Friday, April 30, 2010

The North Korea Endgame - However difficult, unification must be the ultimate objective

The North Korea Endgame. By Nicholas Eberstadt
However difficult, unification must be the ultimate objective.WSJ, Apr 30, 2010

Ironing Out the Kinks in the Dodd Bill - Killing the $50 billion bailout fund would be a good start

Ironing Out the Kinks in the Dodd Bill. By PHILLIP SWAGEL
Killing the $50 billion bailout fund would be a good startWSJ, Apr 30, 2010

Imagine a future in which Sen. Chris Dodd's financial reform bill was law and a firm like AIG or Lehman Brothers failed. Without a vote of Congress, the government could guarantee the firm's debts or put money into the failing firm to keep it afloat and reduce the hit taken by creditors such as banks and pension funds that lent the firm money.

The temptation will be huge; after all, no government official will want to be blamed for allowing another post-Lehman meltdown. But so is the danger that risky behavior and bailouts will become more common.

This scenario is a key defect in the Dodd bill that the Senate has begun to debate. True, the shareholders of a failed financial firm would be wiped out, but creditors—the people who lent it the money that got it in trouble in the first place—will be bailed out. And this has real consequences, because if market participants know they can be rescued for imprudent behavior, they will likely behave more imprudently.

In coming days and weeks, as amendments to the Dodd bill are publicly offered and private negotiations proceed, removing the $50 billion bailout fund would be a good start. A more important way to address the problem of "too big to fail" is to have a resolution process centered on bankruptcy—and in which bailouts would require a vote of Congress. Bankruptcy would make it more likely that the division of resources would be in the hands of judges, not political officials using public money to support favored creditors. When GM and Chrysler were failing, the two firms were used as conduits for a transfer of TARP money to the auto unions.

Other aspects of the Dodd proposal are worrisome. One need not think too creatively to imagine a media-obsessed head of a new consumer financial protection agency looking to impose her will across all aspects of commerce, with attendant hits to lending for consumers and businesses, small and large. The idea of a systemic risk council empowered to gather data and ensure that no firm slips between regulatory cracks is useful—and on this there is bipartisan agreement. Yet regulators and bank supervisors have considerable power already and were not able to head off the recent crisis. Giving more power to a new regulatory agency is not a sure-fire solution and could have unintended negative consequences for jobs and growth.

The bill's approach to taking derivatives trading out of banks is similarly problematic. This trading takes place in large financial institutions for a reason: These are the firms with the expertise and large balance sheets needed to carry it out. And while derivatives can be misused, the bottom line is that they have socially useful purposes, including for financial firms. A community bank, for example, might legitimately want to use derivatives to offset some of the risk it faces from its lending for housing and commercial real estate in a local community. By hobbling this activity, the approach espoused by Sen. Dodd and Sen. Blanche Lincoln threatens to increase rather than limit risk.

Administration officials dissolve into mumbles when asked about the derivatives piece of the bill, suggesting that they recognize the problem. Hopefully they will have the courage to fix this even if it gives the appearance of seeming to "weaken" the bill.

Finally, financial regulatory reform will not be complete without addressing the awkward status of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) whose loan guarantees contributed to the housing bubble behind the crisis. It was appropriate to take over Fannie and Freddie to avoid further risk to the financial sector, but the continued conservatorship of the two firms means that taxpayers remain on the hook for their losses, including losses suffered intentionally to support the administration's public policy goals such as reducing foreclosures.


An appropriate future for Fannie and Freddie would focus them on the socially useful function of securitizing mortgages and thereby fostering housing liquidity. There might still be a role for a government backstop against another catastrophic decline in housing prices, but this public support should be made explicit and the GSEs should pay for it.

With the government standing behind Fannie and Freddie, their huge portfolios of mortgage-backed securities are no longer needed as a buyer of last resort for bundled mortgages to ensure that funding is available for housing. The portfolios were the channel through which Fannie and Freddie enjoyed private gains while imposing risks on taxpayers, and they were the source of systemic risk posed by the firms. The financial regulatory reform bill should ensure a new and sustainable model for Fannie and Freddie that makes explicit any public support for the firms and limits taxpayer exposure to future losses.

There is bipartisan agreement that financial reform is needed. But the details matter. On nonbank resolution, derivatives and consumer protection, the approach in the Dodd bill could well increase financial risks to the economy rather than heading them off. Fixing these issues, along with addressing the risks posed by Fannie and Freddie, will yield a reform that truly learns the lessons from the financial crisis.

Mr. Swagel is a visiting professor at the McDonough School of Business, Georgetown University, and nonresident scholar at the American Enterprise Institute. He was assistant secretary for economic policy at the Treasury Department from December 2006 to January 2009.

Wednesday, April 28, 2010

Attacking the motives of critics is not presidential

It's Only Called the Bully Pulpit. By Karl Rove
Attacking the motives of critics is not presidential.
WSJ, Apr 29, 2010

President Barack Obama's speech last week at New York Cooper's Union showcased two unattractive verbal leitmotifs. The first was the president's reliance on straw-man arguments. America, he said, need not "choose between two extremes . . . markets that are unfettered by even modest protections against crisis, or markets that are stymied by onerous rules."

Mr. Obama was right in calling this "a false choice." Who is suggesting that Wall Street should not be regulated?

The other, more troubling rhetorical device was Mr. Obama's labeling his opponents as "special interests," and demanding that they stop disagreeing with him and get on board his legislative express. Speaking to bank executives, he decried the "furious effort of industry lobbyists to shape" financial regulation legislation—a barb aimed at the investment bankers in the audience who have hired lobbyists. The president urged "the titans of industry" to whom he was speaking "to join us, instead of fighting us."

While criticizing political opponents is standard operating White House procedure, the practice of summoning critics to bully them in public is unpresidential and worrisome.

Before his health-care bill passed, Mr. Obama sent a tough letter to health-insurance CEOs and then castigated them 22 times in a follow-up prime-time televised speech. This is behavior worthy of a Third World dictator—not the head of a vibrant democracy.

Mr. Obama has also excoriated drug and health-insurance companies, while remaining content to have them spend tens of millions of dollars on ads supporting his health-care bill. This smacked of Chicago-style shake-down politics.

Too often, Mr. Obama disparages those who disagree with him as having venal, illegitimate motivations. In his Cooper Union speech he berated the "battalions of financial industry lobbyists" for their "misleading arguments and attacks." He blamed their "withering forces" for buckling "a bipartisan process" that had "produced . . . a common-sense, reasonable, non-ideological approach."

Maybe the renowned lecturer of constitutional law at the University of Chicago should reacquaint himself with Federalist No. 10. James Madison, a father of the Constitution, suggested that there are "two methods of curing the mischiefs of faction."

One was to destroy "the liberty which is essential to its existence"—something that is anathema to our democratic system. The other was to give "to every citizen the same opinions, the same passions, and the same interests," which is impossible.

"The latent causes of faction are thus sown in the nature of man," Madison wrote. Recognizing this led the Founders to create a system in which competition between interests restrains government, cools passions, and forces political compromise. This has kept our politics floating around the center.

Mr. Obama's attacks on his critics are not only unbecoming; they undermine a political process that would otherwise trend toward occasional bipartisan compromise. They are also hypocritical. Mr. Obama said in New York last week that "a lack of consumer protections and . . . accountability" created the credit crisis. As a senator in 2005, he joined Sen. Chris Dodd (D., Conn.) to threaten to filibuster a GOP effort to rein in Fannie Mae and Freddie Mac when it was still possible to diminish the role those companies would play in the financial crisis. He later voted for the Fannie and Freddie reforms after the two went belly up in 2008.

But it is the president's intimidation that is most troubling. Mr. Obama has the disturbing tendency to question the motives of those who disagree with him, often making them the objects of ad hominem attacks. His motives, on the other hand, are pure.

Mr. Obama often makes it seem illegitimate to challenge his views, and he isn't content to argue issues on the merits. Instead, he wants to make opponents into pariahs. And it's not just business executives who are on the receiving end. We've also seen this pattern with the administration's attacks on the tea party movement and those who attended town-hall meetings last summer on health care.

This is a bad habit—and a dangerous one. The presidency is a very powerful office, and presidents need to be careful not to use it to silence dissenting voices.

Mr. Obama will learn these efforts don't work. In a big, free nation like ours, people want to debate the issues. They don't take kindly to arrogant leaders who believe it is their right to silence the opposition—by either driving them out of the legislative process or pushing them out of the public debate with fiery rhetoric. Through the anonymity of a ballot box and beyond the power of presidential intimidation, voters can express their discontent and they will.

Mr. Rove, the former senior adviser and deputy chief of staff to President George W. Bush, is the author of "Courage and Consequence" (Threshold Editions, 2010).

Monday, April 26, 2010

Views from Japan: Megumi Oyanagi's Blog

Views from Japan: Megumi Oyanagi's Blog

Megumi Oyanagi's views and insights about Japan from recent news (economy, society, politics and government, companies and management, people, culture, etc.) can be read in her blog at the link above.

