Time for a Beijing bargain

North Korea's nuclear spectacular

Kim Jong Il's bombshell

Isolated it may be, but North Korea’s antics do damage far beyond its own reach

HE HAS been coaxed, cajoled, censured and sanctioned. Yet whenever it suits North Korea’s boss, Kim Jong Il, he spews out new threats. For years he has managed to extort cash, oil and other goodies for then quietening down, only to behave even more threateningly next time. Can nothing be done to make this serial rule-breaker blink?

With his second nuclear test and multiple missile launchings (see article), North Korea’s Dear Leader has ignored the hand that President Barack Obama has said he is ready to extend to America’s erstwhile enemies. He has also delivered a nuclear-powered slap in the face to China, his semi-backer and the chief proponent for the past six years of a strategy of come-what-may patience, negotiation and perks in an effort to humour Mr Kim out of the bomb business. But patience is not always a virtue in dealing with a regime as practised at blackmail as Mr Kim’s. For unless he now pays a seriously high price for his defiance, the message heard by others, particularly Iran, still mulling how far they should push their own nuclear plans is that they too can have a bomb—if they are prepared to be belligerent enough, for long enough.

Watch what he does, not what he says

Mr Kim has long played the nuclear game by his own rules. The aim of the other five around the negotiating table—America, South Korea, Japan, China and Russia—has been to get him to shut down his bomb factories and (after steadily increasing dollops of trade and investment, and in return for diplomatic ties with America) eventually to give up the bombs he has long claimed to have stashed away. Indeed, Mr Kim has promised, more than once, to do just that. Yet he has dragged out the process at every turn. It came as little surprise to those who always doubted his disarming intentions that the six-party talks came badly off track last year just at the point where tight verification rules were to be agreed upon so that outsiders could check that his promises were kept.

Now Mr Kim says he will “never” go back to the six-party talks. He wants North Korea to be accepted as a nuclear power, his officials say, just as India in practice has been. But you can be sure of one thing if the capricious Mr Kim is persuaded back to the table. With a second nuclear blast to boast of, the price will have gone up yet again. How does he get away with it? And does it really matter that such an isolated and impoverished contrarian keeps breaking all the anti-nuclear rules?

Mr Kim does not need his bombs to wreak havoc in South Korea, whose capital, Seoul, has long been within range of the North’s artillery dug into the hills just over the border. Rather, he needs a “deterrent”, he says, to fend off a hostile America. And yet this latest nuclear test surely destroys North Korea’s best chance in years to get on friendlier terms with the country it claims to fear most. That in turn leads dogged optimists to argue that this may be nothing more than a temporary diplomatic setback after all: the ailing Mr Kim needs the backing of nuclear hardliners in the armed forces, they explain, to steady the regime while he lines up one of his sons to take over the family dynasty.

The thought should bring little comfort. For whether he is trying to hang on to power at home, or determined to cock an enduring nuclear snook at the world, makes little difference when Mr Kim clearly feels he has licence to bang on regardless and get away with it. He has shrugged off past half-hearted sanctions imposed on him by the United Nations Security Council and others. He knows that, whatever he does, some food aid will keep flowing in, since outsiders care more than he does for the plight of his often malnourished, sometimes starving, people. And he calculates that China, which controls most of the oil taps to North Korea, is fearful of a swelling influx of refugees if the economy collapses further. China says it “resolutely” opposes Mr Kim’s latest nuclear and missile tests, but continues to oppose the sort of truly punishing sanctions that could make Mr Kim ponder the error of his ways.

With China’s misguided protection, the harm the radioactive Mr Kim is doing just goes on spreading. There will be no stability in East Asia until he can be induced to cease his nuclear antics. His tests of increasingly sophisticated rockets were causing alarm in Japan—and talk of “rearmament” in some quarters there—even before hints that he is perfecting missile-mountable nuclear warheads to put on them.

Leaving Mr Kim free to demonstrate his nuclear wares also increases the danger that he will find new customers for them. North Korea had already secretly built a nuclear reactor in Syria before Israel destroyed it in an air raid. Before that some of Mr Kim’s nuclear material had turned up in Libya, via the nuclear black market, before that country handed in all its bomb-making paraphernalia. A well-tested warhead design is both easier to hawk and more lucrative to sell.

North Korea is known to work closely with Iran on building nuclear-capable missiles. No one knows where their co-operation stops. Unlike Mr Kim, Iran insists it has no use for the bomb. Yet suspicions have mounted as Iran has invested in expensive technologies for enriching uranium and making plutonium (both possible bomb ingredients) before having a civilian nuclear-power industry that can make peaceful use of them. And though it claims to co-operate with UN inspectors, Iran refuses to answer their questions about studies and past experiments that have little or no plausible civilian purpose.

The fallout to come

But even if North Korean and Iranian scientists have kept their nuclear distance, the example Mr Kim sets and the failure of the UN, America, China and others collectively to do more than inconvenience him with trade restrictions on fast cars and Rolex watches will only cause Iran’s suspicious neighbours, like North Korea’s, to worry that time and the world’s anti-nuclear rules are not on their side. Unless North Korea is checked, the fear and suspicion Mr Kim has created could set off a chain reaction of proliferation. If China is at all serious about joining America as a global leader, this is the time for it to shoulder its responsibility by helping to punish Mr Kim.

Time for a Beijing bargain

China, America and the yuan

Time for a Beijing bargain

Sino-American economic policy needs a new start. Tim Geithner’s visit to China provides an opportunity

HOW times change. When George Bush’s treasury secretaries first visited China, Wall Street was booming, America’s economy was growing and the president’s emissaries routinely lectured their Chinese hosts on the need for freer financial markets and a more flexible yuan. But as Tim Geithner, the current treasury secretary, prepares to make his maiden trip to Beijing on May 31st, Wall Street is synonymous with greed and failure, America’s economy is on its knees and it is the Chinese who have been doing the lecturing. With America’s budget deficit soaring and the Fed’s printing presses running at full speed, China is complaining loudly of the risks that inflation and depreciation pose to its huge stash of dollars, and arguing for an alternative to the greenback as the world’s reserve currency.

The tables may have turned, but the dynamics on both sides of the Sino-American economic relationship are remarkably similar. The lecturing tone is driven largely by politics at home. Just as American treasury secretaries needed to shout loudly about China’s currency in order to appease a potentially protectionist Congress, so Beijing officials must hector Americans about their profligacy to assuage rising domestic fury about the losses China faces on its reserve holdings. On both sides, the most egregious posturing is economically illiterate. America’s bilateral trade deficit with China does not prove that Beijing manipulates its currency, as many congressmen have argued. And despite the huffing in Beijing, the losses that China faces on its reserve portfolio have more to do with its own policy choices than America’s spendthrift ways.

Courageous choreography required

Both China and America should use Mr Geithner’s three-day visit to set a new tone in which co-operation replaces rhetoric. The two countries need to act on a broad economic agenda from global warming (real progress is impossible without co-operation between the world’s two biggest carbon emitters) to funding the expansion of the International Monetary Fund (China has yet to come up with any cash and Congress has not authorised the $100 billion promised by the Obama administration). The priority, however, should be a healthier macroeconomic relationship between the world’s biggest sovereign borrower and America’s largest creditor. What is needed for a sustainable global recovery is well known. China must foster private-sector domestic demand with a stronger currency, among other things. And America must lay out a credible route to the eventual unwinding of its massive stimulus.

In today’s febrile markets any misstep could cause the dollar to tumble and Treasury yields to soar further. So the moves must be carefully choreographed. China should be more forthright on the yuan. After a welcome appreciation alongside a stronger dollar in 2008, China’s currency has fallen on a trade-weighted basis in recent weeks as the dollar has tumbled. Mr Geithner’s hosts should make it clear that even if the dollar continues its slide against other currencies, the yuan will not follow suit. Instead it will gradually appreciate. To forestall any additional surge in Treasury yields, Mr Geithner should elaborate on how the Obama administration intends to cut spending and raise tax revenue in the medium term.

It will take political courage for the Chinese to eschew a weak currency and for an American treasury secretary to unveil fiscal details in Beijing. But the parlous state of the world economy demands nothing less.

