Pennywise, Pound foolish and plan B

Adam Posen published a survey of Japan's bank crisis in the Daily Beast. He makes some critical points about the cost of delay:
That is why the Geithner plan is so complex and jury-rigged, to avoid the need for public requests for more money for banks. Unfortunately, it is unlikely to succeed absent additional public money and more-intrusive government action. The plan will buy some time and certainly some appreciation in bank share prices. Current shareholders will be getting a new lease on life with subsidies from taxpayers. For that reason alone, the plan certainly will cost the taxpayer more in the end than a more direct recapitalization with public control would have.

But the pattern of these crises--Japan in the 1990s or the U.S. in the 1980s, and elsewhere around the world--leads me to believe that this partial fix will be temporary at best. The banks will still have the worst toxic assets on their books; their managers and shareholders' incentives will not have changed. The banks will be playing with a fresh stack of public money with insufficient strings and probably insufficient capital. Then, 18 months or so down the road, the U.S. government will still have to put capital into the banks, because credit markets will break down again, with many banks again under water. But in that case, the necessary recapitalization would have to take place after this round of money is squandered and the current fiscal stimulus will have run out.

Posner is another economist with experience in financial crises adding his voice to the chorus opposing Geithner's plan. He points out that Geithner and Summers made these exact arguments to the Japanese in the 90s, so none of this is new to them. On the merits Obama's policy has little to recommend it, it is likely to fail and will have misdirected substantial government resources.

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AIG: The case for nationalization

The news is out today that AIG is paying off its executives:

The American International Group, which has received more than $170 billion in taxpayer bailout money from the Treasury and Federal Reserve, plans to pay about $165 million in bonuses by Sunday to executives in the same business unit that brought the company to the brink of collapse last year.

The company is run by a government appointed CEO, but because Obama refuses to nationalize these companies they are still bound by their contracts, even those to the people who destroyed the company. Some defenders of Obama's policy have claimed that AIG is nationalized, and used that as an example of what Obama is doing with insolvent large banks. But this situation reveals the problems with that argument, and with Obama's approach to the big banks. Obama's current approach is both ineffective and a political killer.

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Obama and the Third Rail

According to the NY Times Obama plans to wade in to Social Security and Medicare reform:

President-elect Barack Obama said Wednesday that overhauling Social Security and Medicare would be "a central part" of his administration's efforts to contain federal spending, signaling for the first time that he would wade into the thorny politics of entitlement programs.

The strongest liberal criticisms of Obama during the primary came when he adopted the Republican's "Social Security is in crisis" line. While there is a solid case to reform Medicare within the context of reforming our national health care system and providing universal care, there is very little reason to mess with Social Security. Opening up Social Security for changes at this point in time is especially troubling since recent economic performance will make the program look less viable now than it will look in 5 or 10 years when economic growth returns. One silver lining is that any attempt to privatise the program is probably DOA given last year's stock market performance.

Since Obama made Social Security reform an issue in the primary he is probably serious about making changes with this announcement, I doubt it is a head-fake for Republicans.

Anyone have any idea why he is raising Social Security as an issue now? And why in the context of controlling budget deficits?

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Thank God for Barney Frank

The first sign I saw that the adults were taking over was a quote Wednesday from Barney Frank, referring to Fed Chairman Bob Bernanke he said:

I asked the chairman if he had $85 billion to bestow in this way. He said "I have $800 billion."

No one in a democracy unelected should have $800 billion to dispense as he sees fit.

Frank and his allies in the Senate have been clear for years time that the government must step in, in more than a regulatory way, to resolve the mortgage crisis that has now spread throughout Wall Street and the world. In a longer article at Politico Frank outlined the pressing problem, and likely solutions:

The easy part going forward is regulation, but how do you survive to where you can have regulation and keep bad things from happening? It's not clear.

Everything else having been tried, does the federal government have to buy up a lot of the bad stuff? It's the good bank/bad bank notion. The federal government has to take up the bad stuff to unclog these arteries, hold it, hope that there will be some recovery in assets, and get the thing going.

That's the next question. I don't know what else you can do.