Saturday, April 24, 2010

Miss Me Yet? The Freedom Agenda After George W. Bush

Miss Me Yet? The Freedom Agenda After George W. Bush. By Bari Weiss
Dissidents in the world's most oppressive countries aren't feeling the love from President Obama.WSJ, Apr 24, 2010

Dallas

No one seems to know precisely who is behind the "Miss Me Yet?" billboard—the cheeky one featuring a grinning George W. Bush that looks out over I-35 near Wyoming, Minn. But Syrian dissident Ahed Al-Hendi sympathizes with the thought.

In 2006, Mr. Hendi was browsing pro-democracy Web sites in a Damascus Internet café when plainclothes cops carrying automatic guns swooped in, cuffed him, and threw him into the trunk of a car. He spent over a month in prison, some of it alone in a 5-by-3 windowless basement cell where he listened to his friend being tortured in the one next door. Those screams, he says, were cold comfort—at least he knew his friend hadn't been killed.

Mr. Hendi was one of the lucky ones: He's now living in Maryland as a political refugee where he works for an organization called Cyberdissidents.org. And this past Monday, he joined other international dissidents at a conference sponsored by the Bush Institute at Southern Methodist University to discuss the way digital tools can be used to resist repressive regimes.

He also got to meet the 43rd president. In a private breakfast hosted by Mr. and Mrs. Bush, Mr. Hendi's message to the former president was simple: "We miss you." There have been "a lot of changes" under the current administration, he added, and not for the better.

Adrian Hong, who was imprisoned in China in 2006 for his work helping North Koreans escape the country (a modern underground railroad), echoed that idea. "When I was released [after 10 days] I was told it was because of very strong messaging from the White House and the culture you set," he told Mr. Bush.

The former president, now sporting a deep tan, didn't mention President Obama once on or off the record. The most he would say was, "I'm really concerned about an isolationist mentality . . . I don't think it lives up to the values of our country." The dissidents weren't so diplomatic.

Mr. Hendi elaborated on the policy changes he thinks Mr. Obama has made toward his home country. "In Syria, when a single dissident was arrested during the administration of George W. Bush, at the very least the White House spokesman would condemn it. Under the Obama administration: nothing."

Nor is Mr. Hendi a fan of this administration's efforts to engage the regime, most recently by deciding to send an ambassador to Damascus for the first time since 2005. "This gives confidence to the regime," he says. "They are not capable of a dialogue; they don't believe in it. They believe in force."

Mr. Hong put things this way: "When you look at the championing of dissidents . . . and even the rhetoric, it's dropped off sharply." Under Mr. Bush, he says, there were many high-profile meetings with North Korean dissidents. "They went out of their way to show this was a priority."

Then there is Marcel Granier, the president of RCTV, Venezuela's oldest and most popular television station. He employs several thousand people—or at least he did until Hugo Chávez cancelled the network's license in 2007. Now, he's struggling to maintain an independent channel on cable: Mr. Chávez ordered the cable networks not to carry his station in January. Government supporters have attacked his home with tear gas twice, yet he remains in the country, tirelessly advocating for media freedom.

Like many of the democrats at the conference, Mr. Granier was excited by Mr. Obama's historic election, and inspired by the way he energized American voters. But a year and a half later, he's disturbed by the administration's silence as his country slips rapidly towards dictatorship. "In Afghanistan," he quips, "at least they know that America will be involved for the next 18 months."

This sense of abandonment has been fueled by real policy shifts. Just this week word came that the administration cut funds to promote democracy in Egypt by half. Programs in countries like Jordan and Iran have also faced cuts. Then there are the symbolic gestures: letting the Dalai Lama out the back door, paltry statements of support for Iranian demonstrators, smiling and shaking hands with Mr. Chávez, and so on.

Daniel Baer, a representative from the State Department who participated in the conference, dismissed the notion that the White House has distanced itself from human-rights promotion as a baseless "meme" when I raised the issue. But in fact all of this is of a piece of Mr. Obama's overarching strategy to make it abundantly clear that he is not his predecessor.

Mr. Bush is almost certainly aware that the freedom agenda, the centerpiece of his presidency, has become indelibly linked to the war in Iraq and to regime change by force. Too bad. The peaceful promotion of human rights and democracy—in part by supporting the individuals risking their lives for liberty—are consonant with America's most basic values. Standing up for them should not be a partisan issue.

Yet for now Mr. Bush is simply not the right poster boy: He can't successfully rebrand and depoliticize the freedom agenda. So perhaps he hopes that by sitting back he can let Americans who remain wary of publicly embracing this cause become comfortable with it again. For the sake of the courageous democrats in countries like Iran, Cuba, North Korea, Venezuela, Colombia, China and Russia, let's hope so.

Ms. Weiss is an assistant editorial features editor at the Journal.

Friday, April 23, 2010

Europe's VAT Lessons - Rates start low and increase, while income tax rates stay high

Europe's VAT Lessons. WSJ Editorial
Rates start low and increase, while income tax rates stay high.
WSJ, Apr 15, 2010

As Americans rush to complete their annual tax returns today, there is still some consolation in knowing that it could be worse: Like Europeans, we could pay both income taxes and a value-added tax, or VAT. And maybe we soon will. Paul Volcker, Nancy Pelosi, John Podesta and other allies of the Obama Administration have already floated the idea of an American VAT, so we thought you might like to know how it has worked in Europe.

A VAT is essentially a national sales tax that is assessed at each stage of production, with the bill passed along to consumers at the cash register. In Europe the average rate is a little under 20%. (See the nearby chart.) In the U.S., a federal VAT would presumably be levied on top of state and local sales taxes that range as high as 10%. Some nations also exempt food, medicine and certain other goods from the tax.
[1VAT]

VATs were sold in Europe as a way to tax consumption, which in principle does less economic harm than taxing income, savings or investment. This sounds good, but in practice the VAT has rarely replaced the income tax, or even resulted in a lower income-tax rate. The top individual income tax rate remains very high in Europe despite the VAT, with an average on the continent of about 46%.

Europe's individual income tax rates have fallen since the 1980s, following the U.S. lead in the Reagan era, and European corporate tax rates have come down even more sharply. But the drive of this decline has been global tax competition, not the offsetting burden of the VAT.
In the U.S., VAT proponents aren't calling for a repeal of the 16th Amendment that allowed the income tax—and, in fact, they want income tax rates to rise. The White House has promised to let the top individual rate increase in January to 39.6% from 35% as the Bush tax cuts expire, while the dividend rate will go to 39.6% from 15% and the capital gains rate to 20% next year and 23.8% in 2013 under the health bill, from 15% today. Even with these higher rates, or because of them, revenues won't come close to paying for the Obama Administration's new spending—which is why it is also eyeing a VAT.

One trait of European VATs is that while their rates often start low, they rarely stay that way. Of the 10 major OECD nations with VATs or national sales taxes, only Canada has lowered its rate. Denmark has gone to 25% from 9%, Germany to 19% from 10%, and Italy to 20% from 12%. The nonpartisan Tax Foundation recently calculated that to balance the U.S. federal budget with a VAT would require a rate of at least 18%.

Proponents also argue that a VAT would result in less federal government borrowing. But that, too, has rarely been true in Europe. From the 1980s through 2005, deficits were by and large higher in Europe than in the U.S. By 2005, debt averaged 50% of GDP in Europe, according to OECD data, compared to under 40% in the U.S.
It is precisely this revenue-generating ability that makes the VAT so appealing to liberal intellectuals and politicians. Even liberals understand that at some point high income tax rates stop yielding much more revenue as the rich change their behavior or exploit loopholes. The middle-class is where the real money is, and the only way to get more of it with the least political pain is through a broad-based consumption tax such as a VAT.

And one more point: In Europe, this heavier spending and tax burden has also meant lower levels of income growth and job creation. From 1982 to 2007, the U.S. created 45 million new jobs, compared to fewer than 10 million in Europe, and U.S. economic growth was more than one-third faster over the last two decades, according to the Bureau of Labor Statistics.

In 2008, the average resident of West Virginia, one of the poorest American states, had an income $2,000 a year higher than the average resident of the European Union, according to economist Mark Perry of the University of Michigan, Flint. The price of a much higher tax burden to finance a cradle-to-grave entitlement state in Europe has been a lower standard of living. VAT supporters should explain why the same won't be true in America.

China and the US, Two Energy Giants: A Contrast In Approach

Two Energy Giants: A contrast in approach
IER, Apr 22, 2010

China’s economy is growing with dizzying speed, and the government is fueling the growth with plentiful energy. In fact, China’s electrification program and its ability to secure future oil supplies are second to none. By contrast, the U.S. economy is growing more slowly and its energy strategy is limiting that growth. The United States has slowed its electrification, adding only select forms of generating capacity, and has taken steps to reduce its flexibility in securing safe oil supplies.

