The Supreme Court

Change at the top

The retirement of Justice David Souter will let Barack Obama begin to reshape the Supreme Court

WHEN the Supreme Court ends its October term, Justice David Souter, according to those who are privy to his plans, is going to retire. He is neither particularly old (69) nor ill, but simply yearns to get back to New Hampshire, from where the first President George Bush plucked him in 1990 to be one of the nine justices of the country's highest court. Although he has enjoyed the job, he has always hated the months he has to spend in Washington, calling it “the world's worst city” and resolutely avoiding the social round. He was only the sixth unmarried justice of the court, and one of the most private of all.

His departure is still some way off, but the prospect will unleash a flood of excitement and speculation. It gives President Barack Obama his first chance to influence America's top court, and Mr Obama's choice will clearly indicate whether he sees himself as a firmly liberal president, or whether he means to resurrect the promises of bipartisanship he made in the campaign and then, swiftly, seemed to forget again.

Chances to appoint justices to America's Supreme Court come up only rarely. Most presidents can hope to name only one or two candidates to it. And that is considered just as well. The court is the last arbiter on all the country's laws, and the ultimate interpreter of the constitution. Its rulings have shaped America far more decisively than the work of Congress. And justices are appointed for life, making them potentially figures more powerful than the president himself. The right sort of pick may prolong a president's influence long after his return to normal life.

Mr Obama will therefore be drawing up a list of replacements with some eagerness. He is said to want to nominate a woman: since the retirement of Sandra Day O'Connor, a notable swing vote on the court, only Ruth Bader Ginsburg remains, and she has been battling cancer. Names in the wind include Jennifer Granholm, the governor of Michigan, and Elena Kagan, the solicitor-general. But many men are also interested, and Bill Clinton, the former president, is sometimes said to be among them.

Any president hoping to influence the court should know, however, that there is no magic formula. Once they don the black gown, justices owe no allegiance to anyone. Justice Souter's own career illustrates the point. He was picked as a conservative, and for the first few years acted like one, agreeing most of the time with the court's most truculent and passionate right-winger, Antonin Scalia. But in 1992 Justice Souter ruled that the abortion law, Roe v Wade—the bane of conservatives, and the rock on which many Supreme Court nominations have foundered—should not be overturned because to do so without “compelling reason to re-examine” would be “a surrender to political pressure”. In that year, too, he voted against allowing prayer at a graduation ceremony. And in 2000, in Bush v Gore, he voted to allow the election recount to continue while the majority ruled that it should end, and that George Bush should be president. Justice Souter was so disgusted by that ruling, and the partisanship it seemed to show, that he almost resigned.

He is now considered a liberal on the court, and Mr Obama will not therefore alter the court's balance by picking a liberal to replace him. But, as with the sudden defection of Senator Arlen Specter this week, it is another unexpected gift to the new president. Justice Souter could well have outserved him. As it is, several other justices look more frail, and Mr Obama may well find himself in a position to pick two or three. With each one, the chances of reconstructing the court in his image, although still not dependable, get better.

Chrysler Pushed Into Fiat's Arms

Italian Car Maker, UAW Main Owners; Obama Pledges Brief Stay in Bankruptcy; Creditors Take Hit

NEIL KING JR. JEFFREY MCCRACKEN

President Barack Obama pledged to give Chrysler LLC "a new lease on life" by ushering the storied auto maker into a bankruptcy reorganization that will empower its union and put Italy's Fiat SpA in charge while elbowing aside its creditors.

Administration officials said the bankruptcy could last a relatively short two months and lead to a healthier Chrysler. But the intervention Thursday to preserve the 84-year-old company is far from certain and could stall in court, especially if aggrieved parties such as creditors and dealers mount a legal challenge.

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Associated Press

Gina Russo, second from left, and her father Gus, third from left, the owners of Lochmoor Chrysler Jeep in Detroit, watched President Obama announce Chrysler's bankruptcy filing.

The move also could disrupt the country's already-fragile automotive suppliers and scare away Chrysler's already-scarce customers.

The plan envisions a partnership between Fiat and the United Auto Workers union, one of the more peculiar ownership structures in Chrysler's tortured history. The filing may pave a path for General Motors Corp., whose own U.S.-imposed deadline for reorganization is a month away.

Chrysler's Chapter 11 filing -- the sixth-largest ever -- is designed to arrest the decline of a company that popularized the Jeep and the minivan. It marks the latest in a series of government interventions. Earlier, Washington took stakes in troubled banks and insurance giant American International Group Inc.

The administration is determined to protect UAW jobs and salvage the third-largest domestic auto maker, even at the expense of Chrysler's secured lenders. Critics among the lender group charged that the deal would upend established bankruptcy practice by putting junior creditors on par with secured ones.

The filing, made in New York's Southern District, was the culmination of months of wrangling that started last year when Chrysler and GM appealed to Washington for a bailout. It ended with an agreement that eventually could see Fiat taking over Chrysler, a new union pact covering about 150,000 workers and retirees, and a contentious, multibillion-dollar debt-for-cash swap.

The Treasury will contribute $3.3 billion to the plan: $2 billion to pay off Chrysler's lenders and the rest to pay the company's bills during bankruptcy. It said it is prepared to pitch in $4.76 billion more to keep Chrysler running for several years. That's on top of $4 billion the government lent Chrysler in previous months, a debt forgiven as part of negotiations with the UAW and lenders.

Audio

Car Cast: Eyes on the Road columnist Joseph White describe what lies ahead for the auto industry following news that Chrysler filed for bankruptcy and is forming an alliance with Fiat.

President Obama, in a noon speech at the White House, had to explain why he planned to save Chrysler and its workers by forcing the company into bankruptcy. A partnership with Fiat, he said, would give Chrysler "a chance not only to survive, but to thrive in a global auto industry."

Mr. Obama and his auto task force had long seen the merits of washing away some of Chrysler's liabilities through bankruptcy. Fiat can now pick the operations it desires while more easily shedding hundreds of dealer franchise agreements and other obligations it doesn't want.

At the same time, in an echo of the tensions that have run high between Washington and Wall Street, the president and his aides blamed the filing squarely on about 20 smaller investment firms and hedge funds. This group voted against the government's last offer to eliminate $6.9 billion in debt owed them.

They "decided to hold out for the prospect of an unjustified, taxpayer-funded bailout," Mr. Obama charged. Rep. John Dingell, a Michigan Democrat, called the holdouts "rogue hedge funds" and "vultures" and said in a statement that they "will now be dealt with accordingly in court."

The smaller lenders and funds pose some threat to the process of restructuring Chrysler, said attorneys and bankers involved in the matter. They'll likely argue in court the U.S. is overriding contract law, bankruptcy law and constitutional protections against the seizure of private property.

The group, calling itself the "non-TARP lenders," a reference to the Troubled Asset Relief Program that's aided banks, said in a statement that it has "a fiduciary responsibility to all those teachers, pensioners, retirees and others who have entrusted their money to us." The most compliant of Chrysler's big creditors -- among them J.P. Morgan Chase & Co and Citigroup Inc. -- have received hundreds of billions of dollars in TARP aid.

Fiat will contribute no money to the alliance. It has committed what it says are billions of dollars in technologies and designs for fuel-efficient vehicles.

The administration had repeatedly said it has no plans to run Chrysler or dictate its business plans. But its central role in the company's future has extended the federal government into a private enterprise in a way not seen in decades. The pact allows the government and UAW to reorganize the company's top management. Chrysler Chief Executive Bob Nardelli and President Tom LaSorda said Thursday they will leave, clearing the way for Fiat CEO Sergio Marchionne to either take the top spot himself or name a successor.

Moreover, the government said it would use the agreement with Fiat and Chrysler to encourage fuel-efficient cars.

Under the deal, the UAW's retiree health fund will end up with 55% of Chrysler while Fiat will begin with a 20% stake. The U.S. government will get 8% and the Canadian and Ontario governments, home to several large Chrysler facilities, will get 2%.

The pact gives Fiat the opportunity to increase its equity by up to 15 percentage points if it introduces efficient engines to be built in the U.S. and rolls out a car that gets 40 miles a gallon. Later, it could take a controlling stake if certain conditions are met.

The U.S. government will name four Chrysler board members, Fiat will name three, the UAW one and the Canadian governments one.

Cerberus Capital Management LP, which struck a $7.4 billion deal to buy control of Chrysler two years ago, will lose all its equity in the company. Mr. Nardelli will become a Cerberus adviser.

The UAW's retiree health-care fund, which was owed $10.6 billion by Chrysler, will also get a promissory note of $4.6 billion to be paid off by the company over the next 13 years with interest.

Chrysler's UAW workers agreed to eliminate a number of benefits, including a cost-of-living allowance, Christmas bonus, performance bonus and two paid holidays. Retirees would forgo vision and dental care along with other benefits.

Reuters

So far there's no indication that Fiat and Chrysler plan to eliminate any of the company's brands.

The case will test the fragile auto-supply base. Many small and large suppliers across the Midwest, which provide car makers with everything from seats to instrument panels, already are teetering on the edge of bankruptcy or liquidation.

