This crisis is a moment, but is it a defining one?
This crisis is a moment, but is it a defining one?
By Martin Wolf
Is the current crisis a watershed, with market-led globalisation, financial capitalism and western domination on the one side and protectionism, regulation and Asian predominance on the other? Or will historians judge it, instead, as an event caused by fools, signifying little? My own guess is that it will end up in between. It is neither a Great Depression, because the policy response has been so determined, nor capitalism’s 1989.
Let us examine what we know and do not know of its impact on the economy, finance, capitalism, the state, globalisation and geopolitics.
On the economy, we already know five important things. First, when the US catches pneumonia, everybody falls seriously ill. Second, this is the most severe economic crisis since the 1930s. Third, the crisis is global, with a particularly severe impact on countries that specialised in exports of manufactured goods or that relied on net imports of capital.
Fourth, policymakers have thrown the most aggressive fiscal and monetary stimuli and financial rescues ever seen at this crisis. Finally, this effort has brought some success: confidence is returning and the inventory cycle should bring relief. As Jean-Claude Trichet, president of the European Central Bank, remarked, the global economy is “around the inflection point”, by which he meant that the economy is now declining at a declining rate.
We can also guess that the US will lead the recovery. The US is again the advanced world’s most Keynesian country. We can guess, too, that China, with its massive stimulus package, will be the most successful economy in the world.
Unfortunately, there are at least three big things we cannot know. How far will exceptional levels of indebtedness and falling net worth generate a sustained increase in the desired household savings of erstwhile high-spending consumers? How long can current fiscal deficits continue before markets demand higher compensation for risk? Can central banks engineer a non-inflationary exit from unconventional policies?
On finance, confidence is returning, with spreads between safe and risky assets declining to less abnormal levels and a (modest) recovery in markets. The US administration has given its banking system a certificate of reasonable health. But the balance sheets of the financial sector have exploded in recent decades and the solvency of debtors is impaired.
We can guess that finance will make a recovery in the years ahead. We can guess, too, that its glory days are behind it for decades, at least in the west. What we do not know is how far the “deleveraging” and consequent balance-sheet deflation in the economy will go. We also do not know how successfully the financial sector will see off attempts to impose a more effective regulatory regime. Politicians should have learnt from the need to rescue financial systems stuffed with institutions deemed too big and interconnected to fail. I fear that concentrated interests will overwhelm the general one.
What about the future of capitalism, on which the Financial Times has run its fascinating series? It will survive. The commitment of both China and India to a market economy has not altered, despite this crisis, although both will be more nervous about unfettered finance. People on the free- market side would insist the failure should be laid more at the door of regulators than of markets. There is great truth in this: banks are, after all, the most regulated of financial institutions. But this argument will fail politically. The willingness to trust the free play of market forces in finance has been damaged.
We can guess, therefore, that the age of a hegemonic model of the market economy is past. Countries will, as they have always done, adapt the market economy to their own traditions. But they will do so more confidently. As Mao Zedong might have said, “Let a thousand capitalist flowers bloom”. A world with many capitalisms will be tricky, but fun.
Less clear are the implications for globalisation. We know that the massive injection of government funds has partially “deglobalised” finance, at great cost to emerging countries. We know, too, that government intervention in industry has a strong nationalist tinge. We know, as well, that few political leaders are prepared to go out on a limb for free trade.
Most emerging countries will conclude that accumulating massive foreign currency reserves and limiting current account deficits is a sound strategy. This is likely to generate another round of destabilising global “imbalances”. This seems an inevitable result of a defective international monetary order. We do not know how well globalisation will survive all such stresses. I am hopeful, but not that confident.
The state, meanwhile, is back, but it is also looking ever more bankrupt. Ratios of public sector debt to gross domestic product seem likely to double in many advanced countries: the fiscal impact of a big financial crisis can, we have been reminded, be as costly as a large war. This, then, is a disaster that governments of slow-growing advanced economies cannot afford to see repeated in a generation. The legacy of the crisis will also limit fiscal largesse. The effort to consolidate public finances will dominate politics for years, perhaps decades. The state is back, therefore, but it will be the state as intrusive busybody, not big spender.
Last but not least, what does the crisis mean for the global political order? Here we know three important things. The first is that the belief that the west, however widely disliked by the rest, at least knew how to manage a sophisticated financial system has perished. The crisis has damaged the prestige of the US, in particular, pretty badly, although the tone of the new president has certainly helped. The second is that emerging countries and, above all, China are now central players, as was shown in the decision to have two seminal meetings of the Group of 20 leading nations at head of government level. They are now vital elements in global policymaking. The third is that efforts are being made to refurbish global governance, notably in the increased resources being given to the International Monetary Fund and discussion of changing country weights within it.
We can still only guess at how radical the changes in the global political order will turn out to be. The US is likely to emerge as the indispensable leader, shorn of the delusions of the “unipolar moment”. The relationship between the US and China will become more central, with India waiting in the wings. The relative economic weight and power of the Asian giants seems sure to rise. Europe, meanwhile, is not having a good crisis. Its economy and financial system have proved far more vulnerable than many expected. Yet how far a set of refurbished and rebalanced institutions for international co-operation will reflect the new realities is, as yet, unknown.
What then is the bottom line? My guess is that this crisis accelerated some trends and has proved others – particularly those in credit and debt – unsustainable. It has damaged the reputation of economics. It will leave a bitter legacy for the world. But it may still mark no historic watershed. To paraphrase what people said on the death of kings: “Capitalism is dead; long live capitalism.”
Capitalism
Capitalism and the Cheating Ethic
By Steven MalangaThe further we get from the housing bubble that helped to prompt our current financial meltdown, the less we seem bothered by the decline in trustworthiness and the rise in cheating that fueled the irrational exuberance of the home mortgage market. And then along comes New York Times reporter Edmund Andrews to remind us of that era via his own personal story of attempted mortgage deception and borrowing irresponsibility. If you want to understand how individual wrongs by seemingly upstanding members of society piled up and helped fuel our national ruin, read Andrews’ piece, My Personal Credit Crisis, in last Sunday’s Times.
As an economics reporter for the Times, Andrews analyzed and described the frothy housing market before he made his own unwise plunge. In a story he published in June of 2004 he explained the growing risk that home borrowers were taking on, including those who used “innovations” in the market, like no-documentation mortgages that were nicknamed “liar’s loans,” which didn’t require income verification. In the story, Andrews noted that their growing use alarmed housing experts.In Sunday’s personal account of his troubles, Andrews remarkably admits that he was fully intent on using deception, in the form of a liar’s loan, to get his own mortgage. In August of 2004, just two months after his Times story about the increasingly irrational mortgage market, he resolved to buy a $460,000 home in Silver Spring, Md., for himself and his new fiancée. The problem is that he had just $2,777 a month left from his paycheck after paying $4000 in a month in alimony. And so, following his mortgage broker’s advice, Andrews did not list the alimony payments on his application, though the standard mortgage form explicitly asks for such information. To accomplish the deception he applied for a no-doc loan so he wouldn’t have to submit income tax returns or pay stubbs, which would indicate that alimony payments were being deducted from his paycheck.
Still, basic underwriting procedures almost foiled him. A credit check by the lender’s underwriters revealed he was still carrying a mortgage on the home his ex-wife lives in with his kids, which raised questions. So Andrews shifted tactics. Knowing that he couldn’t own up to the divorce without owning up to the alimony payments, he applied instead for a “no ratio” mortgage that doesn’t calculate a borrower’s debt-to-income ratio, so he wouldn’t have to worry about the underwriter asking uncomfortable questions about the house that was still in his name. After he got a mortgage using the new application Andrews admitted that he couldn’t shake the feeling of “having done something bad,” but he also admitted he felt “kind of cool” for making such a big score.
At this point I leave it up to you to decide whether Andrews is guilty of mortgage fraud or not, though the good nuns who educated me in grammar school would have pointed out that his intent was clearly to cheat. Still, it is emblematic of the culture of home lending in the bubble that rather than report Andrews for filing a fraudulent application, the lender, American Home Mortgage, merely let him re-file for another kind of even riskier mortgage. And so, American got what it deserved when Andrews, awash in debt, eventually defaulted on the loan. The only problem is that so did tens of thousands of other borrowers of American, which eventually collapsed and was seized by the government--costing taxpayers untold millions.
Since Andrews published his provocative personal story a few days ago, the tale has evoked online comments ranging from outrage at his taking out so much debt, to empathy at his predicament. But what I find remarkable is that a Times reporter would admit in so blunt a way his intention to defraud—a fact which itself has caused barely a ripple of comment. It’s a reminder that during the housing bubble cheating became so commonplace that those who did it were barely considered to be engaging in fraud. While authorities have pursued rings of con artists who used the mortgage market to swindle builders and banks, the kind of ordinary, everyday deceits that went on have largely been ignored, though they probably played a far greater role in the market’s meltdown than we understand.
