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A new, tougher Obama?
So, he has a killer instinct after all--or at least some limit to his forbearance. Obama's response yesterday to Jeremiah Wright's flurry of appearances, and especially to the pastor's speech at the National Press Club on Monday, was pretty steely. He called what Wright had to say "a bunch of rants". He said he was disgusted, and looked it. In contrast to his earlier and widely noted speech on race, in which he said he could never repudiate Wright the man, this time he just went ahead and did so.
We shall see whether this works. Wright isn't going away. His NPC appearance showed that he is a narcissist as well as a racist demagogue, so there will be more. (So much, by the way, for taking his sermon snippets out of context. Wright has embarrassed not just Obama but also many moderate sympathisers who felt the reverend should be cut some slack. When asked about the government conspiracy to spread AIDS among the black population, he did not apologize for getting carried away; he affirmed that this was his view, saying that the government was capable of anything.) Perhaps Obama has now separated himself, but perhaps not.
It is worth noting that Wright did not say anything new on Monday; he did not say anything that Obama had not already heard. Plainly, Obama was angry not about what Wright said, but about the fact that he has chosen to keep on saying it--to the obvious detriment of Obama's faltering campaign. Who wouldn't be angry under those circumstances? But it is too late for Obama to say that the man's views are so offensive in themselves that they put him outside the realm of decency. If that is true now, as Obama seemed to be saying yesterday, it was true weeks ago.
This is an inconsistency in Obama's evolving position on Wright, though it might not matter. If the good pastor continues to ventilate, many people will continue to ask whether Obama was right ever to have given him the benefit of the doubt--and this is a fair question. On the other hand, giving an old friend the benefit of the doubt is an admirable and understandable trait, especially if you do not do it without limit and remain capable of seeing the error of your ways. As I say, we shall see.
Meanwhile, the gas-tax holiday. Was this a good issue for Obama to pick a fight on? I doubt it. With Clinton and McCain both agreeing on this admittedly stupid, pointless gimmick, Obama has set himself the task of explaining why a few months of slightly cheaper gas (let's say, 9 cents a gallon cheaper--assuming that the incidence of the 18 cent tax is split 50-50 between producers and consumers) is such a bad thing. He is right on the substance: it solves nothing. But the problem is that his own larger ideas on the issue are no better.
The political punch in the way Clinton is spinning this proposal is that it demonizes the oil companies, second only in popularity in this country to demonizing the health insurers. It has to be a winner. And how can Obama object? He defers to no-one in his willingness, this present case excepted, to demonize both. His argument that the McCain/Clinton gas-tax idea is the usual Washington nonsense is true, but hard to square with his own litany on excess profits, wicked corporate interests, the gouging of consumers and the rest.
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Does Wright want Obama to win?
Up to now I had taken it for granted that Jeremiah Wright wanted Obama to win the nomination and the presidency--and that was why he had not been seen or heard from since the controversy over his sermons first blew up. Obama's speech on race had seemed to repair much of the damage, and though his association with Wright remained a problem, things had moved on and it was not going to sink him. Now this:
Should it become necessary in the months from now to identify the moment that doomed Obama's presidential aspirations, attention is likely to focus on the hour between nine and ten this morning at the National Press Club. It was then that Wright, Obama's longtime pastor, reignited a controversy about race from which Obama had only recently recovered - and added lighter fuel.
Speaking before an audience that included Marion Barry, Cornel West, Malik Zulu Shabazz of the New Black Panther Party and Nation of Islam official Jamil Muhammad, Wright praised Louis Farrakhan, defended the view that Zionism is racism, accused the United States of terrorism, repeated his view that the government created the AIDS virus to cause the genocide of racial minorities, stood by other past remarks ("God damn America") and held himself out as a spokesman for the black church in America.
In front of 30 television cameras, Wright's audience cheered him on as the minister mocked the media and, at one point, did a little victory dance on the podium. It seemed as if Wright, jokingly offering himself as Obama's vice president, was actually trying to doom Obama; a member of the head table, American Urban Radio's April Ryan, confirmed that Wright's security was provided by bodyguards from Farrakhan's Nation of Islam.
Wright suggested that Obama was insincere in distancing himself from his pastor. "He didn't distance himself," Wright announced. "He had to distance himself, because he's a politician, from what the media was saying I had said, which was anti-American."