If these suppliers fail, in part because their lenders are spooked by the Chrysler filing, that could cause disruptions at GM as well as at Ford Motor Co., which remains in better shape than its peers, and at foreign-based car makers that use the same suppliers. The U.S. launched a supplier-support program with $5 billion a few weeks ago, but it may not be enough, auto-bankruptcy experts said.

"There will be an impact on the receivables for some suppliers that may lead to their own bankruptcy," said William Kohler, co-head of the automotive practice at the law firm of Butzel Long in Michigan.

Chrysler's 3,200 dealers also are exposed. The administration said it planned eventually to fold troubled Chrysler Financial, which provides loans that dealers use to buy their inventory, and have GM's financing arm, GMAC, take over the business. The transfer would allow GMAC to help trim some weaker Chrysler dealers by refusing to provide financing.

In Derry, N.H., third-generation Chrysler-Dodge-Jeep dealer Troy Allen is pessimistic about the government's plan since the first vehicle from the Fiat alliance is at least two years away. Meantime, "we have the same product that isn't selling," he said.

Mr. Allen said he is moving about 10 vehicles a month these days compared with 40 a year ago. If sales don't pick up, he added, he may have to go out of business.

The Interrogation Memos

The Interrogation Memos and the Law

Criminalizing legitimate policy differences will paralyze the conduct of foreign policy.

RICHARD N. HAASS

Calls are mounting to establish some sort of inquiry -- a special prosecutor, a congressional investigation, a truth commission -- to determine if the Bush administration lawyers who argued that waterboarding and other harsh interrogation techniques could be employed in the aftermath of 9/11 should be prosecuted.

David Klein

At the center of the frenzy are four detailed legal analyses. The memos, written by Justice Department lawyers in 2002 and 2005 and recently declassified and released, read as you would expect them to. The individuals writing them were reflecting their own interpretation of the law, their own policy views, and quite possibly the policy preferences of their bosses.

The subject matter lent itself to debate. Law tends to be more gray than black and white.

The memos make the case that what is not explicitly banned is permitted. What comes to mind is the difference between tax evasion and avoidance. The former is illegal whereas the latter is not. The lawyers were making an aggressive case for the terrorism equivalent of avoidance.

I served in the Bush administration for two and a half years, from January 2001 through June 2003, and knew nothing about these memos or the interrogation techniques they advocate. I harbor deep doubts about the use of such techniques because of the clear cost to America's reputation and the unclear benefits to U.S. intelligence gathering.

But these questions (as important as they are) are not at the heart of today's debate. The issue is whether those who argued that such techniques were not illegal -- and therefore should be available -- ought to be tried.

They should not. To begin with, prosecution of Justice Department officials would have a chilling effect on future U.S. government officials. Few would be brave or foolhardy enough to put forward daring proposals that one day could be judged illegal. Putting things down in writing is a useful intellectual exercise that is also central to good decision-making. With the threat of prosecution, serious memos on controversial matters will increasingly become the exception rather than the rule.

Prosecution would also set a terrible precedent. One would have thought today's politics sufficiently partisan and poisonous without adding legal threats to the mix. Even knowing this was a possibility would discourage people from entering government in the first place.

Last, investigation and prosecution would take time and focus away from what this country and its elected and appointed representatives need to focus on. Investigations and trials would constitute an enormous distraction for the Obama administration and the Congress at a time when this country faces a daunting array of international problems (Afghanistan, Pakistan, Iran, Iraq, North Korea, climate change, swine flu) and is limited by the effects of a recession that is sure to be both deep and enduring.

If there is a fault here that requires attention, it is with the policy and political process. Mid-level officials do not make policy; they seek to influence it through their analysis and recommendations. What is required is a process inside the executive branch in which competing assessments and alternative prescriptions are subject to rigorous scrutiny. And Congress is responsible for effective oversight. Both the previous administration and the Congress failed to meet these tests.

I have had to deal with questions that relate to the current debate twice in my career. One example was Northern Ireland, where for three years (from 2001-2003) I was the U.S. envoy to the peace process. Major progress was made in bridging the divide between mostly Protestant Unionists and mostly Catholic Republicans and in restoring the institutions of local self-government in Northern Ireland.

A good many people were not content with these gains, and sought to reopen the past by creating some sort of truth and reconciliation process. I argued against going down this path: Doing so would reopen more wounds than it would heal, and the "justice" produced would be too much for some and not enough for others. Rather than contributing to Northern Ireland's continuing normalization, it could slow or even reverse it.

My concern over a truth and reconciliation process today to examine alleged torture is similar -- it would likely produce little in the way of truth and even less in the way of reconciliation.

A second experience was more personal. During the Iran-Iraq war of the 1980s and its aftermath, the U.S. provided limited assistance to Iraq. The administrations of Ronald Reagan and George H.W. Bush initially did this to help prevent a military victory by revolutionary Iran, an outcome they feared would destabilize the entire region. After the war ended in mid-1988, the two administrations continued the practice of providing support (mostly economic) to Iraq in an attempt to integrate it into the region and persuade it to adopt a more responsible foreign policy.

The attempt failed.

Years later, following the Iraqi invasion of Kuwait, allegations regarding the improper administration of economic assistance programs were cited as "proof" of a scandal dubbed "Iraqgate." The charge was levied that the administration of George H.W. Bush had secretly armed the Iraqis through these programs and had in part created the threat that the war had to combat. More than four years of hearings and investigations by various executive branch, congressional, and judicial bodies during the Bush and Clinton administrations made clear that these charges were false. No economic assistance funds were ever provided to Iraq, no U.S. arms were exported, and the amount and significance of U.S. dual-use exports were minimal. If there was a scandal, it was in the behavior of the Congress.

What made all this serious was the congressional investigations that absorbed hundreds of hours. I was the senior Middle East hand on the National Security Council staff at the time, and I remember putting in full 12-hour days and then, along with my staff, having to spend several more hours responding to various congressional requests for documents. I was concerned not over anything we had done but over the possibility we might miss locating and handing over some document in a file drawer and be charged with obstruction of justice.

Policy differences over how best to modify the behavior of rogue regimes are legitimate and unavoidable, but this was something else. For those in the executive branch, it was demoralizing and exhausting and, in some cases, costly. People who complain about why it is so difficult to attract talented people to public service could get some of their answers from this episode and others like it.

Government service already asks a lot of individuals. It entails sacrifice, pays little, and often violates privacy. Adding risk of prosecution to the mix will make recruiting the best and brightest that much more difficult. If we are not careful, we will get the government we deserve, but not the government we need.

Mr. Haass is president of the Council on Foreign Relations and the author of "War of Necessity, War of Choice: A Memoir of Two Iraq Wars," published this month by Simon & Schuster.

NOBODY LIKES YOU

Nobody Likes You, Jay

Journalism, or schoolyard gossip?

JAMES TARANTO

The New York Times reports that Jay Bybee "has become estranged from friends." Bybee, a judge on the Ninth U.S. Circuit Court of Appeals, formerly worked at the Justice Department's Office of Legal Counsel, and of late has been under fire from the hard left over memos dealing with the difficult question of what forms of interrogation meet the legal definition of "torture."

The only evidence the Times presents for its assertion that Bybee "has become estranged from friends" is this anecdote:

Prof. Christopher L. Blakesley, a colleague on the law school faculty at the University of Nevada, Las Vegas, said that after the first memorandum was released, he was unable to restrain himself from expressing disagreement at a 2004 dinner at a restaurant that included their wives.

"I asked him how he could sign such an awful thing," Professor Blakesley recalled in an interview.

He said the judge replied that he could not talk about the matter. The dinner proceeded awkwardly, Professor Blakesley said, and they have not spoken since.

Professor Blakesley said that while he liked Judge Bybee, "he has some basic flaws including being very naïve about leaders."

"He has too much respect for authority and will avoid a confrontation no matter what," the professor continued.

Blakesley comes across as a lousy excuse for a friend--and remember, this is his account of the story (earlier, he gave a similar one to the Washington Post). At the time of the dinner, Bybee had just found himself under harsh public scrutiny for his actions in a past job. A real friend would have made a show of sympathy, or at least avoided the topic. Instead, Blakesley subjected Bybee to harsh scrutiny in private, seemingly trying to humiliate him in front of his wife. (Also in front of Blakesley's wife. One imagines that Mrs. Blakesley was less than thrilled at the awkward situation her husband inflicted on her.)

'Shrink to Win' Isn't Much of a Strategy

Republicans need less enforcement and more encouragement.

By PEGGY NOONAN

President Obama's news conference Wednesday night was a bit of a masterpiece. The Obama Thinking Look was back, as he parsed questions, took notes, and offered up rehearsed answers in a way that made them seem not written by the Committee on Soundbites but natural to him, as if he were formulating answers in the here and now. On torture, he cited Churchill. He spoke of pro-lifers not with any of the appellations the left prefers but as pro-lifers. He dispatched the culturally radical Freedom of Choice Act as "not a top priority"; he said he doesn't want to run auto companies and banks and would prefer, in fact, a smaller portfolio. His presentation was low-key, authoritative, and had the look and feel of moderation. When you can give this impression while some of your decisions—for instance, on the legitimate cost and reach of government—are not, actually, moderate, you are demonstrating a singular political talent.

