Obama getting the best of anti-American rulers
BY ANDRES OPPENHEIMER
President Barack Obama has already scored his first major victory against anti-American demagogues worldwide. He has put them on the defensive by the sheer power of his popularity in their own countries.
Even before he sat down at the Oval Office for his first work day on Wednesday, Obama's significant popularity in Latin America and other parts of the world has given him a head start over what he described in his inaugural address as ``those leaders around the world who seek to sow conflict or blame their society's ills on the West.''
In many countries, Obama has a more positive image than that of the local head of state.
That has put many anti-American leaders -- Venezuela's narcissist-Leninist President Hugo Chávez among them -- in the awkward position of having to tone down their daily tirade of epithets against the United States or risk being out of touch with their own people.
While we will have to wait a few days to see the first polls showing Obama's post-inauguration popularity abroad, there are indications that it's huge. Consider:
• A BBC World Service poll of 17,356 people in 17 nations released on Obama's inauguration day shows that 67 percent expressed optimism that Obama's presidency will lead to better relations with the rest of the world.
This amounts to a 21 percentage-point increase over the number of people who expressed that same optimism when a similar poll was conducted six months ago. ''Familiarity with Obama seems to be breeding hope,'' said Steven Kull, director of the Program on International Policy Attitudes, which conducted the poll.
• In Mexico, 76 percent of those polled by the daily Excelsior earlier this month believe things will go better with Obama. The telephone survey conducted by the BGC polling firm showed that 78 percent of those interviewed consider Obama a ''trustful'' person, 75 percent describe him as ''somebody who is close to the people,'' 74 percent as ''admirable'' and 86 percent as ``intelligent.''
• While there are no recent polls on Obama's popularity in Venezuela, pollsters there say it's likely to be higher than that of Chávez.
Oscar Shemel, head of the Hinterlaces polling firm, told me in a telephone interview from Caracas that judging from previous polls on what Venezuelans would consider the ideal leader, ``Obama fits the mold perfectly.''
He said that ''people here are yearning for somebody who is conciliatory, who comes from the bottom and who extends his hand to everybody.'' He added, ``Chávez has a 47 percent positive image. I wouldn't be surprised if Obama scores the same, or higher.''
So it shouldn't come as a big surprise to anybody that Chávez, despite being criticized by Obama in an interview earlier this week, showed uncharacteristic restraint in his comments about the new U.S. president.
While cautioning that ''nobody can have high expectations because we are dealing with the North American empire,'' Chávez expressed his hope that Obama's arrival ``will mark a real change in U.S. relations with Third World countries.''
Bolivia's Chávez-backed President Evo Morales, who recently expelled the U.S. ambassador and blames Washington for almost everything you can imagine, said: ``For the first time in the United States, a black brother has democratically won an election. I feel that the whole world will change.''
Argentina's President Cristina Fernández de Kirchner, a Chávez ally who was on an official visit to Cuba on the day of Obama's inauguration, spoke positively about Obama's inaugural speech, which she said confirmed the ''good expectations'' about the new U.S. president.
''Cristina Kirchner may be thinking, with good reason, that a picture with [former President George W.] Bush would have caused her to lose votes at home, but it has now become evident that one with Obama would get her additional votes,'' political analyst Rosendo Fraga wrote in Argentina's daily La Nación.
My opinion: Obama won the first round in his looming battle with authoritarian rulers in Latin America and around the world.
And I would bet that -- as the polls in coming weeks begin to reflect the impact of his magnificent inaugural speech's warning to autocrats that ''your people will judge you on what you can build, not what you destroy'' -- his star abroad will rise even higher.
Departure puts end to Reagan era
BY CARLOS ALBERTO MONTANER
www.firmaspress.com
George W. Bush leaves office with a high level of popular disapproval. Americans think that he's basically a good man but a failed president. They might be right in both assessments.
Of the three basic responsibilities a president assumes in liberal democracies -- to protect citizens' lives, liberty and property -- the third one was a noisy failure for Bush. During his term, public spending shot up irresponsibly, capped by the greatest destruction of capital since the 1929 Crash.
While none of that would have happened without the complicity of a mostly Democratic Congress (at least in recent time), the so-called ''judgment of history'' is passed on the president, not on the legislative apparatus.
In his brief farewell speech, Bush clung to his greatest success: preventing another terrorist attack like the one on Sept. 11, 2001. Actually, that's no small feat. It seems that the U.S. security forces discovered and dismantled several serious attempts at sabotage and terrorist acts plotted by al Qaeda, but even those police triumphs were costly, in terms of civil rights. The government even was forced to defend its claimed right to wring confessions from detainees through water-boarding torture.
Traditionally, the water torture -- perfected and regulated by the Spanish Inquisition -- consisted of immobilizing the prisoner face up on a wooden board, inserting a cloth in his mouth and pouring water on his face incessantly, thus provoking a continuing and panicking sensation of asphyxia. Usually, the accused confessed to anything, so long as the torture ceased.
In Guantánamo and other detention centers, interrogators probably used a simpler but equally sinister procedure. They aimed a constant stream of water at the nostrils, or pushed the prisoner's head into a pail full of water. Fortunately, Obama's government has stated that it will put an end to that atrocious method of questioning detainees.
What is the legacy of the Bush administration? In my judgment, something that never went through his head when he assumed the presidency: he leaves the country psychologically prepared to adopt the model of a European state, with increasing quotas of state intervention, which will be inevitably reflected in greater fiscal pressure and a loss of dynamism.
More and more Americans desire to enjoy a public and universal system of healthcare, even if it is mediocre. And more Americans prefer to count exclusively on retirement funds managed by the state rather than submit themselves to the market's vagaries.
Somehow, and at least for now, Bush's departure marks the end of the Ronald Reagan era and the discourse of a reduced government and the supremacy of civilian society. Suddenly, Republicans and Democrats, conservatives and liberals, agree to try to palliate the economic crisis through the injection of a torrent of money and a boundless increase in public spending.
From the ''supply-side economics'' postulated by the theoreticians of Reaganism and sustained during Clinton's two terms, we have returned to the ''demand economics'' and the Keynesian idea (a profoundly pernicious one) that the state's budget is the right instrument to prevent recessive cycles and stimulate employment.
Few if any voices are heard in defense of savings, of balanced budgets and the state's neutrality in the face of economic competence. Almost everyone applauds when money is taken from taxpayers to save enterprises that the consumers reject -- as happened in the United States with the great automotive industry -- and the available resources are arbitrarily reassigned, thus harming other productive sectors. And nobody is shocked when the printing presses work overtime to churn out bills, because they assume that some of those bills will drift their way.
Bush never imagined that his legacy was the transformation of The American Dream. With Obama, The European Dream begins on this side of the Atlantic.
The Drug Capitals Of America
Nathan Vardi,Persistent narcotics problems continue to plague American cities both large and small.
It may not be surprising that well-known urban centers like New Orleans, Baltimore, and San Francisco appear on the Forbes list of cities dealing with the worst drug problems in the nation. But some smaller communities are also facing epic battles with drugs, including tiny Española, N.M.
Española is a small city in rural Rio Arriba county, north of Santa Fe. Its population of roughly 10,000 includes a large Hispanic community, relies largely on Los Alamos National Lab for employment and struggles with a high poverty rate. This is the U.S. city that consistently ranks among the top in the nation in drug overdoses, according to federal statistics. It is tough to find another American city that records 42.5 drug-related deaths per 100,000, compared with a national average of 7.3.
