The Democrats who say "nay"

Soros' Recommendations, Extraordinary Renditions, and Funding Abortion

1/29/2009

The Age (Australia)

• Funding Abortion: Jim Wallace, managing director of the Australian Christian Lobby, says foreign aid should not be used to fund abortion services, and says the Australian government should not follow in President Barack Obama's footsteps in lifting the "global gag rule."

Boston Globe

• Extraordinary Rendition: Richard Clarke, counterterrorism adviser to former presidents Bill Clinton and George W. Bush, says President Obama was wise to refrain from banning all extraordinary renditions.

Christian Science Monitor

• Uganda Conflict: Natalie Parke, a research associate at the Century Foundation, says Ugandan President Yoweri Museveni's attack on the Lord's Resistance Army (LRA) is a misguided publicity stunt.

Daily Beast

• Iran's Uranium: Reza Aslan of the University of California says the result of the Bush administration's policy toward Iran is that halting the country's uranium enrichment program is no longer a real possibility. Now, Aslan says, the only way to stop Iran from developing a nuclear weapon is by convincing the country's leaders that they have nothing to fear from the United States, Israel, or other states.

Daily Times (Pakistan)

• Opposition Troubles: In an editorial, the paper says the main opposition party, Pakistan Muslim League-Nawaz's turn away from pragmatism and moderation will likely lead to dangerous instability in the country.

Financial Times

• Soros' Plan: George Soros looks at the conditions that caused September's financial crash, and details a set of recommendations to get the global economy on track.
• Fish Resources: Columnist David Pilling looks at the battle over resources surrounding Japan's fish market, and considers the prospect that humans may irreparably damage the renewable resource of fish.

Globe and Mail (Canada)

• Davos' Future: The Hoover Institution's Timothy Garton Ash says Davos should not be abandoned, as it represents a larger effort for international cooperation and combating economic nationalism.

Gulf Times (Qatar)

• Zimbabwe's Crisis: In an editorial, the paper calls for a return of international attention to the humanitarian crisis in Zimbabwe.

Japan Times

• Pakistan Diplomacy: Brahma Chellaney, a professor at the Center for Policy Research in New Delhi, says President Obama's plan to send 30,000 more troops into Afghanistan is a losing strategy, and says the United States should instead focus on solving the region's problems with high-pressure diplomacy through Pakistan.

Jerusalem Post (Israel)

• Mideast Strategy: In an editorial, the paper says President Obama must eventually commit to defeating Hezbollah, Hamas, and Iran.

New York Times

• Guantanamo Plans: Columnist Nicholas Kristof proposes that President Obama appoint a high-level commission to investigate torture, secret detention, and wiretapping under the Bush administration. He also suggests returning Guantanamo Bay to Cuba, or turning the land into a medical research facility.
• War on Terror: Columnist Roger Cohen says the message of President Obama's interview with Al-Arabiya news on Monday was that the war on terror is over, and that instead, Obama views defeating terrorist organizations as a strategic challenge.

Wall Street Journal

• UN Reform: In an editorial, the paper urges new U.S. Ambassador to the United Nations Susan Rice to live up to her promise to promote reform and transparency at the United Nations.
• Guantanamo's Closure: American Enterprise Institute scholar John Yoo says President Obama's closure of the detention facility at Guantanamo Bay means he is returning the country to a pre-9/11 law enforcement approach. Yoo says Obama's statement in his inaugural speech that Americans should "reject as false the choice between our safety and our ideals" is naïve.

Washington Post

• Pakistan Policy: Columnist David Ignatius says Pakistan presents one of the most complicated problems for President Obama, and interviews Adm. Mike Mullen, the chairman of the Joint Chiefs of Staff, on the subject.

• Flawed Stimulus: Harvard economist Martin Feldstein says the economic stimulus package in its current form does not effectively raise national spending and employment.

The Democrats who say "nay"

The Democrats who say "nay"

ELEVEN Democrats voted against the House stimulus bill. John McCormack of the Weekly Standard smells blood in the water: "most are considered vulnerable next cycle."