The FBI says reports of mortgage fraud increased a whopping 10-fold from 2001 to 2007, while mortgage servicers who have investigated portfolios of bad mortgages have found as many as 70 percent had “misrepresentations” on them. It is possible that hundreds of thousands, and even millions, of borrowers, brokers and salespeople cheated over the space of just a few years, helping to bring down themselves and an entire industry, and contributing mightily to the economic and fiscal predicaments in which we find ourselves.
The German sociologist Max Weber once noted that capitalism was not the pursuit and accumulation of wealth by any means—something that lots of societies had engaged in over the millennia. Rather, Weber noted, what set capitalism apart was that it was an ethic which evolved for “the pursuit of profit, and forever renewed profit [Weber’s italics], by means of continuous, rational…enterprise.” Looking out over the brief history of capitalism when he was writing in 1904, Weber observed that America best embodied this capitalist ethic thanks to what he described as our “ideal of the honest man of recognized credit.” Although we had our share of con men, speculators and robber barons, nevertheless in America, Weber noted, “the infraction of [capitalism’s] rules is treated not as foolishness but as forgetfulness of duty.”
That was a long time ago, apparently. Today, the infraction of capitalism’s rules is opportunity for a publishing contract. Andrews’ remarkably frank tale of his mortgage failings is going to be published in a provocatively titled book, "Busted: Life Inside the Great Mortgage Meltdown,” even while the rest of society grapples with the fallout from such misdeeds.
Is there a larger consequence to such shifts in attitudes? Adam Smith would certainly have thought so. A moral philosopher, Smith laid the groundwork for his ideas on trade and commerce in his first book, Theory of Moral Sentiments, in which he traced the evolution of mankind’s ethics from our nature as social beings who feel bad if we do something that we believe an imagined impartial observe would consider improper. Out of this basic mechanism for making judgments, what Smith called sympathy and modern psychology calls empathy, we create civilizing institutions, like courts of law, to help us govern our economy as it becomes more complex. Over time a society relies on these institutions to reinforce our individual values.
But when real neutral observers—a book agent, an editor at a newspaper, the paper’s readers—no longer blanch at outright deviousness so frankly told, society has lost the mechanism that restrains its citizens from widespread cheating. That’s exactly what happened in the mortgage meltdown, when untold numbers of applicants, their brokers, real estate agents and assorted others openly discussed how to collude in obtaining mortgages through fraudulent means without stopping to consider the implications for society as a whole. And without the slightest sense of embarrassment, apparently.
Obama's Dangerous Debt
Obama's Dangerous Debt
By Robert SamuelsonWASHINGTON -- Just how much government debt does a president have to endorse before he's labeled "irresponsible"? Well, apparently much more than the massive amounts envisioned by President Obama. The final version of his 2010 budget, released last week, is a case study in political expediency and economic gambling.
Let's see. From 2010 to 2019, Obama projects annual deficits totaling $7.1 trillion; that's atop the $1.8 trillion deficit for 2009. By 2019, the ratio of publicly held federal debt to gross domestic product (GDP, or the economy) would reach 70 percent, up from 41 percent in 2008. That would be the highest since 1950 (80 percent). The Congressional Budget Office, using less optimistic economic forecasts, raises these estimates. The 2010-19 deficits would total $9.3 trillion; the debt-to-GDP ratio in 2019 would be 82 percent.
But wait: Even these totals may be understated. By various estimates, Obama's health plan might cost $1.2 trillion over a decade; Obama has budgeted only $635 billion. Next, the huge deficits occur despite a pronounced squeeze of defense spending. From 2008 to 2019, total federal spending would rise 75 percent, but defense spending would increase only 17 percent. Unless foreign threats recede, military spending and deficits might both grow.
Except from crabby Republicans, these astonishing numbers have received little attention -- a tribute to Obama's Zen-like capacity to discourage serious criticism. Everyone's fixated on the present economic crisis, which explains and justifies big deficits (lost revenues, anti-recession spending) for a few years. Hardly anyone notes that huge deficits continue indefinitely.
One reason Obama is so popular is that he has promised almost everyone lower taxes and higher spending. Beyond the undeserving who make more than $250,000, 95 percent of "working families" receive a tax cut. Obama would double federal spending for basic research in "key agencies." He wants to build high-speed rail networks that would require continuous subsidy. Obama can do all this and more by borrowing.
Consider the extra debt as a proxy for political evasion. The president doesn't want to confront Americans with choices between lower spending and higher taxes -- or, given the existing deficits, perhaps less spending and more taxes. Except for talk, Obama hasn't done anything to reduce the expense of retiring baby boomers. He claims to be containing overall health costs, but he's actually proposing more government spending (see above).
Closing future deficits with either tax increases or spending cuts would require gigantic changes. Discounting the recession's effect on the deficit, Marc Goldwein of the Committee for a Responsible Federal Budget puts the underlying "structural deficit" -- the basic gap between the government's spending commitments and its tax base -- at 3 percent to 4 percent of GDP. In today's dollars, that's roughly $400 billion to $600 billion.
It's true that since 1961 the federal budget has run deficits in all but five years. But the resulting government debt has consistently remained below 50 percent of GDP; that's the equivalent of a household with $100,000 of income having a $50,000 debt. (Note: Deficits are the annual gap between government's spending and its tax revenues. The debt is the total borrowing caused by past deficits.) Adverse economic effects, if any, were modest. But Obama's massive, future deficits would break this pattern and become more threatening.
At best, the rising cost of the debt would intensify pressures to increase taxes, cut spending -- or create bigger, unsustainable deficits. By CBO's estimates, interest on the debt as a share of federal spending will double between 2008 and 2019, from 8 percent of the total to 16 percent. Huge budget deficits could also weaken economic growth by "crowding out" private investment.
At worst, the burgeoning debt could trigger a future financial crisis. The danger is that "we won't be able to sell it (Treasury debt) at reasonable interest rates," says economist Rudy Penner, head of the CBO from 1983 to 1987. In today's anxious climate, this hasn't happened. American and foreign investors have favored "safe" U.S. Treasuries. But a glut of bonds, fears of inflation -- or something else -- might one day shatter confidence. Bond prices might fall sharply; interest rates would rise. The consequences could be worldwide because foreigners own half of U.S. Treasury debt.
The Obama budgets flirt with deferred distress, though we can't know what form it might take or when it might occur. Present gain comes with the risk of future pain. As the present economic crisis shows, imprudent policies ultimately backfire, even if the reversal's timing and nature are unpredictable.
The wonder is that these issues have been so ignored. Imagine hypothetically that a President McCain had submitted a budget plan identical to Obama's. There would almost certainly have been a loud outcry: "McCain's Mortgaging Our Future." Obama should be held to no less exacting a standard.
All the News
All the News That's Fit To Suppress
By Michelle MalkinConflict of interest stories make great front-page headlines -- except when the newspaper that revels in breaking them is itself in the middle of an ethical morass. Take The New York Times.
Jennifer 8. Lee, one of the muckraking newspaper's reporters, recently boasted on Twitter that the Paper of Record has now "sold $2 million worth of Obama merchandise (book, commemorative editions, etc.)." The president, she noted chirpily, "is good for the bottom line." This lucrative media-government partnership is on proud display at the Times' online Barack Obama store, where readers can buy mugs, books and framed photos of the newspaper's political boosterism.
A press plate of the Times' Obama inauguration front page goes for $149. A "set of Obama victory coffee mugs" sells for $24.95. And for only $1,129, you can own a signed and framed messianic photo of Obama taken by Times photographer Damon Winter -- and neutrally titled "Shining Moment," with the candidate in artsy silhouette as a sunburst illuminates the scenery.
It's a short leap from there to Times reporter Jeff Zeleny, who infamously asked the president in a prime-time press briefing a few weeks ago what had "enchanted" him the most about being in the White House. You could almost see the sunbursts in Zeleny's pupils as he tossed the drool-covered softball to Dear Leader.
I've often said that it's the journalistic sins of omission that are more damning than the industry's sins of commission. Right on cue, the Times acknowledged this weekend that it had spiked a story on possible illegal coordination between left-wing activist groups ACORN and Project Vote and the Obama campaign just before Election Day. The charges involved Team Obama sharing top campaign donor lists with ACORN's supposedly nonpartisan canvassing arm, Project Vote (the same group Obama worked for as a Chicago community organizer).
New York Times public editor Clark Hoyt tried to spin it as a "tip that didn't pan out." He airily dismissed the charges by ACORN whistleblower Anita MonCrief as "nonsense" and quoted Times national editor Suzanne Daley, who shrugged, "You have to cut bait after a while." It was an all too convenient judgment that just happened to be made as Election Day loomed. (Contrast this with the editorial doggedness of the Times' editors in pursuing and publishing the Star Magazine-quality insinuations that GOP presidential candidate John McCain had carried on an affair with Washington lobbyist Vicki Iseman.)