Heroin is the drug of choice in Española, and local health groups are at a loss to explain the high rate of overdoses despite a longstanding public health effort. In 2001, New Mexico started distributing Narcan, a drug used to reverse the effects of overdose, and bolstered the program in 2007 by giving out Narcan nasal spray instead of needles. Also in 2007, the state passed a law granting immunity from prosecution for people in possession of illegal drugs if they call 911 to seek help for an overdose or take someone to a hospital.
"We are trying to tackle this on a number of fronts," says Deborah Busemeyer of the New Mexico Health Department. "It is certainly concerning that some of our counties are harder-hit than others."
Drug use continues to ravage cities across the nation, and for the last few years, has remained steady--with 8% of the population reporting using drugs, says the Substance Abuse & Mental Health Services Administration, a federal agency. A Zogby/Inter-American Dialogue Survey released in October 2008 shows three-fourths of Americans think the nation is losing its war on drugs.
There have been some successes, which John Walters, the U.S. drug czar under former President George W. Bush, liked to highlight, such as the decline in youth drug use during the Bush administration. Additionally, the price of a pure gram of cocaine has skyrocketed while purity has dropped.
But certain areas of the country continue to see huge drug problems for reasons that sometimes confound those trying to dam the tide. "There are different drug-use rates among the population," says John Carnevale, a public-policy consultant who served three presidents at the White House Office of National Drug Control Policy. "Some communities do get impacted more--sometimes because of location; it could be local economies; it could be all kind of things. I wish we really knew the answer, and maybe we could have a more effective strategy."
There has been little research on geographic drug-use patterns and effects in America. One of the last important federally funded studies of this sort, the Arrestee Drug Abuse Monitoring program, had its cash cut off and ceased operation. To figure out which American cities have been hit hardest by illegal drug use and trafficking, Forbes looked at available federal data and spoke with public health and law enforcement officials across the nation.
The longstanding effort to reduce the nation's drug problem would be better served if geographic drug-use patterns were better understood, says David M. Kennedy, director of the Center for Crime Prevention and Control at the John Jay College of Criminal Justice in New York. "There is no shortage of examples of weird outliers," says Kennedy. "It's not that there is one particular place that is strangely off-center, the fact is that if you look at patterns of drug use, that is a routine finding."
Some of the statistics are indeed surprising. For example, Missoula, Mont., had the highest rate of illicit drug use, according to the Substance Abuse & Mental Health Services Administration's most recent household survey. SAMHSA says averages taken in 2004, 2005 and 2006 showed 13.8% of households polled in the Missoula region reported using illicit drugs in the prior 30-day period.
Montana has been fighting a methamphetamine epidemic that accounts for 50% of the state's adult incarcerations, says the Montana Meth Project, a Missoula-based nonprofit group founded by billionaire Thomas Siebel.
Missoula's meth problem remains robust, according to local law enforcement, but cocaine and marijuana are big contributors to the overall drug problem. "Drug use and the procurement of drugs and sales impacts all of our [areas of] work here, including thefts and burglaries," says Lt. Steve Brester of the Missoula Police Department, who also runs the region's High Intensity Drug Trafficking Area program. "It's pervasive in terms of how it effects all of our department."
Even in major urban centers wrestling with drug problems, the patterns are elusive to many public-policy specialists. What could be more confusing than the situations in Baltimore and Washington D.C., two neighboring cities with longstanding but very different drug problems?
Washington D.C., had 75 cocaine overdoses in 2006, and one-third of adult arrestees tested positive for cocaine as of September 2008, according to data obtained by Erin Artigiani, deputy director for the Center For Substance Abuse Research at the University of Maryland, College Park.
The Drug Enforcement Administration reports that "cocaine and crack are the most significant drug problems in Washington, D.C." And SAMHSA reports that at 5.22%, Washington, D.C.'s 2nd Ward had the highest rate of cocaine use of any area it polled in the nation.
But just 40 miles away in Baltimore, the problem, for years, has been heroin. Public-policy pros remain baffled that the heroin problem never receded in Baltimore like it did in most other big American cities. There were 184 heroin-related overdoses in Baltimore in 2006, reports Artigiani. "Baltimore is home to higher numbers of heroin addicts and [incidents of] heroin-related crime than almost any other city in the nation," says the DEA.
There are the extremely tragic situations, like the current drug problem in New Orleans, where crack is prevalent. Drug dealers were among the first to filter in to New Orleans after Hurricane Katrina, joining some who never left at all. The result: bloody turf wars that have produced the highest murder rate in the country.
At 95 murders per 100,000 people, New Orleans led the nation in killings by a wide margin in 2007. The figures may be skewed by the city's fluid population numbers, and murders did decrease in 2008, but the link between the rampant violence and drugs is clear. "The violence rate is just astronomical because of the drug markets," says Eloise Dunlap, principal investigator for the National Development & Research Institutes, who has studied post-Katrina New Orleans drug markets. "It's just so sad."
One President, Two Nations
There are 'two Americas' -- one that watched the inauguration with hope, the other with skepticism.
John Edwards was right when he spoke about there being "two Americas." The way Edwards framed it, there was an America of "haves" and an America of "have-nots." My version is a bit different. There is an America that watched with hope and excitement as Barack Obama took the oath of office to become the 44th president of the United States. And there is an America that watched with dread and skepticism.
In the first and much larger group, there are many people who have a deep appreciation for the historic nature of Obama's presidency and a sense that he is the right person for the job and will do well. A subset of this group is so worried about the nation's economic problems that they hope Obama succeeds even though they didn't vote for him.
The second group is profoundly pessimistic. Because of his race and education, Obama is very different from any of their friends, neighbors, or co-workers. The people in this group are deeply suspicious of his motives. Some are afraid that he will dismantle our nation's military and leave America vulnerable. Others fear he will tax away everything they worked hard to accumulate. It's not exactly that they want Obama to fail but more that they feel they have little reason to believe that he will succeed in a way that helps them personally. Voters in this group rarely support a Democrat for president, but their pessimism about this particular Democratic president is especially acute. I doubt that Obama will ever be able to win these people over. The bigger question is whether they will ever accept him as president.
Poll results over the past week are fascinating and confirm that the first group is substantially larger than the second. Gallup found that 83 percent of Americans approved of the way that Obama handled his transition, compared with 12 percent who disapproved. This favorable rating is significantly higher than those of Presidents-elect Clinton or George W. Bush. In two Gallup Polls taken after Election Day, Obama's approval numbers were 78 percent and 75 percent. Clinton's final pre-inaugural Gallup approval rating was 68 percent; Bush's was 61 percent.
In the recent Gallup Poll, 13 percent rated Obama's Cabinet appointments "outstanding," while 32 percent said they were "above average," and 38 percent said "average." Just 5 percent thought they were "poor." More important, 64 percent expressed confidence in Obama's ability to be a good president, a number that has averaged 66 percent over the past two and a half months. He also has a favorability rating of 78 percent; only 18 percent expressed an unfavorable view.