China Setting Records: China Oil Demand, Coal Production and Vehicle Sales Up in 2010

During January, February, and March of this year, China was again setting records with huge year-over-year increases in oil demand.  In February, China’s oil demand rose 19.4 percent over a year earlier, the second fastest rise on record. According to Reuters, China is the world’s second largest oil user (second to the United States) and consumed 8.65 million barrels of oil per day in February, an increase of 9.4 percent or 604,000 barrels per day over January’s consumption.[i] Oil imports were up 13.8 percent in March over February, reaching 4.95 million barrels per day, according to preliminary data from China’s General Administration of Customs.[ii] In part, these large oil increases are fueling China’s passenger car fleet. New passenger car sales rose 55 percent in February from a year earlier, following a 116 percent increase in January, most likely aided by the extension of government incentives to boost purchases of smaller vehicles and spur rural demand for cars.  [iii]

China has spent nearly $200 billion on oil deals during the past few years, joining with more than 19 countries —including Russia, Turkmenistan, Kuwait, Yemen, Libya, Angola, Venezuela and Brazil— and paying for exploration, production, infrastructure construction, as well as “loans for energy” deals.[iv] Recently, China’s Sinopec International Petroleum Exploration and Production Company agreed to buy, for $4.65 billion, the 9 percent interest that ConocoPhillips holds in Syncrude,[v] a Canadian business involved in the production of oil sands (an asphalt-like heavy oil).[vi] Approval from the Canadian and Chinese governments is expected in the third quarter of this year.

Along with China’s Canadian oil pursuits, long thought to be a safe and secure supply for U.S. oil demand, the state-owned China Development Bank has promised to lend $20 billion to Venezuela to build new power plants, highways, and other projects, which will be repaid with Venezuelan crude oil. Venezuela’s President Hugo Chavez has long complained about the United States’ standing as the largest buyer of Venezuelan oil, and so he is more than pleased to offer his country’s oil to China instead.[vii] Both the Canadian crude and the Venezuelan crude are heavy oils, and the United States owns most of the refineries that can process heavy crude oils. So, to prepare itself for future heavy oil supplies, China has approved plans for construction of such a refinery. As the United States loses neighboring oil supplies to China, one wonders how the U.S. will meet future oil demand, especially as the Obama Administration has been slow to open new offshore areas to oil development (claiming further study is needed) but speedy at advocating climate legislation and a low-carbon fuel standard, both policies aimed at reducing the demand for fossil fuels without providing comparable energy substitutes.

china oil demand

Oil resources are not the only target on China’s energy wish-list. It also plans to increase its consumption of natural gas; last year, its liquefied natural gas imports rose by two-thirds, to 5.53 million tons or 7.7 billion cubic meters.[viii] China also continues to consume large quantities of its primary fuel, coal, in its industrial and electric generation sectors. According to China’s National Bureau of Statistics, the country’s coal output grew more than 28 percent, to well over 751 million tons in the first quarter of 2010. A report by China’s National Coal Association estimates China’s total coal production capacity exceeds 3.6 billion tons.[ix] This is in sharp contrast to coal mining in the United States, where the Environmental Protection Agency (EPA) has issued a new policy aimed at curbing mountain top removal mining[x] and is scrutinizing surface coal mine permits.  EPA is revoking or blocking Clean Water Act permits for mountain top mining citing irreversible damage to the environment. Some of the permits were awarded years ago.[xi]

Seventy percent of China’s energy comes from coal,[xii] the most carbon-intensive fossil fuel. China already consumes more than twice the coal as  the United States, and by 2030, China is expected to consume 3.7 times as much coal.[xiii] As a result, China emits more carbon dioxide than any other country in the world including the United States, and by 2030, it is expected to release 82 percent more carbon dioxide emissions than the United States.[xiv]

china co2 emissions

China’s Race to Electrification; U.S. Stagnation

Between 2004 and 2008, China added 346 gigawatts of generating capacity, of which 272 gigawatts were conventional thermal power (mostly coal) and 66 gigawatts were hydroelectric power. This compares to a total installed US hydroelectric capacity of 77 gigawatts.  China is estimated to have added an additional 85 gigawatts in 2009, reaching a total of 874 gigawatts,[xv] about 15 percent less than the total capacity in the United States. Of the 85 gigawatts added in 2009, 51 gigawatts were conventional thermal, again mostly coal, 25 gigawatts were hydroelectric, and 9 gigawatts were wind power.[xvi] Many of China’s wind turbines were funded by the U.N.’s Clean Development Mechanism,   under which wealthy countries fund projects in developing countries and receive carbon credits so long as those projects would not have been accomplished otherwise.[xvii]

In contrast, the United States added only 47 gigawatts of generating capacity from 2004 to 2008 (14 percent of the capacity China added), of which 26 gigawatts were natural gas-fired units and 18 gigawatts were wind turbines. New coal-fired capacity additions are practically non-existent in the United States primarily owing to objections regarding emissions of carbon dioxide. Coal-fired projects in the United States have either been cancelled or delayed because of permitting problems, reviews and re-reviews by EPA and resulting financing problems. While the United States has more coal than any other country in the world, with over 200 years of reserves at current usage rates, coal’s share of new U.S. generating markets has been replaced by natural gas and renewable units that are  more politically in vogue.

china electricity generating capacity
us electricity generating capacity



China’s Economic Growth and Export Market

China’s economy, the second-largest in the world in terms of purchasing power, is currently about half the size of the U.S. gross domestic product. According to China’s central bank, the country’s economy grew at an annual rate of 10.7 percent in the fourth quarter of 2009,[xviii] a rate almost twice the U.S. rate of 5.6 percent for the same time period.[xix] And in the first quarter of 2010, China’s economy grew by 11.9 percent. Forecasters predict that China’s economy will exceed that of the United States in 10 to 15 years.[xx]

China became the world’s largest exporter last year, edging out Germany and the United States. Despite a decline in total world trade, China’s exports fell less than those of other big powers. A report by the World Trade Organization calculates that the total value of merchandise exports fell by 23 percent in 2009. Among the top ten exporters, Japan’s shipments were the worst affected, falling by 26 percent. Because China’s exports fell by only 16 percent, it is now the single largest exporter. The World Trade Organization expects trade to rebound by nearly 10 percent this year.[xxi]

leading exporters world

Lessons to Be Learned

Many environmentalists and politicians seem to believe that China is winning the green energy race, but nothing could be further from reality.[xxii] China is in a race for energy—all forms of energy—to fuel its growing economy. The size and scope of its investments in conventional forms of energy dwarf their commitment to “green energy.” It is providing loans around the world to invest in future oil projects, and it cares not that the oil is less than the lightest and sweetest. Canadian oil sands and Venezuelan heavy crude are perfectly fine. China is building a coal-fired generating plant each and every week on average, and increasing its coal mining capacity to fuel them. This belies any stated concerns about increasing their carbon dioxide emissions, already the highest of any country in the world. China is building wind turbines too, but if wealthy countries are willing to pay—why not? It matters not at all that the transmission capacity is not yet there to operate almost a third of these wind turbines. And China’s large-scale hydroelectric projects are engineering feats par excellence, built regardless of environmental concerns.
China is ensuring energy supplies will be available to fuel its growing economy. The United States should take note.

 References
[i] Reuters, China oil demand rise second fastest, inventories drag, March 22, 2010, http://in.reuters.com/article/oilRpt/idINTOE62L01Z20100322?sp=true [ii] Reuters, Oil falls as demand, inventories weigh, April 12, 2010, http://www.reuters.com/article/idUSTRE6142V820100412
[iii] Reuters, China oil demand rise second fastest, inventories drag, March 22, 2010, http://in.reuters.com/article/oilRpt/idINTOE62L01Z20100322?sp=true
[iv] Politico, To compete with China, U.S. must tap natural gas, April 13, 2010, http://www.politico.com/news/stories/0410/35689.html#ixzz0kyYru8gb
[v] Reuters, China bags oil sands stake, not finished yet, April 13, 2010, http://www.reuters.com/article/idUSTRE63C17X20100413 and www.conocophillips.com
[vi] Syncrude, http://www.syncrude.ca/users/folder.asp?FolderID=5753
[vii] The Wall Street Journal, China’s $20 Billion Bolsters Chavez, April 18, 2010, http://online.wsj.com/article/SB10001424052748703594404575191671972897694.html
[viii] Reuters, China bags oil sands stake, not finished yet, April 13, 2010, http://www.reuters.com/article/idUSTRE63C17X20100413
[ix] China Daily, China’s coal output up 28.1% in Q1, April 15, 2010, http://www.chinadaily.com.cn/bizchina/2010-04/15/content_9736151.htm
[x] Environmental protection Agency, New Releases, EPA issues comprehensive guidance to protect Appalachian communities from harmful environmental impacts of mountaintop mining, April 1, 2010, http://yosemite.epa.gov/opa/admpress.nsf/d0cf6618525a9efb85257359003fb69d/4145c96189a17239852576f8005867bd!OpenDocument
[xi] Associated Press, Arch Coal sues EPA over veto of W.Va. mine permit, April 2, 2010, http://news.yahoo.com/s/ap/20100402/ap_on_bi_ge/wv_epa_coal_lawsuit
[xii] Energy Information Administration, China, http://www.eia.doe.gov/emeu/cabs/China/Background.html
[xiii] Energy Information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html
[xiv] Energy Information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html
[xv] http://en.wikipedia.org/wiki/Energy_policy_of_China
[xvi] China’s power generation goes greener with total capacity up 10%, January 7, 2010, http://news.xinhuanet.com/english/2010-01/07/content_12771880.htm
[xvii] http://www.instituteforenergyresearch.org/2010/03/24/kyotos-clean-development-mechanism-is-it-producing-results-for-whom/
[xviii] Politico, To compete with China, U.S. must tap natural gas, April 13, 2010,  http://www.politico.com/news/stories/0410/35689.html#ixzz0kyYru8gb
[xix] http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
[xx] Energy Information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html
[xxi] China overtakes Germany to become the biggest exporter of all, March 31, 2010, http://www.economist.com/daily/news/displaystory.cfm?story_id=15836406&fsrc=nwl
[xxii] http://www.instituteforenergyresearch.org/2010/03/15/the-u-s-in-the-world-race-for-clean-electric-generating-capacity/