Unfortunately for the Standard, this isn't true. According to the Cook Political Report, which keeps track of these things, only five of the 11 breakaway Democrats are considered vulnerable in 2010. Bobby Bright of Alabama and Walt Minnick of Idaho are given even odds of being re-elected to their heavily Republican districts. Parker Griffith of Alabama and Frank Kratovil of Maryland are given slight odds at winning re-election; Paul Kanjorski of Pennsylvania, who won the closest race of his career in 2008, is seen as "likely" to return. The other six Democrats are seen to be safe. Four are "Blue Dog" conservatives who've defied their party for years, and two are rising stars, first elected in 2006, in districts that swung dramatically toward their party's presidential candidate in 2008.

The Democrats' situation becomes a bit clearer when you look at what happened in 2001, when the Democratic minority faced a vote on George Bush's first tax cut. Twenty-eight of the then 211 Democratic House members, or 13.3%, voted with the Republicans. Yesterday's gang of 11 Democrats represented only 4.3% of their conference. Another way to look at it: Twenty-four of the 29 freshman Democrats voted for the package, even though several come from districts that voted for John McCain. The failure to win Republican support was an embarrassment for Mr Obama and his party, but no one's losing sleep in the White House about the Democrats who voted "nay".

Why dealing with the huge debt overhang is so hard

Why dealing with the huge debt overhang is so hard

By Martin Wolf

How much debt is too much? Nobody knows. But the governments of highly indebted high-income economies – such as the US and UK – think they know the answer: more than today. They want even more credit to flow to their struggling private sectors. Is that an attainable ambition and, if so, how might it be achieved?

Let us start with some facts. The ratio of US public and private debt to gross domestic product reached 358 per cent in the third quarter of 2008. This was much the highest in US history (see charts). The previous peak of 300 per cent was reached in 1933, during the Great Depression.

Nearly all of this debt is private. That reached an all-time high of 294 per cent of GDP in 2007, a rise of 105 percentage points over the previous decade. The same thing happened to the UK, on a yet more impressive scale. This has been a gigantic debt and credit expansion.

Particularly remarkable is the composition of the increased debt. In the early 1930s, most US private debt was owed by non-financial companies: so balance-sheet deflation occurred in companies, as was also the case in Japan in the 1990s. This time, however, the big increase in debt was in the financial and household sectors.

Over the past three decades the debt of the US financial sector grew six times faster than nominal GDP. The consequent increases in its scale and leverage explain why, at the peak, the financial sector allegedly generated 40 per cent of US corporate profits. Something decidedly unhealthy was going on: instead of being a servant, finance had become the economy’s master. In a superb brief account of today’s calamity, Lord Turner, chairman of the UK’s Financial Services Authority, refers explicitly to “illusory profits”*.

Moreover, household debt – much of it associated with housing – also rose rapidly: from 66 per cent of US GDP in 1997 to 100 per cent in 2007. A slightly bigger jump in household indebtedness can be seen in the UK.

What do such rises in indebtedness portend? The answer might be: nothing. After all, over the world, debt nets to zero. In principle, the ability to transfer purchasing power from lenders to borrowers is highly desirable: as a British advertising campaign once claimed, credit “takes the waiting out of wanting”. Yet people can also make big mistakes, particularly if they confuse bubbles with permanently high prices. The financial sector is particularly prone to such blunders. As Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard comment: “Systemic banking crises are typically preceded by asset price bubbles, large capital inflows and credit booms, in rich and poor countries alike”**.

Once such asset bubbles burst, it becomes hard to find borrowers and lenders who are either willing or creditworthy. The over-indebted start paying down their debts, instead, as now. Desired savings also soar. Realised savings may not rise, however: incomes may collapse, instead. This is what John Maynard Keynes called “the paradox of thrift”. The result will be a slump caused by balance sheet collapse rather than attempts to control high inflation.

What then might be done?