In the latest NBC News/Wall Street Journal poll, taken before Inauguration Day, the public was deeply pessimistic: 26 percent believe that the country is headed in the right direction, and 59 percent say that it is on the wrong track. However, those results are notably more optimistic than the 12 to 16 percent "right direction" and 73 to 78 percent "wrong track" numbers in the NBC/WSJ surveys taken in September and October. The mood shift is particularly notable, given that the economy has gotten even worse during that period. The same January poll, taken by Democrat Peter Hart and Republican Bill McInturff, showed that 71 percent approved of the way Obama was "handling the transition and his preparations for becoming president." Just 14 percent disapproved. Those numbers were almost identical to December's results.
The NBC/WSJ poll gave respondents a list of seven possible changes in Washington and asked which two they would most like to see realized. Coming in first with 36 percent was "more honesty and integrity in Washington." Tied for second at 29 percent were "more working together by Democrats and Republicans in Washington" and "greater oversight of the financial institutions and business." Just behind with 28 percent was "more transparency and accountability in government." Much lower were "promoting higher moral values" (15 percent) and "improving America's image around the world" (13 percent). In last place at 10 percent was "more racial and religious understanding with a more united country."
Although Americans are clearly clamoring for more unity and bipartisanship in Washington, only 48 percent expect to see it. Almost as many people, 45 percent, think the divisiveness will continue.
WEALTH OF NATIONS
Why Obama Must Be Radical
Rather than splitting the difference between Democrats and Republicans, Obama needs to be bolder than both.
One of the things the country likes best about its new president is his taste for consensus. Barack Obama campaigned as a moderate, open to the views of people who disagree with him. His appointments seem to reflect the same attitude: He has chosen mostly centrists, including many veterans of the Clinton administration, with other viewpoints represented too. In planning his fiscal stimulus, Obama made a point of reaching out to Republicans in Congress. This attitude is widely admired, but one must ask whether Obama's preference for moderation, accommodation, and consensus is what these times require.
The economy's plight is extreme. Bold and unusual remedies are needed. This necessary radicalism, if you want to call it that, is not straightforwardly partisan, to be sure. This is not a matter of listening to one particular faction and ignoring everybody else. But at the same time, you cannot get to the right policy merely by trending to the middle and splitting differences between Democrats and Republicans.
Obama will have to be radical, first, in his approach to the shattered banking system. Despite the vast sums already committed to the effort to rescue banks and other financial institutions, the system is still broken. Lending has not recovered and confidence in the system's integrity is nowhere near restored. Without a well-functioning financial system to provide credit, business investment and consumer spending will stay suppressed, and the economy will revive only slowly, if at all. The first few hundred billion dollars of the Bush administration's Troubled Asset Relief Program were surely not wasted -- they contained the immediate crisis, despite the muddle and the changes of thinking -- but they were insufficient to fix the problem. Spending the second part of TARP in the same fashion, however, is likely to fail as well.
The Obama administration must grit its teeth and look afresh at the problem. The crux of the issue is the reluctance of the banks and the authorities to recognize the full extent of impaired assets. The hope was that asset values had undershot and, given time, would recover -- the perceived task was to hang on, patch and mend, and avoid an outright system-wide collapse in the meantime. Once, you could argue that this approach was worth a try. Now it is time to try something else.
The government must coldly examine the banks' assets and urgently come to a new reckoning. There is more than one way to proceed, but the key thing is that banks must be forced to write down their toxic assets -- not to "fair value," whatever that means, but all the way to what they are now worth in the market. This will make many banks insolvent. The best course then is to nationalize them. Even the ones that stay solvent will likely need the government to supply further new capital in exchange for equity.
The income tax raises comparatively little revenue despite comparatively high rates, a textbook case of bad tax design.
All told, this could be enormously expensive -- another trillion dollars and up -- but at least taxpayers will have paid no more for their resulting ownership of the banks than the institutions are worth. The principal losers will be the banks' previous owners, which is right. This unequivocating clear-out of the banks' balance sheets would create the basis for new lending and a stronger economic recovery.
The Left of the Democratic Party is all for nationalizing the banks (and not just the banks), but it has trouble with the next part of the radical remedy: tax cuts. Many Democrats are opposed to any and all tax cuts, just as many Republicans have suddenly decided that they oppose any and all increases in public spending. This partisan simple-mindedness threatens to delay the new administration's fiscal stimulus, and the economy cannot afford for it to be delayed.
It is most likely true that the first $1 billion of extra public spending on infrastructure will do more to raise demand and employment than the first $1 billion of tax cuts (although Obama's advisers are not entirely certain of the point). But even if you accept that view, the principle of diminishing returns applies: Once you have already commissioned the best infrastructure projects, made unemployment assistance more generous, and spent a lot of money in other intelligent demand-boosting ways, the case for using tax cuts for any additional stimulus gets stronger.
In a package of the size now contemplated -- more than $800 billion over two years -- there is plenty of room for both. And the right kind of tax cuts kick in quickly, faster than spending on infrastructure. The outlook for demand in 2009 and beyond is so poor that a bigger plan is warranted. That makes the case for including some tax cuts stronger still. Rather than splitting the difference between Democrats and Republicans, Obama needs to be bolder than both.
The same is true of the third part of the radical treatment that the economy requires: a plan for fiscal consolidation after this crisis has passed. For the moment, the U.S. government is a creditworthy borrower. In the aggregate, public debt in relation to national income is low by international standards, and foreign investors see lending to the Treasury as a safe investment in troubled times. At some point, though, that will change.
The necessary fiscal response to the economic emergency will cause budget deficits and the public debt to surge. This is part of the cure. It has to be tolerated. To get public borrowing back on a sustainable path, however, and to minimize the risk of a sudden flight from U.S. assets in the meantime, the Obama administration needs to commit itself now to medium-term fiscal restraint. It needs a plan to cut spending and raise taxes once the economy is back on its feet.
As soon as any such plan is suggested, both sides will lodge the usual partisan robo-protests. Democrats will want to raise taxes and leave spending unaddressed. Republicans will want to rely on spending cuts alone. As before, the right policy is bolder than either party advocates: not "split the difference" but "all of the above."
If the administration does the right thing, even many Democrats may complain about the higher taxes. The reason is that the federal income tax -- let alone the part of it that falls on the truly rich -- cannot supply all the needed revenue. Hollowed out by exemptions and deductions since the last big reform in 1986, the income tax raises comparatively little revenue despite comparatively high rates, a textbook case of bad tax design. The idea that reversing the Bush administration's income-tax cuts for the highest-paid will suffice to balance the books is mere fantasy.
Either the base of the income tax will need to be broadened (which will shift more of its burden to the non-rich) or other taxes, falling on a much wider segment of the population, will have to rise. The gas tax is an obvious candidate, assuming that the Obama administration is going to get serious about climate change. Entirely new taxes will most likely be required in addition: an explicit or implicit carbon tax, for instance; perhaps a European-style value-added tax (a national sales tax).
Many Democrats reflexively favor higher taxes because they assume that the burden will fall mainly on the rich. The rich have too much money anyway, they feel, so taking more away makes sense twice over. It makes them less rich (building, in this regard, on the progress of the past year), and the government needs the money. But the costs of retrieving the fiscal situation, not to mention honoring Obama's other promises (including near-universal health care and "affordable college for all"), are going to be far too big for this thin slice of the country to bear.
Here is a confident prediction. By the end of Obama's first term, almost all of us will be paying substantially higher taxes -- or public borrowing will be close to exploding in our faces if it has not done so already.