Hoyt attempted to paint MonCrief as an unreliable source. But Times reporter Stephanie Strom had relied on her for months to break a series of ACORN corruption stories. Moreover, MonCrief's allegations fit the shady money-shuffling pattern among ACORN and its affiliates to a T. Strom had reported on ACORN's own internal review of shady money transfers among its web of affiliates conducted by lawyer Elizabeth Kingsley.
The Kingsley review of the incestuous relationship between ACORN and Project Vote found, in the Times' own words, that it was "impossible to document that Project Vote's money had been used in a strictly nonpartisan manner" and "raised concerns not only about a lack of documentation to demonstrate that no charitable money was used for political activities but also about which organization controlled strategic decisions." ACORN, joked independent investigative journalist Matthew Vadum, "moves money around its network with a boldness and agility that Pablo Escobar would have admired."
MonCrief says she was prepared to hand over documentation on the Obama/Project Vote donor-sharing arrangement to Strom before the Times' editors decided to cut bait. The paper's Election Eve incuriosity about potential tax and campaign finance violations by Team Obama belies its repeated denials of bias and conflict. At a self-aggrandizing media conference in 2007, New York Times Executive Editor Bill Keller declared:
"We are agnostic as to where a story may lead; we do not go into a story with an agenda or a preconceived notion. We do not manipulate or hide facts to advance an agenda. We strive to preserve our independence from political and economic interests. We do not work in the service of a party, or an industry, or even a country. When there are competing views of a situation, we aim to reflect them as clearly and fairly as we can."
Rhetoric, meet reality.
Economists Stuck in 1930s Need a Decade Update
Commentary by Caroline Baum
May 20 (Bloomberg) -- Depression avoided. Another recession to follow? That seems to be a concern for some academics, including Princeton economist Alan Blinder.
Writing in the Sunday New York Times, Blinder says a combination of expansionary monetary and fiscal policies prevented 2009 from turning into 1930.
Mission accomplished it isn’t. Premature withdrawal of the stimulus could turn 2010 into 1936, when a series of missteps -- the Federal Reserve raised reserve requirements while FDR balanced the federal budget -- sent the recovering economy down for Part II, according to Blinder.
“To avoid a replay of the policy disasters of 1936-1937, both the Fed and our elected officials must stay the course,” he writes.
While the current recession is the worst in the last 50 years, the issues facing policy makers are the same: How do they know when enough is enough?
Policy makers aren’t exactly sequestered. They have lots of information, both quantitative (economic data) and qualitative (surveys of businesses and consumers), at their fingertips to help them decide when the time is right to wean the patient from life support. They have econometric models, whose flaws are generally exposed after the fact. And they have (hopefully) the experience, wisdom, good judgment and fortitude to do what may be politically unpopular in the short run but vital in the long run for the health of the economy.
Leaders Lead
Let’s start with monetary policy and see what the seven men and women in Washington and 12 across the country could use as a guide.
Business cycle economists are forever testing indicators to see what leads, what’s concurrent with and what lags the economy’s ebb and flow. (I’ve never understood the value of the laggards.) The Conference Board maintains an Index of Leading Economic Indicators, which peaked in March 2006, moved sideways for more than a year and came within 0.1 point of the peak in July 2007 before heading down.
The LEI is widely ignored in the best of times and dismissed when it doesn’t “agree” with the forecast. The 10 components, most of which are known by the time the index is released, get the same treatment.
The April LEI, due tomorrow, is expected to show a 0.8 percent increase, according to the average forecast of 56 economists surveyed by Bloomberg News. That would be the first increase since June, with stock prices, the spread between the federal funds rate and 10-year Treasury note yield, and consumer expectations contributing to the expected increase.
Sensitive Nomenclature
One month does not make a trend. Nor does it reverse the gloomy message reflected in the six-month annualized change in the LEI and the six-month diffusion index, measures preferred by Conference Board economists to the monthly change. Then there’s the possibility historical revisions will change the leaders’ outlook: January’s 0.4 percent initial increase became a 0.2 percent decline with subsequent revisions.
For the moment, the financial, or intangible, indicators -- the interest-rate spread, the stock market and real M2, which probably didn’t show an April increase but has soared since September -- are showing hopeful signs. And they typically lead more concrete measures, such as jobless claims, building permits and orders for capital goods.
Raw materials prices are sending a similar message. The CRB Spot Raw Industrial Price Index, which excludes oil, bottomed in December and went nowhere for three months before heading higher.
There’s a reason they’re called “sensitive materials prices”: They respond to slight changes in demand. Manufacturers can step up their purchases of copper and steel scrap faster than raw materials’ suppliers can increase output. Prices rise as a result.
Touchy Feely Rejection
Intangibles and price signals aren’t enough for the Fed, which is why monetary policy tends to overstay its welcome. Blinder can rest easy on that score.
When it comes to the possibility of fiscal restraint, the only possible reason to worry is the Obama administration’s expressed desire to tax the rich and unexpressed need to tax everyone else to pay for the proposed spending.
Congress enacted a $787 billion fiscal stimulus bill in February (only 11 percent has been spent so far) and a $3.55 trillion budget last month. The projected deficit for the current fiscal year is $1.84 trillion and $1.26 trillion for fiscal 2010.
And that’s before the dream of universal health care is realized. The idea that Congress can revamp one-sixth of the U.S. economy before the August recess is either folly or hubris. Either way, it’s frightening.
Decade Identification
President Barack Obama has said current deficits are unsustainable, but that will be for foreigners to decide and us to find out. At some point, they will demand higher returns on their dollars or return their dollars. That would be a sure sign the government waited too long to tighten fiscal policy.
If that coincides with monetary policy that has overstayed its welcome, fanning inflation expectations and actual inflation down the road, it might not be long before Blinder starts worrying about a replay of the 1970s, not the 1930s.
Pelosi Offers Republicans ‘Beautiful Target’
May 20 (Bloomberg) -- Earlier this month, Republican pollster Neil Newhouse released a 57-page analysis noting President Barack Obama’s high approval ratings and concluding, “We’re better off posting up against Democrats in Congress.”
In charging that the Central Intelligence Agency misled her about its methods of interrogating terrorism suspects, U.S. House Speaker Nancy Pelosi gave the Republicans an opening to follow that advice.
The party is escalating its attacks on the California Democrat: Its House fundraising arm yesterday sent out a memo asking, “Is Pelosi becoming a liability?” House Minority Leader John Boehner of Ohio called on Pelosi to provide evidence or apologize. The Republican National Committee attacked her in a YouTube video. And the House Republican Conference’s Web site asked, “What did Speaker Pelosi know?”
“Speaker Pelosi wasn’t all that popular to begin with,” Newhouse said. “And now that she’s dug herself a hole on the CIA/interrogation issue and seen her disapproval rise to 50 percent, we’d be nuts if we didn’t keep the pressure on.”
Republican consultant Eddie Mahe said he’d advise party leaders to “sit back and hold your fire” on Obama, whose approval ratings top 60 percent. Instead, he said, “Go after Pelosi, a beautiful target.”
The dispute threatens to distract the Democrats as the party seeks to push through a sweeping legislative agenda that ranges from expanding health insurance and curbing greenhouse- gas emissions to re-regulating financial markets.
Sparking Uproar
Pelosi, 69, sparked the dispute last week when she said the CIA gave “inaccurate” information about a simulated drowning tactic known as waterboarding during a September 2002 briefing when she was on the House Intelligence Committee.
CIA Director Leon Panetta said the agency “truthfully” briefed her, and a CIA chart listed her as being told in the 2002 about “extraordinary interrogation techniques” used to question suspected al-Qaeda operative Abu Zubaydah.
The Obama administration has said it has confidence in Pelosi, and House Democrats rushed to her defense. House Majority Leader Steny Hoyer of Maryland yesterday said the speaker “has an extraordinarily good memory” and recalls things he has forgotten. “I don’t doubt her ability to remember what she was told and when she was told it,” he said.
Brendan Daly, a spokesman for Pelosi, said, “It’s clearly a diversionary tactic by the Republicans to try to distract attention from the fact that the Bush administration ordered a policy of torture.”
Truth Commission
Daly said the Republicans continue to oppose a commission, which Pelosi supports, to investigate the interrogations policy.
Pelosi may be able to buttress her argument that she was never told by the CIA that waterboarding was used by citing published comments from one Republican critic: former CIA Director Porter Goss.
Goss, who attended CIA briefings with Pelosi in the fall of 2002 when he was in Congress, wrote in the Washington Post last month that lawmakers should have understood that the techniques “were to actually be employed.” He doesn’t say the lawmakers were told they had been used.
Pelosi said at an April 23 press conference that she and other lawmakers weren’t told that waterboarding and other enhanced interrogation methods were being used, only that they “could be used.”
Still, for Republicans, who lost control of Congress in 2006 and the White House in 2008, the issue has given them a chance to reframe a debate over whether the Bush administration tortured suspects into whether Pelosi knew about the tactics and didn’t object.
Pelosi Against CIA
“The best problems your opponents have are ones you didn’t create,” Republican consultant Alex Vogel said. “This is not a fight between her and the Republicans. It is between her and the CIA.”