Thursday, April 22, 2010

Federal Prez: "What is not legitimate is to suggest that we're enabling or encouraging future taxpayer bailouts, as some have claimed."

The New Master of Wall Street. WSJ Editorial
Obama surveys the financial kingdom that may soon be his.WSJ, Apr 23, 2010

President Obama is a gifted man, but until yesterday we hadn't known that his achievements include having predicted the financial panic of 2008. It was a "failure of responsibility that I spoke about when I came to New York more than two years ago—before the worst of the crisis had unfolded," Mr. Obama said yesterday in a speech on financial reform at Cooper Union in New York City. "I take no satisfaction in noting that my comments have largely been borne out by the events that followed."

We wish for the sake of our 401(k) we had noticed this Delphic call, not least when Senator Obama was opposing the reform of Fannie Mae and Freddie Mac. But let's not fight over history. The current reality is that the President had better be very, very smart because the reform bill he is stumping for would give him and his regulators vast new sway over financial markets and risk-taking.

This is the most important fact to understand about the current financial reform debate. While the details matter a great deal, the essence of the exercise is to transfer more control over credit allocation and the financial industry to the federal government. The industry was heavily regulated before—not that it stopped the mania and panic—but if anything close to the current bills pass, the biggest banks will become the equivalent of utilities.

The irony is that this may, or may not, reduce the risk of future financial meltdowns and taxpayer bailouts. A new super council of regulators will be created with vast new powers to determine which firms pose a "systemic" financial risk, to set high capital and margin levels, to veto certain kinds of business for certain firms, and even to set guidelines for banker compensation—or maybe not. The point is that these crucial questions will be settled not by statute, but by regulatory discretion after the law passes.

If you think Wall Street beats a path to the Beltway now, wait until the banks seek to influence how regulators will define, say, "proprietary trading." Whatever its flaws, the Glass-Steagall Act of 1932 clearly defined the difference between a commercial and investment bank. This time, the rules will be written by regulators at Treasury, the Federal Reserve, the CFTC, SEC and FDIC, among others. As he so often does, Mr. Obama yesterday denounced "the furious efforts of industry lobbyists to shape" the bill "to their special interests." But if his reform passes, this lobbying is certain to continue, more furiously.

Consider the esoteric matter of derivatives, most of which seem headed for daily settlement on exchanges and a clearinghouse if the bill passes. But not all derivatives. The new master of this universe would be Gary Gensler, a Goldman Sachs alumnus who now chairs the Commodity Futures Trading Commission. Under the bill moving through the Senate, he would decide which derivative transactions must be "cleared" and traded via electronic exchanges, and which can continue to be traded over-the-counter.

Perhaps Mr. Gensler is as wise as King Solomon, or at least John Paulson. Perhaps, like Mr. Obama in 2008, he—and his successors—will be able to foresee the next crisis and determine the derivatives contracts that pose the most future risk. He will need to be, because under such a reform some of the risk of a transaction moves from the two financial parties (say, J.P. Morgan and Goldman) to the clearinghouse—which will almost certainly be "too big to fail" if enough trades go awry in the next crisis.

Or consider the Senate provision, too little discussed, to let the SEC give shareholders more clout over corporate board elections. This would federalize what has long been state predominance in corporate law, while giving the largest and most activist investors far more leverage to impose their agendas on business.

In practice, this means giving more influence over corporate decisions to labor unions and their political surrogates who run the large public pension funds. Their goals are as likely as not to include political causes such as easier unionization, cap-and-trade regulation, or disinvestment in this or that unpopular business or country. This, too, comes down to giving more power to the political class to run business—in this case, even nonfinancial businesses.

The people who oppose these and other provisions do so for a variety of reasons, some principled, some self-interested. But they have every right to fight them. Yet Mr. Obama once again yesterday cast such opposition as dishonest: "What is not legitimate is to suggest that we're enabling or encouraging future taxpayer bailouts, as some have claimed. That may make for a good sound bite, but it's not factually accurate," he said. "A vote for reform is a vote to put a stop to taxpayer-funded bailouts. That's the truth."

Perhaps Mr. Obama should consult Democrat Ted Kaufman of Delaware, who said recently on the Senate floor that "by expanding the [federal] safety net—as we did in response to the last crisis—to cover ever larger and more complex institutions heavily engaged in speculative activities, I fear that we may be sowing the seeds for an even bigger crisis in only a few years or a decade." Mr. Kaufman wants to break up the biggest banks, which may well be preferable to making them wards of the Treasury. Is he lying too?

As in health care, Democrats are intent on ramming this reform through Congress, and Republicans ought to summon the will to resist. Absent that, the only certain result is that Washington will be the new master of the financial universe.

Cash for Tanners - A new subsidy for hitting the beach

Cash for Tanners. WSJ Editorial
A new subsidy for hitting the beach.WSJ, Apr 23, 2010

Liberté, égalité, St. Tropez. That could be the motto of the European Union's "social tourism" project, which advocates subsidized holidays for the underprivileged. According to European Commissioner Antonio Tajani, visiting foreign countries is a "right," and one that could soon be financed by EU taxpayers. This gives a whole new meaning to the concept of "paid vacation."

The EU last year launched a €1 million project to promote social tourism throughout the Continent. The program, which goes by the slight misnomer Calypso—the lonely nymph from Greek mythology was famously confined to an island—seeks, among other things, to identify and promote measures governments have already taken to help the needy to go on holiday. Calypso specifically targets the disabled, poor families, senior citizens and "youth," a group that in geriatric Europe includes people up to 30 years of age.

Cash for tanners is also being touted as good economic policy. At a "Calypso Awareness Building Meeting" in October, the main theme was "Social Tourism: An Opportunity to Overcome the Crisis?" The conference highlighted the example of the Spanish government, which already helps more than one million senior citizens go on organized trips at a cost of €75 million. Thanks to the VAT and other taxes, Madrid claims it's getting back €1.70 for every euro spent.

It probably didn't occur to the sages in Spain that without the subsidies, the seniors would have either still gone on vacation, spent the money on other goods or services or saved it, which would have made it available for other investors. The subsidies merely directed spending to a politically favored purpose without creating additional wealth.

At an EU meeting last week, Spanish Tourism Minister Miguel Sebastian said tourism "should be an asset all citizens can enjoy, in particular those with physical disabilities or financially disadvantaged." With 19% unemployment and rising, Madrid will no doubt have ample demand for its new growth industry. And given the European policy arc in Congress, look for vacation subsidies here too.

Environmentalism as Religion - While people have worshipped many things, we may be the first to build shrines to garbage

Environmentalism as Religion. By PAUL H. RUBIN
While people have worshipped many things, we may be the first to build shrines to garbage.
WSJ, Apr 22, 2010

Many observers have made the point that environmentalism is eerily close to a religious belief system, since it includes creation stories and ideas of original sin. But there is another sense in which environmentalism is becoming more and more like a religion: It provides its adherents with an identity.

Scientists are understandably uninterested in religious stories because they do not meet the basic criterion for science: They cannot be tested. God may or may not have created the world—there is no way of knowing, although we do know that the biblical creation story is scientifically incorrect. Since we cannot prove or disprove the existence of God, science can't help us answer questions about the truth of religion as a method of understanding the world.

But scientists, particularly evolutionary psychologists, have identified another function of religion in addition to its function of explaining the world. Religion often supplements or replaces the tribalism that is an innate part of our evolved nature.

Original religions were tribal rather than universal. Each tribe had its own god or gods, and the success of the tribe was evidence that their god was stronger than others.