Piling on

Government and business in America

Piling on

In his zeal to fix capitalism, Barack Obama must not stifle America’s dynamism

DEFENDING American capitalism these days is a thankless job. Reckless lending by American financiers produced a crisis that has pushed the world into its worst recession since the 1930s. Tales of greed and fraud during the boom years abound.

Small wonder that although Americans still prefer their government neat and local, they are a little less hostile to federal activism these days (see article). Such sentiments, last November, helped propel Barack Obama into the White House and his Democratic Party to bigger majorities in both houses of Congress. As Rahm Emanuel, the president’s chief of staff, says, Mr Obama does not want to waste this crisis. He is using it to create a bigger role for government throughout the economy, from education and health care to banking and energy.

He, and Congress, risk overreaching. America has experienced a failure of finance, not of capitalism. Its broader economy remains an astonishing Petri dish of creative destruction. Even in boom times, 15% of American jobs disappear each year. Their places are taken by new ones created by start-ups and expansions. This dynamism remains evident today, amid the most crushing economic conditions most businesses have encountered (see our special report in this issue). As icons of consumer excess like Starbucks and Neiman Marcus stumble, purveyors of frugality like Burger King and Wal-Mart prosper. Americans are adept at finding opportunity in adversity.

Where government helps

The American economy is dynamic because Americans like it that way, even now. A Pew poll released on May 21st found that 76% of Americans agree that the country’s strength is “mostly based on the success of American business” and 90% admire people who “get rich by working hard”. These proportions have changed little in two decades, and they tend to produce government policies that make America, according to the World Bank, consistently one of the best places to do business.

Yet Mr Obama—and, even more, his Democratic allies in Congress—could do lasting damage to this marvellous machine. That is not because the president is a socialist, as his detractors on talk radio claim. No true leftist would be as allergic as he has been to nationalising tottering banks, nor as coldly calculating in letting Chrysler, and probably General Motors, end up in bankruptcy court.

Moreover, even the most stalwart defenders of the free market, including this newspaper, admit it has shortcomings that only the government can address. The financial system requires close oversight, or crises will destabilise it (see article). In recent years, such oversight has often been absent or fragmented. Only government can enforce competition rules, insist that business and consumers limit carbon-dioxide emissions, or intervene to make health care available to those too sick or poor to afford it. And the current crisis calls for aggressive and temporary fiscal and monetary intervention that is not justified in ordinary times.

But the Democrats’ present zeal for government activism often goes well beyond addressing market failures. The president and Congress seem to believe that they can surgically intervene in the economy but overlook the unintended consequences. They are willing to demonise business when doing so furthers their aims. In one breath Mr Obama praises a bank that wrote down its claims on Chrysler and in the next lashes out at investors who, as was their right, did not.

Members of his team believe that tougher rules for business are necessary to cool voter anger that would otherwise result in even more vindictive measures. But rather than tamping down the backlash, they may only feed it. They aggravate that risk by outsourcing rule-writing to Congress, as with the fiscal stimulus and carbon emissions and, soon, health care. Congress is much more likely than the executive branch to let special interests or demagoguery shape the outcome.

Creating new monsters

Too often, the result is overkill. Last December the Federal Reserve approved sweeping new rules on credit cards. Congress said it was not enough, and passed its own law which takes effect sooner and is even more restrictive. Some provisions restrain genuinely odious practices, such as charging interest on already-paid balances, but others prevent banks from tailoring interest rates to customers’ changing risks.

The approach to energy is worse. Under a mammoth carbon-emissions bill now working its way through Congress, 85% of valuable permits to emit carbon dioxide (which might all have been auctioned) will be given away free. This creates a huge new pot of favours for government to hand out, and new incentives for businesses to lobby. It will be costlier to fight climate change, while harder to avoid political favour-trading.

Mr Obama’s people seem sincere when they say they want to rid the government of its stakes in banks and carmakers as soon as possible. But in the meantime they are introducing new rules, such as limits on performance-related pay at banks, that could do more harm than good (see article). Nor can they resist using that ownership to push goals unrelated to the firms’ welfare, such as pressing banks to relent on foreclosures or carmakers to make alternative-fuel cars for which there is no obvious demand. On top of that, they are passing more stringent fuel-economy standards that favour light trucks over cars. A far less distorting (and transparent) way to cut carbon emissions and raise fuel economy would be a carbon tax—but almost no one in Washington has the courage to propose one.

These mistakes matter because, for all Mr Obama’s oratory, it will be very hard to reverse course in future. Regulations and interventions spawn constituencies that will fight any paring of their benefits. The federal government created Fannie Mae and Freddie Mac, the big mortgage agencies, in the interest of raising home-ownership. But long after that goal was met, the housing lobby barred almost all efforts to rein them in. Only massive taxpayer bail-outs have prevented their collapse.

America’s free-market capitalism has always been a model for the rest of the world. By all means fix its flaws, Mr Obama; but do not take its dynamism for granted.

Drowning, not waving?

The world economy

Drowning, not waving?

From Economist.com

Don't get too excited about some recent brighter economic news

IT HAS been a cheerful couple of days for those starved of bright economic news. Hopeful statistics have been trickling in from many parts of the world. On Friday May 29th revised first quarter GDP figures for America showed that the economy there had contracted slightly less than had earlier been reported. In addition durable-goods orders in the country rose by the most in 16 months. In Japan, factory output rose by 5.2% in April, the biggest monthly increase, in percentage terms, in over half a century. And in the first quarter India’s economy grew by a bullish 5.8%, compared with a year before, while South Korea’s industrial production continued to rise in April.

Even in gloomy Europe there are encouraging signs. Poland’s GDP ticked up by 0.8% in the first quarter, as did German private consumption (in the same period) and retail sales also grew, by 0.5%, in April. British consumer confidence remained steady in April, and house prices there rose both in March and May, according to one index.

For optimists, these are all signs that might point towards the beginning of the end of the “Great Recession”. Headline writers, and those who are urging stockmarkets to continue rising, will continue to talk of hopes of recovery. Yet a closer look at the detail of the latest figures suggests that hope springs eternal and will latch on to what it can—even when a more sober analysis would suggest there is a long way to go before recovery sets in.

Optimists make much of statistics that beat analysts’ expectations. But when a particular figure outdoes predictions it may be because those expectations were overly pessimistic, rather than a sign that something fundamental has changed for the better.

What, for instance, is the right reference point on the latest news on India's economy? Doomsters might fret that it has grown at the slowest quarterly pace in several years. Cheerleaders could rejoice that it has expanded slightly faster than most people had expected. Weary of negative news, the latter explanation is a tempting way to make sense of the numbers, but the gloomy view is equally valid.

Consider, too, the figures for consumer confidence in Britain. Although consumer gloom seems to have abated, the reported level of –27 is remarkably low by historical standards. If one takes into account reports that British consumers had been growing a bit more confident in recent months, the latest statistic could suggest a halt to a small rally, which is hardly something to cheer. This example highlights the difficulty of extrapolating from a single month or quarter of data, which can easily be skewed by one-off events such as a national holiday or sudden desperate measures by retailers to offload stock. Discerning whether a more sustained recovery might be under way takes, unsurprisingly, more data.

Thus pessimists, who are unconvinced that the worst is over for the world economy, have much to reinforce their dark mood. One particular concern is that the financial and credit problems at the root of the global recession have not been dealt with satisfactorily. Keiichiro Kobayashi, a Japanese economist, has looked back to Japan’s experience in the late 1990s and argues that unless the banks are fixed, a strong recovery for the world economy is impossible. Some disagree, suggesting that economic output can bounce back even before credit and financial markets are again healthy, if consumers get their wallets open. But even if this argument is compelling in some historical cases, this time it seems that household spending in many economies will remain weak because of high levels of debt.

One man who has made his name in recent years as a doom-monger, Nouriel Roubini, an economist at New York University, recently suggested that recovery from recession was far from imminent, arguing that “it's going to last another six to nine months”. It might not be surprising that he avoids a bullish prediction, but Mr Roubini goes one step further, noting that other economists are still suggesting a “doomsday” scenario, with continuing contraction for a long time to come, and thus even he could be considered as an optimist.