He is subtle and likes to kill softly. As such, he is something new on the political scene, which means he will require something new from his opponents, including, first, patience.

I am wondering once again if Republicans in Washington fully understand what they are up against.

They have had a hard week. Someday years hence, when books are written about the Republican comeback, they may well begin with this low moment, and the bolting of Arlen Specter to the Democrats. It is fine to dismiss Mr. Specter as an opportunist, but opportunists tell you something: which side is winning. That's the side they want to be on.

And so the latest round of What Should the Republican Party Do?

If it is alive, and it is, it will evolve, as living things do. Beyond that, a thought.

A great party needs give. It must be expansive and summoning. It needs to say, "Join me."

A party that is huge, vital and national, that is truly the expression of the views of a huge and varied nation, will, by definition, contain within it those who are more to the right, and more to the left, and more to the middle. This creates a constant tension, a constant fight, but no matter. As Ronald Reagan said in China, in front of students at Fudan University, we are "a great disputatious nation."

Great parties are coalitions, and coalitions contain disparate and sometimes warring pieces. FDR's coalition contained Southern Democrats from Birmingham and socialists from the Bronx. They didn't agree on much, but they agreed on some essentials, such as "the New Deal is good" and "government should be harnessed to help the little guy." It was imperfect and in time evolved but its success demonstrated that a great party needs give.

More Peggy Noonan

Read Peggy Noonan's previous columns.

And click here to order her new book, Patriotic Grace.

The argument over the Republican party now always devolves into the question: Should it be less conservative? I say devolves because it is Democrats and the left who frame the question that way, and they do so because whatever the answer, yes or no, it will damage Republicans.

Another way to put the question is: Can the party, having accurately ascertained its position, and recognizing shifting terrain, institute a renewed and highly practical tolerance for the many flavors of Republican? Can it live happily and productively with all its natural if sometimes warring constituent groups?

It must.

All the metaphors here are tired, so let's stick with the big tent. A big tent is held up by tent poles. No poles, no tent. No poles, all you have is a big collapsed canvas.

The poles that keep up the tent are the party's essential beliefs. Republicans over the next few years should define what each of their tent poles stands for—a strong defense being an obvious pole, a less demanding and intrusive government being another, a natural affection and respect for tradition and for life being a third—and how many poles there are.

But also, the people inside can't always be kicking people out of the tent. A great party cannot live by constantly subtracting, by removing or shunning those who are not faithful to every aspect of its beliefs, or who don't accept every pole, or who are just barely fitting under the tent. Room should be made for them. Especially in those cases when Republican incumbents and candidates are attempting to succeed in increasingly liberal states, a certain practical sympathy is in order.

In the party now there is too much ferocity, and bloody-mindedness. The other day Sen. Jim DeMint said he's rather have 30 good and reliable conservative senators than 60 unreliable Republicans. Really? Good luck stopping an agenda you call socialist with 30 hardy votes. "Shrink to win": I've never heard of that as a political slogan.

Is it fully mature, and truly protective toward America, to be so politically exclusionary?

It is true that Republican unity would benefit now, or soon, from a great man or woman who can by the force of his presence, by the provable support of the people of his home state, by his ability to persuade, by his ability to seem somehow inevitable (as FDR and Churchill, Thatcher and Reagan all did), emerge and win the support of a plurality of the American people.

That is a wonderful and exciting thing when it happens.

But such a person may or may not emerge. People who resolve history just by showing up are few and far between.

We say of a great one, "That's the sort of person who comes along once a generation," but in fact when you look back on history you realize it's a lucky nation that yields one up even that often. A lot of history is just making do, muddling through. A lot of history goes unmarked by conspicuous greatness.

Right now, Republicans have to muddle through and do their best. They are up against a talented and charismatic leader whom people want to succeed. His party is with him. Certainly it is hungry, and grateful to him for getting them back in the game.

Republicans are also up against themselves. On Capitol Hill they are up against the Bush era, when through fear of the White House or mindless opportunism they supported things they now decry. It will take them a while to seem credible again. The smarter of them know this. They're waiting for time to pass and a new cliché about them to take hold. Old cliché: "They're not a credible alternative." Future cliché they hope for: "They've learned a lot in the wilderness."

Republicans are trying to find themselves during a time of dramatic, rolling change, demographic change, younger voters who seem embarrassed to be associated with them, an aging and contracting base and, perhaps most ominously, what appears to be a new national openness to a redefinition of the relationship between the government and the governed.

The ground is shifting. It's hard to get your footing in an earthquake. As Republicans on the Hill try, they must also try to steady their party. It needs a greater sense of realism about its predicament. It needs less enforcement and more encouragement. It needs to inspire the young and the politically unformed not with bloodlust but with ideas.

A great party allows everyone in, and allows prospective members to self-define. If they say they're Republicans, they should be welcomed and helped to find a place where they fit. A great party has a lot of such places. A great party is expansive. A great party has give.

Republicans need less enforcement and more encouragement.

By PEGGY NOONAN

He is subtle and likes to kill softly. As such, he is something new on the political scene, which means he will require something new from his opponents, including, first, patience.

I am wondering once again if Republicans in Washington fully understand what they are up against.

And so the latest round of What Should the Republican Party Do?

If it is alive, and it is, it will evolve, as living things do. Beyond that, a thought.

A great party needs give. It must be expansive and summoning. It needs to say, "Join me."

More Peggy Noonan

Read Peggy Noonan's previous columns.

And click here to order her new book, Patriotic Grace.

It must.

All the metaphors here are tired, so let's stick with the big tent. A big tent is held up by tent poles. No poles, no tent. No poles, all you have is a big collapsed canvas.

Is it fully mature, and truly protective toward America, to be so politically exclusionary?

That is a wonderful and exciting thing when it happens.

But such a person may or may not emerge. People who resolve history just by showing up are few and far between.

The GOP After Specter

The party needs a healthy debate, but not because he's left.

By KIMBERLEY A. STRASSEL

Arlen Specter's decision to go Democrat has sent the GOP into a new round of infighting over what the party is, and where it goes now. Mr. Specter is a very unhealthy basis on which to be having what might otherwise be a healthy debate.

Not that anything could stop the bitter winds now blowing through the Republican fields. Within hours of Mr. Specter's bombshell, the sides were formed up. Team Good Riddance featured the Club for Growth's Andy Roth: "Arlen Specter is the epitome of everything voters have come to hate about the Republican Party." "Arlen Specter makes case for term limits," Tweeted Mike Huckabee. "Don't let the door hit you on the way out," sang pundit Michelle Malkin.

Team Now-Look-What-You've-Done featured writer David Frum: "For years, many in the conservative world have wished for an ideologically purer GOP. Their wish has been granted. Happy?" Sen. Lindsey Graham unleashed on the Club for Growth, sagely adding: "As Republicans, we've got a problem." Maine's Olympia Snowe lamented: "You haven't certainly heard warm, encouraging words about how [the GOP] views moderates."

Purely from a tactical standpoint, Mr. Specter's move matters deeply. The Democrats are a gnat's breath away from a filibuster-proof majority. He has vowed to continue to vote his conscience on issues such as card check. Yet in the face of tough opponent in next year's Democratic primary, Mr. Specter's conscience might wander.

Purely from a philosophical standpoint, Mr. Specter's move means nothing, because he didn't leave his party on philosophical grounds. As even the good senator acknowledged in his press conference, his top priority is, and always has been, staying in office. Had the GOP last year allowed Mr. Specter to pen the entire party platform to his liking, he'd still have bailed this week. The Pennsylvanian has only ever been purely ideological on one issue: the polls.

It is this, by the way, that helps explain why Mr. Specter -- and certain other self-acclaimed Senate "moderates" -- raise such particular ire within their party. Maine's Susan Collins lectured the GOP this week that it needed to be open to "centrists." It does. Though it might help if Sen. Collins ever explained what she thinks that means.

When Joe Lieberman broke with his party on Iraq, or John McCain with his on global warming, or when Daniel Patrick Moynihan stood for Social Security reform, they were able to clearly articulate what it was about their political beliefs that led them to those positions. They also took their positions at some political risk. When Ms. Collins positions herself as a deficit hawk, even as she votes for every spending bill in sight -- often with a pure eye for re-election -- and then scolds her colleagues for not being more accepting of her "centrism," well, the party tends to get a bit cranky.

The point here being that Mr. Specter isn't necessarily a good indicator of how open, or not, the GOP is to "ideological" diversity. As it happens, the Pennsylvania Republican primary electorate that Mr. Specter is now so unwilling to be "judged" by didn't suddenly turn against him because he was pro-choice (he always has been) or pro trial-lawyer (ditto). He got in trouble after he voted for the blowout $787 billion stimulus bill. (More on that later.)