Pelosi’s approval ratings were at 39 percent in a May 14-17 CNN/Opinion Research Corp. poll. Obama’s stood at 62 percent.
“She makes an inviting target,” said Republican consultant John Feehery, a former spokesman for then-House Speaker Dennis Hastert, an Illinois Republican.
Pelosi, the first woman elected U.S. House speaker, has repeatedly garnered more than 70 percent of the vote in getting re-elected in her San Francisco district. Her Democratic colleagues may be more vulnerable, Feehery said.
Going After Majority
“The voters can go after her through her congressional majority,” he said.
Democratic consultant Glenn Totten said the Republicans are targeting Pelosi to try to prevent Obama from getting his agenda through.
“This is very much an attempt to divert attention from the real business of the country,” Totten said.
There are risks involved with such a strategy, said Julian Zelizer, a professor of history and public affairs at Princeton University in New Jersey.
“Stories are already emerging that dispute the CIA accounts,” Zelizer said. “The controversy only fuels discussion of techniques in the war on terrorism that many Americans did not support, and public attention remains focused on which party will salvage this economy.”
If the Democrats can change the conversation back to the economy, he said, then Republicans will find this was “another week lost for the party in its effort to remake its image.”
Stocks Fall on Fed Warning
Stocks Fall on Fed Warning
PETER A. MCKAYROB CURRAN
U.S. stocks dipped into the red Wednesday afternoon as a bounce for banks waned and the Federal Reserve warned that their expectations for the depth of the recession worsened in the last three months.
Officials also projected an even deeper recession than they expected three months earlier and a more sluggish recovery over the next two years as labor markets remain under pressure, according to April meeting minutes. However, the outlook appeared to have brightened somewhat between the March and April meetings.
![[Markets Data]](http://s.wsj.net/public/resources/images/MDGpromo_D01222009151210.jpg)
Recently, the Dow Jones Industrial Average dipped 2 points to 8472 after earlier trading up more than 100 points at 8591, which would be its highest close since January. J.P. Morgan Chase was down 2.2% to $35 and American Express fell 1.1% to $24.54. Hewlett-Packard also weighed on the index, off 4.8% to $34.81, after it posted a 17% skid in earnings.
The tech-heavy Nasdaq Composite Index was up 0.3% to 1740. The S&P 500-stock index was off slightly at 908, hurt by a 2.5% dip in financial stocks.
"Although the credit shock has subsided, the housing shock clearly has not, nor has the shock in the labor market as we continue to lose more than 500,000 jobs [a month]," said David Rosenberg, chief economist and strategist for Toronto's Gluskin Sheff & Associates.
Financial stocks had climbed earlier after Bank of America said it completed a stock sale that raised $13.5 billion in capital. The government recently ordered the bank to replenish its capital after the recent stress tests of 19 lenders. Shares of the bank were up about 2.8%, off the best levels of the session.
Like most market participants on Wednesday, floor broker Ted Weisberg welcomed Bank of America's offering as a sign that the market's long-term fundamentals are improving. He shrugged off the broader financial sector's weakness Wednesday as a pause in its rally from its March lows.
An exchange-traded fund tracking the S&P's financial sector had rallied almost 95% coming into Wednesday's action, compared to a 34% in the index as a whole. "We're just dealing with a stock market that was defying gravity," said Mr. Weisberg, who had previously bought Bank of America shares but has stayed on the sidelines of Wednesday's rally.
Treasury Secretary Timothy Geithner said in testimony to the U.S. Senate Banking Committee that the 19 stress-tested banks have raised more than $56 billion in funds to date, including $34 billion in offerings of common stock. Investors had mostly welcomed those deals as confirmation that Wall Street is getting back to normal functioning after a period in which companies' ability to raise capital at any price was essentially frozen.
"The rash of secondaries we've seen and the way they've been scarfed up has been pretty impressive," said portfolio manager Uri Landesman, of ING Investment Management in New York. "It's taken a lot of liquidity out of the market, but at the same time, we're still seeing buying in other areas of the market. That tells me we're seeing some real money come off the sidelines for investment," rather than short-term trading.
But some deals have garnered a tepid reception. Regions Financial said that it plans to raise $1.25 billion through an offering of common and new mandatory convertible.
![[Stocks]](http://s.wsj.net/public/resources/images/OB-DS223_pan052_D_20090520143206.jpg)
Bloomberg News/Landov Frank Cannarozzo at the New York Stock Exchange May 20. Morning gains eroded on a slide for bank stocks.
Oil futures surged above $62 a barrel, a six-month high after a drawdown in gasoline inventories. After sliding below 30 for the first time since September on Tuesday, the CBOE Volatility Index slid another 0.2% on Wednesday to 28.75.
Oil and energy stocks have been on a tear amid a renewed round of speculation and optimism that the U.S. economy is due for a rebound that could bolster fuel demand. Many traders have argued that the rally is due for a correction in light of robust U.S. stockpiles of crude and refined fuels heading into the peak post-Memorial Day travel season.
According to the Energy Information Administration, U.S. reserves of crude and gasoline fell faster than expected last week. Crude reserves were down 2.1 million barrels versus expectations of a 700,000 barrel draw. Gasoline reserves were down 4.3 million barrels, compared to expectations of a 1.2 million draw, according to a Dow Jones Newswires survey.
"Gasoline is probably the most balanced of the energy products in terms of the fundamentals right now," said Tom Bentz, vice president at BNP Paribas Commodity Futures in New York. "But even there, we're not seeing any shortages anywhere. The bottom line is that the market is really trading now on sentiment and other things than the fundamentals."
Retail gasoline prices have risen more than 13% over the past month but are still down nearly 40% from a year ago, according to the driving club AAA.
Shares of all types of commodity producers gained. Rio Tinto was higher by 6.6% to $179.48, BHP Billiton gained 1.9% to $54 and U.S. Steel rose 7.8% to $32.27.
Deere was up 1.6% after it announced a 38% slide in fiscal second-quarter profit that nevertheless beat analysts' expectations. The equipment maker also forecast a pickup in farm activity for 2010. Chip maker Analog Devices announced a 93% slide in first-quarter profits, but its executives said they expect a recovery in the semiconductor sector in the first half of this year. Investors chose to focus on those comments, resulting in a 15.5% surge in Analog shares.
Stephen Lieber, chief investment officer at Alpine Woods Capital Investors, said that Wednesday's market action could be represenative of things to come in the next few months, with a few stand-out names amid an otherwise ho-hum performance in major indexes.
Alluding to the minutes of the Federal Reserve's April rate meeting released on Wednesday, Mr. Lieber said: "If you look at it, they're not forecasting any sort of immediate recovery. But you can still get some selective strength in the equity market in an environment like that."
In the minutes, Fed officials projected a deeper U.S. recession than they previously expected, and they opened the door to buying more mortgage-backed and Treasury securities to help stabilize the financial system.
The Humanitarian Face of the State, With Fangs
The Humanitarian Face of the State, With Fangs
The glorious Barack Obama, broad-minded humanitarian universalist that he is, promised to reverse the wickedness of the Bush administration, which ran a prison camp in Guantánamo Bay and kept pictures of ruthless abuse from public view to save the face of Bush.
Bush the despot!
Obama the savior!
And sure enough, after taking office, Obama did something or other toward closing that prison camp just off our shores, along with its secret military trials and abuse. How the partisans cheered on one side and booed on the other.
Except that just the other day, Obama quietly reversed himself. Now the camps must stay. After all, there are real enemies there, the "worst of the worst." The trials will still be in secret. The military will still run them, because, you know, you just can't trust those civilian courts to arrive at the right verdict.
As for those pictures of abuse, Obama can't allow those to be seen. What were they thinking? Why, for our Islamic enemies to have access to those will only give them a weapon to whip up their countries in some sort of anti-US frenzy.
Is the idea that if we do not release those pictures that the Islamic world will come to believe that the prisoners in Guantánamo and other venues are treated decently, with three square meals per day, awaiting trial by jury?
Clearly the reason for blocking the photos is not to embarrass the US state with its own people. No surprise here: the state's interest is mainly in protecting itself. That's why it does what it does.
Of course the Republicans played their appointed role as guardians of the torture power and celebrated when Obama reversed his previous position and his campaign promise. Finally he is taking his responsibility as head of state.
But how is it possible that the great humanitarian universalist reversed himself at all, even against his own promises and even to the point that the ACLU is protesting?
Well, it is all about thinking like the state. It took his administration a bit to get the hang of it in international affairs but it was just a matter of applying the logic of his domestic program, which is all-controlling.
Think of it this way. Even if Obama wanted to be another way, wanted to bring a new sense of things to government, it is not difficult to slip into the role of a despot. That is, after all, the job he campaigned for years to get and the job he now holds.
Let's say you are a health geek who is dedicated to the proposition that Americans eat too much junk food. But then you are hired as the manager of the local doughnut shop. Your first day on the job you issue mild warnings to customers that they should go easy on the double-dozen purchases.