U.S. Bases in Japan Up Alert Level

Day Ahead: Stocks Seen Narrowly Higher Awaiting Data

Europe's Week Ahead: Ryanair and Bouygues report results

Energy Stocks Up as Oil Climbs

Energy Stocks Up as Oil Climbs

Energy stocks extended their recent gains Friday, while the broader market flickered between gains and losses after another mixed batch of economic data.

Major indexes were mixed. At 10:55 a.m., the Dow Jones Industrial Average was up 19 points. The Nasdaq Composite Index was up 0.3%. The S&P 500 was up 0.4%, though its energy sector rose nearly 2% as oil prices climbed.

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Crude-oil futures, which have risen in each of the last four full trading sessions, were up 88 cents and just below $66 a barrel on Friday in New York, bolstered by improving confidence that global demand will catch up to currently robust global supplies. Oil has nearly doubled from its mid-February lows.

A day after the Organization of Petroleum Exporting Countries decided to leave its output target unchanged, the cartel's secretary general told reporters that OPEC would be careful "not to take any negative decision'' to hurt the chances of economic recovery around the world. He even held out hope of output increases "if the price goes high" and if stockpiles diminish too much -- but he declined to specify what a "high'' price would be.

Big winners in the stock market's energy sector included Total, which rose 3.7% and BP, up 2.3%. Dow components Exxon Mobil and Chevron also rose.

In economic news, a revised report said the U.S. GDP contracted at a 5.7% annual rate in the first quarter, as less inventory liquidation and a smaller drop in exports led to an adjustment from the originally estimated 6.1% contraction. The revision was slightly smaller than economists expected -- a glum signal for stock investors. Separately, consumer sentiment brightened slightly this month, while a reading on Chicago-area manufacturing was weak.

David Bellantonio, head trader at Instinet, an online brokerage and trading platform based in New York, said the S&P seems stuck in a range between 880 and 930, though he doesn't expect those doldrums to last much longer. He said some volatility could return on Friday, the last trading session for the month.

"It would be too much to expect it to stay in a range like this through the summer," said Mr. Bellantonio. "There are some pockets of strength out there."

Heading into Friday's action, the Dow Jones Industrial Average was up 2.9% for the month and the S&P was up 3.9%, on track for the third consecutive month of gains and the biggest three-month percentage gains in more than 10 years. It would be the longest winning streak since the three months ended in October 2007 -- when both indexes hit record highs.

Stocks look to notch a third straight monthly gain, the longest streak Oct. 2007. Plus, General Motors inches closer to bankruptcy. Barrons.com's Bob O'Brien has your day ahead.

Among stocks to watch, Dell shares climbed 1.8% after it said late Thursday that earnings in the most recent quarter sank 63% as sales suffered. The report didn't paint a rosy picture for the computer market, but the profit came in slightly better than expected.

Tiffany fell more than 2% after the luxury retailer said earnings fell 64% as consumers continued to rein in spending and the jeweler's margins weakened amid higher product costs.

Overseas, European stocks were higher, with London's FTSE up 1.3%, while Asia struggled to make gains overnight.

The dollar weakened against major rivals, and Treasury prices rose. The benchmark 10-year note gained 9/32 to yield 3.580%.

Republicans, Let's Play Grown-Up

Republicans, Let's Play Grown-Up

Sotomayor's hearings are an opportunity for serious debate.

"Let's play grown-up." When I was a child, that's what we said when we ran out of things to do like playing potsie or throwing rocks in the vacant lot. You'd go in and take your father's hat and your mother's purse and walk around saying, "Would you like tea?" In retrospect we weren't imitating our parents but parents on TV, who wore pearls and suits. But the point is we amused ourselves trying to be little adults.

And that's what the GOP should do right now: play grown-up.

The Democrats in the White House have been doing it since January, operating with a certain decorum, a kind of assumption as to their natural stature. Obamaland is very different from the last Democratic administration, Bill Clinton's. The cliché is true: White House staffs reflect their presidents. Mr. Clinton's staff was human, colorful, messy, slightly mad. They had pent-up energy after 12 years of Republican rule, and they believed their own propaganda that Republicans were wicked. They were oafish: One dragooned a government helicopter to go play golf. President Obama's staff is far less entertaining. They're smooth, impeccable, sophisticated, like the boss. They don't hate Republicans but think they're missing a few chips (empathy, logic, How Things Really Work). It is true they don't know what they don't know, but what they do know (how to quietly seize and hold power, for instance—they now run the American auto industry), they know pretty well.

But back to Sonia Sotomayor, which is my subject.

She is of course a brilliant political pick—Hispanic when Republicans have trouble with Hispanics, a woman when they've had trouble with women. Her background (public housing, Newyorican, Catholic school, Princeton, prominence) is as moving as Clarence Thomas's, and that is moving indeed. Politically she's like a beautiful doll containing a canister of poison gas: Break her and you die.

The New York Post's front page the day after her announcement said it all: "Suprema!" with a picture of the radiant nominee. New York is proud of her; I'm proud of our country and grateful at its insistence, in a time when some say the American dream is dead, that it most certainly is not. The dream is: You can come from any place or condition, any walk of life, and rise to the top, taking your people with you, in your heart and theirs. (Maybe that's what they mean by empathy: Where you come from enters you, and you bring it with you as you rise. But if that's what they mean, then we're all empathetic. We're the most fluid society in human history, but no one ever leaves their zip code in America, we all take it with us. It's part of our pride. And it's not bad, it's good.

Some, and they are idiots, look at Judge Sotomayor and say: attack, attack, kill. A conservative activist told the New York Times, "We need to brand her." Another told me a fight is needed to excite the base.

Excite the base? How about excite a moderate, or interest an independent? How about gain the attention of people who aren't already on your side?

The base is plenty excited already, as you know if you've ever read a comment thread on a conservative blog. Comment-thread conservatives, like their mirror-image warriors on the left ("Worst person in the woooorrrlllddd!") are perpetually agitated, permanently enraged. They don't need to be revved, they're already revved. Newt Gingrich twitters that Judge Sotomayor is a racist. Does anyone believe that? He should rest his dancing thumbs, stop trying to position himself as the choice and voice of the base in 2012, and think.

A few—very few—agitate to go at Judge Sotomayor as the Democrats went after Robert Bork in 1987. The abuse suffered by that good man is a still suppurating wound within the GOP, but it is also a wound for the Democrats, the worst kind, a self-inflicted one. They damaged our national political culture and lowered their own standing with their assault, and their victory left them looking not strong and uncompromising but mean and ferocious. And on some level they know it. Ask Ted Kennedy, if he had it to do over again, if he would repeat all his intemperate and unjust words about "Bob Bork's America" and "back-alley abortions" and blacks turned away from lunch counters. He'd be a fool if he said yes. He damaged himself in that battle.

The choice for Republicans isn't between "attack" and "roll over." It's broader than that, and more interesting. There's a new and fresh opportunity here for Republicans in the Senate to be serious, and, in their seriousness, to be seen and understood in a new light.

Serious opposition to Judge Sotomayor is not only fair, it's necessary: It's your job to oppose if you oppose. But it should be serious, not merely partisan. Mr. Obama himself well knows he voted against John Roberts and Sam Alito only in essence because they were conservative. He was planning a presidential run and playing to a left-wing base. But that didn't enhance his reputation, did it? Not with anyone who wasn't part of his base.

Barring extraordinary revelations, Judge Sotomayor is going to be confirmed. She's going to win. She does not appear to be as liberal or left-wing as others who could have been picked. She seems reminiscent of the justice she will replace, David Souter. She will likely come across in hearings as smart, spirited, a middle-aged woman who's lived a life of grit, determination and American-dream proving.

Republicans can be liberated by the fact that they're outnumbered and likely about to lose. They can step back, breathe in, and use the Sotomayor confirmation hearings to perform a public service: Find out what the future justice thinks and why she thinks it, explain what they think and why they think it, look at the two different philosophies, if that's what they are. Don't make it sparring, make it thinking.

Don't grill and grandstand, summon and inform. Show the respect that expresses equality and the equality that is an expression of respect. Ask and listen, get the logic, explain where you think it wrong. Fill the airwaves with thoughtful exchanges.