That's not to say the GOP doesn't need to work this through, and soon. But to do it productively, as one wise Republican put it to me, the GOP needs to be "clear about the difference between philosophy and message." The party is currently in trouble because the party lost its principles. Overspending, earmarks, corruption and policy drift undermined Republican claims to be the party of reform.

With a popular president now branding the GOP as the "party of no," there will be a strong Republican temptation to cut deals on health-care or energy, hoping to get credit for bipartisanship, or for making policies less bad. But the GOP will never win running as a less enthusiastic version of big-government Democrats. Washington votes are the only way for congressional Republicans to actually demonstrate a philosophy to voters, and it is here the party must reclaim its mantle of the party of limited government and entrepreneurship.

This is different from a message of outreach, which the party also desperately needs, but is accomplished primarily in the field. It involves members explaining to younger constituents why old-fashioned principles of choice and freedom still work for modern problems like health care. It means transmitting a welcome to those attracted to even one part of the conservative philosophy -- free markets, strong national security, social values -- even if not all. It requires recruiting candidates who aren't held to stiff litmus tests, but who have a shot of winning in the Northeast, say, or Illinois.

Trying to mold this thinking around Arlen Specter will only prove an exercise in confusion. It already is.

Stocks Slip After Two-Month Rally

Stocks began May on a less-than-sunny note, with major indexes sliding as investors paused to assess the previous month's surge and the U.S. economy's chances of recovering as hoped.

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At 10:30 a.m., the Dow Jones Industrial Average was lower by about 60 points, pulled lower by drops in technology and retail stocks including Intel and Home Depot. General Motors and Walt Disney shares also sank. The S&P 500 declined about 0.6%, weighed down by its consumer categories despite a University of Michigan report that showed improved consumer sentiment in April. The Nasdaq Composite Index was down 0.7%.

"It's kind of listless trading right now," said David Bellantonio, head of trading at Instinet, a brokerage and electronic trading platform based in New York.

New data Friday on the factory sector were mixed. The Institute for Supply Management said its April manufacturing index showed a reading of 40.1, up from 36.3 in March and its highest since September. Though an improvement, the data still indicates contraction in the sector. Factory orders dipped 0.9% in March, a separate report by the Commerce Department showed.

April was a stellar month for shares world-wide. The Dow Jones World Index jumped 12% in dollar terms, its largest monthly jump since it began in 1991. The Dow industrials surged 7.4% in April, the best two-month percentage rise in seven years.

Financial stocks, which helped drive the market to its lows and lead the recent gains, were a relative bright spot Friday. Among the Dow's financial components, Citigroup was up 2.3% after it said it sold its Japanese retail brokerage Nikko Cordial to Sumitomo Mitsui Financial Group. The KBW Banks Index was up 0.5%.

A fresh test for markets could come as early as next week, when details of the U.S.'s "stress-tests" of major banks are expected to be released. Many investors are concerned that the markets are likely to retrace much of their gains as economic data remain bleak.

In earnings news, MasterCard shares fell 6% after the credit-card company said its first quarter profit fell 18%. MetLife slid 5% after posting a first-quarter loss after the closing bell on Thursday. Hartford Financial Services shares were down 5% after the life insurer reported a first-quarter net loss of $1.21 billion.

U.S. government bond prices slipped, further elevating yields. The yield on the benchmark 10-year note was 3.17%.

Justice Souter to Retire From Court

JESS BRAVIN EVAN PEREZ

WASHINGTON -- Supreme Court Justice David Souter has disclosed plans to retire, two congressional aides briefed on the decision said, a move that would create the first vacancy on the high court for President Barack Obama to fill.

Justice Souter, 69, has been a reliable member of the court's liberal wing, and President Obama is unlikely to appoint a successor who would significantly alter the court's ideological makeup. He is likely to select a candidate young enough to serve for decades, bolstering the court's aging liberal faction. Most observers expect he will nominate a woman to join the seven other men and one woman remaining on the court.

Who Should Obama Pick for the Supreme Court? Join the Discussion

Justice Souter was a little-known New Hampshire jurist when Republican President George H.W. Bush elevated him to the Supreme Court in 1990. Influential New Hampshire Republicans vouched for his credentials, but he soon proved a disappointment to conservatives hungry for a reversal of precedents they opposed. Joining with Justices Sandra Day O'Connor and Anthony Kennedy -- moderates appointed by President Ronald Reagan -- Justice Souter voted to limit, rather than overturn, Roe v. Wade, the 1973 opinion that recognized abortion rights.

View Interactive

Justice Souter was no liberal trailblazer, like the jurist he succeeded, William Brennan. But as the court's center shifted to the right after Justice Thurgood Marshall's 1991 retirement, Justice Souter increasingly found himself on the court's left wing. In recent years, he has almost invariably aligned with Justices John Paul Stevens, Ruth Bader Ginsburg and Stephen Breyer on the defining issues, including the executive powers asserted by former President George W. Bush, the constitutionality of executing criminals for crimes short of murder, and the extent government can consider race when seeking to promote diversity.

The Obama administration hasn't publicly named any choices to fill a high-court vacancy. But possible candidates could include Kathleen Sullivan, 53, a professor and former dean of Stanford Law School; Georgia Chief Justice Leah Ward Sears, 53; and U.S. Circuit Judge Sonia Sotomayor, 54.

Justice Sears is the first black woman to hold a top state court post in Georgia.

Another oft-mentioned candidate, former Harvard Law School Dean Elena Kagan, 48, earlier this year became Mr. Obama's solicitor general, the official who represents the government before the Supreme Court.

A Souter retirement comes as little surprise. While justices Stevens, 89, and Ginsburg, 76, are older, both have said they enjoy the work and have more to contribute to the bench. Justice Ginsburg had an operation earlier this year to remove a cancerous tumor from her pancreas, but the court has said the disease was caught early and the surgery was successful.

Justice Souter has complained about life in Washington and even about aspects of the court's work, such as the numbingly technical cases involving applications of pension or benefits law. Earlier this year, he told friends he planned to retire at the end of the present term if Justices Stevens and Ginsburg decided to remain on the court for at least another term. Unlike his fellow justices, he didn't hire law clerks for the term that begins in October, and some members of his staff were inquiring about finding other jobs.

Associated Press

Justice David Souter

"I don't think it is a big surprise," said Bill Glahn, who once worked for Justice Souter in the New Hampshire attorney general's office and has remained friends with him since. "He's almost 70 years old. At some point, you make a choice as whether you're going to be there forever or whether you want to retire and do some of the other things you want to do, whether it's taking a walk in the morning or reading some books."

A battle over a Supreme Court nomination could add significant weight to an already heavy congressional agenda, which includes action on health care and possibly climate change later this year.

To have a new justice in place by the beginning of the court's term in October would mean conducting a Senate confirmation process at the same time as Congress would debate the other big legislative issues and face deadlines for action on spending bills.

Democrats -- along with two independents -- have 59 votes in the Senate and a 60th possibly on the way. They are in a good position to push through any nomination. But there is no guarantee the party, which has a broad philosophical spectrum, will vote in lockstep.

In 1992, just two years into his term, Justice Souter provided the fifth vote in a key abortion case, Planned Parenthood v. Casey, that served notice the court wasn't ready to overturn the 1973 Roe v. Wade decision upholding a woman's right to have an abortion.

Justice Souter was again in the majority in a 5-4 decision in 2003 when the high court endorsed the use of race in choosing students for America's top universities and the concept of racial diversity as a compelling national interest.

President Obama has a chance to make history with the choice, by appointing the first Hispanic justice to the bench. One prospect is Judge Sotomayor, first appointed to the federal bench by President George H. W. Bush and then elevated to the Second Circuit Court of Appeals by President Bill Clinton. Of Puerto Rican heritage, she grew up in a housing project in New York City's South Bronx neighborhood and went on to graduate from Princeton University and Yale Law School.

Ms. Sullivan has been an advocate for abortion rights and gay rights. She has written widely on the Constitution and represented companies before the Supreme Court.

Day Ahead: Markets Tread Water After Two Good Months

Thursday, April 30, 2009

Today's Forgotten Man

By Gov. Mark Sanford

Over the last few years House Speaker Bobby Harrell has penned any number of op-eds and press statements taking me to task on different fronts, and to date I've declined to respond. I simply considered them noise about the obvious -- our long-standing disagreement on whether it is a good idea to limit government growth. His most recent missive, however, calls for a response, because it well captures the differences in our views regarding the best interests of both present day and future South Carolinians.

I'm reminded of one of the first conversations I had with Speaker Harrell upon his taking that new role, in which he laid out his belief that if growing government was necessary to grow the economy, he wholeheartedly believed in growing government. His actions have been consistent with this belief.

My response was that over time growing government would do the opposite -- it would shrink the private sector and the economy.

If this was merely some academic difference of philosophy, it would hardly be worth noting. But the Speaker is right, in that this difference has a real impact on every day South Carolinians. He's just wrong about what that impact is.

