday and had a margin of error or plus or minus 3.8 percentage points.
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