Some recommend a “liquidation”. A chain of bankruptcy would indeed eliminate a debt overhang, as happened in the 1930s. But, with much of the economy enmeshed in bankruptcy and the financial sector imploding, a depression would result. To choose that option must be insane.

Less unappealing is organised mass bankruptcy. Proposals for an organised debt-for-equity swap in failed or enfeebled financial institutions fall into this category. So, too, does allowing courts to modify mortgage contracts. Executed efficiently and expeditiously, such ideas are attractive. Costs would fall on shareholders and creditors, not taxpayers, and so sustain the principle of private responsibility.

An opposite approach is to sustain existing levels of debt, by slashing its cost to borrowers and trying to grow out of it over many years. This is what current monetary policies seek to achieve. It is a good idea, however unpleasant to creditors. But this would not generate much additional borrowing or fresh spending; it would not stop the indebted from trying to lower their debt; and it would not restore the financial sector to health.

Yet another approach is to replace private debt with public debt. That is what recapitalisation of banks now means. Over time, private-sector debt should fall, while public-sector debt, explicit and implicit, rises. Socialising debt increases the chances of growing out of it. That has happened before, notably in the case of UK public debt over the course of the 19th century.

Finally, there is inflation. If central banks and governments are aggressive enough, they can generate inflation, which will lower the debt burden. But they will imperil – if not terminate – the experiment with unbacked fiat (or man-made) money that started in 1971.

So which is the best approach?

At the overall level, it must largely be to grow out of the debt overhang, with socialisation of a part of it an essential element. Relapse into inflation would be a huge policy failure. A plan is also needed to deal with the plight of many households and with the overextended and undercapitalised financial sector.

The financial sector, as a whole, cannot deleverage by selling assets. It would be helpful if claims of global financial institutions could be netted out, instead, though that would require international co-operation. The Obama administration must also soon launch a recapitalisation of US banking, but not by buying the “toxic assets” at above-market prices. A debt-equity swap would be preferable. If that is politically impossible or too destabilising, publicly financed recapitalisation is inevitable. Just do not dare to call it nationalisation.

Whatever is done, one compelling truth cannot be evaded. It is going to be very hard to generate substantial net borrowing by households and non-financial corporations in the high-income countries with high internal debt. It is unimaginable that they will return to levels of private-sector borrowing, spending and increases in debt that characterised these countries for so long. Countries with large current account surpluses have long demanded an end to the profligate borrowing and spending of the customers upon whom they depended. They should have been careful what they wished for: they have now got it. Enjoy!

Davos: Soros And Solutions

Davos: Soros And Solutions

David Serchuk

The Forbes.com Investor Team hopes that the Davos attendees conspire to bring down global interest rates. Meanwhile, George Soros warns of further collapse.

With the world in the worst economic spiral since alcohol consumption was a crime, it's no wonder the World Economic Forum at Davos, Switzerland is a muted affair this year.

Goldman Sachs has reportedly called off its annual party, which is only fitting for a firm that's stock has fallen 56% in a year. The list of bigwigs staying away is as noteworthy as the list of attendees. Then again, with a theme of "Shaping the Post-Crisis World" Davos' planners had to know they planned a somber powwow.

At least the theme presumes the crisis will end someday.

George Soros brought his usual glad tidings to the party. The "financial structure we used to take for granted has collapsed," he said, echoing the theme of his latest book, The New Paradigm for Financial Markets, in which he argues that the current crisis is the popping not of a real estate bubble but of a 20-year-old credit bubble. Soros also noted that the financial system is on "artificial life support."

Soros believes that a "good bank" needs to be created, one spared of the so-called "bad" assets that have wrecked the world's economies. Soros also believes the creation of new credit instruments will have to be regulated in the future and that the entire world, but especially the West, needs to prepare for slower economic growth in the years ahead. Though Soros supports a "good bank/bad bank" solution as well, his "good bank" would serve as the world's new lender while the rest of the financial industry tries to heal itself.