In the 1930s, President Franklin D. Roosevelt spoke metaphorically about the Forgotten Man. Roosevelt was referring to those at the bottom of the economic ladder who were suffering greatly during the Depression.

Here's the problem. In her book, "The Forgotten Man," economic historian Amity Shlaes painstakingly documents how the Great Depression became "great" -- lasting more than 10 years -- because the massive growth in government's taxing, spending and debt, killed the very source of private sector economic activity essential for recovery.

In today's political process, the Forgotten Man seems to be the taxpayer, as is shown in part by the legislature increasing spending by roughly 40 percent in four years' time.

The interests Speaker Harrell writes on and seeks to protect are important, but they are not the only interest we should consider in this debate. Each day I find myself asking "Who will pay for this?" And in not answering this, Speaker Harrell illustrates the ways in which the Forgotten Man of today is indeed the taxpayer.

Today, the average South Carolina taxpayer is being forced to bail out a plethora of interests - that over the long run will mean higher taxes, more debt owed to the Chinese, and the prospect of rampant inflation that will devastate their savings in the future.

That's why I believe it makes sense to not spend every dime of stimulus money coming to us from Washington. We propose taking about 10 percent and applying it to paying down state debt, which is especially important given our $20 billion in unfunded state government promises (learn more at www.scgovernor.com). Alternatively, spending it all will mean we dig a $700 million financial hole in 24 months. If a family won the lottery, setting something aside to pay down the mortgage or the credit cards, rather than spending it all, would be viewed as prudent.

This debate has never been about whether or not money paid for by South Carolina will be lost to another state as Speaker Harrell suggests. We certified the money; it can't slip off to California tomorrow. It is about whether we use this tough economic time to force change long overdue in our state. Why is it we do things like lose $500,000 a year on a state-run golf course park, or be the only state in the country that legislatively runs large parts of government through a Budget and Control Board? We will never make the hard choices that result in savings if we simply paper over these things with a lot of borrowed money from Washington.

While the Speaker doesn't seem to realize the path our nation and state are on, more and more of our fellow citizens do. I was struck last week by the Tea Party rallies in Columbia, Charleston, and Greenville where thousands of South Carolinians turned out in a spontaneous display of protest against reckless government spending. Working people across our state and nation are emerging and saying "No more" because they seem to understand today's gut-check moment on spending, debt and taxes.

In that initial conversation, I also told the Speaker that my overarching belief was that government's aim should be less about promoting and redistributing goods and services, and that instead its highest value was in promoting freedom, which was key to both the pursuit of happiness and a strong job creating economy. As our state and nation veer toward an unprecedented mountain of debt, and our global economy continues to sink, I think that approach is more relevant to average taxpayers today than ever before

Misspent Worry on Chinese Military Spending

Doug Bandow

Misspent Worry on Chinese Military Spending

U.S. military spending continues to increase even though conventional threats against America are de minimis. China is the leading contender for Enemy Number 1. But if Beijing poses a threat, it is to U.S. domination of East Asia, not America. Only the latter is worth fighting for.

Commonly expressed is fear of growing Chinese military outlays. The Pentagon highlighted its concern with the latest annual report on the PRC’s defense budget. Yet Beijing’s armed forces remain dwarfed by America’s military, which starts at a vastly higher base and spends several times as much.

The Pentagon report states that the U.S. “encourages China to participate responsibly in the international system.” True enough, but how does Washington define “responsibly”? One suspects it means accepting American military hegemony in East Asia. With which Beijing isn’t likely to agree.

The PRC military build-up so far has been significant but measured. “The People’s Liberation Army (PLA) is pursuing comprehensive transformation from a mass army designed for protracted wars of attrition on its periphery against high-tech adversaries,” explains the Pentagon. Moreover, China’s “armed forces continue to develop and field disruptive military technologies, including those for anti-access/area-denial, as well as for nuclear, space, and cyber warfare, that are changing regional military balances and that have implications beyond the Asia-Pacific region.”

Yet this concerted expansion little threatens U.S. security. Only the PRC’s nuclear force is theoretically able to strike America today. Beijing possesses about 60 missiles, some of limited range. In contrast, the U.S. nuclear arsenal includes thousands of sophisticated warheads on hundreds of missiles. Beijing is going to have to spend years to build a modest force simply capable of deterring America.

Of course, China intends to move beyond its own shores. The PRC is “developing longer range capabilities that have implications beyond Taiwan,” which “could allow China to project power to ensure access to resources or enforce claims to disputed territories,” warns the Pentagon.

However, notes DOD, China’s military “continues to face deficiencies in inter-service cooperation and actual experience in joint exercises and combat operations.” Moreover, Beijing is not yet capable of “defeating a moderate-size adversary.” Adds the Pentagon, “China will not be able to project and sustain small military units far beyond China before 2015, and will not be able to project and sustain large forces in combat operations far from China until well into the following decade.”

In any case, the PRC has minimal strategic conventional reach. For example, the U.S. possesses 11 carrier groups. China? Zero. Beijing's strategic air capability is insignificant, at best. The country is only able to project power regionally, a fact that should not be ignored.

While East Asian countries may face a greater risk as China's spending rises, defending these nations—which are largely capable of protecting themselves—is not the same as defending the U.S.

China’s most obvious objective is to create a military capable of enforcing its will on Taiwan. However, tensions in the Taiwan Strait and DOD admits that “an attempt to invade Taiwan would strain China’s untested armed forces and invite international intervention.” Taipei also could do significantly more to protect itself.

In fact, Beijing’s military build-up is focused on preventing America from attacking China. The Pentagon admits as much without explicitly saying that Beijing is focused on deterring Washington:

“China has or is acquiring the ability to: 1) hold large surface ships, including aircraft carriers, at risk (via quiet submarines, advanced anti-ship cruise missiles (ASCMs), wire-guided and wake-homing torpedoes, or anti-ship ballistic missiles); 2) deny use of shore-based airfields, secure bastions and regional logistics hubs (via conventional ballistic missiles with greater ranges and accuracy, and land attack cruise missiles); and 3) hold aircraft at risk over or near Chinese territory or forces (via imported and domestic fourth generation aircraft, advanced long-range surface-to-air missile systems, air surveillance systems, and ship-borne air defense).”

Who would be sending in “large surface ships” using “shore-based airfields, secure bastions and regional logistics hubs,” and deploying aircraft against the PRC? Don’t ask.

Washington has vital interests to protect, but not all of its interests are vital. Defending American territory, liberties, and people at home is vital; ensuring dominant American influence half a world away, and discouraging allies from strengthening their own defenses, is not.

And doing the latter at an acceptable cost will grow ever more difficult. By spending a fraction of America’s defense budget Beijing is constructing a military able to deter U.S. intervention against China. To overcome this force Washington will have to spend far more, money which it does not have.

With China on the move, DOD observes that “The United States continues to work with our allies and friends in the region to monitor these developments and adjust our policies accordingly.” But the resulting policy adjustment should be reducing America’s international ambitions rather than increasing America’s military spending. Washington should replace dominance with defense as the core of its foreign policy.

Doug Bandow is a Senior Fellow at the Cato Institute. A former Special Assistant to President Ronald Reagan, he is the author of Foreign Follies: America’s New Global Empire (Xulon Press). This article is adapted from an article in National Interest online.

Shrinking U.S. Economy Puts Pressure on the Dollar

By Chris Gaffney

04/30/09 St. Louis, Missouri Good day… Yesterday was a big day in St. Louis as President Obama came to visit on his 100th day in office. I can’t believe it has been 100 days since the inauguration. Time sure does fly! I’m sure Obama and the rest of his administration would like the calendar to move even faster as this recession will likely last through the end of 2009. While the government has thrown trillions of dollars at the markets in an attempt to turn them around, the key ingredient for reversing recessionary cycles is time. There is now ‘quick fix’ for the problems we are in, and the policies the administration has begun will take time to have an impact on our shrinking economy. Obama said as much in his nationally televised press conference last night.

Speaking of shrinking economies, U.S. GDP showed an even steeper contraction in the first quarter than economists predicted. U.S. GDP fell 6.1% compared to the 6.3% fall during the last quarter of 2008. This drop confirms that we are now in the worst recession since the Great Depression. Their report showed a record slump in inventories and further declines in housing. But another report released by the Commerce Department showed a surprising 2.2% gain in consumer spending in the first quarter, the most in two years. So we have consumers who increased their spending and confidence, while the U.S. economy was contracting at near record pace.

Another report that didn’t get much press was the GDP Price Index and the Core PCE, which are measures of price inflation. These numbers rose more than expected, with the GDP price index rising 2.9%, nearly doubling economists’ predictions of a 1.8% increase, and substantially higher than last quarter’s 0.5% rise. This sets up the possibility that we could see what many consider the worst-case scenario: falling GDP with rising inflation (STAGFLATION). With inventories at very low levels, a slight increase in consumption can lead to a very quick rise in prices. But the Fed doesn’t seem to be bothered too much by that scenario, as they continue to focus on efforts to get the economy growing, with no apparent concern about inflation.