But modern religions have largely replaced tribal gods with universal gods and allowed unrelated individuals from outside the tribe to join. Identification with a religion has replaced identification with a tribe. While many decry religious wars, modern religion has probably net reduced human conflict because there are fewer tribal wars. (Anthropologists have shown that tribal wars are even more lethal per capita than modern wars.)

It is this identity-creating function that environmentalism provides. As the world becomes less religious, people can define themselves as being Green rather than being Christian or Jewish.

Consider some of the ways in which environmental behaviors echo religious behaviors and thus provide meaningful rituals for Greens:

• There is a holy day—Earth Day.

• There are food taboos. Instead of eating fish on Friday, or avoiding pork, Greens now eat organic foods and many are moving towards eating only locally grown foods.

• There is no prayer, but there are self-sacrificing rituals that are not particularly useful, such as recycling. Recycling paper to save trees, for example, makes no sense since the effect will be to reduce the number of trees planted in the long run.

• Belief systems are embraced with no logical basis. For example, environmentalists almost universally believe in the dangers of global warming but also reject the best solution to the problem, which is nuclear power. These two beliefs co-exist based on faith, not reason.

• There are no temples, but there are sacred structures. As I walk around the Emory campus, I am continually confronted with recycling bins, and instead of one trash can I am faced with several for different sorts of trash. Universities are centers of the environmental religion, and such structures are increasingly common. While people have worshipped many things, we may be the first to build shrines to garbage.

• Environmentalism is a proselytizing religion. Skeptics are not merely people unconvinced by the evidence: They are treated as evil sinners. I probably would not write this article if I did not have tenure.

Some conservatives spend their time criticizing the way Darwin is taught in schools. This is pointless and probably counterproductive. These same efforts should be spent on making sure that the schools only teach those aspects of environmentalism that pass rigorous scientific testing. By making the point that Greenism is a religion, perhaps we environmental skeptics can enlist the First Amendment on our side.

Mr. Rubin is a professor of economics at Emory University. He is the author of "Darwinian Politics: The Evolutionary Origin of Freedom" (Rutgers University Press, 2002).

On Presidential Rhetoric

On Presidential Rhetoric. WSJ Editorial
Obama's ad hominem method and the politics of polarization.WSJ, Apr 22, 2010

President Obama came to office promising an era of political comity, but even he has had to concede that his first 15 months in office haven't lived up to his campaign hope of transcending partisan divisions. While it takes two to tangle, we think the hyper-polarization owes more than a little to Mr. Obama's own rhetorical habits. More than any President in memory, Mr. Obama has a tendency to vilify his opponents in personal terms and assail their arguments as dishonest, illegitimate or motived by bad faith.

A notable instance is Mr. Obama's ad hominem attack on Mitch McConnell at a California fundraiser for Barbara Boxer on Monday. The Senate Minority Leader "paid a visit to Wall Street a week or two ago," Mr. Obama said, and "met with some of the movers and shakers up there. I don't know exactly what was discussed. All I can tell you is when he came back, he promptly announced he would oppose the financial regulatory reform."

In other words, the Kentucky Republican is merely a mouthpiece for the bankers. Mr. Obama added that Mr. McConnell's objections to the bill were not merely "just plain false" but also "cynical"—and then he repeated the attack on motives at another event the following evening.

We can't recall anything close to this kind of language from, say, Ronald Reagan toward House Speaker Tip O'Neill, or even George W. Bush after Harry Reid called him a "liar." But it is an Obama staple.

A few hours after the Supreme Court's vindication of political speech last year in Citizens United, Mr. Obama called the decision "a major victory for Big Oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans."

He later personalized his criticism by rebuking the Justices as they sat in front of him during the January State of the Union, accusing them of reversing "a century of law to open the floodgates for special interests—including foreign corporations—to spend without limit in our elections." So the Justices, too, are mere tools of corporate interests. Don't expect many of them at next year's SOTU.

The President is especially fond of employing this blunt rhetorical force against business. In a December interview, Mr. Obama said he "did not run for office to be helping out a bunch of fat cat bankers on Wall Street. . . . They're still puzzled why it is that people are mad at banks. Well, let's see," he continued. "You guys are drawing down $10, $20 million bonuses after America went through the worst economic year that it's gone through in—in decades, and you guys caused the problem."

Amid the Beltway panic during the AIG bonus bonfire in March 2009, Mr. Obama played directly to the public anger. "This is a corporation that finds itself in financial distress due to recklessness and greed," said the President, and asked, "How do they justify this outrage to the taxpayers who are keeping this company afloat?"

He did the same with the Chrysler bondholders who had initially resisted the White House's bankruptcy terms that squeezed them in favor of the United Auto Workers. Mr. Obama characterized these investors in April 2009 as "a small group of speculators" who "were hoping that everybody else would make sacrifices, and they would have to make none." They quickly caved.

Likewise, in his September address to Congress on health care, Mr. Obama did not merely disagree with opponents but accused them of being "cynical and irresponsible," spreading "misinformation," and making "bogus," "wild" or "false" claims through "demagoguery and distortion."

He added that "If you misrepresent what's in this plan, we will call you out." He later singled out Anthem Blue Cross by name, describing the California insurer's behavior "jaw-dropping" in February after it attempted to raise consumer premiums.

Politics ain't beanbag, but most Presidents leave this kind of political attack to surrogates or Vice Presidents. Mr. Obama seems to enjoy being his own Spiro Agnew. A President may reap a short-term legislative gain from this kind of rhetoric, but he also pays a longer-term price in ill-will and needless polarization.

Presidents speak to all of America and they best build consensus through argument and persuasion—not by singling out political targets, cultivating resentment, questioning motives and mocking differences of principle or political philosophy. Mr. Obama's bellicosity is no more attractive than Sarah Palin's attempts to pit "the real America" against the big-city slickers. And his rhetorical method seems especially discordant coming from a President who still insists, in between these assaults, that he is striving mightily to change the negative tone of American politics.

If the President and his advisers are wondering why his approval ratings are falling even as the economy is recovering, they might look to his own divisive conduct and the contempt he too often shows for anyone who disagrees with him.

Monday, April 19, 2010

Fannie and Freddie Amnesia - Taxpayers are on the hook for about $400 billion

Fannie and Freddie Amnesia. By PETER J. WALLISON
Taxpayers are on the hook for about $400 billion, partly because Sen. Obama helped to block reform.WSJ, Apr 20, 2010

Now that nearly all the TARP funds used to bail out Wall Street banks have been repaid, the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac stand out as the source of the greatest taxpayer losses.

The Congressional Budget Office has estimated that, in the wake of the housing bubble and the unprecedented deflation in housing values that resulted, the government's cost to bail out Fannie and Freddie will eventually reach $381 billion. That estimate may be too optimistic.

Last Christmas Eve, Treasury removed the $400 billion cap on what the government might be required to invest in these two GSEs in the future, and this may tell the real story about the cost to taxpayers. In typical Washington fashion, everyone has amnesia about how this disaster occurred.

The story is all too familiar. Politicians in positions of authority today had an opportunity to prevent this fiasco but did nothing. Now—in the name of the taxpayers—they want more power, but they have never been called to account for their earlier failings.

One chapter in this story took place in July 2005, when the Senate Banking Committee, then controlled by the Republicans, adopted tough regulatory legislation for the GSEs on a party-line vote—all Republicans in favor, all Democrats opposed. The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.

These authorities were necessary to control the GSEs' risk-taking, but opposition by Fannie and Freddie—then the most politically powerful firms in the country—had consistently prevented reform.

The date of the Senate Banking Committee's action is important. It was in 2005 that the GSEs—which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements—accelerated the purchases that led to their 2008 insolvency. If legislation along the lines of the Senate committee's bill had been enacted in that year, many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.

Why was there no action in the full Senate? As most Americans know today, it takes 60 votes to cut off debate in the Senate, and the Republicans had only 55. To close debate and proceed to the enactment of the committee-passed bill, the Republicans needed five Democrats to vote with them. But in a 45 member Democratic caucus that included Barack Obama and the current Senate Banking Chairman Christopher Dodd (D., Conn.), these votes could not be found.

Recently, President Obama has taken to accusing others of representing "special interests." In an April radio address he stated that his financial regulatory proposals were struggling in the Senate because "the financial industry and its powerful lobby have opposed modest safeguards against the kinds of reckless risks and bad practices that led to this very crisis."

He should know. As a senator, he was the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry.

With hypocrisy like this at the top, is it any wonder that nearly 80% of Americans, according to new Pew polling, don't trust the federal government or its ability to solve the country's problems?

Mr. Wallison is a senior fellow at the American Enterprise Institute.

The SEC vs. Goldman - More a case of hindsight bias than financial villainy

The SEC vs. Goldman. WSJ Editorial

More a case of hindsight bias than financial villainy.
WSJ, Apr 19, 2010


The Securities and Exchange Commission's complaint against Goldman Sachs is playing in the media as the Rosetta Stone that finally exposes the Wall Street perfidy and double-dealing behind the financial crisis. Our reaction is different: Is that all there is?


