Obama and the world

During last year's election campaign, Barack Obama's supporters stressed his promise as a leader who could restore US standing in the world. Even at home, despite the worsening economy, many of Mr Obama's fans deemed this his most important virtue. The rest of the world agreed. Understanding that nothing happens unless America takes charge, few other governments were opposed to a renewal of US leadership. On the contrary, most longed for it.

As the Group of 20 developed and emerging nations' summit in London approaches, how is that going? About as well as could be expected.

Mr Obama's campaign always exaggerated the difference he would make on foreign policy. His style could hardly be more different from the caricature of US supremacism projected by George W. Bush, but the underlying issues were unlikely to be any easier to deal with. So it has proved. In many areas of foreign and security policy, in contrast to the clear break he is attempting in domestic policy, Mr Obama is mostly rebranding Mr Bush's approach.

On Iraq, things are moving much as they would have done if Mr Bush were still in office. Likewise in Afghanistan, where the administration is proposing a surge not unlike the one in Iraq - overseen by the same general, under the political supervision of the same defence secretary - which Mr Obama found so unimpressive last year.

On Iran, Mr Obama has for the moment adjusted the rhetoric, but not the underlying condescension, the key demands, or the implicit "do as we say or else". "War on terror" terminology is used less often and less eagerly than it was by the Bush administration. This has not stopped the US attacking targets in Pakistan, a legally dubious enterprise to put it mildly, and one that looks a lot like waging war on terror. Lately the administration has even wanted North Korea's leaders to believe that the US might shoot down the rocket they are preparing to launch. How George W. Bush can you get?

What about Guantánamo, which many Americans see as a scar on the country's conscience and reputation? Mr Obama has reaffirmed his campaign promise to close the prison, and plans are afoot to do this. But the administration is in no hurry to release the people it no longer calls "enemy combatants". In a recent television interview, the president criticised some of the releases carried out by the Bush administration, mentioning that people let go have rejoined terrorist groups. To the dismay of civil-rights lawyers, the government's legal posture towards prisoners trying to challenge their detention in court is in most ways indistinguishable from that of the previous administration.

This strategy of mostly persisting with the foreign and security policies of Mr Bush while insisting that those policies have been overthrown has not yet met organised resistance from US allies. The fact that Mr Obama is so much better liked buys him a great deal of goodwill, and the desire to suck up to him still predominates.

Nonetheless, as the new president continues to seek material support for his fundamentally Bush-like security policies - more European troops in Afghanistan, a united front in dealing with Iran and other troublemakers, overseas dispersal of the G-Bay detainees - he is often going to come up empty-handed, leading to disillusionment on both sides. Friction with the allies is likely to increase.

Geithner's power grab

I was wrong in my FT column on Monday when I said:

Indisputably, an orderly resolution regime is required for all financial institutions, banks and non-banks alike.

To my dismay, this is disputable after all.

The Treasury secretary... released more details on Wednesday on a plan for a legal framework to put a "non-bank" into receivership at the behest of the government. With the backing of Ben Bernanke, Federal Reserve chairman, Mr Geithner wants powers to "resolve'' ailing companies that are deemed systemically important.

He told legislators on Tuesday that such powers would have allowed the government to handle better the collapse of AIG, the giant insurer now surviving on $173bn of taxpayer funds.

House Republican leader John Boehner said on Tuesday that Mr Geithner's plan sounded like "an unprecedented grab of power".

That is the kind of comment that makes me wonder if the Republicans ever intend to be taken seriously on these issues. How can one intelligently oppose an FDIC-like resolution regime for AIG and other systemically significant non-banks?

I've heard it said that the FDIC's pre-bankruptcy powers should be seen as a quid pro quo for deposit insurance, which AIG did not enjoy, since it was not a deposit-taker. Fine, but do you mean to tell me that AIG's liabilities were not underwritten by taxpayers? Of course they were. See what happened to that $173 billion. Well then, what is wrong with plain bankruptcy in such a case? Perhaps you remember Lehman, an experience nobody cared to repeat. AIG was kept out of ordinary bankruptcy for a reason.