Explaining further, Wright said friends had written to him and said, "We both know that if Senator Obama did not say what he said, he would never get elected." The minister continued: "Politicians say what they say and do what they do based on electability, based on sound bites, based on polls."
I think one can imagine how delighted Obama must have been to read accounts of this appearance. What I would love to know, though, is what Wright and those cheering leaders of the black community are thinking. The obvious theory is that Wright must want Obama to lose, and thus affirm the pastor's account of all that is sick about the country: God damn America, too bigoted a nation to elect a black man president. If that is what he is doing, and he keeps it up, he may yet get his way.
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Column: Self-destructive Democrats
Last week’s vote in Pennsylvania was an even worse result for the Democratic party than is widely supposed. Hillary Clinton’s impressive victory will sustain her campaign through all the remaining presidential primaries, even if Barack Obama bounces back on May 6 in Indiana and North Carolina. At the same time, though, Mr Obama’s campaign did not collapse. Far from it: he made big inroads into the lead that Mrs Clinton once had in the state.
Therein lies the problem. The result in Pennsylvania does not license the party’s “super-delegates” to get behind Mrs Clinton and overrule Mr Obama’s unassailable lead in elected delegates. Pennsylvania was a calamity because it resuscitated Mrs Clinton without coming close to crippling Mr Obama.
Of course, prolonging the ill-tempered battle between Mr Obama and Mrs Clinton hurts the Democrats and helps John McCain, the Republican candidate. For the Democrats, this is bad enough – but it is not the half of it. When this race is over, there will be a loser with ample reason, in either case, to challenge the winner’s legitimacy. The prolonging of the campaign is not the main problem. The greater danger for the Democrats comes at the termination of an exquisitely close race – in a bitterly divisive outcome, whoever prevails, regardless of whether it happens sooner or later.
You can read the rest of this column for the FT here.
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Politics and the killer instinct
The contrasting characters (this is not just a matter of "style") of Hillary Clinton and Barack Obama have been prominently on display since the Pennsylvania results came in. Her killer instinct is so much to the fore that it often seems to be her only instinct. It is both her greatest strength (she never quits) and her greatest weakness (she targets, rather than wishing to talk to, those she disagrees with). With Obama, the opposite seems true: his killer instinct seems not just suppressed but entirely absent. Again, this is both a strength (his appealing consensus-seeking temperament) and a weakness (he prefers to roll with the punches rather than striking back).
Today Hillary was telling an audience in Indiana that she now leads in the popular vote for the Democratic nomination. This is true only if you include both Florida and Michigan--where Obama was not even on the ballot. Her comments made no concession to this fact. She is ahead on the least plausible measure of the popular vote and behind on the others. No problem: that will serve. And here is another instance glimpsed today. She attacked Obama for allowing that John McCain would at least be a better president than George Bush. No, she insisted. McCain wants to stay in Iraq for 100 years: he is every bit as bad as Bush. Never give the enemy an inch, is her creed. In that single comment she attacked both Obama and McCain--unfairly, in both cases, but effectively.
Meanwhile, what was Obama saying? He was telling an audience in Indiana what a good race Hillary had fought in Pennsylvania, what a strong candidate she was, and how he had no doubt that the Democratic party would rally round whoever was nominated. This was beyond gracious: these were sentences from a concession speech. It required the New York Times, in its oddly splenetic editorial, to attack Hillary for fighting a negative campaign. (When they endorsed her, were they expecting the Clintons to take the high road?) Her actual opponent was far kinder.
If Hillary could give Obama some of her taste for the jugular--she has so much to spare--they would both be better candidates.
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The race goes on
You have to admire Hillary's determination. Being the underdog brings out the best in her--and it either neutralizes or makes forgivable the less appealing aspects of her campaign and character.
She remains the underdog. Her victory in Pennsylvania was solid without being startling. The margin was exactly what was required to make it certain that she would stay in the race--yet without much altering the arithmetic that so strongly favors Obama. Her ten-point advantage is less than she needed to get on track to overturn Obama's lead in the Democratic popular vote (although, admittedly, this depends on how you measure it); his lead in pledged delegates was secure in any case. It is not enough, either, to persuade wavering superdelegates that the Obama campaign is failing--or at any rate, failing so badly that they could override a pledged-delegate lead without tearing the party to pieces. Having said all that, once again she arrested his momentum, and raised questions about his ability to close the deal.