After 18 months of investigation, the best the government can come up with is an allegation that Goldman misled some of the world's most sophisticated investors about a single 2007 "synthetic" collateralized debt obligation (CDO)? Far from being the smoking gun of the financial crisis, this case looks more like a water pistol.
***
Let's deconstruct the supposed fraud, in which Goldman worked with hedge fund investor John Paulson, who wanted to bet on a decline in the subprime mortgage market. The SEC alleges that Goldman let Paulson & Co. dictate the mortgage-backed securities on which investors would speculate via the CDO, and then withheld from investors Paulson's role on the other side of the transaction.


The SEC also alleges that Goldman deceived ACA Management—a unit of the largest investor on the other side of the deal and the firm officially selecting which mortgage-backed securities everybody would bet on—into believing that Mr. Paulson was actually investing in an "equity" tranche on ACA's side of the deal.


Regarding the second point, the offering documents for the 2007 CDO made no claim that we can find that Mr. Paulson's firm was betting alongside ACA. The documents go so far as to state that an equity tranche was not offered by Goldman, as ACA must have known since it helped put the deal together and presumably read the documents. The SEC complaint itself states that ACA had the final word on which assets would be referenced in the CDO. And in some cases, ACA kicked out of the pool various assets suggested by the Paulson firm.


More fundamentally, the investment at issue did not hold mortgages, or even mortgage-backed securities. This is why it is called a "synthetic" CDO, which means it is a financial instrument that lets investors bet on the future value of certain mortgage-backed securities without actually owning them.


Yet much of the SEC complaint is written as if the offering included actual pools of mortgages, rather than a collection of bets against them. Why would the SEC not offer a clearer description? Perhaps the SEC's enforcement division doesn't understand the difference between a cash CDO—which contains slices of mortgage-backed securities—and a synthetic CDO containing bets against these securities.


More likely, the SEC knows the distinction but muddied up the complaint language to confuse journalists and the public about what investors clearly would have known: That by definition such a CDO transaction is a bet for and against securities backed by subprime mortgages. The existence of a short bet wasn't Goldman's dark secret. It was the very premise of the transaction.


Did Goldman have an obligation to tell everyone that Mr. Paulson was the one shorting subprime? Goldman insists it is "normal business practice" for a market maker like itself not to disclose the parties to a transaction, and one question is why it would have made any difference. Mr. Paulson has since become famous for this mortgage gamble, from which he made $1 billion. But at the time of the trade he was just another hedge-fund trader, and no long-side investor would have felt this was like betting against Warren Buffett.


Not that there are any innocent widows and orphans in this story. Goldman is being portrayed as Mr. Potter in "It's a Wonderful Life," exploiting the good people of Bedford Falls. But a more appropriate movie analogy is "Alien vs. Predator," with Goldman serving as the referee. Mr. Paulson bet against German bank IKB and America's ACA, neither of which fell off a turnip truck at the corner of Wall and Broad Streets.


IKB describes itself as "a leading investor in CDOs" and "a leading credit manager in the German market." ACA, for its part, participated in numerous similar transactions. The Journal reports that ACA was known for embracing more risk than its competitors, because, with a less-than-stellar credit rating, it had a higher cost of capital.


By the way, Goldman was also one of the losers here. Although the firm received a $15 million fee for putting the deal together, Goldman says it ended up losing $90 million on the transaction itself, because it ultimately decided to bet alongside ACA and IKB. In other words, the SEC is suing Goldman for deceiving long-side investors in a transaction in which Goldman also took the long side. So Goldman conspired to defraud . . . itself?


As for the role this trade played in the financial crisis, its main impact was transferring $1 billion from the long-side housing gamblers to Mr. Paulson. Ultimately, this meant big losses for the Royal Bank of Scotland, which acquired one of the long-side players after the transaction and had to be rescued by a capital injection from the U.K. government. But RBS made more than enough bad choices of its own that contributed to its failure. These hedge-fund trades make for entertaining tales of financial derring-do, but they are hardly the root of the panic.
***
Which leads us to the real impact of this case, which is political. The SEC charges conveniently arrive on the brink of the Senate debate over financial reform, and its supporters are already using the case to grease the bill's passage. "I'm pleased that the Obama Administration is using all of the tools in its arsenal to bring accountability to Wall Street and standing up for homeowners and small businesses across America," said Senate Majority Leader Harry Reid on Friday about the SEC case. "This is also why we need to pass strong Wall Street reform this year." Of course, this case matters to homeowners not at all.
We have had our own disputes with Goldman, and we've criticized the firm for its explanations of its dealings with AIG. We have also urged the Senate to rewrite its flawed financial regulatory-reform bill precisely because it would benefit Goldman and other giant banks with explicit bailout powers available to assist them. There are serious questions about the role of Goldman and other too-big-to-fail banks in the American financial market. Yet this case addresses none of these questions.
Perhaps the SEC has more evidence than it presented in its complaint, but on the record so far the government and media seem to be engaged in an exercise in hindsight bias. Three years later, after the mortgage market has blown up and after the panic and recession, the political class is looking for legal cases to prove its preferred explanation that the entire mess was Wall Street's fault. Goldman makes a convenient villain. But judging by this complaint, the real story is how little villainy the feds have found.

Thursday, April 8, 2010

Tokyo Rising

Tokyo Rising, by Ted Galen Carpenter
Cato, April 7, 2010

One very clear fact emerged from my recent meetings with officials and foreign-policy scholars in Australia and New Zealand: even though both countries have major economic stakes in their relationship with China, they are exceedingly nervous about the possibility of Chinese hegemony in East Asia. Since most of them also are reaching the (reluctant) conclusion that the United States will not be able to afford indefinitely the financial burden and military requirements of remaining the region's security stabilizer, a role the United States has played since the end of World War II, they are looking for other options to blunt China's emerging preeminence.

Increasingly, policy makers and opinion leaders in Australia and New Zealand seem receptive to the prospect of both India and Japan playing more active security roles in the region, thereby acting as strategic counterweights to China. That is a major shift in sentiment from just a decade or two ago. The notion of India as a relevant security player is a recent phenomenon, but there did not appear to be any opposition in Canberra or Wellington to the Indian navy flexing its muscles in the Strait of Malacca in the past few years. That favorable reaction was apparent even in vehemently anti-nuclear New Zealand, despite India's decision in the late 1990s to deploy a nuclear arsenal, which dealt a severe blow to the global nonproliferation cause.

Even more surprising is the reversal of attitudes regarding a more robust military role for Japan. When I was in Australia in the 1990s, scholars and officials were adamantly opposed to any move by Tokyo away from the tepid military posture it had adopted after World War II. The belief that Japan should play only a severely constrained security role—under Washington's strict supervision—was the conventional wisdom not only in Australia, but throughout East Asia.

And U.S. officials shared that view. Major General Henry Stackpole, onetime commander of U.S. Marine forces in Japan, stated bluntly that "no one wants a rearmed, resurgent Japan." He added that the United States was "the cap in the bottle" preventing that outcome. The initial draft of the Pentagon's policy planning guidance document, leaked to the New York Times, warned that a larger Japanese security role in East Asia would be destabilizing, and that Washington ought to discourage such a development.

U.S. policy makers appear to have warmed gradually to a more robust Japanese military stance. That was certainly true during the administration of George W. Bush, when officials clearly sought to make the alliance with Japan a far more equal partnership.

Yet some distrust of Japanese intentions lingers, both in the United States and portions of East Asia. The wariness about Japan as a more active military player is strongest in such countries as the Philippines and South Korea. The former endured a brutal occupation during World War II, and the latter still bears severe emotional scars from Tokyo's heavy-handed behavior as Korea's colonial master.

Even in those countries, though, the intensity of the opposition to Japan becoming a normal great power and playing a more serious security role is waning. And in the rest of the region, the response to that prospect ranges from receptive to enthusiastic. That emerging realism is encouraging. The alternative to Japan and India (and possibly other actors, such as Indonesia and Vietnam) becoming strategic counterweights to a rising China ought to be worrisome. Given America's gradually waning hegemony, a failure by other major countries to step up and be significant security players would lead to a troubling power vacuum in the region. A vacuum that China would be well-positioned to fill.

If China does not succumb to internal weaknesses (which are not trivial), it will almost certainly be the most prominent power in East Asia in the coming decades, gradually displacing the United States. But there is a big difference between being the leading power and being a hegemon. The latter is a result that Americans cannot welcome.

The emergence of a multipolar power system in East Asia is the best outcome both for the United States and China's neighbors. It is gratifying that nations in the region seem to be reaching that conclusion. Australia and New Zealand may be a little ahead of the curve in that process, but the attitude in those countries about the desirability of Japan and India adopting more active security roles is not unique. Washington should embrace a similar view.