As my column pointed out:

Bankruptcy was tried, of course, in the case of Lehman, and was not a great success: many see that as a catalyst for the worst phase of this crisis. After the Lehman debacle, keeping counterparties whole to avoid systemic collapse was the entire point of coming to the rescue of AIG and the others.

Apparently, the lesson of the Lehman case was drawn too hastily. Do not worry too much about moral hazard, many concluded. Letting banks that took excessive risks fail in order to encourage more prudent behaviour is all very well in theory; in practice, you pull the ceiling down on your head.

Yes, but then one must also understand that the AIG outcome - keep everybody whole but taxpayers - is the alternative, and this no longer looks so good either. It fails the test of fairness, which is what the outcry is all about. It fails the test of efficiency too. The company's death-wish business model, which involved insuring risks being taken by other financial groups on a literally insupportable scale, had moral hazard written all over its transactions. As James Hamilton of the University of California at San Diego has pointed out, if AIG's counterparties were betting that the government would stand behind those suicidal credit default swaps, which in turn allowed them to keep rolling the dice, they turned out to be right.

So the question is this: if you cannot let a systemically significant bank or shadow bank collapse, and you cannot keep it whole at taxpayer expense, how do you dispose of it in an orderly way? How do you arrange a fair and efficient sharing of the losses? A template exists for US banks, though not for shadow banks or for hedge funds pretending to be insurance companies, in the resolution procedures of the Federal Deposit Insurance Corporation.

If the best the Republicans can do in opposing this line of thinking is issue all-purpose admonitions against government power, it would be better for everybody including themselves if they just shut up.

Legacy assets

To be honest, I'm still trying to understand the Treasury's new "legacy assets" proposal: Krishna Guha's account; Treasury fact sheet. Of course it might fail but my instant reaction was not to think that it is "almost certain to", as Paul Krugman writes with characteristic clarity (and a corresponding refusal to see any merit whatever in the other side's position).

There are (at least) two programs here, not one. Many critics are failing to distinguish between the loans program and the securities program, though these are intended to work in very different ways. And although the great complication of the overall plan seems to have satisfied most commentators' appetite for details, at least for now, crucial aspects of how it will work are in fact still unknown. For instance, as Krisha notes:

Pricing will still be difficult. Many toxic securities are complex and backed by fraudulent mortgage loans. Some are highly idiosyncratic, so discovering a price for one may not convey much about others. Banks may not be willing to part with loans that have not been heavily written down at auction prices, though Ms Bair hinted that regulators may force them to do so.

That banks will simply refuse to play at the prices offered by the PPIFs is probably the main risk for the loans part of the plan--though one that goes away if they are forced to sell. Will they be? Krishna continues:

Moreover, unless credit conditions ease considerably, the price levels established under these schemes will be sustained only by continuing access to lower-cost government finance.

Again, details to follow. The full terms of the FDIC's guarantees under the loans program, and how it proposes to recoup any losses incurred on these guarantees, are not spelt out. The much-expanded TALF will carry the burden of dealing with legacy securities (hitherto regarded by the Treasury as the larger part of the problem) as opposed to legacy loans, but exactly which assets it will cover and the interest rate to be charged by the Fed are also not stated. And so on.

Standing back from the trees, Steve Pearlstein has a good piece making the case for guarded optimism. It would be educational to see Paul respond to some of his points.

Paul is certainly right that this is really just a new improved TARP. But an improvement is an improvement, not to be dismissed out of hand. Especially if it moves the scheme in the direction of an RTC-type resolution, which is something many critics singing from Paul's hymn-sheet have been calling for. Gillian Tett writes:

Mr Geithner's plan essentially tries to fix this problem [the breakdown in the market for securities] by handing government money to private investors so they can purchase the toxic debt. The basic idea is a rehash of the formula successfully adopted 15 years ago by the Resolution Trust Corporation, the body that resolved the Savings and Loans crisis.

Back then, the RTC extended up to 85 per cent non-recourse loans to private investors to kickstart a market for trading S&L assets. This time, the Geithner plan will also offer large dollops of government debt to investors wanting to buy toxic assets (and kick in some equity capital too.)