Everyone around you thinks you are out of your mind. It only takes a few days to realize that you are in fact crazy to talk this way. The more doughnuts people buy, the better off you are and the better off your employees are. You are working against your own success by promoting other forms of eating.
Of course you change your tune!
And would that the state were like a doughnut shop. As Butler Shaffer points out in his new book Boundaries of Order, which argues that the state is unviable in our times,
every political system is nothing more than a mechanism that allows some to benefit at the expense of the many through violent takings of property…. Politics is unthinkable without property trespasses and takings.
This is why "there are no fundamental differences among major political parties: at their core, each embraces the authority of the state to regulate how property will be owned and used."
The state is driven by its own internal interests, which can only be fulfilled at the expense of society. The state operates according to the principle of violence. Violence is the ultimate bargaining tool of the state. This is true in domestic and foreign relations, whether running a health program or a prison camp.
It is particularly telling that Obama cited the grave threat that these poor slobs — who are in Guantánamo because they dared fight against the interests of the Holy American Empire — represent to all of us. As Shaffer writes,
Because of our willingness to huddle at the feet of political officials whenever we feel ourselves threatened, the state will feed us an endless supply of fear-objects with which to assure our continuing submission. This is why the well-being of the state is dependent upon the war system.
This is how I can predict only muted protests from the Left concerning Obama's betrayal. So long as he continues to expand the state in the domestic area — inflating, taxing, regulating, nationalizing — they will put up with abuses of the human rights that they claim to champion.
Guantánamo is a metaphor. How those prisoners are treated is a mere foreshadowing of how we will all be treated under the total state.
Llewellyn H. Rockwell, Jr. is chairman of the Ludwig von Mises Institute in Auburn, Alabama, editor of LewRockwell.com, and author of The Left, the Right, and the State. Send him mail. See his article archives. Comment on the blog.
Can President Obama’s Policies Heal the US Economy?
Can President Obama’s Policies Heal the US Economy?
In his interview with the New York Times on May 3, 2009, President Obama said,
I know how to ask good questions of my doctor. But ultimately, he's the guy with the medical degree. So, if he tells me, you know what, you've got such-and-such and you need to take such-and-such, I don't go around arguing with him or go online to see if I can find a better opinion than his.
We suspect that President Obama has adopted the same approach with respect to managing the US economy. In fact, in the same interview he said that he is very much influenced by the ideas of Joseph Stiglitz, Larry Summers, and Paul Volcker.
During the interview he also expressed his admiration for Robert Reich and Paul Krugman. Although he didn't say it, we suggest that the US president is also greatly influenced by the ideas of Federal Reserve Chairman Ben Bernanke.
All these famous personalities derive their way of thinking from the writings of John Maynard Keynes and endorse heavy government involvement in the economy.
The influence of these personalities on the mindset of the US president is vividly revealed in his economy speech at Georgetown University on April 15, 2009. According to the president,
Recessions are not uncommon. Markets and economies naturally ebb and flow, as we have seen many times in our history. But this recession is different. This recession was not caused by a normal downturn in the business cycle. It was caused by a perfect storm of irresponsibility and poor decision-making that stretched from Wall Street to Washington to Main Street. As has been widely reported, it started in the housing market…. Everybody was making record profits — except the wealth created was real only on paper. And as the bubble grew, there was almost no accountability or oversight from anyone in Washington. Then the housing bubble burst. Home prices fell. People began defaulting on their subprime mortgages. The value of these loans and securities plummeted. Banks and investors couldn't find anyone to buy them. Greed gave way to fear. Investors pulled their money out of the market. Large financial institutions that didn't have enough money on hand to pay off all their obligations collapsed. Other banks held on tight to the money they did have and simply stopped lending.
Note that not even a word is mentioned about the possible responsibility of the Fed for the present economic crisis. This omission is puzzling.
Recall that the president suggested that he knows how to ask good questions. And yet it seems that when it comes to the world of economics, he has lost this skill and is not asking the relevant questions. He is not arguing with the experts.
In a typical Keynesian way, the US president argues that the crisis in the financial markets started to spread to the real economy. Consequently, all this has undermined overall demand in the economy. To prevent further deterioration, the Obama administration introduced measures to counter the economic slide.
The first step was to fight a severe shortage of demand in the economy. The Federal Reserve did this by dramatically lowering interest rates last year in order to boost investment. And my administration and Congress boosted demand by passing the largest recovery plan in our nation's history.
There is, however, no such thing as a shortage of demand. In fact, individuals' demand is unlimited. What is scarce is not demand but rather individuals' ability to fund the demand.
For instance, an individual might have a demand for a Mercedes 600, but only have the funding for a bicycle.
In order to be able to fund a Mercedes, our individual must produce enough goods to enable him to secure the car.
A dramatic lowering of interest rates and massive government spending cannot improve the bottom line of the economy (the individual's ability to produce more and better-quality goods). Such policies can only redistribute real wealth from wealth producers to wealth consumers.
For instance, in an economy comprised of a baker, a shoemaker, and a tomato grower, imagine that another individual enters the scene. This individual is an enforcer who is exercising his demand for goods by means of force. Can such demand give rise to more output, as the popular thinking has it? On the contrary, it will only impoverish producers. The baker, the shoemaker, and the farmer will be forced to part with their product in exchange for nothing, and this, in turn, will weaken the flow of production of final consumer goods. According to Mises,
there is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity. (Human Action, p. 737)
This, however, is not what the president believes. He is of the view that during the current crisis government should increase and not cut its expenditure.
To begin with, economists on both left and right agree that the last thing a government should do in the middle of a recession is to cut back on spending. You see, when this recession began, many families sat around their kitchen table and tried to figure out where they could cut back. So do many businesses. That is completely responsible and understandable reaction. But if every family in America cuts back, then no one is spending any money, which means there are more layoffs, and the economy gets even worse, that's why the government has to step in and temporarily boost spending in order to stimulate demand. And that's exactly what we're doing right now.
Here Obama accepts the terrible advice of his economists that savings is bad for the economy. If he had spent some time pondering this issue, he would have reached the conclusion that what is good for the individual is also good for the economy.
He would have discovered that the key for funding is real savings. He would have also discovered that real savings cannot be replaced with money and government outlays. It must be appreciated that government is not a wealth generator — it is a wealth consumer. The government is completely dependent on the wealth of the private sector. Hence the more government spends, the less is left for wealth generators and the weaker the economy gets.
This means that only wealth generators — and not the government and the central bank — can generate funding.
President Obama would have discovered that, unlike what his advisers are telling him, it is not possible to create something out of nothing. In order to be able to consume, individuals first must produce useful things.
After suggesting that savings is bad, the president goes on to argue that it is necessary to provide assistance to banks in order to revive credit.
The heart of this financial crisis is that too many banks and other financial institutions simply stopped lending money. In a climate of fear, banks were unable to replace their losses by raising new capital on their own, and they were unwilling to lend the money they did have because they were afraid that no one would pay it back. It is for this reason that the last administration used the Troubled Asset Relief Program, or TARP, to provide these banks with temporary financial assistance in order to get them lending again. No, I don't agree with some of the ways the TARP program was managed, but I do agree with the broader rationale that we must provide banks with the capital and the confidence necessary to start lending again.
No, the heart of the current financial crisis is the boom-bust policies of the Fed. It is these policies that caused massive real-wealth destruction and hence weakened the economy's ability to generate real savings. Note that it is real savings that funds economic activity.
Once the process of real-funding formation comes under pressure, obviously banks' ability to lend follows suit. After all, banks are just intermediaries; they help to facilitate real savings, but they cannot generate real savings. Although banks are still reluctant to lend, they are quite happy to lend to viable borrowers. The fact that bank credit is still tight raises the likelihood that the pool of real savings is still under pressure.
The US president is of the view that somehow he could make the banks lend regardless of real savings. The only expansion of lending that the president could enforce upon banks is lending "out of thin air." This type of lending amounts to the creation of money "out of thin air" — the key factor behind the present economic crisis. To justify his policies, the US president maintains,
Of course, there are some who argue that the government should stand back and simply let these banks fail — especially since in many cases it was their bad decisions that helped create the crisis in the first place. But whether we like it or not, history has repeatedly shown that when nations do not take early and aggressive action to get credit flowing again, they have crises that last years and years instead of months and months — years of low growth, low job creation, and low investment that cost those nations far more than a course of bold, upfront action.
Again, the president must appreciate that without the expansion of the pool of real savings it is not possible to make banks expand credit. The only credit that they can expand is "out of thin air." This type of credit can only further weaken the bottom line of the economy.
Contrary to the advice the president was given — probably by Fed Chairman Bernanke — we can suggest that the more government tries to fix the banking sector, the worse things are likely to be. Also, contrary to Bernanke's views, it is the Fed's tampering with the US economy during the 1930s that transformed a recession into a depression.