The Forbes.com Investor Team also had its own set of answers for what they would like to see the world's economic mavens do when they gather in their conferences, back rooms and parties.

Robert Froehlich, chief investment strategist of DWS Investments, the retail branch of Deutsche Bank (nyse: DB - news - people ), says he would like to see the Bank of England, the European Central Bank and the U.S. Federal Reserve all convene and cut interest rates to match the U.S. "Talk about shock 'n' awe for markets," he says.

Froehlich donned his "Dr. Bob" had and added a somewhat sci-fi vision of the kind of infrastructure investments he would like to see globally. No mere roads and bridges for him; he wants governments to finally commit to the monorail. "The light rail should be used for all city-to-city travel under 1,000 miles," he says. "Also a series of moving sidewalks would help as well. And everything should be powered by solar and wind."

On a more quotidian note, Froehlich also endorses the idea of having the world's sovereign wealth funds create a global "toxic" fund, where every country chips in. This fund would take toxic funds off balance sheets worldwide, rebooting the system.

John Osbon, head of Osbon Capital Management, thinks such a mega-wealth fund is not a realistic option but is still in favor of a U.S. aggregator bank to house illiquid debt securities: "With the U.S. creating a toxic bond pricing structure and market prices, the rest of the world would quickly follow," he says.

The erudite Osbon also remarked that, "As David Smick points out in his excellent book, The World Is Curved, 'Today we find ourselves in a situation in which the globalized financial system both enables and threatens our national well being.'"

Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research, agrees with Froehlich's direction, even if he doesn't think it can all be put in place. "Anything close to these would certainly be beneficial," he says.

he Forbes.com Investor Team hopes that the Davos attendees conspire to bring down global interest rates. Meanwhile, George Soros warns of further collapse.

What The World Needs Now …

Osbon: With the heads of the second, third and fourth largest (Japan, China, Germany) economies in the world speaking, we should definitely care what is said in Davos. With the title of "Shaping the Post-Crisis World" as its theme, Davos is an ideal opportunity to hear how world leaders are planning to collaborate to get us out of the global economic mess we are in. And we are in it together.

In markets, we have seen how correlation goes up as markets go down, leaving investors with almost no place to hide. As David Smick points out in his excellent book, The World Is Curved, "Today we find ourselves in a situation in which the globalized financial system both enables and threatens our national well being."

In my opinion, investors are the perhaps unwilling new partners in a new era of global government involvement, but we are partners. The "stock of the bureaucrat" has risen dramatically in the last year as financial engineers and money masters have been so wrong on such a fantastic scale.

I would look for statements of collaboration and common interest from heads of state first and foremost. Words do matter. Promises may not be kept, but the effort is worth a lot.

Froehlich: If you think of Davos as a gathering of political, business, labor, academic and religious leaders, I can't think of a more important time ever for a Davos event than right now. If we are ever going to get out of this, everyone must come to the table with an open mind. Business as usual is not an option. We all must change the way we think and the way we act. We are all in this together, and the only way out of this is together. Us vs. Them doesn't work in the global village.

The best thing we can hope for out of Davos is the behind-the-scene one-off meetings between various parties that may plant the seed for a future breakthrough on some front. I don't focus too much on what is being publicly said at Davos. It is such a big stage and everyone is acting. Instead of listening to what they say, let's watch what they do and pray.

Forbes: Any back-room deals you'd like to see take place at Davos?

Froehlich: Well the first deal I would like to see done is a Bank of England, European Central Bank, Fed Reserve Board agreement where the B of E and ECB dramatically cut rates all the way down to 25 basis points matching the U.S. Talk about shock 'n' awe for our markets.

Then I would like to see the U.S., China, Japan and Europe all change their infrastructure focus. And instead of building the same old roads, how about a transit system for the future instead of more of the same. The short answer is think Disney.

I believe we need a series of urban monorails in every major city. In addition, we need a light rail transit system linking major metro areas that works. The light rail should be used for all city-to-city travel under 1,000 miles. Also a series of moving sidewalks would help. And everything should be powered by solar and wind.