You have to wonder whether such politically unorthodox radicalism -- a new and bigger bank bailout; a bigger fiscal stimulus than now contemplated; and a believable commitment to future fiscal restraint -- could ever be the product of pragmatism and consensus. At first sight, it does not look like the line of least resistance.
Martin Luther King said that a leader was not a searcher for consensus but a molder of consensus. Before Obama even tries to be a molder, he must decide what he thinks. If he then chooses to be bold, he will have to persuade not only Democrats and Republicans in Congress but, more important, the country at large.
Obama is self-evidently an extraordinary politician, with the makings of a fine president and all the political capital any new leader could ask. The country trusts him and expects great things. The challenge is enormous.
A leaner future for Wall Street bankers
Without wishing to harp on about John Thain’s last-straw decision to accelerate bonus payments at Merrill Lynch, seemingly to get them in under the wire before the new bosses at Bank of America could cavil, it symbolises a huge clash of consciousness.
On one side are politicians, government regulators, commercial bankers such as those at Bank of America and the general public, most of whom are now outraged at the lavish rewards on Wall Street over the past decade. On the other side stand the investment bankers themselves, who would naturally prefer the system to continue much as before.
Any suggestion that Wall Street should curb bonuses was met, before the financial crisis, with two arguments from those at investment banks who were vested in the system:
First, they said there was little alternative but to pay top performers enormous rewards because they were like star football players who could simply leave and get even greater rewards elsewhere if the company did not pay up.
Second, they said that the system of paying out half of all revenues annually in bonuses was deeply entrenched in the partnership culture of Wall Street and was accepted by shareholders, who had done well by investing in these banks.
I think the Merrill Lynch incident is an indication that investment bank chief executives, although they have largely sacrificed their own bonuses for 2008, essentially believe that nothing much will change. They think they will have no alternative but to keep paying up.
I happen to think they are wrong. One reason for this is that I do not think governments are going to stand for it. There is growing indignation at Wall Street firms simultaneously taking taxpayers’ money and continuing to pay billions to their employees.
More powerfully, in the long term, I think the market has changed. Floyd Norris points this morning to an interesting study of high pay on Wall Street, and how it hit peaks in the 1920s and recently. It declined sharply in the 1930s because of falling demand for elite financial skills and, as Floyd points out, there were periods in the post-war years when bankers were not well rewarded at all.
During these periods, of course, the firms in question were partnerships that simply could not pay out a lot to their partners because there was not much money to do it with. But the same effect is likely to kick in at public companies too, exacerbated by the greater public scrutiny of the Wall Street system.
Not only is the bonus pool likely to shrink as a proportion of revenues, but those revenues are also going to be under pressure. That dual effect will have a painful impact on bonuses. Mr Thain’s downfall is one small indication of this.
Mexico man 'dissolved 300 bodies'
 Mr Meza says he "didn't feel anything" when getting rid of the bodies |
A man arrested by Mexican police says he disposed of 300 bodies for a drugs gang over the past decade by dissolving them in chemicals.
Santiago Meza, called the "stew maker", said he was paid $600 (£440) a week to dissolve the bodies of murdered rival gang members in caustic soda.
He was presented to the media by the Mexican army after being arrested on Thursday near the city of Tijuana.
Over 700 people died in the US border city last year in an ongoing drugs war.
The Mexican army says it believes Mr Meza's claims are true.
"They brought me the bodies and I just got rid of them," Mr Meza told journalists at a construction site where he disposed of the bodies over a 10-year period. "I didn't feel anything."
The 300 corpses were said to belong to murdered rivals of Mexican drug kingpin Teodoro Garcia Simental, who is battling for control over drug trafficking routes through Tijuana, after defecting from the powerful Arellano Felix cartel.
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Mexico's drug violence has surged and grown more gruesome in recent years, particularly in the northern border cities of Tijuana and Ciudad Juarez.
Also on Friday, two human heads were found inside coolers near police stations in the central Guanajuato state, officials said. The heads were accompanied by a note threatening allies of the "La Familia" drug cartel.
Drug-related violence claimed 5,700 lives across Mexico last year, more than double the number of victims in 2007.Repeating our economic errors
Steve Chapman
We all know how we got into this economic mess. We spent too much, borrowed with abandon and acted like the bills would never come due. So what's the prescription for getting out? Spending more, borrowing more and acting like the bills will never come due.
When something sounds too good to be true, it usually is. This alleged cure deserves special scrutiny because it invites our policymakers to redouble the very policies that caused the crisis. Congress and the new administration are all too eager to abandon restraint so that we can overcome the consequences of excess.
Take mortgages. The current recession stems from the popping of the real estate bubble, which came about because too much money went into housing. But now the Obama administration and House Democrats are pushing to assure more investment in housing.
They intend to raise the limit on loans that mortgage giants Fannie Mae and Freddie Mac can buy from $417,000 last year to $729,750 in some markets. And James Lockhart, who oversees the two companies as head of the Federal Housing Finance Agency, told the Wall Street Journal they should accept a lower rate of return than in the past in order to help Americans buy homes.
But it's worth remembering where our problems began - with an oversupply of housing. Channeling more funds into the residential sector will encourage more home building, which will worsen the glut, which will push prices down even further and generate more foreclosures, which will deepen the recession.
The sad reality is that the housing sector has gotten too big and will have to shrink. A lot of people who prospered from catering to the inflated demand for housing, from carpenters to real estate agents, will have to find new ways to make a living. That's what the end of a bubble means.
But plenty of people in Washington are nostalgic for the good old days. It's not just in housing. The Treasury and the Federal Reserve had to inject hundreds of billions of dollars to shore up banks battered by loans that went bad - toxic debt, it was called. So we want banks to be more prudent, right? Wrong. Congress is complaining that banks that received federal aid are being overly stingy.
Well, yes. If a lot of your loans go bad, it's a sign you need to exercise more care. That's especially true during a recession, which can wipe out companies that once were profitable. Any bankers who want to keep lending at the rate they did before are asking to become insolvent, and more insolvent banks would drag down the economy.
The economy foundered partly because we were too dependent on debt to finance current consumption, and that was unsustainable. But burning some $825 billion on fiscal stimulus, as President Obama proposes, means more of the same. We will borrow money to prevent a decline in our current standard of living. That money will eventually have to be paid back, which will require a decline in our future standard of living.
One defense of the stimulus package is that it will finance needed investment in infrastructure and other public goods. Unfortunately, government spending is particularly prone to waste because governments, unlike private companies, don't have to worry about going out of business if they spend unwisely.
This round of spending is sure to be even more wasteful than the norm. Why? Because the government is in such a hurry to get it done, making it harder to vet projects properly. So the return on investment will be lower than usual, and maybe negative.
All this federal spending is supposed to stimulate the economy. But plenty of reputable economists are doubtful. And even if the old-fashioned Keynesian approach is sound in theory, it is probably useless in practice. The Congressional Budget Office says only 7 percent of the infrastructure money requested by Mr. Obama will be spent by September. Less than half the highway funds would be spent in the next four years. Most of the outlays will come after they are no longer needed.
But practical realities are no match for our desire to keep living beyond our national means. We spent our way into this mess, and it's too tempting to think we can spend our way out.
Steve Chapman is a nationally syndicated columnist.