He can argue that he came through the Wright and Bittergate affairs unscathed. His overall result in Pennsylvania was close to his performance in Ohio, a demographically similar state, which voted before those recent setbacks. Indeed, he made big inroads on Hillary's early lead. One wonders whether, if not for Bittergate, he would have held her to a closer result, and maybe even won--in which case it would all have been over. But he did not, and, money permitting, this result most likely gives Hillary enough momentum to keep going through all the remaining primaries.
What kind of campaign will she fight from now on? As I say, she will most likely end up losing, but what matters for the party's electoral prospects in November is the manner of her losing. She may increase the intensity of her attacks on Obama--which puts her party as well as her own reputation at risk. Or perhaps she will strike a more positive note, calculating that a negative assault does not meaningfully improve her chances. You could argue that her best hope now is to stay viable as a candidate and pray that Obama makes some terrible error, and she does not need to go negative to do that. It will be interesting to see whether Hillary is capable of that kind of tactical compromise--whether she can do anything but fight all out, whatever it takes.
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The Philadelphia debate
Tonight’s Democratic debate in Philadelphia was the worst I’ve watched, and that is saying something. The blogging consensus, not to mention the furious comments clogging up the ABC post-debate comment thread, has it right. The “moderators” were evidently bored by most of the policy issues at stake in this election—small matters such as comprehensive health care reform, the war in Iraq (eventually mentioned), the economy (mostly ignored). They preferred to dwell on American-flag lapel-pins, and on a variety of silly ambush questions intended, I don’t doubt, not to elicit information and discussion, but to wrong-foot the candidates and produce some “good television”. The whole thing was so phoney and dreary, even by the standards of these events, that I wonder how many people not being paid to watch managed to stay with it to the end.
As for the candidates, it was a night both would prefer to forget. They were not so much uninspiring as anti-inspiring. Hillary scored points but, as is her way, in a fashion that probably bumped up her disapproval rating as much as Obama’s. Having said that, Obama definitely had the worse of it. He looked tired, demoralised even, and was often as faltering and hesitant as in the first debates, way back when. Dealing with Wright (yes, that again), he squirmed, returning (to my astonishment) to his first, failed, and totally non-credible line of defense—namely, that he was not present when his pastor said those things, so it all came as something of a shock. He was that bad.
It couldn’t have gone better for the GOP if they had scripted and stage-managed the entire event.
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When you pander, don't admit it
The polls suggest that Obama weathered the Jeremiah Wright affair with little or no damage. This new flap--arising from remarks to supporters that most members of the liberal intelligentsia would regard as stating the obvious--may hurt him more.
You go into some of these small towns in Pennsylvania, and like a lot of small towns in the Midwest, the jobs have been gone now for 25 years and nothing’s replaced them. And they fell through the Clinton administration, and the Bush administration, and each successive administration has said that somehow these communities are gonna regenerate and they have not. And it’s not surprising then they get bitter, they cling to guns or religion or antipathy to people who aren’t like them or anti-immigrant sentiment or anti-trade sentiment as a way to explain their frustrations.
What a gift to Hillary. She piled on:
Clinton aides said they planned to make Obama's comments central to their message on the campaign trail this weekend. The New York senator will campaign across Indiana Saturday, and will return to Pennsylvania on Sunday.
In a soft-spoken denunciation of her Democratic rival that lasted several minutes, Clinton played up her own faith and Midwestern roots before attacking point by point Obama's claims that people who feel disenfranchised in small town America "cling to guns or religion or antipathy to people who aren't like them or anti-immigrant sentiment or anti-trade sentiment as a way to explain their frustrations."
"Americans who believe in God believe it's a matter of personal faith," she said, to periodic applause. "People of faith I know don't cling to religion because they are bitter. People embrace faith not because they are materially poor but because they are spiritually rich."
On the issue of guns, Clinton said: "People of all walks of life hunt, and they enjoy doing do because its an important part of their life, not because they are bitter."
"I don't think it helps to divide our country into one America that is enlightened and one that is not," Clinton continued, finishing her remarks with a line she introduced on Friday in Philadelphia after the story broke: "People don't need a president who looks down on them. They need a president who stands up for them, and that's exactly what I will do."