Finally, I would have the Sovereign Wealth Funds step up to the plate and jointly create a global "toxic" Sovereign Wealth Fund. Every country pays in their fair share. This fund takes all the toxic assets off the balance sheets of financial companies the world over and the system is rebooted.

Frederick: Dr. Bob's goals seem rather idealistic, but anything close to these would certainly be beneficial.

Osbon: Follow the money would be my suggestion for divining the Davos results. London and the ECB interest rates are still out of line relative to Japan and the U.S., so Bob is spot on in looking for cuts to zero-plus rates there.

I would also look to fiscal stimulus plans--China is leading the way right now with a $500 billion plan, or 25% of their economy. We can't accept all the Chinese numbers at face value, but the announcement is a significant signal.

On the fiscal side, I find it ironic that the U.K. and the rest of Europe, which have a history of nationalization and are much supportive of government involvement in their everyday lives, have not announced "re-socialization" plans involving more spending and investment. They are behind the market curve right now, in my view.

Lastly, a mega-TARP and "big, bad bank" outside of national boundaries is not realistic in my view. Unilateral leadership on toxic assets could make a big difference, however, which I why I am in favor of the U.S. creating a "bad bank," although I object to it philosophically. With the U.S. creating a toxic-bond-pricing structure and market prices, the rest of the world could quickly follow.

Why could any of the above happen? For two reasons involving competitive cooperation. The alternative of "doing nothing" doesn't work, and the politicians who move first will get the a larger share of the benefits of the solution for their respective countries.

When in Doubt, Blame the Asians

by Tim Swanson

In a rush to explain the current economic conundrums facing the United States, an increasingly popular rationale is to shield policy makers and collectively blame Asia's huge rate of savings and large productive capacity.

For instance, former Treasury Secretary Henry Paulson thinks that global trade imbalances with Asia pushed interest rates down and drove "investors towards riskier assets."

Brad Setser of the Council on Foreign Relations believes that Americans borrowed too much and Asians saved and lent too much to Americans — that Asian money consequently flooded the US economy and drove down interest rates.

Michael Pettis, an American finance professor in China, suggests that China overproduces and underconsumes, an imbalance that ultimately recycled large amounts of savings back into the US housing and securities markets, creating an unsustainable bubble.

However, the main problem with the explanations provided by Paulson and the burgeoning establishment line is that none of the Asian countries sits on the Federal Reserve board, the prime instigator of this effervescent predicament. And as influential as the China or Japan lobbies are seen to be by many, neither country sets the federal-funds rate or conducts open-market operations.

Who's Who

Americans at the Federal Reserve alone are responsible for setting interest rates. And stoked in part by the financial specter of Mexico and other external phantoms beginning in July of 1995, Chairman Greenspan began a series of rollercoaster rate cuts — and temporary increases — culminating in a perversely low 1% rate in mid-2003.[1] This, along with expanding the monetary base — provided by the Fed and coordinated with other central banks — arguably spurred speculative malinvestment globally in areas such as technology and, later, real estate.[2]

Beginning in 2002, the Bush administration began a protracted campaign of deficit spending to fund wars and welfare. In addition, government-sponsored housing agencies (GSEs), including Fannie Mae, Freddie Mac, Ginnie Mae, and the FHLBs, enacted a series of loose-lending standards — in part to comply with the Community Reinvestment Act — and consequently guaranteed and accumulated trillions of dollars in what are now viewed as deleteriously risky mortgage-backed securities.[3][4]

In establishment terms, these are the "known knowns."

Some other "knowns" that are undisputable: Americans ran the housing GSEs; Americans occupied the Bush administration; and, to the best of our knowledge, Alan Greenspan is an American. And while many of these decision makers may be immigrants, none of them was then simultaneously an executive member of the CCP, LDP, GNP, KMT, or PAP.[5]

Finger Pointing up the Chain of Command

The above exercise reveals those who are responsible for enacting particular legislation and executing specific policies.