Chavez Poses Real Danger
Chavez Poses Real Danger, Authors Say
Doug Schoen and Michael Rowan, both long-time observers of Venezuelan politics, have written a blockbuster expose of the anti-American agenda of that nation’s President Hugo Chavez and warn that his nation should be added to the list of terrorist sponsors .
In their book, “The Threat Closer to Home: Hugo Chavez and the War Against America” (Free Press), the authors make it clear that Chavez poses a real threat to the United States through his country's sponsorship of terrorists.
In an exclusive interview with Newsmax, Schoen explains why this clear and present threat to this nation’s interests and security has largely gone unnoticed.
“Arguments that should have been made a long time ago, and for a variety of reasons — Chavez is a clown, he’s been anti-Bush, is currying favor with a massive PR campaign in the West, particularly among liberals — he's managed to operate under the radar with a lot of his nefarious activities,” Schoen tells Newsmax.
Schoen ominously adds, “He is an avowed supporter of Hamas. He says what Israel is doing is a Holocaust. He says that Hamas is welcome anytime in Caracas. He is training Hezbollah's fighters in Venezuela.
"Just this week, the Turks interdicted a shipment of what they believe were explosives, but were called tractor parts, that were heading from Tehran to Caracas. This is just a random week in the life of Hugo Chavez and look what's going on.”
Newsmax: In the book you stress how Chavez has been able to use huge oil revenues to promote his anti-American agenda. Now that the price of oil has plummeted, won’t this somewhat cripple his efforts?
Schoen: This is a man who first and foremost puts his militaristic and expansionist and aggressive tendencies first. While it's certainly going to hurt him, I think it is only going to make him more authoritarian and aggressive.
He is still buying Russian arms and he is still supporting anti-American interests around the world.
Newsmax: Won't the loss of revenues have an effect on his relationships with his bought-and-paid-for allies?
Schoen: There will be less money available to do that for sure. But I don't think he's going to cut back doing it in any way. For example, this week Chavez was going to cut off low-cost oil to Kennedy's Citizen Energy program in Massachusetts. But he got a little bad press, so he's going to keep doing it because it gives him political cover — and that gets him the Kennedy family supporting his activities.
It's been completely cynical, because it's not as if he had any commitment to poor people in the United States. It is just his way of saying, Look, I can do good things.
Newsmax: Talking about his commitment to poor people, a lot of his own people's loyalty has been bought with his oil revenues. Will not that be affected?
Schoen: I think it will when he substitutes intimidation for blandishments. There have been more than a few opponents of the state who have been either economically hurt or imprisoned. I think that what this means is he is going to just clamp down harder and be more aggressive.
Newsmax: Isn't there a growing opposition to Chavez in Venezuela?
Schoen: There is, and I've worked with it over the years. The problem is that it is not organized. It is not cohesive, and he buys it off, he threatens it, he intimidates it, and he will cheat in counting the votes. A combination of those factors makes it very difficult for an organized coherent opposition to exist.
In the case of the Philippines with Marcos, or Serbia with Milosevic, we worked directly with the opposition . . . We haven’t engaged directly with the opposition in Venezuela, and we should. It's just not an organized and disciplined counterforce to Chavez.
Newsmax: Does he now have complete control over the military, which in the beginning was very much opposed to him?
Schoen: Absolutely. [After Chavez instituted] the referendum on extending term limits two Decembers ago, the military came to him and said, "Hugo, you're not going to steal this one, too." And so they let him say that it was a 51-49 defeat and that he had just narrowly missed. But he didn't narrowly miss. The vote was like 60-40 or 65-35 against him. But the deal he made with the military was, We'll let you appear to have a close vote as long as you back off being president for life.
Newsmax: In short, you don’t think there is any chance he’s going to be overthrown?
Schoen: No. He is going to have another referendum next month on extending term limits. I think he's going to try to cheat if he can get away with it.
Newsmax: How should the United States deal with the Chavez threat?
Schoen: First, I think that Venezuela must be declared a state sponsor of terrorism . . . [Chavez] supports terror, supports Hezbollah, Hamas, has said nice things about al-Qaida, and is in alliance with Iran . . .
We should also break our dependence on foreign oil generally, and particularly, on his oil. And we need to have a Marshall plan for Latin America, where we engaged economically and democratically, with opposition groups who support our values.
Newsmax: What are his connections with Iran?
Schoen: Chavez has made seven trips to Tehran, and [President Mahmoud] Ahmadinejad has made five or six trips to Caracas. There's no reason for those countries to be engaging, other than to oppose the United States.
Newsmax: Given our current economic situation, do you see any possibility he will attempt to further cripple our economy?
Schoen: He's made it very clear he wants to hurt the United States, and one of the practical things he's done is try to get OPEC to cut production so that oil prices could rise. He's also tried to get OPEC off the dollar standard onto a euro standard to undermine the American dollar.
The facts in this case paint a picture of a man who is chillingly and dangerously threatening our interests in many ways. This is a problem of very, very serious proportions that has not been seriously addressed.
Giving Most-Productive Their Due In One-Sided Tax-Burden Debate
By J.T. YOUNG
Class warriors are mobilizing again. The high federal deficit, decreasing revenues, increasing spending and the expiring 2001 tax cuts all can serve them as reasons to raise taxes. With such ample ammunition for class warfare's resumption, the Left will have no problem singling out who should pay these higher taxes.
The rest of us, however, should use this opportunity to re-examine how the tax burden debate has been mischaracterized to the detriment of our most productive workers.
The common perception is that the federal income-tax burden focuses on the upper-income part of the scale, while social insurance taxes — Social Security and Medicare — focus on the lower-income range.
Social insurance, or payroll, taxes are flat-rate assessments on the first dollar earned. There are no deductions or credits to diminish their impact and, in the case of Social Security taxes, they are not assessed beyond a certain earnings threshold ($102,000 in 2008).
The Left argues that, for lower-income earners, payroll taxes neutralize the income tax's progressive nature.
The logical leap from the Left's argument is that lower-income groups shoulder the same disproportionate level of contributing to total payroll tax revenues as upper income groups do to total income-tax revenues — right? Wrong.
As the accompanying table shows, the U.S. is not much less dependent on top earners for funding its social insurance programs than it is for its general revenues.
The bottom 51% of earners have a negative income-tax burden — due to refundable credits such as the earned income credit — but they still only shoulder 13% of total payroll tax revenues. In contrast, the top 49% of earners pay 102.4% of income-tax revenues (making up for refundable credits' cost) but still pay 87% of payroll taxes too.
Judged as a ratio of their population percentage vs. their contribution percentage, the difference grows dramatically up the income scale.
The top 3% of earners pay almost 20 times their population rate in income-tax revenues and over five times their rate in payroll tax revenues. The bottom 51% of earners contribute just one-tenth their population level in combined federal tax revenues.
While social insurance programs are regressive in their taxation, they are progressive in their distribution — low-income contributors receiving a greater relative payout than higher-income contributors do. This is possible only because of the top earners' disproportionate contribution.
Illuminating in its own right, this distributional examination also underscores how one-sided the tax debate has become. Top earners are immediately transformed into "the wealthy" — despite the fact that there is substantial lifetime movement up and down the income scale.
In fact, earning status is an "effect," not a "cause." It results from the worker's contribution. Without output, there is no income — the more the output and the more it is valued, the more the remuneration. Top earners are not only top revenue contributors, they are because they are also our most productive workers.