It has no intellectual merit, but an exuberantly brainless rant by Jane Smiley in reply to Hillary (to think how I admired "A Thousand Acres"...) is worth noting:
So now, Barack Obama tells the truth about conditions as we know them--that the countryside and the small towns are dying in many places in our country, and that the corporatocracy doesn't care enough to do a thing about it. He points out that immigrant-baiting, gay-baiting, gun-baiting, and religious pandering have helped to destroy those towns and that countryside, that those being destroyed have been cynically enlisted by their very own destroyers to provide the votes that help accomplish the destruction. And this is what Senator Hillary Clinton says about it: "Senator Obama's remarks were elitist and out of touch. They are not reflective of the values and beliefs of Americans."
From Senator Clinton's remarks, I infer that to actually see what has gone on in the US in the last 20 years is unAmerican. It doesn't matter who you are, where you were born, what you pay in taxes, what else you might have contributed to the culture, how you vote, who you support. If you don't support fundamentalist religion, job outsourcing, and free access to guns, then you are not even American.
I cannot believe how angry this makes me. I cannot believe that after the last seven and a half years, I can even get this angry. Yes, I know she is pandering to her audience. Yes, I know she will do anything to get elected. Yes, I know that she and Bill Clinton are corrupt to the core, and that I should have never expected anything better of her. But, please, any of you angry white women who still support this craven shill, don't mention it to me. Do me the following favor -- apologize to your children for not stopping the war that HIllary voted for, the war that is going to impoverish them. Then apologize to them for the effects of global warming that are going to make their lives hell. Then apologize to them for the school shooting they may someday see, the one where the kid gets the guns out of his father's gun case, or buys at a gunshow. Apologize to them for the meaningless wars they are going to fight and pay for. Then tell them that "American values" killed their hopes and maybe killed them. And ask them if they think it's going to be worth it.
Back in the land of the non-raving, Mickey Kaus offers a characteristically painstaking dissection. He enumerates four principal flaws in Obama's comments. He says the remarks combine "things that Obama wants us to think he thinks are good (religion) with things he undoubtedly thinks are bad (racism, anti-immigrant sentiment)". They accuse Pennsylvanians of being racists. They contradict his own position (on trade, at least). And yes, Kaus says, they are plain condescending.
I think I would consolidate points one and three, but otherwise I agree. The reference to trade interested me especially. Up to now, Obama has indeed endorsed anti-trade sentiment. In last week's comments he portrayed that view as an error induced by bitterness and frustration. Anti-trade sentiment is regrettable, he seemed to say (though Ms Smiley is stone-deaf to this implication). But it is understandable that ordinary people should be mistaken on this, and we more successful types, with less to be bitter or frustrated about, should make allowances. If that is not condescension, I don't know what is.
Pandering is one thing. It is to be expected of politicians. But it is unwise, and it violates the etiquette of the profession, to say that you are pandering. Hillary panders to anti-trade sentiment, to the religious, and now (can this be correct?) to gun enthusiasts--all with apparently total conviction. Obama panders less well. I think it is a question of experience.
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The fiscal consequences of George W. Bush
In a new column for the FT, I discuss the fiscal legacy of the Bush administration. After I filed it, I settled down to do my taxes. The sequencing was lucky. Had I endured the annual April ordeal first, I think I would have been too paralysed by gloom to discuss the subject. (Living in DC--local income-tax rate, 8.5 per cent--doesn't help. What do they do with it all? )
Competition for “most damaging legacy of the Bush administration” is lively. Iraq is the front-runner, of course, but bear in mind the wreckage of fiscal policy – although to use that term is to imply that the US even has a fiscal policy, when it does not. It would be more accurate to talk of fiscal consequences or fiscal footprint (an apt metaphor) than to imply anything as deliberate as “policy”.
All three presidential contenders criticise the administration on this, but none is offering much improvement. The Democrats remind the country that in the late 1990s the Clinton administration ran a budget surplus. With ill-designed tax cuts and reeling indiscipline on spending (partly, but not only, because of the war) the Bush administration turned this into a deficit. Barack Obama’s answer is the same as Hillary Clinton’s: undo the tax cuts and then raise spending by even more. John McCain, the Republican nominee and supposed fiscal conservative, is against raising taxes and promises to get spending down instead – but will not say how to do it.
The whole debate rings hollow anyway, because most Americans think it has nothing to do with them. The Democrats are promising to raise taxes only on the rich: the country’s vast middle class expects to be unaffected. And as long as Mr McCain declines to explain exactly how he will curb spending (aside from attacking earmarks, the special interest spending projects which in the larger scheme of things are trivial), voters will be equally blithe about that side of the calculation too. Everyone can deplore the fiscal incontinence of the Bush administration and hardly anyone need worry about what restoring fiscal control might require. In this, as in other areas, the thinking boils down to: “After George W. Bush, everything will be fine.”