So far the Bush administration's approach to the crisis is best described here:
people are standing by the side of a river and they keep seeing babies being rushed down the river in the current and they desperately reach out trying to save as many babies as possible. Day after day they're reaching out. They get new tools, they build a bridge, they get a ladder, they're constantly trying to get to those babies. They're hoping that they can save as many, until finally somebody walks up and says, "Who's throwing them in? Go upriver, find out what the real problem is and stop that!"

Finally last night the Bush administration began taking good advice and looked upriver. They have suspended the short selling of financial and insurance stocks and Bernanke and Paulson are presenting their plan for a government entity like an RTC or FDR era HOLC to take on the bad assets drowning brokers and banks. Congress is moving rapidly to adopt Frank and his allies plans, probably by next week.

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The counterside of the negative

I've been complaining for the last few days that the Republicans were succeeding with the "Democrats in Division" story, and specifically using it to divide the Clinton and Obama coalitions, and that the Obama campaign was failing at defense. I was getting angrier as I saw more slights against the Clintons pile up, and I noted some Obama supporters taking offense at various statements by Hillary or Bill Clinton. I was beginning to fear that the divisions in the party might become permanent, dooming Obama's chances, and I didn't understand why the Obama campaign wasn't proactively shutting down the news stories that were popping up.

But after Hillary and Bill Clinton's speeches, and watching the Gallup poll show a dramatic rise for Obama today based on yesterday's post-Hillary results, I've begun to wonder if Hollede was on to something with his The Real Head Fake diary.

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Winning the Invisibles

The most effective theme in Hillary Clinton's campaign was her speaking for the people who are invisible in modern America. The theme had a strong appeal with women who made up a strong core of her support, but it really kept her competitive throughout the primaries by broadening her appeal to the blue collar and low income workers who are largely ignored by our culture.

In an article today Ron Brownstein discuses a study by Stan Greenberg on who these voters are and why Obama is having such a hard time reaching them:

Doubts about Barack Obama's experience, values, and patriotism, more than racial resentments, are driving the resistance to him among working-class whites, according to an extensive study of those voters to be released today by veteran Democratic pollster Stanley B. Greenberg.

In the study, built around focus groups and a poll, Greenberg and four colleagues found Obama facing substantial hurdles but still possessing the opportunity for gains in Macomb County, a bellwether blue-collar suburb northeast of Detroit.

The survey found McCain leading Obama in Macomb by 51 percent to 42 percent, with Obama suffering substantial defection among white noncollege Democrats. In the focus groups, conducted among Democrats resisting Obama, voters struggled between a strong desire for change and deep doubts about the presumptive Democratic nominee.

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spreading unease

There has been a flare up of campaign insiders concerned about Obama's chances which has spread to some of the big pro-Obama blogs. The proximate cause is what Obama supporter Nate Silver describes as weakening electoral college strength:

Although Barack Obama remains a slight favorite in this election, his position is more vulnerable than at any point since the primaries concluded, and he no longer appears to have a built-in strength in the electoral college that we had attributed to him before.

Various insiders expressed unease to the NY Times:

As Senator Barack Obama prepares to accept the Democratic presidential nomination next week, party leaders in battleground states say the fight ahead against Senator John McCain looks tougher than they imagined, with Mr. Obama vulnerable on multiple fronts despite weeks of cross-country and overseas campaigning.

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Napolitano heads Platform Committee

Politico reports that:

The DNC just announced that "Governor [Janet] Napolitano will chair the Platform Drafting Committee. Michael Yaki will serve as National Platform Director and Karen Kornbluh will be the Principal Author of the Platform."

These appointments suggest that the platform will be a more centrist document than party platforms are traditionally. Usually the candidate treats the platform as a bone for the base, with the proviso that nothing in it may hurt him politically. Candidates sometimes identify a particular issue that is important to them, such as when Kerry removed support for the death penalty from the current platform. Given this selection of staff Obama does not intend to offer the platform as a refuge for those to his left in the party, though it does suggest that choice is safe as a party principle (Napolitano is a strong choice advocate). It may be that instead Obama has decided to use the platform to mollify women.

Governor Napolitano recognized Obama as a DLC kindred spirit early:

Napolitano represents a particular subset of Obama supporters, those who embraced the "third way" moderation of Clinton and the Democratic Leadership Council during the 1990s, but came to see Obama, not Hillary Clinton, as the inheritor of that legacy, updated to account for the ugly realities of the post-September 11 world.