These are workers who we want producing — and, yes, earning — at their full potential. Again, it is an illusion that paychecks follow positions rather than performance. They do not, simply because they can not. The private sector cannot overcompensate for long, whether willfully or mistakenly, because it cannot afford to. Only a redistributive system can do that.
By allowing the tax debate to be cast in terms of wealth, instead of value-produced, redistributional aims can seem plausible to the misguided but well-intentioned Left.
But if we speak in proper terms of productivity, an increased redistributional goal takes on an entirely different meaning. The effect of shifting resources away from more- to less-productive uses reduces the entire system's output.
No struggling private company shifts resources away from its most productive uses. Yet the public sector routinely and tacitly seeks to do just this.
The policies of class warfare result because we nonwarriors do not understand the extent or the effect of redistributional policies. We neither recognize how pervasive redistribution already is nor what in fact is being redistributed.
In hard times, the emotional reaction is to reallocate all the more. Yet what is truly necessary is to increase productivity as much as possible — and thereby the overall economy — and then allow the private sector to allocate resources according to their best uses. Our tax policy goal should be to minimize the reallocation, not further increase it.
• Young served in the Department of Treasury and the Office of Management and Budget from 2001 to 2004 and as a congressional staff member from 1987 to 2000.
Gitmo & National Security Courts: Poor Law, Poor PR
By David RittgersPresident Obama wasted no time in halting detainee trials before military commissions in Guantanamo. Good. He will soon be confronted with a range of ideas for dealing with the detainees there--including prosecuting them in special "national security courts" that will supposedly offer justice while keeping classified evidence out of the public view.
Obama needs to recognize that establishing such courts is a recipe for both bad law and bad policy. Along with numerous compelling legal arguments, any court outside of existing civilian or military systems only serves to exaggerate the power of extremist terrorists and validate their delusions of grandeur.
Proponents of national security courts often point to the Foreign Intelligence Surveillance Court (FISC), which reviews requests for surveillance warrants against suspected foreign intelligence agents. The FISC uses judges with high-level security clearances that, as some proponents argue, could be used as the backbone for a new court system to try the detainees. The trials would be largely closed to the public and would not use a jury.
Using closed courts to try suspected terrorists plays the propaganda game in exactly the way our enemies want, and cheapens American justice on the world stage. Terrorism and insurgency constitute violence with a message. To effectively counter terrorists, we must provide a message of our own that denies a propaganda victory to their cause. Meting sound and irreproachable justice is an important way to do that.
While American forces are constantly improving their counterterrorism and counterinsurgency methods, we remain ineffective in countering enemy propaganda in the field of "lawfare." Lawfare is the use of international law to attack nation-states in courts of law and public opinion. The Taliban do this every time they hide behind civilians and then denounce Coalition forces for the inevitable and regrettable casualties. Guantanamo represents a self-inflicted lawfare wound against the United States, where the limbo between domestic criminal law and the law of war erodes at America's values and international standing.
While serving as a Special Forces officer in Afghanistan, I took into account the Taliban's propaganda purposes when planning operations. They didn't need to kill us to win a small victory. They needed to shoot at us and run away to tell the tale, where fishing stories of exaggerated casualties could encourage ever larger groups of radicalized fighters to attack the Afghans and their American allies.
Khalid Sheikh Mohammed had lawfare in mind when he and several co-defendants tried to plead guilty to the Military Commissions and ask for the death penalty. This constituted one final martyrdom mission where he could complain to the world about his treatment before a kangaroo court. We must not give him his final moment of glory.
Instead, transfer Khalid Sheikh Mohammed into an existing court along with the other detainees we have enough evidence to try. Courts-martial are the envy of the world's military justice systems. Better yet, use the federal court system; nothing destroys Al Qaeda's message better than a jury trial. A co-equal branch of government, represented by a life-tenured judge not beholden to the president, using a jury of average American citizens, weighing the evidence and coming to a guilty verdict--that is effective counter-lawfare.
Federal courts are fully able to handle such cases. They have successfully prosecuted over a hundred terrorism cases since 9/11, attaining over a 90 percent conviction rate. Using the Classified Information Procedures Act (CIPA), federal courts can exclude classified information or offer it in a redacted or unclassified version to protect government interests. Federal courts have proven flexible and successful with CIPA, special detention rules, jury security measures, and exceptions to domestic law that mean we won't have to read Miranda rights to future detainees.
The Founders wrote the Bill of Rights after a violent insurgency brought on by government oppression, and the principles contained therein are no weaker while countering today's terrorists. Using national security courts to try the detainees in Guantanamo opens the door to closed and classified trials of domestic terror suspects. This degradation of essential liberties is unwise and avoids the social function of trials: to show the world--not just a judge in his chambers--that the defendant is guilty and deserves our condemnation.
In the current war of images, Al Qaeda struck a terrible blow with airplanes smacking into the sides of skyscrapers. Since that awful moment, America has a mixed record in the battle of opposing pictures and video clips, with Abu Ghraib and Guantanamo effectively offsetting the purple fingers of voters in new democracies. Let the next image--Khalid Sheikh Mohammed marching off to life imprisonment with a federal marshal at his side--follow an open trial with declassified versions of the necessary evidence, not a hearing behind closed doors.
Another Winter Of Their Discontent
Economy: Britain fell deeply into recession in 2008's final quarter, its economy shrinking 1.5%. That's a 6% yearly rate of decline, the worst since the second quarter of 1980. An unwelcome whiff of the 1970s is in the air.
Britain's top economic policymakers, led by Prime Minister Gordon Brown, are desperately casting about for an answer to Britain's crisis. Brown, who famously promised "no more boom or bust" after Tony Blair's Labor Party took power in 1997, has watched as the economy swooned and the British pound collapsed (see chart).
Things have gotten ugly very fast, with the banking system — once among the world's most respected — now in near insolvency. Things are so bad that U.K. banks' liabilities now total more than four times the size of Britain's total GDP, leading some pundits to gibe that it has become "Reykjavik on the Thames" — a reference to Iceland's bank meltdown last year that paralyzed its once-prosperous economy.
Some have begun comparing today's crisis with the one in the 1970s, when Britain's pound sterling crumbled and its economy suffered from a decade-long bout of strikes and stagflation.
For those who don't remember, it was the worst of times. A coal strike in 1973 led to nationwide blackouts. Angry voters ousted moderate Conservative Party Prime Minister Edward Heath in favor of Labor Party leader James Callaghan. But things didn't get better.
In fact, by 1976, Britain was broke, and had to go hat in hand to the IMF for a $5 billion loan.
In late 1978 and early 1979, Britain went through what pundits called its "winter of discontent." Garbage workers, coal workers, transport workers, even grave diggers, went on strike, and British industry was essentially placed on a three-day workweek.
Fed up with the chaos, the British people turned to Margaret Thatcher, the Tory Party leader, who rebuilt Britain using the ideas of Friedrich Hayek and other apostles of free-market thought.
Within three years of Thatcher taking the reins of government, Britain was booming.
To be fair, the situation today isn't quite as bad as it was in the 1970s. For one, there are far fewer strikes to contend with. For another, Thatcher's boom in the 1980s created a much larger and more diverse economy. Until quite recently, London vied head-to-head with New York as the capital of global finance.