On taxes and spending – as on Iraq – it will not. The point has become dulled through repetition, but the fact remains that the US faces, from a position of fiscal weakness, new and mounting pressures on public finance. In dealing with the larger problem, muddling through is unlikely to succeed. The country will have to change how it confronts fiscal questions.
You can read the rest of the column here.
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The end of the American exception
Here is a subject that preoccupies me at the moment. Europe continues, slowly and reluctantly, to deregulate its economies. In this it is following the US example. The American economy has some problems at the moment, but the EU's governments are ever mindful of, and oppressed by, the long-term success of the American model. What is interesting is that the United States has been moving the other way. If the Democrats control both the White House and Congress next year, which seems very likely, America's hitherto-gentle drift in Europe's general direction will accelerate. One day, might the lines actually cross?
This piece for The Atlantic takes a first stab at the question. I offer it as an introduction to the topic. I intend to return to it.
That the United States stands apart is something Americans and Europeans have agreed on for a long time. It goes back to Tocqueville, like most things. Many of the differences of character and culture he noted in the first half of the 19th century are still there, no doubt, but some more recent contrasts are looking questionable. Since 1945, American exceptionalism has been asserted with particular confidence—but gradually diminishing validity—in economic affairs. America is to Europe as private enterprise is to the public good, as selfish individualism is to social partnership, as "compensation" is to work-life balance. Modern America has limited government, weak unions, high-powered incentives, capitalism red in tooth and claw. Post-war Europe has tax-and-spend, transport strikes, six-week vacations, and the welfare state. Or so, on both sides of the Atlantic, we fondly imagine.
Living in the U.S. for several years after decades as a restless Brit, I continue to be struck by two things. First, this idea of rival economic paradigms appeals to both audiences: Neither would have it any other way. This may be why the notion persists so tenaciously, despite not being true. That is the second thing. Caricatures are well and good, but this one is just too much. In economic matters, America is far more like Europe, and Europe more like America, than either cares to admit. Moreover, the differences continue to shrink, and the pace of convergence seems about to accelerate. We will see whether the idea of America as the land of uncushioned capitalism—the timid and work-shy need not apply—will outlast a faster approach to the European norm.
The Democrats' promise of comprehensive health reform—something the country finally seems to want—is what prompts this line of thought. Over the past ten years, it seems, many Americans have come to think it wrong that a country as rich as theirs fails to guarantee access to health care. For much longer, almost all Europeans have thought it both incomprehensible and shameful. This is America's biggest social-policy exception (unless you count capital punishment as social policy). And it is marked for abolition.
Universal health care, if it happens, will be an enormous change in its own right, of course, but also one with further implications. It is going to push taxes up—in the end, possibly way up. The plans lately under discussion have not been properly costed, but figures of $50 billion to $75 billion a year in extra spending—the sorts of numbers bruited for the Democrats' proposals—are optimistic. Beyond the initial outlay, whatever that proves to be, is the likelihood that people will gradually migrate (at their own initiative, or more likely at their employers') from private insurance schemes to the new (and presumably subsidized) public alternatives. Everything depends on how the system is managed, but it is easy to foresee, in the fullness of time, a far bigger increase in the cost to taxpayers than the current plans envisage. And if American health care coverage and financing get more European, American taxes will have to as well.
The rest of the article is here.
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When the buck stops
Ken Rogoff asks, "Has the moment come to replace the dollar?" His answer is: "Maybe not quite yet....but soon." (His article, which I came across on Real Clear Markets, is for Project Syndicate, but it seems to have been posted in the The Daily Star of Lebanon, of all places, before it is available there.)
At current market exchange rates, the European Union is now larger economically than the US. New central and eastern European members are bringing enormous dynamism and flexibility. At the same time, the European Central Bank has gained considerable credibility from its handling of the global credit crisis. Indeed, if the euro zone can persuade Great Britain to become a full-fledged member, thereby acquiring one of the world's two premier financial centers (London), the euro might start to look like a viable alternative to the dollar.
In 1971, as the dollar collapsed towards the end of the post-World War II fixed exchange-rate system, US Treasury Secretary John Connally famously told his foreign counterparts that "the dollar is our currency, but your problem." And the dollar's exalted global status has survived ever since, despite many episodes of neglect and abuse.