Here are some areas: What is judicial activism? Is it sometimes more rightly called judicial presumption? Judge Sotomayor sided against the Connecticut firemen in the famous Ricci case—why? Was this empathy, or a very selective sympathy that resulted in the victimizing of human beings who were not members of a politically favored ethnic or racial group? What is affirmative action, when does it become quota making? How does she understand the Second Amendment? What did the Framers intend there? In what ways did her experience, upbringing and ethnicity contribute to her understanding of the law?

These are just a few fertile areas. There are more.

The odd thing Republican elected officials forget is that they often have the better argument. So used are they to the defensive crouch that they find it difficult to stand tall, expand, tell, hear. They should have more faith in the philosophical assumptions of their party, which so often reflect the wisdom of experience, of tradition, of Founders more brilliant than we.

This might be a good time for them to rediscover their faith in the American people, in their ability to listen, weigh and think. That thinking may not always show up immediately in polls, but it adds up in time and has its own weight, its own force, and future.

Trust them. They're grown-ups, even if they don't always dress the part.

The Sotomayor Rules

The Sotomayor Rules

Some were made to be broken.

• By KIMBERLEY A. STRASSEL

President Barack Obama has laid down his ground rules for the debate over Supreme Court nominee Sonia Sotomayor. The big question now is whether Republicans agree to play by rules that neither Mr. Obama nor his party have themselves followed.

Ismael Roldan

Ground Rule No. 1, as decreed by the president, is that this is to be a discussion primarily about Judge Sotomayor's biography, not her qualifications. The media gurus complied, with inspiring stories of how she was born to Puerto Rican immigrants, how she was raised by a single mom in a Bronx housing project, how she went on to Princeton and then Yale. In the years that followed she presumably issued a judicial opinion here or there, but whatever.

The president, after all, had taken great pains to explain that this is more than an American success story. Rather, it is Judge Sotomayor's biography that uniquely qualifies her to sit on the nation's highest bench -- that gives her the "empathy" to rule wisely. Judge Sotomayor agrees: "I would hope that a wise Latina woman with the richness of her experiences would more often than not reach a better conclusion [as a judge] than a white male who hasn't lived that life," she said in 2001.

If so, perhaps we can expect her to join in opinions with the wise and richly experienced Clarence Thomas. That would be the same Justice Thomas who lost his father, and was raised by his mother in a rural Georgia town, in a shack without running water, until he was sent to his grandfather. The same Justice Thomas who had to work every day after school, though he was not allowed to study at the Savannah Public Library because he was black. The same Justice Thomas who became the first in his family to go to college and receive a law degree from Yale.

By the president's measure, the nation couldn't find a more empathetic referee than Justice Thomas. And yet here's what Mr. Obama had to say last year when Pastor Rick Warren asked him about the Supreme Court: "I would not have nominated Clarence Thomas. I don't think that he was a strong enough jurist or legal thinker at the time for that elevation."

In other words, nine months ago Mr. Obama thought that the primary qualification for the High Court was the soundness of a nominee's legal thinking, or at least that's what Democrats have always stressed when working against a conservative judge. Throughout the Bush years, it was standard Democratic senatorial practice to comb through every last opinion, memo, job application and college term paper, all with an aim of creating a nominee "too extreme" or "unqualified" to sit on the federal bench.

Mr. Obama knows this, as he took part in it, joining a Senate minority who voted against both Chief Justice John Roberts and Justice Sam Alito. Mr. Obama also understands a discussion of Judge Sotomayor's legal thinking means a discussion about "judicial activism" -- a political loser. In a day when voters routinely rise up to rebuke their activist courts on issues ranging from gay marriage to property rights, few red-state Democrats want to go there. Moreover, a number of Judge Sotomayor's specific legal opinions -- whether on racial preferences, or gun restrictions -- put her to the left of most Americans.

Which brings us to Ground Rule No. 2, which is that Republicans are not allowed to criticize Judge Sotomayor, for the reason that she is the first Hispanic nominee to the High Court. The Beltway media also dutifully latched on to this White House talking point, reporting threats from leading Democrats, including New York Sen. Chuck Schumer, who intoned that Republicans "oppose her at their peril."

This would be the same Mr. Schumer who had this to say about Miguel Estrada, President Bush's Hispanic nominee (who, by the way, came to this country as an immigrant from Honduras) to the D.C. Circuit Court of Appeals in 2002: Mr. Estrada "is like a Stealth missile -- with a nose cone -- coming out of the right wing's deepest silo." That would be the same Mr. Schumer who ambushed Mr. Estrada in a Senate hearing, smearing him with allegations made by unnamed former associates. That would be the same Mr. Schumer who sat on the Judiciary Committee, where leaked memos later showed that Democrats feared Mr. Estrada would use a position on the D.C. Circuit as a launching pad to become the nation's . . . first Hispanic Supreme Court judge. Two tortured years later, Mr. Estrada withdrew, after the Democrats waged seven filibusters against a confirmation vote.

Republicans will be tempted by this history to go ugly. They might instead lay down their own rules, the first being that they will not partake in the tactics of personal destruction that were waged by the left on nominees such as Mr. Thomas or Mr. Alito or Mr. Estrada. But the party could also make a rule to not be scared away from using Judge Sotomayor's nomination, or future Obama picks, as platforms for big, civil, thorough debates about the role of the courts and the risk of activist judges to American freedoms and beliefs.

Obama's GM Plan Looks Like a Raw Deal

Obama's GM Plan Looks Like a Raw Deal

Congress, not a secret task force, should decide the company's fate.

RALPH NADER ROBERT WEISSMAN

What public purposes animate the government's planned rescue of General Motors Corp?

David Gothard

Millions of people in communities across the country depend on the government getting the GM rescue right. That's why it is startling -- and mistaken -- for the future of GM to rest with a small, largely unaccountable, ad hoc task force made up of a handful of Wall Street expats.

A congressional abdication of authority of historic proportions has left the executive branch with nearly complete discretion over how to handle GM and Chrysler's restructuring. President Barack Obama has further delegated authority, giving effective control to this task force, which operates under the titular authority of a top-level interagency group headed by National Economic Council Director Larry Summers and Treasury Secretary Tim Geithner.

In the days before an avoidable June 1 bankruptcy filing, it is imperative that Congress honor its constitutional duties and demand that the GM restructuring deal be sent to it for deliberative review -- before any irreversible measures, such as a voluntary bankruptcy declaration, are taken. This means delaying any precipitous decisions until after Congress returns from its Memorial Day recess.

The case for congressional involvement would be solid enough on constitutional and procedural grounds alone. But the secretive task force's plan raises red flags and requires Congressional examination in open hearings. With the government set to take a 70% ownership stake in GM, there are too many unanswered, troubling questions to proceed with a risky bankruptcy declaration. Here are 10 pressing issues among many:

1) Has the task force conducted any kind of formal or informal cost-benefit analysis on the costs of a GM bankruptcy and excessive closures? These may include the social effects of lost jobs (including more than 100,000 dealership jobs alone), more housing foreclosures, the government expense of providing unemployment and social relief, lost tax revenues, supplier companies that will be forced to close, damaged consumer confidence in the GM brand, and impacts on GM's industrial creditors.

2) Do GM and Chrysler really need to close as many dealerships -- which do not cost manufacturers -- as have been announced? Is the logic of closing dealerships to enable the remaining dealers to charge higher prices? If so, why is the government facilitating such a move?

3) Is the task force asking for too many plants to close and the elimination of too many brands?

4) Why is the task force permitting GM to increase manufacturing overseas for export back into the U.S.? Under the GM reorganization plan, the company will rely increasingly on overseas plants to make cars for sale in the U.S., with cars made in low-wage countries like Mexico rising from 15% to 23% of GM sales here. For the first time, GM plans to export cars from China to the U.S. in what is a harbinger of the company's future business model. What is the conceivable rationale for permitting GM to increase manufacturing overseas -- especially in dictatorships, for export back into the U.S. -- when preserving jobs and industry is the avowed goal of this immense taxpayer bailout?