The Fed’s Open Market Committee voted unanimously yesterday to leave its target interest rate unchanged at between 0 and 0.25% (they really can’t go much lower!!). They also voted to continue their purchases of long-term Treasuries and housing debt, which they began last month. The FOMC statement said the contraction has slowed and the outlook “improved modestly” but that the economy may “remain weak.” Job losses and a very tight credit market will likely inhibit consumer spending in the coming quarters.

As I said earlier, there was no mention whatsoever of an exit strategy on how the Fed plans to pull in the record amount of money supply it has unleashed on the economy. The Fed said they will continue to monetize the debt at an unbelievable pace: as much as $1.25 trillion of mortgage-backed securities, $200 billion of federal agency debt, and $300 billion of Treasuries. They are making these purchases in an attempt to keep interest rates at below market levels to fabricate a refinancing boom. While they have been somewhat successful in keeping rates lower than they would be under normal market conditions, these purchases are extremely inflationary and won’t be easily reversed. But the FOMC believes they will have plenty of time to worry about inflation, and have decided to basically ignore it for now. Problem is, inflation can spike pretty quickly, and the FOMC will be hard pressed to raise interest rates just as the economy is starting to pull out of recession. I just don’t believe they will have the guts to be proactive with inflation, and we will probably see a major spike in prices on the other side of this recession.

Inflationary concerns are at the forefront of the ECB as they prepare for next week’s policy meeting. ECB President Jean-Claude Trichet has imposed a gag order on council members as they argue over what to do next to rescue the European economy. Some members had been taking their cases to the media recently in an attempt to push the ECB into following the U.K., U.S., and Japan down the quantitative easing path. But more conservative members don’t believe the ECB should use these untested methods, and are worried about the eventual inflationary impact of them. The ECB cut rates less than expected in April, and pushed a decision to use other methods off to next week’s meeting. Germany’s Axel Weber wants to make 1% the floor for the benchmark rates, and is against buying debt to pump additional money into the economy, while other council members want to begin asset purchases to force rates lower.

Data released this morning shows that Europe’s unemployment rate rose to the highest in more than three years, and inflation held at a record low, which will increase pressure for the ECB to continue to cut rates. The March unemployment rate jumped to 8.9% in the euro area, and inflation held steady at 0.6% in April. Other reports released this week suggested confidence in Europe is stabilizing which could counter some of the pressure to take additional measures. Chuck will bring you the details of the ECB meeting, which will occur a week from today.

The dollar sold off on safe haven reversals, but then moved back up in European trading. So after a bit of a roller coaster ride, we are pretty much right where we started yesterday morning. But the overall market sentiment seems to be shifting back to dollar negative. Two separate reports released by currency trading desks yesterday revised their currency forecasts down for the U.S. dollar. Bank of America-Merrill Lynch revised their forecasts for the dollar, yen (JPY), euro (EUR), and pound (GBP) on the ‘rising probability’ the global recession has passed its lowest point. Their report stated that the euro would recover faster than previously predicted as the global economy turns. A separate report by Citigroup said the dollar would fall if/when the 10-year Treasury note yields rise above 3.06%. Technical analysts at Citigroup wrote that past trading patterns look like they are repeating. “Buying the dollar and US Treasuries was the trade of choice toward the end of 2008 and is now unraveling,” they said.

Global deleveraging pushed investors back into the U.S. dollar, but as the global economy recovers (led by an increase in consumption in China), investors will move these funds out of this safe haven. Yield differentials will again determine investment direction, and growing economies will be able to attract more speculative capital. The U.S. dollar, which has benefited from the global downturn, will be sold. In order to protect your portfolio, investors should have some exposure to the currencies and metals.

One currency that has turned in one of the best performances versus the U.S. dollar this week has been the Canadian dollar (CAD). The loonie touched the strongest level in two weeks on a move up in the price of oil. Equity markets are up, as investors have become much more confident regarding a global turn around. This confidence has carried over to the commodity markets, where oil and some of the industrial metals have been rising again. Canada relies on shipments of raw materials including oil, natural gas, copper, and lumber for more than half of its export revenues.

A report released by TD Securities, a large Canadian trading desk, predicted that the Canadian dollar would appreciate by as much as 14% by November if it breaks through a key technical level. If the U.S. dollar breaks below 1.1764 CAD$/$ (or above 0.85 US$/CAD$) the upside opens up hugely over the next few months. The report puts a target of 1.04 CAD$/US$ (or 0.9615 US$/CAD$) for the loonie, a 14% increase from today’s levels.

As I touched on above, the commodity currencies turned in one of their best performances in weeks as the price of oil shot back above $50. Both Norway’s krone (NOK) and the Australian dollar (AUD) rallied along with the Canadian dollar. The Aussie dollar actually rose to the highest level in more than six months against the U.S. dollar. The Norwegian krone, Australian dollar, and Canadian dollar are three of the four best currencies versus the U.S. dollar on a YTD basis. The top performer versus the U.S. dollar in 2009 has been the South African rand (ZAR), but recent rate cuts there may start eating into its recent strength.

South Africa cut its benchmark rate a full percentage point, the fourth reduction since December to help spur their economy. New Zealand’s central bank also cut rates to a record low yesterday. Reserve Bank Governor Alan Bollard reduced the overnight rate by 50 basis points to counter the nation’s worst recession in more than three decades. He indicated that rates may go lower, and will stay down for the foreseeable future. The kiwi (NZD) sold off after the announcement.

Good economic news out of Japan has been rare, so yesterday’s report that Japan’s factory output rose for the first time in six months was a surprise. And even more surprising was the fact that the pace of the output rise was nearly double that predicted by economists. Factory production climbed 1.6% in March from February, when it dropped 9.4%. In a separate report, the Bank of Japan said the world’s second largest economy would resume growth in 2010 after shrinking 3.1% this fiscal year. But I still caution investors regarding investments into the yen. The Japanese yen benefited from the reversal of the carry trade, but global markets seem to be substantially less leveraged than before. The Japanese yen is not going to be able to benefit from another large push by additional deleveraging.

Got to go now, as we have our quarterly officers meeting in a few minutes. Sounds like it will be all good news, as EverBank continues to hit on all cylinders. It really is another Great Day at EverBank!!

Currencies today 4/30/09: A$ .7289, kiwi .5666, C$ .8383, euro 1.3263, sterling 1.4812, Swiss .8790, rand 8.4585, krone 6.5931, SEK 8.0664, forint 218.38, zloty 3.323, koruna 20.125, yen 98.15, sing 1.4775, HKD 7.75, INR 50.035, China 6.8210, pesos 13.74, BRL 2.1796, dollar index 84.49, Oil $51.81, Silver $12.62, and Gold… $889.20

That’s it for today…more rain is predicted for today, and the rain is expected to continue all the way through the weekend. Typical spring weather here in St. Louis. The big positive on the rain is that it washes away most of the pollen, and provides some relief for my allergies. Had a great run through a local park with my wife last night, its kind of nice having company on my runs (I can never get her to wake up as early as I do during the week!). Hope everyone has a great day today, as it is Tub Thumpin Thursday!!

The Limits of Economic Garbage

By The Mogambo Guru

04/30/09 Tampa Bay, Florida I was pretty sloshed as I put another shot of tequila to my now-benumbed lips, but the same thought kept going through my whirling head: Total Fed Credit (also referred to as Federal Reserve Credit), zoomed $70.3 billion last week! Yikes! $70.3 billion of new credit appeared, as if by magic, in the accounts of banks in One Freaking Week (OFW)!

And this is not, of course, new money. Instead, this is Fed credit, which the Federal Reserve admittedly creates out of thin air at their whim and gives to the banks, but which BECOMES money when somebody borrows money from a bank.

And how much money can be created out of this Fed credit? Almost unlimited amounts, since the amounts of money that the banks must keep on hand as reserves against this new “unlimited amounts” of new money and loans is, apparently, zero! Hahaha! “Fractional banking” indeed! Hahaha! What as fraud!

And so I look around and wonder many things, such as, “Who the hell is borrowing money? And for what? And why is my butt numb?” As I try to focus my bleary eyes to scan the barroom, all I can see is a bunch of no-account, slovenly, lowlife, bad-tempered, low-IQ losers like me, drinking our lives away in some dingy, cheap bar that is far enough away from the family and co-workers so that I don’t have to put up with any more of their silly crap, and if one of them does stumble in here, I am buzzed enough that I can use inebriation as an excuse to beat the hell out of them for being so stupid that, for instance, they don’t buy gold when their moronic government is committing economic sin after economic sin! Any one of which is more than enough to guarantee economic collapse and total ruination!!

And if you don’t believe me, then go to Mises.org and do a little reading, and then after you have your Moment Of Economic Enlightenment (MOME), get back to me, saying, “Although they never come right out and say it, ‘We’re freaking doomed!’ about sums it up! Now I am buying gold and guns since I have been shown True Mogambo Enlightenment (TME), and now – thus filled with paranoia, panic and screaming outrage – I worship at your feet as a Junior Mogambo Ranger (JMR), where I can but hope that they are not as smelly as I have heard!”