World currency standards have enormous inertia. The British pound only forfeited its role to the US dollar after more than 50 years of industrial decline and two world wars. But it could happen a lot faster this time. As central bankers and finance ministers ponder how to intervene to prop up the dollar, they should also start thinking about what to do when the time comes to pull the plug.
I did a piece on the same subject for The Atlantic last May. The article goes into some of the advantages that the US has derived from the dollar's reserve-currency status, and what is at stake if that should change.
The dollar’s status as the global currency confers more advantages on the United States and its citizens than you might think—advantages far beyond convenience for international travelers (though let us not underestimate that). The dollar’s popularity has moved real resources from the rest of the world to the United States. And on a much larger scale, through an economic sleight of hand in global financial markets, it has allowed the country to sustain an otherwise impossible standard of living. These wonderful tricks, unfortunately, may not work much longer. When they start to fail, as they eventually must, the dollar’s peculiar global role will suddenly become a focus of attention. You don’t know what you’ve got till it’s gone.
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Further thoughts on regulating finance
In my Monday column for the FT I take issue with the view that what went wrong in financial markets had nothing to do with regulatory failure, and make the case for tightening some rules, and creating some new ones.
When the crisis in US and global financial markets started to unfold, so began the incantation of two default opinions. One: regulation is the answer and we must have more. Two: regulation is the problem and more would be worse. With all that chanting to be getting on with, neither choir has time to look at what has happened. Which is as well: the details might call for some thought.
I am a pro-market type, whose stock-in-trade is to warn of the unintended consequences of hasty or excessive regulation. In the present case, however, we are badly served by our usual catechism. This time, elements of large-scale regulatory failure are indisputably at the centre of what has happened. If, for the sake of leaving our prejudices in peace, we deny the obvious, we bring our regard for markets into disrepute and have nothing to offer by way of an intelligent policy response.
Financial crises rarely have a single cause and the current one is no exception. But with all due respect for the complexity of the matter, can anybody deny that the US market for subprime mortgages was a critical component? And can anybody apart from Alan Greenspan, former chairman of the Federal Reserve, look at the way this business was conducted and argue that it was adequately regulated? At the origination level, fraud was a factor, to be sure – and fraud is illegal, with or without new rules. But indefensibly bad practice was widespread, too, by originators that were lightly regulated or completely unregulated. Much of this bad lending was preventable by ordinary standards of prudence – and to say so is not the wisdom of hindsight. The late Edward Gramlich, a former Fed governor, gave ample warning of this regulatory lacuna.
He was right and Mr Greenspan was wrong. The subprime mortgage business needs more regulation. There, was that so hard?
You can read the rest of it here.
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National Journal: Don't trash the Paulson blueprint
Struck by the near unanimity of the view that the Paulson blueprint is beside the point--something that Paul Krugman and the Wall Street Journal, for heaven's sake, have been able to agree on--I attempt a limited defense in this column for National Journal (the link expires in a week). The document is not a waste of time, and I do not see it as a cynical political maneuver. Most of what the Treasury proposes actually makes sense, and it would be good to see the plan acted on. The problem is that the blueprint fails to ask the most pressing and important questions. As I noted two posts ago, it is more about form than content.
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Illicit: The Movie
In 2005, my friend Moises Naim, the editor of Foreign Policy, published "Illicit: How Smugglers, Traffickers, and Copycats are Hijacking the Global Economy"--a unique and fascinating study of illicit trade in the new age of globalization. National Geographic has made a TV documentary based on the book, and on Tuesday night it showed a preview in Washington. The film has some gripping footage. It is well done and I recommend you watch it. But television has a limited attention span and not much taste for complications, and I have to say I did not find the movie as stimulating as the book.
It does successfully dramatize some of the key ideas. The scale of illicit trade--which encompasses, to name a few, counterfeiting, money-laundering, illegal drugs, fake medicines, loose nukes, and illegal immigrants--is huge. The pattern of trade is complex, organized and extended. Traders large and small have been much faster and more adept at developing their networks than governments have been in interrupting them: borders empower the criminals, and disempower the authorities. Also, this is a story about disturbing synergies. Once you have a supply chain for counterfeit handbags, or bogus pharmaceuticals, you can use it for other things too. In that sense, at least, illicit globalization is akin to a single multinational industry.