5) Why is the task force supporting GM's efforts to devise a two-tier wage structure, whereby new auto jobs no longer provide a ticket to the middle class?

6) How will bankruptcy affect GM's overseas operations, with special reference to China and GM's corporate entanglements with Chinese partners? Are they and their large profits being exempted from the conditions imposed on domestic operations? Are GM's China-based assets and profits inside or outside of the bankruptcy process?

7) Would a corporate and government-driven bankruptcy process comport with any rights of owner-shareholders to decide whether they want their company to be dissolved?

8) How will bankruptcy affect GM's obligations to parties engaged in pending or future litigation in the courts with GM regarding serious injuries suffered because of design or product defects in vehicles sold prior to the bankruptcy? Or parties engaged in "lemon" litigation?

9) What guarantees are the task force, supposedly representing the taxpayers' investment, obtaining to ensure that the GM of the future invests in safer and more fuel-efficient vehicles?

10) Why is the Obama administration signaling that, after reorganization, when the government owns 70% of GM, it will not exercise the control that attaches to ownership?

Many in Congress have been eager to disassociate themselves from the perceived mess of the GM reorganization, believing it too complicated. This is a stark contrast to 1979, when Congress held extensive hearings and passed enacting legislation on the Chrysler bailout and later with the complex Conrail restructuring.

If not motivated by their constitutional duty, members of Congress might perhaps listen to political arguments to assert their rightful authority. If GM and the task force take the company into bankruptcy, more than displaced workers will be demanding that Congress answer: "Why are we bailing out the auto companies and then facilitating their moving production overseas? Why aren't we leveraging the public investment to protect jobs and manufacturing capacity, as well as facilitate investments in environmentally appropriate technologies?"

It need not be so. The congressional leadership still has a few days to stop the reckless rush to bankruptcy court and to assert its responsibilities.

Mr. Nader is a consumer advocate. Mr. Weissman is editor of Multinational Monitor magazine

Taxing Health Care

Taxing Health Care

Obama and Democrats owe John McCain an apology.

Politicians wouldn't be politicians if they didn't trim their sails to the prevailing winds. Even so, the emerging 180-degree turn by Democrats on taxes and health insurance is one for the record books.

AP

Democrats have spent years arguing that proposals to equalize the tax treatment of health insurance are an outrage against the American people. Workers pay no income or payroll taxes on the value of job-based plans, but the same hand isn't extended to individuals who must buy coverage on their own. Last year liberals mauled John McCain for daring to touch the employer-based exclusion to finance more coverage for the individually uninsured. He was proposing "a multitrillion-dollar tax hike -- the largest middle-class tax hike in history," said Barack Obama, whose TV ads were brutal.

But now Democrats need the money to finance $1.2 trillion or more for their new health insurance entitlement. Last week Senate Finance Chairman Max Baucus released his revenue "policy options" and high on the list is . . . taxing health benefits. Or listen to White House budget director Peter Orszag, who recently told CNN's John King that the exclusion "was not in the President's campaign plan, it wasn't in our budget. Clearly, some Members of Congress are putting it on the table and we are going to have to let this play out."

Mr. King tried again. "Let this play out. But would the President sign a bill that includes a pretty significant tax increase? That would be a tax increase." Mr. Orszag: "We're not going to be -- I think it's premature to be commenting on individual items . . . There are lots of ideas that are being put on the table." Translation: You betcha he'd sign it.

The tax exclusion is such a big revenue prize because Mr. Baucus is scrubbing every other tax nook and cranny and only coming up with rounding errors. A sampler:

- Impose an excise tax on hard alcohol, beer and some kinds of wine. That would be in addition to a sin tax on beverages sweetened with sugar or high-fructose corn syrup, such as soda. Mr. Baucus doesn't offer revenue estimates, though the Congressional Budget Office says a $16 per proof gallon alcohol tax might raise $60 billion over 10 years, and another $50.4 billion at three cents per 12 ounces of sugary drink.

- End or limit the tax-exempt status of charitable hospitals, which only costs currently a mere $6 billion a year.

- Make college students in work-study programs subject to the payroll tax. Also targeted are medical residents, perhaps on the principle that they'll one day be "rich" doctors. CBO has no score on these.

- Reducing Medicare reimbursement rates for supposedly "over valued physician services," such as diagnostic imaging. CBO says that requiring doctors to get prior clearance could save $1 billion in 10 years.

- For individuals with high-deductible insurance plans, contributions to health savings accounts would no longer be tax deductible. That would penalize patients who choose plans that encourage them to be informed consumers. CBO says that banning HSA payments entirely would yield all of $10 billion.

By contrast, the employer-based exclusion offers a huge money pot -- an estimated $226 billion in 2008. Yet as liberal MIT economist Jonathan Gruber recently told Mr. Baucus's committee, "no health expert today would ever set up a health system with such an enormous tax subsidy to a particular form of insurance" (his emphasis). It creates a coverage gap between workers who receive it from their employers and those who pay -- or can't afford to pay -- with after-tax money.

The tax exclusion is also one reason health costs continue to rise. It encourages workers to take an extra dollar of compensation in fringe benefits instead of cash while also routing low-deductible health spending through third parties. Some 84 cents of every medical dollar is spent by someone other than the patient. The insured have no incentives to make cost-conscious decisions about care.

So reforming the exclusion would inject a dose of discipline into American medicine. But for most Democrats the goal isn't to create a more rational health-insurance market. They simply want the revenue for another government program. Mr. Baucus won't target gold-plated employer insurance plans in general, because union-negotiated benefits are usually gold-plated. Rather, he may cap or phase out the exclusion by income, starting with workers earning more than $200,000. Insurance options that don't conform to government diktats (health savings accounts) would also lose any tax advantage. This would do nothing for market efficiency, but it would be one more stealth tax increase.

Democrats owe an apology to Mr. McCain, and it'll be fascinating to see if they will now suffer a political backlash of their own making. Having told the country that this tax reform is really a tax increase, Democrats are opening themselves to the same attacks they leveled against Republicans.

They could avoid that fate if they used the tax exclusion money to finance, say, a tax credit for the uninsured. That would be a genuinely bipartisan reform. But liberals won't accept that because they want to take one giant step toward government-run health care. And the only way they can pay for it is by taxing everything in sight, including your current health insurance.

Thursday, May 28, 2009

Glenn Beck Clips 05-28-09 Beck and O'reilly Ream Corrupt ACORN Group

Bigotry Begets Bloat?

Bigotry Begets Bloat?

So claims a new study--but the evidence is thin.

JAMES TARANTO

"Perceptions of racism--from being treated with suspicion in a store to unfairness in employment or housing--can heighten stress levels and affect health, research has shown," reports the Boston Globe:

A new study from Boston University links these smoldering signs of racism to weight gain in black women, suggesting a possible explanation for the their [sic] higher obesity rates compared to white women.

Yvette Cozier, an epidemiologist at the Slone Epidemiology Center at BU, led a survey of more than 43,000 women enrolled in the long-running Black Women's Health Study. Writing in the June issue of Annals of Epidemiology, she and her co-authors describe participants' reports on their weight, body mass index, and perceptions of racism.

At the beginning of the eight-year study, the women were asked if they sometimes felt they were treated poorly in a restaurant or store, whether they thought people considered them dishonest or less intelligent, and if they had felt unfairness on the job, in housing, or from police. The women, 21 to 69 years old at the study's outset, were placed in four groups based on how frequently they said they experienced these signs of racism. Their weight was recorded every two years from 1997 through 2005. Their waist circumference was measured at the beginning and end.

At the end of the trial, all the women had gained weight. But the women who said they felt higher levels of racism gained more weight and had bigger waist-size increases compared to the women who felt the least racism. That held true after accounting for factors such as education, geographic region, and beginning body mass index.

"Racism is real and it has real effects," Cozier said in an interview. "It can result in real changes in the body."

In fact, Cozier's study--available here at the low, low price of $31.50--offers no support whatever for this statement.

To begin with, nothing in the study addresses the hypothesis that "racism is real," unless one defines racism solely as a phenomenon within the mind of the putative victim. The study purports to measure the prevalence of perceived racism. It does not test the accuracy of its subjects' perceptions.