Similarly, almost twenty years of aggressive tampering with the economy by the Japanese government and central bank has failed to meaningfully revive the Japanese economy. (This tampering has only weakened the bottom line of the Japanese economy.)
After assuring the US public that he knows how to counter the economic crisis, the president said,
But even as we continue to clear away the wreckage and address the immediate crisis, it is my firm belief that our next task is to make sure such a crisis never happens again…. We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock.
His intentions are good. However, his actions have already laid the foundation for a gigantic bubble and a further weakening of economic fundamentals.
Supreme Disappointments: Conservatives and Liberals are Both Wrong
Supreme Disappointments: Conservatives and Liberals are Both Wrong About Rights
Where do individual rights come from? You’d think that if anyone knows the answer, it would be America’s top judges.
But you would be wrong.
On this basic question conservative and liberal judges alike are locked into a crucial error about America’s bedrock constitutional principle: individual rights.
The error consists in regarding rights as gifts from society that can be revoked at will, through the political process.
In truth, rights are not social gifts but political principles based on facts of reality. These facts don’t bend to the so-called will of society. That’s why the most fundamental question a Supreme Court justice must answer is what in fact do the individual’s rights to life, liberty, property, and happiness include? Only then can he determine if a certain law or government action is securing or violating those rights.
But judges don’t ask this question anymore, because they don’t think it’s objectively answerable.
Instead, and broadly speaking, judicial conservatives only ask what privileges American society granted the individual at the time of constitutional ratification. To conservatives, it’s meaningless to ask whether the right to liberty in fact includes, say, the right to use contraception (a question 18th-century Americans may have answered incorrectly). Their only concern is whether society at that time meant to permit this action. So when modern legislators make criminal offenses out of abortion, contraception, homosexuality, and other acts said to be frowned upon centuries ago, conservative judges feel duty-bound to stand aside and do nothing, in obedience to the “social will.”
Judicial liberals reject this conservative view of social values frozen in time, like a sepia-toned snapshot of bygone days. Instead, liberals see constitutional values evolving like a motion picture, constantly updating to reflect current social mores. To liberals, it’s meaningless to ask whether the right to liberty in fact includes freedom of trade and contract (a question that a majority of Americans may be answering incorrectly today). Their only concern is whether the “will” of today’s society favors permitting such actions. So when Congress declares federal dominion over every nut, bolt, and button of American industry, liberal judges feel duty-bound to stand aside and do nothing--not because earlier Americans intended to allow such controls, but because modern Americans want them.
But conservatives and liberals are both wrong about rights.
It is not true that rights are grants from society. The very concept of a right identifies the actions you can take without anyone’s permission. Rights are not social privileges but objective facts, identifying the freedoms we need to live our lives--whether a majority in society agree or not. This is why the Founding Fathers dedicated their new government to the protection of each individual’s already-existing rights to life, liberty, and the pursuit of happiness.
Thus, the Fifth and Fourteenth amendments forbid the government to deprive you of “life, liberty, or property” (except when you have violated someone else’s rights, and even then the government must follow due process, such as holding a trial). The Ninth Amendment safeguards all “rights” not listed elsewhere. These principles encompass all the innumerable actions required for your survival and happiness over a lifetime--the right to make a contract, earn a profit, build a house, make a friend, speak your mind, and so on.
Because the Constitution is the “supreme Law of the Land,” judges are duty-bound to strike down statutes that violate rights. This is not improper “judicial activism” but the robust, constitutional power of judicial review.
Judges must never bow to social opinion, historical or current, when exercising judicial review. For example, laws that institutionalized government discrimination against blacks in military service and voting deserved to be struck down, even if political majorities in the Founders’ generation or modern times favor such rights violations.
To their discredit, today’s judges--conservatives and liberals alike--have all but abandoned this judicial safeguard of our liberties.
The arch-conservative Robert Bork once declared that Ninth Amendment “rights” carry no more meaning than an accidental inkblot on the constitutional parchment. And according to Justice Antonin Scalia, there’s nothing in the Constitution “authorizing judges to identify what [those rights] might be, and to enforce the judges’ list against laws duly enacted by the people.” As for life, liberty, and property, government can smash them at will, if society so wishes. “Does [the Constitution] guarantee life, liberty or property?” asks Justice Scalia rhetorically. “No, indeed! All three can be taken away. . . . It’s a procedural guarantee.”
Judicial liberals don’t dispute that a judge must bow to the “social will”--they simply divine it differently. As one liberal Justice declared, the Constitution “must draw its meaning from the evolving standards of decency that mark the progress of a maturing society.”
While conservatives and liberals squabble about whether society permits you this action or that, they are defaulting on their sacred constitutional duty of judicial review.
America desperately needs a new generation of judges who understand that their function is not to uphold social opinions but to protect our rights.
Thomas A. Bowden, author of The Enemies of Christopher Columbus, is a writer for the Ayn Rand Institute in Irvine, CA. The Institute promotes Objectivism, the philosophy of Ayn Rand, author of Atlas Shrugged and The Fountainhead. Thomas A. Bowden practices law in Baltimore, Maryland.
Great Debate on Global Warming
Great Debate on Global Warming
Andrew Roth
Rep. Dana Rohrbacher did a FANTASTIC job beating up on Rep. Jim Moran in this debate about global warming. But he did an even better job taking Chris Matthews to task for "poisoning the well." Well done!
The Master of Money
The Snowball: Warren Buffett and the Business of Life
By Alice Schroeder
There is now a long shelf of books about Warren Buffett, but this is the first time he has gone to any trouble to add to it. Reportedly Buffett now regrets his decision--he has apparently put some fresh distance between himself and his official biographer. If so, it's not hard to see why. Alice Schroeder is a former Morgan Stanley research analyst, able to understand and to explain Buffett's money-making, but she declined to confine herself to the business at hand. She has sought to describe Buffett's psychological landscape as clearly as his financial one. For the reader, the results are pretty terrific--there are not a lot of 838-page narratives that leave you wanting more--but for Buffett they are no doubt upsetting.
Over his long and admirable career, the famous billionaire has been shockingly honest about who he is and what he does. Now along comes this first-time author who insists on seeing his pleasant honesty and raising it, painfully. Even worse: she's a woman! Buffett has a long and happy history of admitting attractive, intelligent women into his life, which Schroeder describes without mentioning how neatly she fits into the pattern. These women have invariably felt the need to shelter and to protect their man, and to subordinate their own needs to his--until now. Buffett should have known better: you should never completely trust a writer. Especially if she is any good.
Begin, as Schroeder does, at the beginning. Born in 1930, the son of an emotionally abusive mother and a father whom he adored but who was unable to absorb the full shock of his wife, Buffett was emotionally problematic. In Schroeder's telling, the young Warren was sneaky, socially awkward, and generally a wiseass with a cruel streak. As a man he would reserve his harshest criticism for those who lied or cheated or stole, but as a boy he shoplifted pathologically--not because he wanted a particular thing, but simply for the pleasure of stealing. At ease in Omaha, he was unhappy everywhere else, and so he suffered especially when his stockbroker father Howard was elected to the House of Representatives and he became the new kid at middle school in Washington, D.C. He was young for his class. In the most important social departments, he started out well behind his classmates and, as he puts it, "I never caught up, basically." He had terrible social anxieties and, right up until the time he married, at the age of twenty-one, a special lack of talent with girls.
In spite of all this he was deeply, ferociously competitive. Here is one of the odd things about the man whom Schroeder describes: the plain facts of his young character assemble themselves into something like a portrait of a universal loser--and yet right from the start Buffett himself seems to have been able to believe that the universe was wrong and he was right. What other people thought of him, and how other people measured him, did not prevent him from establishing his sense of himself as someone who might win. In his Washington, D.C. school (before he talked his parents into letting him return to Omaha) Buffett did well in only one class, typing. Here, in his own words, is how he went about it: "I made A's every semester in typing. We all had these manual typewriters and, of course, you'd slam the carriage back to hear this 'ding.' I was by far the best in the class at typing out of twenty people in the room. When they'd have a speed test, I would just race through the first line so I could SLAM the carriage back. Everybody else would stop at that point, because they were still on the first word when they would hear my 'ding!' Then they'd panic, and they'd try to go faster, and they'd screw up. So I had a lot of fun in typing class." (This, by the way, is how Schroeder incorporates Buffett's voice throughout her narrative--long italicized quotes woven into the body of the narrative. One measure of how lucky she is in her subject is how much interest there is in just flipping through the book from cover to cover reading only the italicized quotes. Buffett is apparently incapable of being dull.)
The young Buffett's ambition found a number of conventional if implausible outlets--bodybuilding, for instance; he devoured books with such titles as Big Arms and Big Chest--and one strange one, at least for a little kid: money-making. At a shockingly young age Buffett learned the pleasure of having more money than his friends. To accumulate it he worked paper routes, bought and managed pinball machines, and created a horse-racing tip sheet that he sold at the local track. Upon arriving in Washington he asked his father to use his congressional status to request from the Library of Congress every book it had on horse handicapping. By the time he was sixteen, Buffett had accumulated the equivalent in today's dollars of $53,000, and hardly saw the point of taking the spot he had been offered at the Wharton School. He knew what he wanted to do for a living--live in Omaha and invest in stocks--but his parents prevailed and off he went to college. He lasted three years before he returned and finished at the University of Nebraska.