While we wait for you to finish your reading assignment, I did a complete 360-degree turn on that barstool, but I never did see anybody that was borrowing money, since none of them had any, which I surmise from asking each of them to loan me some money, but all of them said they didn’t have any.

But I did notice that all that spinning around made me dizzy! Whew!

Downing another shot to steady my nerves and make “the spins” go away, I happened to notice that the Federal Reserve bought up, for itself, a whopping $94.5 billion of worthless, toxic crap last week! In One Freaking Week (OFW)!

That is $3,000 for every non-government worker in America! What a blatant fraud!

I don’t know exactly what they bought, but I am sure that it is not only the usual fraud of amassing a clot of U.S. government and agency debt, but also worthless bank securities that they have promised to buy as part of the Fed’s efforts to socialize losses by sticking everybody with inflation in prices as a result of such an inflation in the money supply, which is (to use the correct “professional economist” jargon) Off The Freaking Charts (OTFC)!

And speaking of economists, the famous John Mauldin, in his Frontline Weekly Newsletter, has unwittingly agreed with me about something other than that we both agree that I am a know-nothing loudmouth weirdo. Now, he has said just enough so that now I can say, “John Mauldin and I say that” the majority of the halfwits who have been teaching economics, infesting schools with their loathsome ilk, are morons, as all of this economic calamity around the world, spawning unimaginable suffering and losses with much worse to come for a long time yet, took them all completely by surprise, while it was the classical, Austrian school of economics that had long predicted everything.

And now, John Mauldin and I laugh at them all, and we shall wax rich as Croesus, and gluttonously hedonistic so as to outshine Caligula as gold soars, soars, soars to the top of the moon as the dollar falls, falls, falls to the bottom of the toilet as a result of this huge, monstrous final debasement of the dollar of the satanic Federal Reserve creating the avalanche of credit, that creates the tsunami of money, to buy over $2 trillion in new federal government debt this year alone! Hahaha!

We’ll be rich while everybody else is screwed! “It’s an ill wind that doesn’t blow somebody some good!”

Well, I admit that he did not actually say any of that, but he did mention my name once in a telephone conversation that I treasure to this day (“Hi, John! This is the Mogambo!” and he said, “What in the hell is a Mogambo?” before he hung up).

And he did say almost the same thing, if you kind of read between the lines, when he writes, “We have been teaching generations of MBA students economic garbage. Gaussian curves and things you could model. The classic line is from Ibbitson, is a brilliant professor and a brilliant mind, who said economics is a science. No it’s not. It’s barely an art form. It’s voodoo. That’s what we practice.” Exactly!

Ty Andros of TraderView.com explains that “neither the Chicago School nor Keynes can explain what is unfolding, and in the Austrian School everything is and has been predictable. Why are the first two considered mainstream? Because in both schools of thought, government is the answer rather than the problem. For the mainstream, the problems can always be solved by borrow, print, lend and spend.”

And since we are talking about the abject failure, ridiculous theoretical underpinnings and laughable incompetence of the Federal Reserve, I admit that their performance is not as bad as those laughable institutions that have “School of Government” in their names, when they are, beyond a doubt, the most incompetent, traitorous bunch of fifth-columnist morons that this country has ever seen.

I mean, for crying out loud, government (federal, state and local) now spends half of GDP! Hell, the federal government alone spends a third of GDP!

And governments now directly support half the population of the Whole Freaking Country (WFC), and employs 1 out of every 7 workers in that selfsame WFC! “School of Government”? Hahaha!

Mr. Mauldin sums it up as, “As we trained a generation to believe they could model, and they did it. They modeled garbage, and now we’ve wiped out a generation of retirement income.”

Well, I would like to amend that to say that people who bought gold have not been wiped out, and if those people are as smart as they seem, then I am sure that they are hanging onto that gold since this is surely the beginning of Something Really Big (SRB)!

Whee! This investing stuff is easy!

Gold Will Top $2,000 Per Ounce

How Gold Will Top $2,000 Per Ounce

By Chris Mayer

04/30/09 Gaithersburg, Maryland “The value of gold, as the only true ‘hard currency,’ is coming to the fore, as evidenced by the investment choices of some of the world’s most seasoned investors.”
– AngloGold Ashanti Ltd. chief executive officer Mark Cutifani

For the first time in a couple of decades, some of America’s most successful, big-name investors are buying gold. David Einhorn, the hedge fund manager who predicted the downfall of Lehman Bros., recently bought gold for the first time. And then there is John Paulson, the guy who made billions of dollars by correctly anticipating the housing bust and credit crisis.

Paulson just plunked down $1.3 billion for an 11% stake in AngloGold. He’s also got a big position in Kinross Gold.

Peter Munk, the 82-year-old chairman and founder of Barrick Gold, also offers up his own anecdote about gold’s broadening appeal. “I have had more phone calls in the past six months than ever before – from people who have $120,000 inherited from grandmother, and from hedge fund managers with millions,” he says. “I am not saying George Soros, but people of that caliber have told me they are buying gold.”

You no longer have to be a gold bug to think gold will rise in price. In fact, this buying by some of the world’s greatest investors may be the leading indicator for a quick 116% climb – to $2,000 per ounce or higher. Give gold the cold stare of a professional handicapper and the odds look very good, indeed.

Why? The biggest reason is that the value of the dollar looks about as brittle as a 90-year-old’s hip socket. And if you worry about the value of the dollar – or any paper currency – then gold is a good alternative.

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In fact, gold has held up well while most everything else has taken a beating over the last year. On a recent conference call with investors, First Eagle fund manager Abhay Deshpande points out that gold is at a new high in just about every currency apart from the U.S. dollar and Japanese yen. “It has performed its job for everyone in these countries,” he says. “It has held its value.”

Take a look at the nearby chart and you can see the falloff of the dollar in recent years and the rise of gold.

“But there have always been worries about the value of the dollar,” you say. “That’s not new.” True. What is new is a global financial crisis unlike anything we’ve seen in the post-World War II era. And that crisis has brought with it serious doubts – the most serious in decades – about the dollar’s ability to keep its top perch in the aviary of world currencies. As that doubt increases, gold gathers new fans.

As I write, the headlines are abuzz with China’s proposal to replace the dollar as the world’s reserve currency. (The U.S. Treasury secretary, in a weak moment, said: “We are quite open to that.” He took back those words, but the hammer had already hit the nail.) China and other countries hold a lot of dollars. And they are not too happy to see the U.S. government handing out bills like after dinner mints. America’s $2 trillion (and ballooning) annual deficit and ballooning national debt causes them to wonder about the value of all the paper they hold.

They are not the only ones worried, as I noted up top. Many top investors are already buying gold.

It is easy to buy gold today with gold exchange-traded funds (ETFs). They are like mutual funds that hold gold. As investors pile into these ETFs, the ETFs’ gold holdings also go up. It’s one way to see the dramatic increase in demand for gold in just the last few quarters. (See chart below.)

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So we have to ask: At $900 per ounce, are all the fears baked in or are we on some new history-making path?

I have a good friend who advises institutional clients on investing. As he reminds me, the really big money hasn’t started buying yet. There are no big pension funds or endowments with significant gold holdings. That could change. If so, the gold price will go wild.

“Gold is a small market,” Munk notes. Munk’s career spans 60 years and he knows the gold market as well as anyone. Says he:

“Let’s say a small percentage of the world’s central banks – or simply the United Arab Emirates itself – do not believe President Obama’s pledge that he will halve the U.S. deficit by the end of his first term. They shift some of their dollar reserves to gold. It would not take many decisions of this kind to push the price above $2,000 per ounce.”

That’s how gold gets to $2,000 per ounce – just a bit of doubt turning into action. The mind boggles at what would happen if China decided to hold more gold! Gold could well hit $5,000! As long as President Obama, Fed Chief Bernanke and pals treat the dollar like confetti, gold should continue to gather new fans. And gold stocks should do even better.

Gold stocks are supposed to do especially well as gold rises. But that has not been the case over the last year and a half. Mostly, this was because mining costs were rising as fast as, or faster than, the price of gold – thanks in part to record-high energy prices. But as Deshpande points out: “These things have reversed in recent months as gold stocks became quite cheap relative to the underlying value of the gold in the ground.”

The case for gold and gold shares is a nice and clean setup, like one of those toy houses in the window at Macy’s on Madison Avenue. The world order will not always hinge around the dollar. Global finance will not always find its center on Wall Street. As Munk pointed out: “Look around Davos this year. So Goldman Sachs cancels its dinner party. In its place, a Kazakh company has a dinner party.”

As the dollar goes bust, who knows what will replace it? With gold, you don’t have to worry too much about the answer.

The Good New Days

By Bill Bonner

04/30/09 London, England Those were the good ol’ days!