But Britain's ills hold some lessons for the U.S. Believe it or not, Britain has outspent the U.S. in trying to get its economy back on its feet. It has put more capital, as a share of its economy, into its banks. And it's spent lavishly on Keynesian stimulus. It hasn't worked.
Now, it's talking about nationalizing its banks. But this won't work either, and the U.S. would do well not to emulate its British cousins overseas.
Nationalizing the banks might preserve them, but it will lead to a skewed, government-directed allocation of capital. Politicized loans will become the norm. Those who aren't popular or connected — which describes, by the way, many entrepreneurs — will not get loans.
This is already happening in the U.S. with the TARP program. As the Wall Street Journal noted in a news analysis of TARP, "some powerful politicians have used their leverage to try to direct federal millions toward banks in their home states."
Just imagine these banks being nationalized.
Britain, and for that matter the U.S., would be far better off doing something along the lines of the Resolution Trust Corp. The U.S. formed the RTC in the early 1990s to buy bad assets from hundreds of troubled banks, then sell them on the market.
It worked. Banks cleaned their balance sheets, and began lending again. The system was saved.
Something similar would work today, if given a chance. It would be expensive — an estimated $1 trillion or so — but it would restore the banking system to health, and get the economy moving again.
It's a good idea, one we hope President Obama will adopt.
Economics focus
Diagnosing depression
What is the difference between a recession and a depression?
THE word “depression” is popping up more often than at any time in the past 60 years, but what exactly does it mean? The popular rule of thumb for a recession is two consecutive quarters of falling GDP. America’s National Bureau of Economic Research has officially declared a recession based on a more rigorous analysis of a range of economic indicators. But there is no widely accepted definition of depression. So how severe does this current slump have to get before it warrants the “D” word?
A search on the internet suggests two principal criteria for distinguishing a depression from a recession: a decline in real GDP that exceeds 10%, or one that lasts more than three years. America’s Great Depression qualifies on both counts, with GDP falling by around 30% between 1929 and 1933. Output also fell by 13% during 1937 and 1938. The Great Depression was America’s deepest economic slump (excluding those related to wars), but at 43 months it was not the longest: that dubious honour goes to the one in 1873-79, which lasted 65 months.
Japan’s “lost decade” in the 1990s was not a depression, according to these criteria, because the largest peak-to-trough decline in real GDP was only 3.4%, over the two years to March 1999. Since the second world war, only one developed economy has suffered a drop in GDP of more than 10%: Finland’s contracted by 11% during the three years to 1993, mainly thanks to the collapse of the Soviet Union, then its biggest trading partner.
Emerging economies, however, have been much more depression-prone. Among the 25 emerging economies covered each week in the back pages of The Economist, there have been no fewer than 13 instances in the past 30 years of a decline in real GDP of more than 10%. Argentina and Poland were afflicted twice. Indonesia, Malaysia and Thailand all suffered double-digit drops in output during the Asian crisis of 1997-98, and Russia’s GDP shrank by a shocking 45% between 1990 and 1998.
The left-hand chart shows The Economist’s ranking of slumps in developed and emerging economies over the past century. It excludes those during wartime (both Germany and Japan, for example, saw output plunge by 50% or more after 1944). The depressions in Germany and France in the 1930s make it into the top 12, but not that in Britain, where GDP fell by a relatively modest 6%.
Before the 1930s all economic downturns were commonly called depressions. The term “recession” was coined later to avoid stirring up nasty memories. Even before the Great Depression, downturns were typically much deeper and longer than they are today (see right-hand chart). One reason why recessions have become milder is higher government spending. In recessions governments, unlike firms, do not slash spending and jobs, so they help to stabilise the economy; and income taxes automatically fall and unemployment benefits rise, helping to support incomes. Another reason is that in the late 19th and early 20th centuries, when countries were on the gold standard, the money supply usually shrank during recessions, exacerbating the downturn. Waves of bank failures also often made things worse.
But a recent analysis by Saul Eslake, chief economist at ANZ bank, concludes that the difference between a recession and a depression is more than simply one of size or duration. The cause of the downturn also matters. A standard recession usually follows a period of tight monetary policy, but a depression is the result of a bursting asset and credit bubble, a contraction in credit, and a decline in the general price level. In the Great Depression average prices in America fell by one-quarter, and nominal GDP ended up shrinking by almost half. America’s worst recessions before the second world war were all associated with financial panics and falling prices: in both 1893-94 and 1907-08 real GDP declined by almost 10%; in 1919-21, it fell by 13%.
The economic slumps that followed the collapse of the Soviet Union and those during the Asian crisis were not really depressions, argues Mr Eslake, because inflation increased sharply. On the other hand, Japan’s experience in the late 1990s, when nominal GDP shrank for several years, may qualify. A depression, suggests Mr Eslake, does not have to be “Great” in the 1930s sense. On his definition, depressions, like recessions, can be mild or severe.
Another important implication of this distinction between a recession and a depression is that they call for different policy responses. A recession triggered by tight monetary policy can be cured by lower interest rates, but fiscal policy tends to be less effective because of the lags involved. By contrast, in a depression caused by falling asset prices, a credit crunch and deflation, conventional monetary policy is much less potent than fiscal policy.
Yes, we have no bananas
Where does that leave us today? America’s GDP may have fallen by an annualised 6% in the fourth quarter of 2008, but most economists dismiss the likelihood of a 1930s-style depression or a repeat of Japan in the 1990s, because policymakers are unlikely to repeat the mistakes of the past. In the Great Depression, the Fed let hundreds of banks fail and the money supply shrink by one-third, while the government tried to balance its budget by cutting spending and raising taxes. America’s monetary and fiscal easing this time has been more aggressive than Japan’s in the 1990s.
However, these reassurances come from many of the same economists who said that a nationwide fall in American house prices was impossible and that financial innovation had made the financial system more resilient. Hopefully, they will be right this time. But this crisis was caused by the largest asset-price and credit bubble in history—even bigger than that in Japan in the late 1980s or America in the late 1920s. Policymakers will not make the same mistakes as in the 1930s, but they may make new ones.
In 1978 Alfred Kahn, one of Jimmy Carter’s economic advisers, was chided by the president for scaring people by warning of a looming depression. Mr Kahn, in his next speech, simply replaced the offending word, saying “We’re in danger of having the worst banana in 45 years.” America’s economy once again has a distinct whiff of bananas.
The Financial Crisis: Bad and Getting Worse, but Put Away that D-word
It began as the "subprime crisis" in 2007, and then mushroomed into a full-blown global recession in 2008. And still, despite mammoth government intervention, the bad news keeps getting worse. Are we now teetering on a precipice, ready to plunge into another Great Depression? Can the latest proposals pull the economy out of its nosedive?
There is plenty to worry about. But while many experts say this crisis is the worst since the Depression, that does not mean it will be as bad.
Unemployment and other economic gauges will continue to worsen, but unless governments make a major misstep, like igniting a worldwide trade war, economies should stabilize and recover on a "very flat path" that could take several years, says Wharton finance professor Marshall E. Blume.
Japan went through a similar bank crisis in the 1990s without tumbling into a full-blown depression, adds Wharton finance professor Jeremy J. Siegel. "Given that we're reacting faster than Japan, I think you can make a good inference that [a depression is] not going to happen here," he says.