One of the patterns that Schroeder teases out of Buffett's life--not just in his investments but also in his relationships--is his tendency to seek safe harbors. And yet once he has found safety, he isn't content to remain there. Instead he waits for opportunities to stage surprise attacks on the outside world. Omaha is his fort; the outside world is lucrative but dangerous, and Buffett never enters it without some cost-benefit analysis. But in 1950, after he read a book called The Intelligent Investor written by a pair of Columbia University professors named David Dodd and Benjamin Graham, Buffett didn't think twice. As his then-housemate says here, "it was almost like he'd found a god." When Buffett applied to the Columbia Business School, his application landed on the desk of David Dodd. Dodd brought Buffett to Columbia; Graham brought him into his investment firm.
Like Buffett, Graham was instinctively non-conformist--even more so in his exotic personal life than his professional one. ("A Mount Everest for women who liked a challenge: they met him and wanted to climb on top," is how Schroeder oddly describes it.) Buffett--whose idea of a wild night seems to have involved reading Moody's Manuals in as many positions as possible--turned a blind eye to Graham's sex life to remain focused on his financial technique. Benjamin Graham was in many ways very different from what Warren Buffett was destined to become. Graham's experience of the Great Depression had instilled him with pessimism. He eschewed judgments about the future prospects of a company or an industry, and instead looked for bargains in the here and now--companies that were trading below the value at which they might be liquidated. Graham was "looking at businesses based on what they were worth dead, not alive," as Schroeder puts it. Cigar butts, he called these.
Cigar butts obviously appealed to Buffett, but Buffett's investment career was destined to coincide with a very different period in American financial history. There never was a better time and place to make money from optimism than in the American stock market since World War II. Had Buffett confined himself to the gloomy business of plucking wet smelly cigar butts off the ground, he would never have become Warren Buffett. And Buffett was built differently than Graham. He had emerged from his childhood both a pleaser and an optimist. Dale Carnegie's How To Win Friends And Influence People apparently made a deep impression on him. When he looked at a company, he saw not just its asset value but also its possibilities.
Buffett's first big bet was on a then obscure insurance company called GEICO. GEICO was not, by Graham standards, a bargain: it traded at a price above the value of its assets. But Buffett dug down into the business, saw how fast the company was growing, and, as Schroeder writes, "felt confident of being able to predict what it would be worth in a few years. ... A less Graham-like analysis could hardly be imagined. Graham's 1920s bubble and Depression experiences had made him suspicious of earnings projections. But Warren was betting three-quarters of his patiently acquired money on the numbers he had calculated."
In retrospect it is hard to say whether the rising market created Buffett's long-term optimism, or Buffett's optimism simply found a lucky home in a rising market. It is hard, also, to say whether Benjamin Graham changed Buffett's life or merely gave him an excuse to do what he was going to do anyway. At any rate, Graham wound up being more of an intellectual pit stop than a destination. In 1956 Buffett moved back to Omaha, started his first investment partnership, and really never looked back. By 1960 he had made money grow at such incredible rates that "his name was being passed along like a secret." A dollar invested with Buffett in 1957 was 26 dollars by 1969, and he was taking no obviously wild risks. In no year did he ever lose money.
In describing how Buffett's mind works, and why it is so well suited to his chosen career, Schroeder is particularly good. A shrewd evaluator of businesses and the people who ran them, Buffett turned himself, at a young age, into a kind of odds-calculating machine. As Schroeder puts it, "he tended to extrapolate mathematical probabilities over time to the inevitable (and often correct) conclusion that if something can go wrong it eventually will." This habit of mind informed not just his investment decisions but also much else--for instance, his obsession with nuclear proliferation. In Buffett's mind, it is not a question of if but when a nuclear bomb explodes in a big city, and the goal should be not to prevent it but to reduce the odds, and put the terrible day off for as long as possible.
To his natural gifts as a bookie Buffett coupled an incredibly keen sense of self-preservation. He seems always to have been something of a physical and emotional coward. He is actually less wary in his financial life than he is outside of it. He avoids social conflict, unless there is money on the line, and also all sorts of new experiences. His long-time partner Charlie Munger likes to call Buffett a "learning machine," but there are whole swaths of human activity he actively resists learning anything at all about, such as the entire high-tech industry. He confines himself to the diet of an eight-year-old, refusing to eat anything much beyond spaghetti, hamburgers, and grilled cheese sandwiches. Schroeder describes a bizarre scene in which Katharine Graham escorted Buffett to dinner at the Manhattan apartment of Sony Chairman Akio Morita. Japanese chefs served plate after plate that Buffett left completely untouched. "By the end of fifteen courses, he still had not eaten a bite," writes Schroeder. "The Moritas could not have been more polite, which added to his humiliation. He was desperate to escape back to Kay's apartment, where popcorn and peanuts and strawberry ice cream awaited him. 'It was the worst,' he says about the meal he did not eat. 'I've had others like it but it was by far the worst. I will never eat Japanese food again.'" Buffett ate what he needed to eat to remain alive--and learned what he needed to learn to invest shrewdly.
Finally, and most critically, Schroeder stresses Buffett's obsession with money, which he famously views less as a unit of exchange than a store of value. Kay Graham once asked him for a dime to make a phone call and Buffett, finding only a quarter in his pocket, went off to make change. In telling the tale of Buffett's rise, Schroeder returns over and over to his pathological stinginess. As rich as Buffett became, he never stopped measuring himself by how much money he had. He tells Schroeder that he pretty much measures his whole life by Berkshire Hathaway's book value, and the reader can't help wondering if that is ultimately how he measures other people, too. "He was preoccupied with money," Schroeder remarks. "He wanted to amass a lot of it, and saw it as a competitive game. If asked to give up some of his money, Warren responded like a dog fiercely guarding its bone, or even as though he had been attacked. His struggle to let go of the smallest amounts of money was so apparent that it was as if the money possessed him, rather than the other way around."
Buffett's single-minded pursuit of money seems to have left him with little interest in anything else. His detachment from his children became a running joke in the Buffett family. Schroeder quotes a friend's description of the first Mrs. Warren Buffett as "sort of a single mother. ... He was so used to her attention and remained so undomesticated that once, when she was nauseous and asked him to bring her a basin, he came back with a colander. She pointed out that it had holes; he rattled around the kitchen and returned triumphantly bearing the colander on a cookie sheet. After that she knew he was hopeless." In the late 1970s Susie Buffett moved to San Francisco and pursued other relationships, and even told one lover that she would seek a divorce. In the bargain she persuaded her housekeeper back in Omaha, an attractive younger woman named Astrid Menks, more or less to replace her as Buffett's caretaker. Buffett apparently leapt rather more enthusiastically into this arrangement than his wife expected. "Susie herself was shocked," writes Schroeder. "This wasn't what she had in mind when she stressed to her husband that they both had needs. But it might have been predicted. Warren had searched his whole life for the perfect Daisy Mae, and whatever he wanted Astrid did: buy the Pepsi, do the laundry, take care of the house, give him head rubs, cook the meals, answer the telephone, and provide all the companionship he needed."
Through it all, Buffett maintained his desire to present to the outside world a life simple and ordinary. He only ever made one public statement on his polygamous family arrangements ("[I]f you knew the people involved, you'd see that it suited all of us quite well"), though he added to Schroeder that "they both need to give, and I'm a great receiver, so it works for them." His life was structured to maximize the time and energy he could devote to Berkshire Hathaway, and he seems to have spent very little time questioning that structure. From time to time he seems to have backed away from his life with what sound like tiny spasms of self-doubt. As early as 1970, he wrote to his shareholders that "I don't want to be totally occupied with outpacing a market rabbit all my life." But always he takes a deep breath and waits for the feeling to pass.
In her account of Buffett's equally complicated financial life, Schroeder describes two decisions that led him down the path he eventually took. The first came in 1958, after he bought a small windmill-maker in Beatrice, Nebraska called Dempster Mill Manufacturing. Having milked its assets for all they were worth and then put it up for sale, Buffett found himself cast in the town papers as the rapacious, heartless big-city financier. He hated the role. He was painfully thin-skinned and avoided any situation in which he might come in for personal criticism. From that moment on, he sought to be seen as the good guy. He set out to solve an original and seemingly insoluble problem: how to become the world's richest man and also be universally admired and loved. At times he would still behave like an old-fashioned capitalist pig--exploiting weakness in others, obsessing about money, stiffing workers, driving ruthlessly hard bargains, and so on; but he did it so deftly and sensibly, and with such good humor, that he was seldom again cast in the role of the villain.