Ted Galen Carpenter, vice president for defense and foreign-policy studies at the Cato Institute, is the author of eight books on international affairs, including Smart Power: Toward a Prudent Foreign Policy for America (2008).

New START - Evaluating the U.S.-Russia Nuclear Deal

Evaluating the U.S.-Russia Nuclear Deal. By KEITH B. PAYNE
The White House and Kremlin can't seem to agree what's in it, but it appears to restrict U.S. missile defense efforts and has no limits on Russia's tactical nukes.
WSJ, Apr 08, 2010

Today President Obama will sign a new strategic arms reduction treaty with Russia. Official Washington is already celebrating the so-called New START Treaty in the belief that it reduces forces below the 2002 Moscow Treaty levels and "resets" U.S.-Russian relations in the direction of greater cooperation. But the new treaty—whose actual text and accompanying legal documents were not released before the signing ceremony in Prague—may not accomplish these goals.

The administration's "fact sheet," for example, claims that the treaty will reduce the number of strategic weapons to 1,550, 30% lower than the 2002 treaty. But New START has special counting rules.

For example, there are reportedly 76 Russian strategic bombers, and each one apparently can carry from six to 16 nuclear weapons (bombs and cruise missiles). Nevertheless, and unlike under the Moscow Treaty, these many hundreds of nuclear weapons would count as only 76 toward the 1,550 ceiling. Consequently, the New START Treaty includes the potential for a large increase in the number of deployed strategic nuclear weapons, not a reduction.

The administration claims, as Under Secretary of State Ellen Tauscher stated emphatically on March 29, that "There is no limit or constraint on what the United States can do with its missile defense systems . . . definitely, positively, and no way, no how . . ." Yet our Russian negotiating partners describe New START's constraints on missile defenses quite differently.

On March 30, Russian Foreign Minister Sergei Lavrov said in a press conference after the G-8 foreign ministers meeting in Canada that there are obligations regarding missile defense in the treaty text and the accompanying interpretive texts that constitute "a legally binding package." He also stated at a press conference in Moscow on March 26 that "The treaty is signed against the backdrop of particular levels of strategic defensive systems. A change of these levels will give each side the right to consider its further participation in the reduction of strategic offensive armaments." Kremlin National Security Council Secretary Sergei Prikhodko told journalists in Moscow on April 2 that "The United States pledged not to remodel launchers of intercontinental ballistic missiles and submarine-based ballistic missiles for firing interceptor missiles and vice versa."

The New START restrictions on missile defense as described by Russian officials could harm U.S. security in the future. For example, if the U.S. must increase its strategic missile defenses rapidly in response to now-unforeseen threat developments, one of the few options available could be to use Minuteman silo launchers for interceptors, either at California's Vandenberg Air Force Base or empty operational silos elsewhere. Yet, if the Russian description of New START is correct, doing so would be prohibited and the launchers themselves probably will be eliminated to meet the treaty's limitation on launchers. U.S. officials' assurances and Russian descriptions cannot both be true.

Another claim for New START is that possible concerns about the limitations on U.S. forces must be balanced against the useful limits on Russian forces. Yes, this argument goes, the U.S. will have to reduce the number of its strategic delivery vehicles—silos, submarine tubes and bombers—but in the bargain it will get the benefit of like Russian reductions.

This sounds reasonable. According to virtually all Russian sources, however, New START's agreed ceiling on strategic nuclear delivery vehicles will not require Russia to give up anything not already bound for its scrap heap.

The aging of its old Cold War arsenal and the pace of its strategic nuclear force modernization program means that Russia will remain under the New START ceiling of 700 deployed launchers with or without a new treaty. Whatever the benefit to the U.S. agreement to reduce its operational strategic force launchers, it is not to gain reciprocal Russian reductions. No such reciprocity is involved.

Some hope that New START's amicable "reset" in U.S.-Russian relations will inspire Russian help with other issues, such as the Iranian and North Korean nuclear programs, where they have been less than forthcoming. This is a vain hope, as is demonstrated by the past 40 years of strategic-arms control: Innovative strategic force agreements and reductions follow improvements in general political relations. They do not lead to them.

Finally, for many the great locus of concern about Russian nuclear weapons lies in its large arsenal of tactical (i.e., short-range) nuclear weapons. According to U.S. officials, Russia has a 10-to-one numeric advantage. In 2002, then Sens. Joe Biden and John Kerry, and the current White House Science Adviser, John Holdren, expressed great concern that the Bush administration's Moscow Treaty did not limit Russian tactical forces. One might expect, therefore, that New START would do so; but the Russians apparently were adamant about excluding tactical nuclear weapons from New START.

This omission is significant. The Russians are now more explicit and threatening about tactical nuclear war-fighting including in regional conflicts. Yet we still have no limitations on Russia's tactical nuclear arsenal. The problem may now be more severe than in 2002, but concern seems curiously to have eased.

This brief review is based on the many open descriptions of the treaty by U.S. and Russian officials. Given the apparent inconsistencies on such basic matters as whether the treaty requires weapon reductions or allows increases, or whether missile defenses are limited or untouched, the Senate will have to exercise exceptional care in reviewing the actual language of the treaty documents before drawing conclusions about their content.

Mr. Payne is head of the department of defense and strategic studies at Missouri State University, and a member of congressional Strategic Posture Commission.

Tuesday, April 6, 2010

The Dodd Bill: Bailouts Forever

The Dodd Bill: Bailouts Forever. By PETER J. WALLISON AND DAVID SKEEL
The Lehman Brothers liquidation shows that bankruptcy works fine. The FDIC has no experience with such large institutions.WSJ, Apr 07, 2010

There are many reasons to oppose Sen. Chris Dodd's (D., Conn.) financial regulation bill. The simplest and clearest is that the FDIC is completely unequipped by experience to handle the failure of a giant nonbank financial institution.

The country should be grateful for the determination with which the FDIC Chair, Sheila Bair, has thus far guided the agency through the financial crisis. But it is wrong to think that because the FDIC can handle the closure of small banks it is equipped to take over and close a giant, nonbank financial firm like a Lehman Brothers or an AIG.

Consider first that the largest bank the FDIC closed in the recent financial crisis, IndyMac, had assets of $32 billion. The largest bank ever to fail, Continental Illinois in 1984, had assets of $40 billion. At $639 billion, Lehman Brothers was nearly 15 times bigger; AIG had over $1 trillion in assets when it was kept from failing by the Federal Reserve.

The assets of a large, nonbank financial institution are also different. Neither Lehman nor AIG had insured depositors—or depositors of any kind—and their complex assets and liabilities did not look anything like the simple small loans and residential and commercial mortgages the FDIC deals with.

Moreover, the policies the FDIC follows when it closes small banks would be positively harmful if they were used to close a huge nonbank financial institution. The agency is used to operating in secret, over a weekend; its strategy is always to find a buyer. When applied in the case of a large, failing nonbank financial institution, this means that some other large, "too big to fail" institution will only become that much larger.

When the FDIC can't find a buyer, it can usually transfer a failed bank's deposits to another bank, because deposits have real business value for banks. This is not true of the liabilities of large financial institutions, which consist of derivatives contracts, repurchase agreements, and other complex instruments that no one else is interested in acquiring.

The real choice before the Senate is between the FDIC and the bankruptcy courts. It should be no contest, because bankruptcy courts do have the experience and expertise to handle a large-scale financial failure. This was demonstrated most recently by the Lehman Brothers bankruptcy.

It didn't get a lot of media attention, but an important financial event occurred on March 15, when Lehman Brothers offered a blueprint for its reorganization and exit from Chapter 11—18 months to the day after it filed its bankruptcy petition. In the course of Lehman's resolution, its creditors, shareholders and management all took severe losses.

The firm's principal assets—its broker-dealer, investment-management and underwriting businesses—were all sold off to four different buyers within weeks of the filing of its petition. At the time of its failure, the firm had over 900,000 derivatives contracts, more than 700,000 of which were canceled and the rest either enforced or settled, if its creditors agreed, in the blueprint for the firm's reorganization.

The FDIC has no significant experience with broker dealers, investment management, securities underwriting, derivatives contracts, complex collateral arrangements for repos, or the vast number of creditors that had to be included in the Lehman settlement. Is it at all likely the agency could have done any better?

There is another lesson in the Lehman bankruptcy. Mr. Dodd claims his bill cures the too-big-to-fail problem because it requires the liquidation of a failing firm. But Lehman has been liquidated; what is left is a shell that may or may not struggle back to profitability.

The difference between the Lehman bankruptcy and what the Dodd bill proposes is important to understand. The Dodd bill provides for a $50 billion fund, collected in advance from large financial firms, that will be used for the resolution process. In other words, the creditors of any company that is resolved under the Dodd bill have a chance to be bailed out. That's what these outside funds are for. But if the creditors are to take most of the losses—as they did in Lehman—a fund isn't necessary.