But there, I think, is where the film goes wrong. You can push that insight too far, and elide the differences between different kinds of illicit activity. The book is careful not to do that. The film, in contrast, develops this idea as its principal theme. It wants you to think that protecting intellectual property is almost a national security issue--that buying a fake Ralph Lauren shirt is only one step removed from facilitating nuclear terrorism. This is a view that the US Chamber of Commerce (which supported the production) doubtless finds to its liking, but it is not the right way to think about the issue.
In the Q&A after the showing, Moises said (as he emphasizes in the book) that governments need to prioritize if they are to get a grip on the problem. For instance, he favors, as I do, drug legalization. The film does not go there. It never really gets beyond the idea that illegal drugs equals counterfeit handbags equals loose nukes equals poisons in medicine bottles.
As I watched the movie I found myself thinking along these lines: suppose, just for the sake of argument, that the world had liberal trade, an enlightened policy of decriminalization of illicit drugs, and an equitable dispensation on global intellectual property rights. What kind of inroads against illicit trade would you make, merely by doing the right things in those areas? And think of the resources those changes would free up to address the issues--loose nukes, among them--that remained.
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The Paulson blueprint is more about form than content
The new Treasury blueprint for reforming financial regulation is not really a blueprint at all. (The full document is here; or see a Treasury summary of it here.) It says some sensible things and has some good ideas, but for the most part it is an agenda for discussion rather than a detailed plan. Given that the Treasury has been working on this thing at least since March 2007, it is surprisingly thin.
Moreover, it is concerned exclusively with the structure of the regulatory system. I think that getting this right is more important than Paul Krugman does—he calls this the Dilbert strategy—but Paul is surely right to complain that a better structure will get you only so far. It is a question of form and content. What the rules say matters more than which regulators are responsible for enforcing them, and the so-called blueprint does not go into that.
For instance, the document calls in the short term for the Federal Reserve to “continue to write regulations implementing national mortgage lending laws”. It also “recommends clarification and enhancement of the enforcement authority over these laws”. Fine. But what should these laws actually say? We are told only that they “should ensure adequate consumer protections”. No doubt; so far as I am aware, nobody is calling for inadequate protections. The question is, what does “adequate” demand. Up to now, the Fed has presumably judged the existing standards—embodied mainly in the Truth in Lending Act—to be all right. (When he was Fed chairman, Alan Greenspan applauded the explosion of subprime mortgage lending, saying it let people buy a home who would otherwise have been unable to.)
In the long term, the report envisages a structure based on what it calls an objective-based approach. This means dividing up the regulatory workload by broad tasks, rather by types of institutions covered. Today’s approach segregates banking, insurance, securities and futures under different (overlapping and cross-cutting) systems of regulation—an idea that last made sense decades ago. The Treasury urges instead a three-part division of responsibilities. There would be a “market stability regulator”—the Fed—whose job would be to gather information and monitor risks across the whole financial system. There would also be a single “prudential regulator”, concerned with capital adequacy, investment limits, and risk management—with a remit confined to firms with explicit federal guarantees. Finally there would be a “business conduct regulator”, operating across all types of financial firms (and absorbing the SEC), to protect consumers and investors.
This basic structure makes much more sense than the present chaotic array of industry-focused regulators. But one big gap—even at this level of generality—is obvious. On my reading of this document, the Fed is seen mainly as a system-wide information gatherer, not a rule writer or rule enforcer. True, it would have “the responsibility and authority to…take corrective actions when necessary”. But what does that mean? I think it means, provide liquidity at times of stress—which it does already. The document does not explicitly entertain the idea that the Fed would write and enforce new rules to make stability easier to achieve. The prudential regulator would do that, you might argue--but only for firms with federal guarantees. That narrow remit would have excluded Bear Stearns, for instance. Investment banks and hedge funds will not be covered. And the business conduct regulator does not fill this gap either: it is concerned with consumer and investor protection, not financial safety and soundness.
It seems to me obvious that prudential regulation ought to extend beyond firms with “explicit government guarantees”. At the very least, delete “explicit”. We are witnessing right now how the collapse of firms without explicit guarantees may nonetheless pose a threat to the integrity of the whole financial system. Evidently, it is a threat that the Fed and the Treasury have recognized—and that is why the umbrella of implicit guarantees continues to expand. There must be a regulatory quid pro quo for that, just as for the explicit kind.
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