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Barack vs. the Bill of Rights

Back in the 1988 campaign George Bush senior derided Michael Dukakis as a "card-carrying member of the A.C.L.U." It was part of the Republican campaign to demonize all things liberal as far left, out of the mainstream and vaguely Communist. It was always a perverse charge, the ACLU defines a uniquely American form of liberalism rooted in the Bill of Rights. Liberals, and the ACLU, favor an expansive interpretation of the Bill of Rights tilted toward the individual, conservatives favor a narrow interpretation that expands the power of government. Supreme Court cases often most clearly illuminate these competing interpretations.

On the eve of our Independence day celebrations it may be worthwhile to reflect on the meaning of liberty, the Bill of Rights that protects it, and how our nominee sees both. One way to understand Barack Obama's point of view on liberty is to compare his positions on civil liberties issues to the ACLU's. The beginning of the general election and a series of Supreme Court decisions have given us an opportunity to do so. Four of the ten amendments of the Bill of Rights have been in the news recently, and Barack Obama has weighed in on each. In each case Barack Obama has opposed the interpretation of the ACLU.

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Kick her while she's down

May has been a hard month for Hillary Clinton and her supporters. We entered the month with cries of "The Math" from the Obama campaign. The North Carolina and Indiana primaries on the 6th did not do nearly enough to dent Obama's delegate advantage. After she made up significant ground in West Virginia and Kentucky on the 20th the Obama campaign cranked up its sleaze and smear campaign. They soon realized that blaming their losses on Appalachian racism was wrong and self destructive, so they turned to their most despicable tactic and promoted a story so deranged that even the NY Post backed off from it. Exploiting the death of RFK was the lowest point to date for a campaign with a history of character assassination and division. That very weekend an Obama friend of 20 years gave a divisive and misogynist sermon at Trinity UCC, Obama's now former church, putting Obama on the defensive and yielding another misstep. I never thought I would see a Republican reject attacks on Hillary Clinton with more grace than the Democrats, but here was John McCain saying"I respect her and I think that kind of language and that kind of treatment of Senator Clinton is unwarranted, uncalled for and disgraceful," while all Obama could think about was himself"That is why I am deeply disappointed in Father Pfleger's divisive, backward-looking rhetoric, which doesn't reflect the country I see or the desire of people across America to come together in common cause" Other Democratic party leaders couldn't even manage that "more in sorrow than in anger" response to hateful rhetoric aimed at a Democrat. But the last blow was to come from the party hacks.

Everyone but the most deluded Obama supporters knew that the DNC's Rules and Bylaws committee would reverse itself and give Florida and Michigan meaningful representation at the convention, that was clear from the day of their decision last year. The only question was what compromise they would negotiate. In the end the Obama campaign wrung enough delegates from the committee to put the nomination out of Clinton's reach, but only by taking Clinton's Michigan delegates. In doing so Obama (He had the votes) and the RBC abandoned any notion of rules and gave a final insult to Clinton, her supporters and democracy.

Once again voters rallied to Clinton's side. She finished off the month with a big win in Puerto Rico.

One would think that politically, from Obama's point of view, none of this makes any sense. Obama needs Clinton's supporters to be even competitive in the general election, why would he be kicking Hillary while she was down if he had the nomination in the bag? That drives them to McCain. Obama has two problems, both of which do serious damage to his prospects in the general election. One is that he did not have the nomination in the bag, and he damaged himself by aggressively overcompensating for his real weaknesses. His second problem is that he is disconnected from and tone deaf to the concerns of large segments of the Democratic electorate. He and his supporters have been consistently blind to the offense their attacks have given to women, Hispanics and working class people, while being hypersensitive to any offense to him.

It is hard to imagine, after the RBC meeting, that Hillary Clinton will win the nomination. No doubt she will do what she has always promised to do: work her heart out for the nominee. But she cannot save Obama from himself. So far he shows no sign of even understanding how deeply his actions have offended voters, and no sign of desiring to repair the damage. Maybe in his big speech tomorrow he will skip the soaring but empty rhetoric, finally acknowledge his own role in the divisiveness of this primary and begin to talk to the people he has pushed away.

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Diaries

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