Many estimates call for gross domestic product in the U.S. to shrink by 2.6% in the first quarter of 2009, Siegel notes. That's bad, but small compared to the 27% decline from 1929 through 1933. A depression is generally defined as a drop of 10% or more.
Still, there is more bad news than good, and the depth of the problem can be measured by the lack of consensus on what to do about it. Consider this gloomy observation in a January 20 Wall Street Journal story about the British government's abrupt decision to pump billions more into what the writer called the country's "flagging" financial-rescue plan: "Governments on both sides of the Atlantic are struggling to keep up with the deepening economic crisis -- and may be running out of ammunition to battle it."
In the U.S., banks continue to withhold loans despite huge infusions of government cash, and Goldman Sachs estimates that financial institutions will lose $2 trillion on loans, with only half of that realized to date. Banks are even starting to call in loans to borrowers, such as home builders, who have made all their debt payments on time. Troubles are now expanding to commercial real estate firms. The numbers of layoffs, bankruptcies and foreclosures are growing. Household names, such as Circuit City electronics stores, are closing their doors, and problems have worsened at Citigroup and Bank of America despite government help.
There is little consensus on how to remedy the problem. Indeed, the U.S. government is again considering buying up toxic assets held by financial firms, a plan adopted last fall and then immediately scrapped in favor of direct cash infusions to banks.
The tale of woe and confusion is much the same around the world. The economic slowdown is so steep as to cause oil prices to drop to around $40 a barrel, from more than $140 last summer. Trade is so sluggish that shipping rates have plunged to astonishing lows. The European Commission warned on January 20 that the 27 nations of the European Union are likely to experience a "deep and protracted recession."
At the request of then President-elect Barack Obama, the Senate on January 15 voted to release the second half of the $700 billion Troubled Asset Relief Program. (No action by the House is required.) Comments from Obama administration officials suggest much of this $350 billion may be used to buy "bad assets" held by financial institutions. Those include mortgage-backed securities and other holdings that have plunged in value and become all but untradeable. Getting these assets off the financial institutions' books was at the heart of the TARP program when it was proposed in September by Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke.
Paulson and Bernanke say that removing the toxic assets would remove uncertainty about the banks' health, and encourage the banks to resume lending, seen as the key to turning the financial crisis around. But after Congress approved TARP, Paulson instead pumped the money directly into troubled banks, taking some preferred shares and warrants in exchange, arguing the banks needed quicker help because they had turned out to be in worse shape than previously thought. But the banks remain reluctant to lend, and it is not clear the first half of the TARP fund was the good investment Paulson said it was. The Congressional Budget Office estimated in a January 16 report that taxpayers would lose $64 billion of the first $247 billion in TARP spending.
Whether the government should now revive the asset-purchase plan is subject to debate.
Wharton finance professor Richard Marston thinks the direct infusions will restore banks' lending ability faster than asset purchases would, but the government should in return demand a bigger ownership stake than it has. "The Treasury should find a way to inject capital where the taxpayer ends up with large stakes in the banks -- even if they are not formally nationalized. The bank shares are going to soar with recovery, and someone is going to make a fortune." That should be taxpayers if they take on the cost and risk of propping up the banks, Marston argues.
According to Blume, there is so much uncertainty that it is impossible to know which bank-rescue approach is best. Cash infusions can help very quickly, while the asset purchases take longer. But if direct infusions mean toxic assets are left on the banks' books, doubts about the banks' long-term health will remain. Other institutions would then be reluctant to do business with them, and investors would refuse to provide private capital, which ultimately is key to the banks' return to health.
Building a 'Bad Bank'
Also under discussion in Washington is the creation of a "bad bank" to buy the toxic assets. This government-run bank, partly owned by the banks that sell it the assets, would hold those assets, sell them or bundle them into securities for sale to investors. A big question: What should the bad bank pay for those assets if there are no recent sales to show what they are worth? FDIC chairman Sheila C. Bair has said the assets could be purchased at "fair value," which is a price the banks set themselves.
"The idea of setting up a 'bad bank' in which to transfer bad debt may be a good idea," Marston says. But he finds the price dilemma troubling, since paying fair value could cause the government to pay more than it will eventually recover by reselling the assets. "Do we pay market prices for the debt, in which case it does not help the banks? Do we pay above-market prices" and take shares of the banks in exchange?
Under yet another approach, modeled on that used for Citigroup and Bank of America, the government would provide taxpayer-backed insurance against losses in toxic assets that stay on banks' books. But that, too, could leave the public shouldering the banks' losses. Wharton finance professor Franklin Allen argues that the best approach would be "temporary nationalization" of those banks that get public help. That would allow the government to install its own managers, clearing out executives who have presided over so much trouble.
Controlling TARP
"This injection of capital without any [government] control is just not working," says Allen, noting that the banks had not resumed lending after the first TARP infusion. "This [second $350 billion in] TARP money is not going to be used well, and it's going to end up in a black hole. What keeps happening is they give money and then the banks keep coming back for more."
Siegel, too, feels that TARP support should have more strings attached, such as a requirement that banks not call in loans to borrowers who are solvent, creditworthy and up to date on their payments. "I'm not optimistic about this [second half of the] TARP money. Clearly, the first half didn't seem to help."
Obama administration officials also have said they want to use part of the new round of TARP funding -- perhaps as much as $100 billion -- to help homeowners avoid foreclosures. Advocates say this is only fair, since huge sums have gone to rescue corporations, and many argue that stemming foreclosures will help stop the freefall in home prices which has been a major cause of the banks' losses. Hence, attacking the foreclosure problem could lead to more lending by banks, giving the economy the fuel it needs to start growing again.
There are various ways to use government money to put a dent in foreclosures, from providing direct assistance to homeowners to insuring lenders against further losses if they modify loan terms. It is not yet clear what approach the Obama administration favors.
Nor is it a given that reducing the number of foreclosures will have much effect. Allen believes the economic problems are now so widespread that shoring up the housing sector would not help turn things around the way its advocates hope, so that public spending on foreclosures might be wasted. "I think the crisis has moved on from real estate," he says.
Allen and Siegel note that some banks already have expanded programs to renegotiate loan terms to help borrowers stay in their homes. Accepting reduced payments can be less costly for the lenders than foreclosure, especially if there are no buyers for foreclosed properties. J.P. Morgan, for example, recently announced a vastly expanded plan to modify loans on its books as well as those among more than $1 trillion in loans sold to investors.
Too Many Homes
"I think [foreclosures are] a very important problem, but I think it's being worked out by the private sector," Siegel says. The root problem, according to Siegel: There are too many homes and too many were bought at inflated prices. "The price of homes has to fall. There's no way to stop that from happening."
Blume, too, doubts the government can effectively stop the wave of foreclosures. With the economy worsening and unemployment rising, fewer and fewer people can afford the homes they have, and many potential buyers lured by bargain prices can't find banks to give them mortgages. "I have not yet seen a plan to help reduce foreclosures that gets to ... the problem ... that people bought houses they could not afford. If you reduce the interest rate a little bit, they still can't afford them."
He concludes that there may be no alternative but to let the housing market adjust on its own. "Ultimately, all these houses will be off the market," Blume says. "Somebody will buy them and then the market will stabilize."
But there's no telling, he adds, how long that will take, or how far home prices will have to fall.
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