Further, it appears that for part of the study, even the perception of racism was imputed by the researchers rather than reported by the subjects themselves. Here is how the study describes the questions:

Five questions asked about the frequency in daily life (everyday racism) of the following experiences: "you receive poorer service than other people in restaurants or stores," "people act as if they think you are not intelligent," "people act as if they are afraid of you," "people act as if they think you are dishonest," and "people act as if they are better than you." Response options were "never," "a few times a year," "once a month," "once a week," "almost every day." Three questions asked about lifetime experience of being "treated unfairly due to your race" on the job, in housing, and by the police (lifetime racism). Response categories were "yes" and "no."

The "everyday racism" questions are not about race! The researchers merely assume that if a black woman encounters someone who acts as if he is better than she, it must be because she is black, not because, say, he's a stuck-up jerk--or because she is oversensitive. The "lifetime racism" questions do measure perceived (though not necessarily actual) racism, but the "everyday racism" questions measure only perceived slights.

Cozier's assertion that what she baselessly calls racism "has real effects" is equally unwarranted. The study shows a correlation between what it characterizes as "perceived racism" before 1997 and weight gain in the ensuing eight years; it does not establish that the former caused the latter. To our mind it seems much more plausible to posit that the tendency to see oneself as a victim of racism (or to be perturbed by perceived slights, whether racially motivated or not) and the tendency to gain weight arise from a common cause, which one might describe as an attitude of powerlessness or a lack of self-confidence.

Relatedly, Cozier's study found that "normal-weight women were more likely to use confrontive coping ('tried to change the situation'), while overweight and obese women were more likely to use evasive coping ('put off facing the problem')." But how one copes with a problem is a separate question from one's threshold for perceiving a problem in the first place.

The study concludes by asserting that its findings "underscore the public health importance of continuing antidiscrimination efforts in this country and worldwide." Now there's a brave position! Yet it doesn't follow from the study either. To be sure, antidiscrimination efforts are worthwhile inasmuch as they prevent discrimination. But is there a shred of evidence that they reduce the level of perceived discrimination?

A Look Inside Fed’s Balance Sheet

• A Look Inside Fed’s Balance Sheet — 5/28/09 Update
  Posted by Phil Izzo

  The Fed’s balance sheet shrunk in the latest week to $2.064 trillion from $2.165 trillion. While the central bank boosted its holdings of Treasurys and federal agency debt, the increases were more than offset by declines in direct bank lending and liquidity swaps with foreign central banks. The TALF and commercial paper facilities also shrunk in the latest week.

  In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. Every Thursday afternoon, the chart will be updated with the latest data released by the Fed.

  In an effort to simplify the composition of the balance sheet, some elements have been consolidated. Portfolios holding assets from the Bear Stearns and AIG rescues have been put into one category, as have facilities aimed at supporting commercial paper and money markets. The direct bank lending group includes term auction credit, as well as loans extended through the discount window and similar programs.

  Central bank liquidity swaps refer to Fed programs with foreign central banks that allow the institutions to lend out foreign currency to their local banks. Repurchase agreements are short-term temporary purchases of securities from banks, which are looking for liquidity and agree to repurchase them on a specified date at a specified price.

  Click Continue Reading to see an interactive chart.

  G20: Why Pittsburgh?

  Posted by Bob Davis

  The decision to convene the leaders of the Group of 20 countries in the U.S. this fall around the time that heads of government gather at the United Nations in New York presented U.S. officials with a delicate decision: How to gather the 20 leaders in a way that didn’t insult those from countries that aren’t included.

  The solution was to put some geographic distance between the U.N. and the site of the G20 meeting, but not so much distance that the site was inconvenient. One option considered was a site in northern suburbs of New York City.

  The White House said Thursday that the G20 leaders will convene in Pittsburgh on September 24 and 25. By choosing the western Pennsylvania city (unemployment rate 7.6%, at last tally) the U.S. is turning to an approach often followed by the Group of Eight, the organization of big industrialized countries.

  Over the years, G8 summits often have been used as an economic development tool, a way to bring businesses to cities outside the host nation’s capital. Italy, for instance, shifted the location of this summers G8 summit from the island of La Maddalena off the northeast coast of Sardinia to l’Aquila in the Abruzzo region, a town devastated by an earthquake in April.

  Fed May Have to Tweak Treasury Purchase Program

  Posted by Deborah Lynn Blumberg

  With long-end Treasury yields racing higher this week and wreaking havoc on the mortgage bond market, the Federal Reserve might have to tweak its Treasury purchase program sooner rather than later.

  To date, the Fed has purchased a little less than half of the $300 billion it has pledged to buy in Treasurys by the fall, yet long-end Treasury yields have continued to trek stubbornly higher since March and are now beginning to pull mortgage rates up with them.

  To keep rates from moving even higher from here, now is the prime time for the Fed to fine-tune its programs. That may not necessarily mean increasing the amount it buys — which might have the unwanted effect of undermining the dollar. Rather, the Fed should be more targeted in the maturities it buys, Treasury market participants urge.

  Treasurys maturing in five to 10 years should be the focus of the Fed’s buying, said Ward McCarthy, managing director at Stone & McCarthy. McCarthy sees no need to increase the overall amounts, but urges the Fed to dedicate “as much heavy artillery as possible” to those maturities.

  Higher Treasury yields come amid tentative signs of economic improvement. Traders and investors are also demanding higher returns in response to the huge amount of new Treasurys on offer this year at a time when there are fewer primary dealers to buy the debt. Goldman Sachs estimates the government could sell some $3.5 trillion in Treasurys this fiscal year ending September, dwarfing the amount of Fed buying.

  This week, yields rocketed decisively higher, breaking through key psychological levels. Adding to the sell-off were worries about the U.S. ratings outlook, even though the three major ratings firms all noted that the U.S. triple-A rating isn’t under any threat for now. Higher Treasury yields upended the mortgage bond market — the 10-year Treasury yield is the benchmark for fixed-rate mortgages — further exacerbating the sell-off in government debt.

  The 10-year yield touched 3.76%, a level nearly 100 basis points up from where it was when the Fed began its buying. The rate rise is worrisome as it threatens to undo the Fed’s success in forcing mortgage rates lower with its purchases of agency and mortgage debt. Thursday, the average 30-year fixed rate was quoted above the key 5% mark at 5.08%, according to bankrate.com, from just 4.78% last week. The Fed has bought nearly $500 billion in mortgage bonds alone, out of the over $1 trillion earmarked for mortgage-related debt.

  The Fed in the next two weeks is scheduled to buy Treasurys four times, less than it has in the last two weeks of May. It will buy seven- to 10-year notes this coming Wednesday and two- to three-year securities Thursday. The following week it will buy Treasurys maturing in four to seven years and then ones maturing in 10 to 17 years.

  Don Galante, senior vice president of fixed income at MF Global, urged the Fed to zero in on an even narrower band — seven- to 10-year notes. Reducing its purchases of two-year notes and buying seven- to 10-years would not only help mortgage rates, Galante said, but it would also make more sense from a financial standpoint, given the recent decline in prices in long-dated Treasurys.

  The Fed “should take advantage of the steepness of the yield curve,” Galante said, referring to the gap between short- and long-dated yields. Whether or not the Fed needs to dedicate more than the $300 billion already pledged is a matter for another day, he added. Now, policy makers “just need to change the weighting of what they’re doing.”

  Given the week’s widening in risk premiums on mortgage debt to Treasurys, the Fed should act quickly, he said.

  Yet there are arguments to be made for the Fed to make a big splash to regain control over the path of long-dated yields.

  The Fed should remove any limits to the amount of Treasurys it will buy, Lou Brien, market strategist at DRW Holdings in Chicago, said, and instead note that it will buy as much as needed to help the economy heal. “A $300 billion cap starts the clock ticking,” he said.

  Brien said it might not be the Treasury or the mortgage markets that force the Fed’s hand. Should stocks take fright over rising Treasury yields and drop sharply, the Fed could be goaded into action.

  Policy makers themselves have discussed changes to the Treasury purchase program, the minutes of the April FOMC meeting showed. Some thought an increase in the total amount might be warranted, but others recommended waiting to see how the economy and financial conditions respond.