Buffett's second great decision was to maximize, at great financial cost to himself, the interest that the public might take in his business affairs. In 1986, Congress passed a tax reform that changed how Berkshire Hathaway's capital gains were taxed. Previously, those gains had been taxed only once, when a shareholder sold his shares. Now, so long as Berkshire remained a public corporation, Buffett would need also to pay tax on any gains from the sale of stocks inside his portfolio. There was an obvious solution, and it was seized upon by public fund managers everywhere in Buffett's position: shutter the corporation and become a private equity fund. At the time Berkshire had $1.2 billion of unrealized capital gains. Buffett might have doled these out, and then restarted as a partnership free of corporate double tax. Instead, at a cost to himself that Schroeder puts at $185 million, he kept Berkshire intact.
A man who cares so deeply about money reveals himself most wholly in his decisions to part with it. Buffett had exchanged cash for an audience. The first twenty years of his investing life had been spent more or less in obscurity. (In 1981 only twenty-two people attended the Berkshire Hathaway conference.) By 1986, however, Buffett's every move was being watched, and usually cheered. His fame became not only a pleasure but an asset. His capital became unlike anyone else's, because it came with his name attached to it. Warren Buffett saw deals that no one else saw, and had access that no one else had. If the stock market was a roulette table, he had his hand on the wheel. Then he pushed his luck.
From very early on in his investment career, Buffett had qualms about Wall Street. He began his career as a stockbroker, but when he learned that a stockbroker made his money not by enriching his customers, but by churning their portfolios, he lost interest in the job. As his wealth grew and amplified his opinions, he voiced them more frequently, and conveyed his distaste for Wall Street brokerage firms. And so it came as a shock, in 1986, when he turned on a dime and bought a giant stake in Salomon Brothers (where, at the time, I happened to work). The firm had been mismanaged and was the target of a hostile raid which, if successful, would almost certainly have cost the CEO, John Gutfreund, his job. In rode Buffett to take a stake in the firm that foiled the raid, and to keep Gutfreund in his job.
But it was no ordinary stake. Buffett's reputation as the soul of integrity enabled him to charge the embattled CEO extra for his capital: his dollars were not just money, they were also an ethical imprimatur. Salomon Brothers sold Buffett a security that guaranteed a high return, no matter how the other shareholders fared, and a sensational return if the firm's stock price happened to rise. Other investors had to worry that the firm was well run, whereas Buffett was being paid a big sum to bet only that it would not go bankrupt. He had rented not just his capital but also his reputation. The moral algebra of the transaction was curious: it caused a lot of people to feel better about Salomon Brothers but no one to think worse of Buffett.
But the joke was on Buffett. A few years later, a rogue trader at Salomon Brothers rigged the U.S. Treasury bond market. Gutfreund had learned of the fraud and failed to mention it on visits to both the Treasury and the Fed. Treasury Secretary Nicholas Brady was so outraged that he decided to eliminate the firm from the list of dealers allowed to do business with the U.S. Treasury--a decision that would have driven Salomon Brothers, overnight, into bankruptcy. The head of the SEC, Richard Breeden, described Salomon Brothers as "rotten to the core." Schroeder devotes a great deal of space to the scandal, and in the bargain delivers the definitive account of it, at least from Buffett's point of view. This entanglement with a big Wall Street firm, she tells us, quickly turned into the single most miserable experience in Buffett's career. This man who prized his moral high ground above everything was put in the position of publicly defending, and rescuing for profit, a business of which he strongly disapproved. "How had he gotten himself into the--at best awkward--position of sitting on the board of such a company?" Schroeder asks, quite reasonably. "It was as if, during a dry spell, Buffett's urge to make money had once again overwhelmed his high hopes, high aspirations, and high principles. And as had been true throughout his life, whenever his avarice got the upper hand, trouble followed."
The story that followed remains incredible. The whole world wanted to put Salomon Brothers out of business, but Buffett, all by himself, prevented it from happening. Just as some years earlier the SEC had failed to sanction him for fraud, essentially on the grounds that he was too good a person ever to have meant to commit fraud, the Treasury decided not to put his investment bank out of business because he, Warren Buffett, was willing to run it--which he did, until he got his money back. He then returned to Omaha, and vowed never to do it again.
Which brings us, oddly, to our present financial crisis. There has never really been a bad time in the last fifty years to be Warren Buffett, but just now would seem to be less favorable than most. If Buffett still measures his life by the book value per share of Berkshire Hathaway, then for the first time in forty years he must feel like a wasting asset. His share price is still off more than 40 percent from its highs, underperforming even the S&P 500. He railed against derivatives as weapons of mass destruction, and now turns out to have been sitting on a $68 billion pile of credit default swaps and exotic put options on various stock market indexes. And having vowed never again to become entangled in a big Wall Street investment bank, he has gone and sunk $10 billion into Goldman Sachs, a virtual re-enactment of his investment in Salomon Brothers--cash for reputation. The difference this time is that he has gotten himself a sweeter deal than not merely ordinary shareholders, but also the U.S. Treasury.
On the surface at least, he seems like a guy who has spent the last few years ignoring all of his own best advice. What does Schroeder make of this? By September of last year, when Berkshire's share price began to collapse, The Snowball was already in bookstores. Its final chapter has a rushed, panicky feel to it, as if the author sensed that she was going to watch some meaningful part of her story unfold after she told it. If so, she was right: Buffett's role in the current crisis is likely to be as interesting as any episode of his career.
Still, while Schroeder could not have foreseen the sensational reversal in Berkshire's fortunes, she offers, inadvertently, an explanation for it: the impulse to grasp for things before they all slip away. Susie Buffett, diagnosed with cancer the year before, died in 2004. "Before 2003," writes Schroeder, "Buffett's need for attention had been satisfied by a few interviews a year and the shareholder meeting. He had always been careful and strategic in his cooperation with the media (if not always forthcoming about just how cooperative he had been). But starting around the time of Susie's illness, for whatever reason, he had begun to need the mirror of media attention, television cameras especially, almost like a drug. The intervals he could tolerate without publicity were growing shorter. He cooperated with documentaries, spent hours talking to Charlie Rose, and became such a regular on CNBC that it started to prompt puzzled queries from his friends."
Thus she leaves open the possibility that Buffett might have gone a bit soft in old age. "Basically, when you get to my age," she quotes him telling a group of business school students, "you'll really measure your success in life by how many of the people you want to have love you actually do love you. I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them." Where there was once only the time value of money, there is now also the time value of love. My God, he's even given his fortune away!
In short, there has never been a better time to bet against Warren Buffett. The reader will forgive me, I hope, if I decline to do it. For one, he is sitting on a huge pile of increasingly precious capital, and has the power to extract the most onerous terms for its use. Yes, he railed incessantly against derivatives and yes, he has gotten himself twisted into the awkward position of having traded them himself. But the problem, as he most surely knew, was never derivatives. (This was a man who, in 1998, stood ready to buy the entire trillion-dollar derivatives book of the collapsed hedge fund Long Term Capital Management.) The problem was stupidly priced derivatives.
For some years now Buffett has been making his living selling insurance mainly against natural rather than financial catastrophe. He demanded high prices to accept the risk that Florida would be wiped out in a hurricane instead of low prices to accept the risk that American house prices would fail to appreciate forever. That he drifted, when the price beckoned him to drift, into selling insurance against financial catastrophe is not all that surprising. What is surprising is what he somehow avoided: every other AAA-rated financial institution essentially rented out its credit rating to the great subprime mortgage boom, and bankrupted itself. These firms have either collapsed (AIG, AMBAC, MBIA) or are in the process of collapsing (GE). Berkshire Hathaway may no longer be AAA-rated, but it will easily survive even this debacle. The problem in this sorry episode was not that we suffered from too much of Warren Buffett's instincts, but that we suffered from too little.
There is another reason I wouldn't like to bet against Warren Buffett: I did it once and lived to regret it. Long ago, after Buffett became entangled with Salomon Brothers, I wrote a long critical article about him for this magazine, which, perhaps because there has never been much criticism of Warren Buffett, makes a cameo appearance in several books about him, including this one. The piece dwelled on Buffett's small hypocrisies--posing as a friend of the ordinary shareholder while accepting bribes from corrupt corporate regimes, using his track record as a weapon against the efficient-markets people when he cut deals available to no other investor--and downplayed his virtues.
Even then I thought that his virtues far outweighed his vices, and felt a bit like the guy who, having grown weary of hearing others drone on about the physical perfection of some supermodel, went to the beach with a camera and snapped a photo of her cellulite. Now Schroeder's brave book offers a close-up of the same cellulite, but more fairly, in the context of a genuinely delightful character. Buffett might not like it, but this book has done him a very Buffett-like service. Twenty years from now, when the financial markets have forgotten our current trauma, and finance is once again fashionable, some young person will pick it up and discover that history's most legendary investor was not a cartoon but a real live human being. And still, somehow, deeply admirable.
Michael Lewis is the author most recently of Home Game, to be published this month by Norton.
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