Which system is more likely to eliminate the moral hazard of too big to fail? In a bankruptcy, as in the Lehman case, the creditors learned that when they lend to weak companies they have to be careful. The Dodd bill would teach the opposite lesson. As Sen. Richard Shelby (R., Ala.) wrote in a March 25 letter to Treasury Secretary Tim Geithner, the Dodd bill "reinforces the expectation that the government stands ready to intervene on behalf of large and politically connected financial institutions at the expense of Main Street firms and the American taxpayer. Therefore, the bill institutionalizes 'too big to fail.'"

Mr. Shelby is right on target. It doesn't matter where the money comes from—whether it's the taxpayers or a fund collected from the financial industry itself. The question is how the money is used, and if it is used to bail out creditors of large firms—reducing their lending risks—it will encourage large firms to grow ever larger.

Like Fannie and Freddie, these large financial firms will be seen as protected by the government and, with lower funding costs, will squeeze out their Main Street competitors. Then, if these financial giants are on their way to failure, they are handed over for resolution to a government agency that has no experience with firms of this size or complexity. Surely the Senate will see the flaws in this idea.

Mr. Wallison is a senior fellow at the American Enterprise Institute. Mr. Skeel is a law professor at the University of Pennsylvania.

Monday, April 5, 2010

RIP Michael Foot, a Socialist Who Understood What Socialism Was

“Michael Foot, a bookish intellectual and anti-nuclear campaigner who led Britain’s Labour Party to a disastrous defeat in 1983, died [March 3],” reported the Associated Press. He was 96.
Foot personified the socialist tendency in the Labour Party, which Tony Blair successfully erased when he won power at the head of a business-friendly, interventionist “New Labour.” Yet Foot remained a respected, even revered, figure.
“Michael Foot was a giant of the Labour movement, a man of passion, principle and outstanding commitment to the many causes he fought for,” Blair said Wednesday. Prime Minister Gordon Brown, Blair’s partner in creating “New Labour,” praised Foot as a “genuine British radical” and a “man of deep principle and passionate idealism.”
Michael Foot may have been the most serious intellectual ever to head a major Western political party. He wrote biographies of Labour politicians Aneurin Bevan and Harold Wilson, and of H.G. Wells, and a 1988 book on Lord Byron, “The Politics of Paradise,” and he edited the “Thomas Paine Reader” in 1987. So when you asked Michael Foot what socialism was, you could expect a deeply informed answer. And that’s what the Washington Post got in 1982, when they asked the Labour Party leader for an example of socialism in practice that could “serve as a model of the Britain you envision.” Foot replied,
The best example that I’ve seen of democratic socialism operating in this country was during the second world war.  Then we ran Britain highly efficiently, got everybody a job. . . . The conscription of labor was only a very small element of it.  It was a democratic society with a common aim.
Wow. Michael Foot, the great socialist intellectual, a giant of the Labour movement, a man of deep principle and passionate idealism, thought that the best example ever seen of “democratic socialism” was a society organized for total war.

And he wasn’t the only one. The American socialist Michael Harrington wrote, “World War I showed that, despite the claims of free-enterprise ideologues, government could organize the economy effectively.” He hailed World War II as having “justified a truly massive mobilization of otherwise wasted human and material resources” and complained that the War Production Board was “a success the United States was determined to forget as quickly as possible.” He went on, “During World War II, there was probably more of an increase in social justice than at any [other] time in American history. Wage and price controls were used to try to cut the differentials between the social classes. . . . There was also a powerful moral incentive to spur workers on: patriotism.”

Collectivists such as Foot and Harrington don’t relish the killing involved in war, but they love war’s domestic effects: centralization and the growth of government power. They know, as did the libertarian writer Randolph Bourne, that “war is the health of the state”—hence the endless search for a moral equivalent of war.

As Don Lavoie demonstrated in his book National Economic Planning: What Is Left?, modern concepts of economic planning—including “industrial policy” and other euphemisms—stem from the experiences of Germany, Great Britain, and the United States in planning their economies during World War I. The power of the central governments grew dramatically during that war and during World War II, and collectivists have pined for the glory days of the War Industries Board and the War Production Board ever since.

Walter Lippmann was an early critic of the collectivists’ fascination with war planning. He wrote, “A close analysis of its theory and direct observation of its practice will disclose that all collectivism. . . is military in method, in purpose, in spirit, and can be nothing else.” Lippman went on to explain why war—or a moral equivalent—is so congenial to collectivism:
Under the system of centralized control without constitutional checks and balances, the war spirit identifies dissent with treason, the pursuit of private happiness with slackerism and sabotage, and, on the other side, obedience with discipline, conformity with patriotism. Thus at one stroke war extinguishes the difficulties of planning, cutting out from under the individual any moral ground as well as any lawful ground on which he might resist the execution of the official plan.
National service, national industrial policy, national energy policy—all have the same essence, collectivism, and the same model, war. War is sometimes, regrettably, necessary. But why would anyone want its moral equivalent?

Sunday, April 4, 2010

Beyond Bankruptcy And Bailouts - The FDIC resolution process is the right model for failing firms

Beyond Bankruptcy And Bailouts. By SHEILA BAIR
The FDIC resolution process is the right model for failing firms.WSJ, Monday, April 5, 2010

Meaningful reform of our financial regulatory system is finally within reach. The opportunity to pass such a comprehensive overhaul may not come again in our lifetimes.

Never again should taxpayers be asked to bail out large, failing financial firms. Unfortunately, we still lack a viable way to close financial behemoths without risking market collapse.

The good news is that the FDIC has a well-established process that works for failing banks. Going forward, this model should be available to close large, failing firms. This means banning government assistance to individual companies and forcing them into orderly liquidation.

Financial institutions are unique in that their funding sources can dry up very quickly, disrupting credit flows to the real economy. Bankruptcy can abruptly sever those credit flows, which can cause an immediate systemic impact. The FDIC resolution process for insured banks provides continuity of credit functions, while liquidating the operations of a failing firm.

Over its 76-year history, the FDIC has handled thousands of resolutions of all manner of size and complexity. The FDIC resolution mechanism closes the institution and auctions it to the private sector, reallocating resources to stronger institutions. And it gives the government the right to repudiate executive contracts, eliminate bonuses, require derivatives counterparties to perform on their obligations, and impose losses where they belong: on shareholders and creditors.

Both the already passed House bill, as well as the bill approved by the Senate Banking Committee, draw on the FDIC model to create a resolution authority that specifically applies to large, complex nonbank financial firms. Under both bills, bankruptcy would be the normal process. But under extraordinary procedures, the government would have the option to put the very largest firms into an FDIC-style liquidation process if necessary to avert a broader systemic collapse.

As with banks, the legislation would allow the FDIC to create a temporary institution in order to allow continuity and prevent a systemic collapse while the firm is being liquidated. To provide working capital for this bridge, both bills would require the largest financial firms to pay assessments in advance so that taxpayers would not be at risk. The firms that pose the most risk would pay the most. This orderly liquidation process—funded by the firms themselves—would, for the first time, force these institutions to internalize the full costs of the risks they create.

The FDIC process can also facilitate pre-planning and international cooperation when a large, global financial entity gets into trouble. Given the conflicting bankruptcy regimes throughout the world, there is growing international consensus that we need a special liquidation process available as an alternative. Great Britain and the European Union are both seeking to construct special resolution mechanisms. The U.S. should draw on the FDIC's long experience and lead the way.

Some have tried to label the FDIC model as a "bailout" because it is not bankruptcy. Yet the FDIC process is anything but a bailout, as any small bank can attest.

Some are opposed to this reform because the creation of a realistic liquidation process would eliminate the funding advantage that the largest financial firms have. But these changes will strengthen the competitive position of smaller banks whose relative funding costs have grown significantly in the wake of the bailouts. Because of "too big to fail," markets assume that larger institutions do not face the same risk of failure as smaller ones. Real reform will put their shareholders and creditors on notice to do their own due diligence rather than rely on taxpayers.

The disruptions caused by forcing large, nonbank financial institutions through bankruptcy can create significant risks for the real economy, as we saw in the case of Lehman Brothers in the fall of 2008. The disorderly Lehman collapse and the AIG bailout cannot be our only models. The FDIC-style process represents a proven, third way.

We support any constructive improvements to the legislation that will reinforce market discipline and preclude future bailouts, while providing the FDIC with the necessary tools to market and sell a failed institution in a way that maximizes recoveries and protects the government against loss. Any legislation must remove all doubt that bailouts are an option. Misinformed criticisms of the legislation that simply serve to politicize, obfuscate or delay enactment will only perpetuate the favorable market funding these firms receive from their implicit government backing.

We cannot afford to let the status quo continue. We must embrace sensible regulatory changes and send a strong signal to large institutions and those who invest in them that from now on, they must sink or swim on their own. Only then will theoretical market discipline become reality.

Ms. Bair is chairman of the FDIC.