  Given the jittery state of financial markets, the Fed may not have the luxury of waiting until its next meeting on June 23-24.

  Fed’s Trouble With Bubbles

  Posted by Michael S. Derby

  Back in 2002, when Ben Bernanke was just a Fed governor, he made a joke that has had special resonance in the current crisis.

  Speaking to a conference honoring the legacy of economist Milton Friedman, Bernanke said of the relationship between the Great Depression and the Fed: “We did it. We’re very sorry” and “we won’t do it again.”

  The future central bank chief was referring to a collection of monetary policy mistakes and other Fed-related issues, which he and others believed greatly exacerbated the economic tribulations of those years.

  While Bernanke could not have known it at the time, the speech had significant implications. His criticism of the tight money policies pursued then by the Fed explains the extremely stimulative response aimed at the current crisis.

  When he said the Fed wouldn’t repeat past errors, Bernanke meant it. But what about new errors?

  While it remains a controversial notion, a notable camp of economists believe the Fed’s approach to asset price bubbles has played a huge role in the economy’s current woes. There are signs officials are embracing some of that thinking and are mulling ways they can avoid making the same missteps in the future.

  Central bankers have long been reluctant to tighten interest rates to prick asset price bubbles. They doubt their ability to spot bubbles, and fear that their relatively blunt policy tools, once pointed at a given asset class, will likely cause too much collateral damage in the broader economy.

  That philosophy has proved costly. In the current episode critics contend cheap money offered by the Fed in the early years of the decade, coupled with lax regulation, set off a housing market boom totally out of line with economic fundamentals.

  When that bubble exploded, it sowed the seeds for the worst downturn since the Depression. Rate policy and other Fed tools, some argue, could have done something to arrest runaway house prices. But it wasn’t even tried, thus leaving the Fed again in a starring role in events surrounded by considerable economic pain.

  Whether they buy the criticism, Fed officials’ views are nevertheless evolving. As they realize tight money in a time of economic contraction is bad, officials are now trying to find ways to use their toolkit to prevent future bubbles that will cause broader economic harm.

  In a speech last fall, Bernanke recognized the problem, and what may need to be done. “There’s no doubt that as we emerge from the current crisis that we’re all going to look very hard at that issue, and what can be done about it,” he said in October.

  In April San Francisco Fed president Janet Yellen said the trouble bubbles can cause “lends more weight to arguments in favor of attempting to mitigate bubbles.” The official argued in favor of a tailored approach to specific events, saying regulation and supervision might be the right path in certain circumstances, and rate policy the better avenue at other times.

  Soon to retire Gary Stern, the veteran leader of the Minneapolis Fed, has also seen his thinking evolve. Speaking earlier this month he agreed bubbles should be more forcefully addressed by policy makers. Stern flagged tradeoffs between growth and the blunting of a bubble, and highlighted the importance of Fed communication to navigate this environment.

  “The central bank must have public support for the actions it pursues, and it is easy to imagine resistance to concerns about asset price levels,” Stern said. But it can be done, he said, pointing to Paul Volcker’s successful battle against inflation at the start of the 1980s, even though it came at great economic cost.

  Economists React: New Home Sales Indicate Stability, Not Recovery

  Posted by Phil Izzo

  Economists and others weigh in on the modest increase in new-home sales.

  • The new home sales numbers seem to confirm what the single-family housing starts and permits numbers imply — that the market for new single-family homes is flattening — indeed, that it may have hit bottom in January — and that the recovery will be a slow one. Despite improving numbers, we are not ready to say that the market has hit bottom. These numbers are estimates with large standard deviations. Because the margin of errors is big, the footnote in the press release warns, “It takes four months to establish a trend for new homes sold.” We still project that this market will start expanding in the second half of this year. –Patrick Newport, IHS Global Insight
  • As opposed to the resale volumes, which increased by 2.9% month-to-month in April, new home sales remain sluggish. Plunging prices, record-low mortgage rates and an $8000 tax credit for first time buyers did not help much to push up hew housing demand. We believe, new home sales is probably a better reflection of the underlying demand than the existing home sales which have been highly boosted by the increasing foreclosure numbers recently. Nevertheless, new home inventories kept declining in April which sent the months’ supply in new homes to 2.3 month below a record of 12.4 months reached in January. In addition, the home prices kept falling and were 14.9% below last April’s levels. Even though we see builders are becoming more optimistic about the future of the housing industry and there is some stabilization in housing demand, surging foreclosures, rising mortgage rates and high unemployment rates will weigh heavily on new home sales and will prevent a sharp rebound in the housing market in the near future. –Yelena Shulyatyeva, BNP Paribas
  • New homes are now sitting on the market for a median 10.9 months before selling, and completed homes still comprise an extraordinarily high share of total homes for sale. While sales have stabilized within a fairly narrow range over recent months, there is little to suggest that the sales rate will post a meaningful and sustained increase any time soon. Despite the Fed’s efforts, mortgage rates are heading higher, while the ongoing erosion in the labor market and tougher mortgage lending standards will continue to act as drags on sales. It is true that the first-time buyer tax credit is stimulating sales, but this will not be sufficient to sustain a meaningful increase in new home sales. –Richard F. Moody, Forward Capital
  • Even with some normalization of unsold inventory of newly constructed homes, it’s unlikely that the real estate market can support any significant pick-up in homebuilding activity in the foreseeable future. That’s because foreclosure activity is still increasing and these properties are flooding the market. –David Greenlaw, Morgan Stanley
  • The report was a bit of a mixed bag, as the weaker than expected gains in new home sales will likely be offset by the improvement in the inventory data. –Millan L. B. Mulraine, TD Securities
  • This is a bit disappointing, given the hefty increase in homebuilder sentiment in the past couple of months. The relatively late Easter might have restrained activity, we suppose, but we cannot be sure. Either way, we still think the combination of very low mortgage rates and falling inventory will entice people back into the market in greater numbers over the next few months. –Ian Shepherdson, High Frequency Economics
  • Looking ahead, reports from homebuilders indicate that activity picked up in April and then a bit further in May, led by first-time homebuyers attracted by steep price declines at the bottom end of the market. The same appears to be true of existing homes, where first-timers are being tempted by deeply discounted properties coming out of foreclosure. Therefore, while sales rates may well have bottomed, it seems clear that gains in activity will remain concentrated in lower priced homes. However, supply will remain enormous, particularly with increased competition coming from distressed sales of existing homes. This suggests that prices will continue to edge lower at the bottom end of the market even as demand for these homes picks up a bit –Joshua Shapiro, MFR Inc.
  • Although new single-family sales were a little below expectations in April, we judge the data to be consistent with a bottoming out in new housing construction activity as also suggested by single-family housing starts and permits and the NAHB’s housing market index. Perhaps the most constructive indicator is the decline in the number of homes for sale in April, both in absolute terms and in relation to sales (though the months’ supply remains elevated). The latest mortgage delinquency data for the first quarter remind us that there are still very significant problems in the housing market. –RDQ Economics

  Secondary Sources: Clinton, Compensation, China

  Posted by Phil Izzo

  A roundup of economic news from around the Web.