At no point did Asian savers force Fannie Mae to reduce down payments on houses or reduce mortgage rates. At no point did Asian savers force American banks to allow consumers to use their home equity as ATM machines. At no point did Asian savers force the Bush administration to run deficits to pay for foreign wars and domestic welfare. At no point did Asian savers force government-sanctioned ratings agencies to rubber stamp risk assessments. And at no point did Asian savers force Alan Greenspan to lower interest rates.[6]

Neither the US government nor its federally controlled housing agencies had to spend the money it received from Asia. In fact, they could have refused the money altogether. No means no, right?

In addition, the government could have paid off its obligations and maintained a balanced budget. Instead it spent it all and continued borrowing. As a consequence, it is pure balderdash to insinuate that the uptick in Asian savings somehow coerced the House Committee on Ways and Means to appropriate billions in extra liabilities. No one in Asia pointed chopsticks, bamboo, or a gun at Larry Summers, Paul O'Neall, Dennis Hastert, Bill Thomas or American consumers and told them to spend the money.

True enough, Asian countries produced relatively cheap goods that Americans wanted to buy, but it was the Federal Reserve alone that created the "cheap" money that was then lent to Americans who in turn bought products from China.

In fact, the only "hot" money in the global system was that created by the Federal Reserve. Every dollar that the Chinese and Japanese used to buy US Treasury bonds originated from the Federal Reserve. And as much as they would have liked to do it, no evidence has surfaced to suggest that China, Japan, South Korea, or any other Asian country was involved with counterfeiting money. That responsibility is left solely with the Federal Reserve's own printing press.

The Politically Incorrect Narrative

As illustrated by Robert Murphy, the most recent bubble began in 2001, when the Fed dramatically increased the money supply, temporarily making American banks and financial institutions artificially wealthier (i.e., they received funds first). These firms, in turn, lent to American consumers at extraordinarily low rates. Americans, believing they were rich, spent the money on products made in places such as Asia. Asians, for various reasons, saved more than they spent. And, looking to diversify and participate in the global economy, many Asians parked their earned savings in purportedly safe assets.

It so happens that the US Treasury during this time was trying to fund large deficit spending and sold large amounts of bonds — which are dubiously rated AAA.[7] Similarly, in an attempt to satisfy congressionally mandated universal homeownership goals, GSEs such as Fannie Mae loosened home-financing standards for millions of Americans and sought financing on the international credit markets — and also held a dubiously AAA-rated bond.[8] As a consequence, a substantial portion of the Asian savings was used to purchase these seemingly safe bonds.[9]

So to review, the "imbalance" did not start because of too much savings in Asia but rather because of a huge expansion of credit by the Federal Reserve and imprudent welfare handouts by the federal government.

Stop Being So Productive

As noted above, professor Michael Pettis thinks China has a chronic problem with overproduction and he is right in one respect: American consumers purchased too much from China. He correctly notes that, around 1998, Americans stopped saving and "diverted a rising share of their income to consumption." Pettis then constructs a framework in which self-serving fiscal policies of China and America became self-reinforcing and ultimately led to unsustainable growth.

This phenomenon eventually peaked — in housing prices in 2006, in stock prices in 2007, in corporate-bonds prices in 2008, and arguably in sovereign-bond prices in 2009–10.[10][11]

But instead of connecting the dots to the only institution capable of expanding the credit supply — the Federal Reserve — Pettis seeks a bilateral, politically crafted solution that does not involve the abolition (or even admonishment) of the Fed. This is the same Fed that did not see a housing bubble coming.

And by insisting that it was overzealous Manchurians concocting trade policies in smoke-filled rooms of the Forbidden City, American policy makers are setting up future generations for a monetary disaster.[12]

Three years from now, the American political class will be begging for Asian savings, but it is unlikely that many Asians will be interested in coming to their rescue[13] — in part because they were unfairly blamed for a phenomenon they did not create and in part because they see how the political class will spen