The Wall Street Journal:

“US economic output tumbled in the first quarter as businesses cut back sharply, marking the nation’s worst six-month contraction in 51 years…

“The 6.1% annualized decline in gross domestic product came as the home-building sector continued to deteriorate, business investment in buildings and equipment plunged and firms drew down inventories at the fastest pace since the start of the decade.”

But wait…51 years ago was the decline of ’57-’58. According to our sources, that recession – though frightening when it began – only took 3.2% off the nation’s GDP. And it ended after six months.

Perhaps we should look back and see what heroic acts on the part of Congress and the Fed cured that recession so quickly.

What’s this? The record shows that Fed did almost nothing. According to Jim Grant, though the Fed cut its key rate to 2.25%, the total monetary stimulus provided by the Fed during that period amounted to zero. On the fiscal side, however, Congress boosted spending, adding to the deficit the equivalent of 3.2% of GDP.

In other words, faced with an equivalent downturn, the feds of yesteryear cured the recession of ’57-’58 – or it cured itself – with a total exertion of barely one-tenth what they are doing today.

But it was a different world back then. To make a long story short, the great boom was just beginning…the Empire was still rising…its currency was still backed by gold…and its books – both federal government registers and national trade accounts – were in balance.

That was also when Detroit’s invitation to “see the USA in a Chevrolet” still had advertising punch. We remember the ads on television…those sleek new automobiles (Detroit came out with brand new models every year)…with their big tailfins and their wide, comfy ride…tops down…roads open…no seat belts – those were the good old days.

General Motors was the biggest and most profitable automobile company on the planet…an icon of American capitalism and its industrial success.

But what’s this? Today’s news tells us that not only is GM to be nationalized, it and Chrysler are to be taken over by the UAW! Ah…at last…Marx’s dream has come true. The workers – at least those in the United Automobile Workers union – are taking over the means of production. Between the government and the unions, General Motors will be almost entirely in the hands of the sweating proletariat.

To that end, a dear reader wrote in this morning and said: “GM will not disappear. Just a slight change to what it represents: Government Motors.”

Along with the story – in the Financial Times – comes a photo of the UAW on strike in 1937. It’s a ‘sit down’ strike…so we see them sitting down in the factory…comfortably resting on Chevy seats while reading the paper.

But these are the good new days.

Imagine if we’d had to write these daily reckonings during the Eisenhower years. What would we have said? We couldn’t rant about government debt – the feds were running balanced budgets and paying down the debt from WWII. We couldn’t fret about trade deficits either – we were running huge trade surpluses. Nor could we wag our finger at consumer spending and personal debt. People were spending money – but they were earning it. The savings rate was healthy. And total debt stood at only about 150% of GDP. Now it is close to 360%.

What a dreary time. There was nothing and no one for a sensible economist to laugh at. Vice President Richard Nixon pledged to fight the recession of ’57-’58 with “whatever action is necessary to stop the economic downturn and stimulate the recovery of the recession.” But, the government’s efforts were very modest. Besides, it was still 14 years before Nixon took out his knife and stabbed the gold-backed monetary system in the back. Back then, the people were freer…but the government was more constrained. There were still limits on what mischief a reckless government could get up to. A country with a pile of dollars back in the ’50s had no worries. It could turn them in to the U.S. Treasury and receive gold at the statutory rate. Its only risk was that the foreign treasury might run out of gold before it got there. This was no risk in the case of the United States of America – it had cleverly sucked in the majority of the world’s gold in exchange for goods and services (hint…many of them made loud noises) during the two world wars.

But all of that has changed now. No one wants to ‘see the USA in a Chevrolet’ anymore. They prefer BMWs. And hybrids made by the Japanese. Now, the U.S. government runs the biggest deficits in history – intending to buy its way out of a recession that, so far, is no worse than the Eisenhower recession of ’57-’58. Next week, the feds will hold the largest auction of Treasury debt in history. They will raise $71.6 billion…on their way to doubling the U.S. national debt over the next five years. The U.S. savings rate is nowhere near as high as it was in the ’50s and ’60s…but it least it has one. Savings disappeared completely during the final years of the Bubble Epoque. Now, Americans are saving 5% again.

The savings rate in the United States isn’t good for our friends in the Far East. Not at all. In fact, according to Merrill Lynch, China’s economy didn’t grow at all in the last quarter of 2008. And it’s still contracting fast, ever since the start of this year

If the American and European consumers don’t loosen their grip on their wallets, the Chinese ‘miracle’ could be reversed. And the effects on the battered U.S. economy will be much worse than the impact the Asian currency crisis of 1997 had on the United States.

While Shanghai stocks haven’t yet collapsed anything close to what we’re seeing on this side of the ocean… it won’t be long before they catch up.

And now the poor Chinese sit nervously on 1.4 trillion dollars – wondering what to do with it. They buy a few factories…they cut a few deals. But they cannot readily exchange their dollars – neither for gold nor for anything else that doesn’t have a $ sign on it. As soon as they begin the trade in any substantial volume, the object of their exchange will shoot up in value…while their dollars will plunge.

The total value of all the gold ever mined is only about $4.4 trillion, for example. The United States is still the largest holder…but it has only 8,133 tons of the stuff…for a total value of $240 billion. So, if we did the math right, the Chinese could buy up all the entire U.S. gold reserve and have about $1.2 trillion left to spend.

Now, we turn to Addison for his take on Obama’s first 100 days:

“We pause, amid the bustle of today’s news, to assess the new president’s first 100 days in office. Heck, everyone else is,” writes Addison in today’s issue of The 5 Min. Forecast.

“And we figure a good place to begin is the budget resolution the House passed yesterday. All $3.5 trillion of it. Complete with revenues only half that number.”

“The resolution comes complete with projections of spending and revenue out to the year 2014, by which time the deficit will be whittled down to a ‘mere’ $523 billion. Which is actually less than the White House’s projection of $749 billion. Hope springs eternal.”

And back to Bill, with more thoughts:

The rally is on! The Dow rose yesterday – up 168 points. Gold rose $7 – to close at $900. Oil is above $50 again, but just barely.

We repeat ourselves: one of the surest things in the investing world is a rally after a major downturn. Typically, prices recover 20% to 50% of the previous decline. Then, there is another leg down.

At first, when the rally comes, investors are hesitant. They’ve just lost a lot of money. They don’t trust the market. They wait. Then, as prices rise more, they begin to pay careful attention and wonder: is it time to get back in? Gradually, more and more commentators answer: yes. And so the money comes back into the stock market. A trickle at first. Then, a flood. Prices rise…and the financial press talks about a new bull market.

But if it is a real bear market, this is just a way of bringing naïve investors back into the market so they can be destroyed. Prices fall again…to a much lower level. Often, this process is repeated several times before the real bottom comes. And by then…nobody cares.

Gold traded over $800 an ounce in the early ’80s. Stocks, then at a major bottom, declined to the point where the Dow was also in the 800s. For one ounce of gold, you could have bought the entire group of Dow stocks.

Back in the early 30s, a similar thing happened. At its lowest point, the Dow fell to 41 on July 8th, 1932. Then, it took 2 ounces of gold to buy the entire Dow.

Could a similar thing happen this time? You bet it could. It now takes about 9 ounces of gold to buy the Dow. That’s already down from a high of 43, set in 1998. Back then, the Dow was over 11,000…and the price of gold was only $260.

Since then, our ‘Trade of the Decade’ has been to sell the Dow and buy gold. But the decade is not quite out…and the trade still has some juice left in it. We could easily see the Dow below 5,000 in the next downward move. That alone would put gold in the 5 or 6 oz/Dow range. Keep waiting and it should eventually get to 1 or 2 ounces per Dow – perhaps at about 4,000 on the Dow…and $2,000 for gold.

Poor Ireland. It is expected to decline by 8% this year. And a think tank warns that the decline might rise to 14% of GDP by 2010. Soon, the ships will be leaving Dublin harbor again…bound for faraway places…and laden with huddled masses, yearning for a job. They will go to Sydney, to Baltimore, and to Buenos Aires…just like they did in the 19th century…filling the world with another great Irish diaspora, singing their sad songs and telling their sad tales…and dreaming of Erin’s isle, without rain.

Friday, May 1, 2009

Change at the top

The retirement of Justice David Souter will let Barack Obama begin to reshape the Supreme Court

Chrysler Pushed Into Fiat's Arms

Italian Car Maker, UAW Main Owners; Obama Pledges Brief Stay in Bankruptcy; Creditors Take Hit

Audio

The Interrogation Memos and the Law

Criminalizing legitimate policy differences will paralyze the conduct of foreign policy.

Nobody Likes You, Jay

Journalism, or schoolyard gossip?

'Shrink to Win' Isn't Much of a Strategy

Republicans need less enforcement and more encouragement.

By PEGGY NOONAN

More Peggy Noonan

Republicans need less enforcement and more encouragement.

By PEGGY NOONAN

More Peggy Noonan

The GOP After Specter

The party needs a healthy debate, but not because he's left.

By KIMBERLEY A. STRASSEL

Stocks Slip After Two-Month Rally

Justice Souter to Retire From Court

Thursday, April 30, 2009

Today's Forgotten Man

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