  • Clinton’s Economic Legacy: On the New York Times’s Economix blog, David Leonhardt posts a transcript of Bill Clinton’s comments on his economic legacy. “Mr. CLINTON: Yes. Well, I don’t know if I would have done anything different. First, I always ask. I do not believe this would have happened in this way if I had been in office or if Al Gore had been elected. I just don’t. I think we would have caught the housing bubble and taken steps to stem it before it got out of hand. And I know that having Arthur Levitt at the Securities and Exchange Commission would have made a huge difference.”
  • Crazy Compensation: Writing for the Journal, Alan Blinder says that incentive packages bear a large portion of the blame for the crisis. “What to do? It is tempting to conclude that the U.S. (and other) governments should regulate compensation practices to eliminate, or at least greatly reduce, go-for-broke incentives. But the prospects for success in this domain are slim. (I was in the Clinton administration in 1993 when we tried — and failed miserably.) The executives, lawyers and accountants who design compensation systems are imaginative, skilled and definitely not disinterested. Congress and government bureaucrats won’t beat them at this game. Rather, fixing compensation should be the responsibility of corporate boards of directors and, in particular, of their compensation committees. These boards, I’ll remind you (and please remind the board members), are supposed to represent the interests of stockholders, not those of managers. Quite plainly, many were asleep at the switch, with disastrous consequences. The unhappy (but common) combination of coziness and drowsiness in corporate boardrooms must end. As one concrete manifestation, boards should abolish go-for-broke incentives and change compensation practices to align the interests of shareholders and employees better. For example, top executives could be paid mainly in restricted stock that vests at a later date, and traders could have their winnings deposited into an account from which subsequent losses would be deducted.”
  • China’s One-Child Policy: At the Stash, Zubin Jelveh looks at a new paper that examines the effects of China’s one-child policy on savings and what that means for the crisis. “But why did the Chinese choose to save rather than spend their earnings in the first place? A big part of that answer, argue Shang-Jin Wei of Columbia University and Xiaobo Zhang of IFPRI in a new working paper, is China’s one-child policy, which sent the country’s sex ratio from 107 boys per 100 girls in 1980 to the current imbalance of 120 boys per 100 girls. That means that by 2005, there were about 40 million men who could not “mathematically get married due to a shortage of women,” write the researchers. The reason a shortage of women would cause an increase in savings is not clear. In order to compete for wives, a shortage could cause men and families with sons to save more in order to signal their wealth to potential brides. On the other hand, these groups might also spend more money on status goods like expensive clothes and cars to achieve the same end. However, the researchers find that across different provinces across China between 1978-2006, “local savings rates are systematically and positively correlated with local sex ratios.”"
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• May 28, 2009
  5:00 AM

  South Korea: Ready to Lead the G20?

  Posted by Bob Davis

  British Prime Minister Gordon Brown put considerable time and political skill into making the Group-of-20 leaders meeting in London a success last month. Though there was considerable bickering, the industrialized and big developing nations generally agreed to boost stimulus spending, crack down on tax havens and regulate hedge funds.

  Next year, South Korea chairs the G20, to the groans (privately expressed) of some U.S. and European officials. Why the worry? In international negotiations on trade and finance, Asian nations are notorious for laying back and only reluctantly making concessions at the end of talks. The U.S. and Europe invariably push the deals forward.

  South Korea will depart from the Asian pattern, vows Il SaKong, a prominent South Korean economist who is the country’s point man on the G20 summit. “The G20 members, especially the G7, know we’ll be more than willing to lead,” he said. “Leadership doesn’t mean working alone. Leadership means getting harmony, getting cooperation and getting support.” The G7 are the U.S., Canada, Britain, France, Italy, Germany and Japan.

  But leadership also means bull-dogging ahead. “Koreans are never shy; we have a short temperament,” he said.

  One of the biggest challenges facing G20 countries is figuring out how to make sense of so many leaders summits. The G8 — Russia plus the G7 — meets in Italy in July. The G20 — the G8 plus big emerging markets — meets in September in New York. Then the G20 is likely to gather again in the spring of 2010 in South Korea, Mr. SaKong figures.

  What can the different sessions focus on? The state of the economic crisis is bound to set the agenda. The G8, for instance, may include an effort to revive the perpetually stalled Doha trade talks, Mr. SaKong said, as well as push ahead on climate change issues. He said he considers the G8 “an informal steering committee” for the larger group. (A number of big developing countries are attending the Italy summit anyway for side sessions on trade, climate and other matters.)

  By September, if the global economy improves, the G20 may start to look at the “subject of what do you after the crisis? A post-crisis strategy,” Mr. SaKong said. He was in Washington D.C. on Wednesday to talk to White House economic adviser Lawrence Summers and others on the G20 agenda.

  And by the following spring? “If you use the word recovery as touching the bottom, by the first of next year the world economy will be close to that situation,” he said. At that point, the post-crisis strategy may start to be implemented.

  But Mr. SaKong was wary about using use the term “exit strategy,” for fear it would send a premature signal that the crisis is over. “We have to be careful about that term until we are assured the recovery is firmly based,” he said. “If we talk about an exit strategy, that could be interpreted as eliminating stimulus and tightening monetary policy.”

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• May 27, 2009
  6:16 PM

  Keeping Up With TALF

  Posted by Kellie Geressy

  With the deadline for the fourth round of Term Asset-Backed Securities Loan Facility (TALF) funding drawing close, seven deals were launched Wednesday in the asset-backed security market, all of them eligible for cheap funding from the Federal Reserve.

  Deals totaling more than $5.779 billion including those backed by auto leases from Japanese auto maker Nissan Motor Co., German car maker BMW AG, and American auto manufacturer Ford Motor Co. came to market. Nissan is offering a $1 billion deal, BMW $1.5 billion in such debt and Ford $1 billion.

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• May 27, 2009
  5:48 PM

  Rural America Has Broadband — or Not — Says FCC

  Posted by Amy Schatz

  With $7.2 billion in stimulus money at stake, much has been made of how little broadband Internet service is available in rural America. But a new report from the government agency in charge of devising a national Internet strategy says it doesn’t really know how much of rural America is actually wired.

  “We would like to answer this question definitively,” the Federal Communications Commission said in a report released Wednesday. “Regrettably we cannot. The (FCC) and other federal agencies simply have not collected the comprehensive and reliable data needed to answer this question.”

  Good thing Congress set aside $350 million for states to draw up local broadband maps, perhaps, since federal officials will have scant information to go on when handing out that $7 billion and change over the next two years.

  The FCC is advising Obama administration officials on how to hand out broadband stimulus funds and its also embarked on a broader effort to come up with a national broadband strategy. The agency’s report on rural broadband access is the first step towards that.

  (It’s worth noting that the report reflects the thoughts of interim Democratic FCC chairman Michael Copps, not the full FCC.)

  Congress asked the FCC to take a look at the state of broadband in rural America when it passed the $290 billion Farm Bill last year. Other than finding that the agency basically has no idea where broadband is available in rural America, the FCC basically said that federal agencies need to work together better and that the government may need to step in and take a greater role in ensuring rural America has Internet access.

  “A complementary government role in broadband deployment can yield advantages that a free market solution cannot achieve alone,” the report says. “For example, government involvement in rural broadband may increase the efficiency and reliability of local services, such as law enforcement and emergency services, promote job growth and economic development by attracting and retaining businesses and increasing use of technology in a community.”

  The Agriculture Department has been in charge of helping wire rural America for some time but its program has come under some criticism for being too slow, bureaucratic and less than effective in handing out money.

  The FCC didn’t dwell on those criticisms in its report although it did note the “(Agriculture Department) programs face several challenges.”

  In March, the Agriculture Department’s inspector general was a bit more pointed when he released a report that said the USDA’s continued practice of awarding funding to areas where broadband service is already available doesn’t really help people in rural, un-served areas. – Amy Schatz

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• May 27, 2009
  4:06 PM

  Another Gloomy Forecast: This One From the U.N.

  Posted by David Wessel

  The United Nations downgraded its economic forecast for 2009, and said it anticipates the world economy will to shrink by 2.6% 2009, much worse than the “pessimistic scenario” of its January forecast which predicted a decline of 0.5%. By the UN Tally, the world economy expanded by 2.1% 2008 and nearly 4 per cent per year during 2004-2007.

  “Should current policy measures take traction, a mild recovery may be expected in 2010,” says a UN mid-year report, World Economic Situation and Prospects 2009 (WESP). But it cautioned that a more prolonged global recession is also possible if the vicious cycle between financial destabilization and retrenchment in the real economy cannot be sufficiently contained and concerted global policy actions are not taken. “If financial markets do not unclog soon and if the fiscal stimuli do not gain sufficient traction, the recession would prolong in most countries with the global economy stagnating at lower welfare levels well into 2010,” says the report.

  WESP includes a more optimistic, but increasingly less likely, scenario where the world economic recovery would begin in the second half of 2009 and the WGP would expand by 2.3% in 2010. This scenario requires problems in financial markets to be resolved in the first half of 2009. Approaching the end of May 2009, the economic landscape remains very winterly with no visible green shoots to be seen which could signal beginnings of a new spring, the UN said.