Moreover, just as the RTC tried to depoliticise the pricing of these assets by conducting open firesales and competitive bids, Mr Geithner's plan aims to use free competition to establish a price for these planned sales. That way nobody can claim that the price has been "fixed" to the benefit of either banks or investors, or so it is hoped.

"This is RTC II," enthuses Tim Ryan, the former head of RTC. "I have been crying out for something like this for seven months - now we have it at last."

Paul is also right that everything depends, as it has from the beginning,  on the degree to which this is a liquidity problem (implying that the toxic assets are fundamentally underpriced in the current market) and a solvency problem (implying that they are are worth no more than the existing market, such as it is, says). The plan is as awful as Paul says only if lack of liquidity has nothing to do with it. To defend Geithner's plan, you don't have to argue that the banks would be fine if only the market for these securities could be made to work--this is expressly not the government's position--only that the market is impaired and that this is adding a lot to the problem. Paul's view seems to be that the toxic assets are more or less worthless under any plausible scenario. That seems to be putting a lot of faith in the efficiency of the market for toxic assets.

Inside Obama's economic brain trust

An outstanding and indispensable piece on the White House economics team. Mr Heilemann, I doff my hat.

Tim Geithner boarded the 6 a.m. US Airways shuttle to Washington last Wednesday at La Guardia, slid his rail-thin frame into seat 5C, then stared into the middle distance. Geithner is invariably described as boyish, but that morning he looked every one of his 47 years--and then some. He wore a dapper blue suit, a spread-collar shirt, and dark circles under his eyes. For days, Geithner had been consumed in the unfolding AIG fiasco. He'd been running nonstop, laboring to contain the fallout, to explain how this bonus-related abomination had occurred, what he knew, when he knew it, why he seemed so impotent. But Geithner was too smart to harbor any illusions about the efficacy of those efforts. He knew that what awaited him in Washington was going to be ugly. When the plane touched down, he gathered his things and walked silently toward the jetway. He had the look of a man about to enter a burning building in a suit soaked with gasoline.

The rage over AIG

I recommend this editorial in the FT: the rage over AIG is understandable but not thought through, and the House bill is an abdication of responsibility.

In AIG's case, the US government is now the de facto owner. As such it has rights and responsibilities, and it should attend more conscientiously to both. The Treasury should decide whether the bonuses are necessary to retain people essential to the success of its stabilisation plan. If they are, much as one may recoil at the idea, the bonuses should be paid: the cost pales in comparison to the vastly larger sums at stake. If not, the people who received them - those who have not already left, that is - should be told to return them or be fired. The government is within its rights as a new owner to set new terms for its employees.

The legislative blunderbuss about to be discharged by Congress, on the other hand, is likely to blow up in taxpayers' faces. It forbids the case-by-case judgments on pay which are necessary to ensure that the stabilisation plan succeeds. And it expresses the tyrannical principle that Congress can use the tax code to void contracts that the executive branch has consented to, after the fact and with retrospective force. The measure is constitutionally dubious, as Congress well knows. All these considerations have been set aside for the purpose of venting the country's anger. It is an abdication of responsibility.

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A point of clarification

A reader has asked me to explain the term "big girl's blouse". It resists exact translation. The nearest I can come to it is "daft apeth" (or haporth, or even halfpenny-worth, if you're not into that whole short-form thing). Does that help?

My mother often calls me a daft apeth. It's an affectionate rebuke. Big girl's blouse, admittedly, adds intimations of being a sissy--either that or of coming from Bury (pronounced to rhyme with hurry), insofar as one can make this distinction. It appears that Kate Winslet called Leonardo DiCaprio a big girl's blouse during the filming of "Titanic", which is a bit strange because our Kate is not a northern lass.

Obama and the polls: is opinion shifting?

National Journal's Charlie Cook, doyen of political rune-readers, on the latest numbers:

Just as the economic news was relentlessly negative until the last few days, poll numbers for Republicans were horrific for months. So the GOP should be heartened by the first encouraging polling news it has received perhaps since Lehman Brothers defaulted in mid-September: Republicans have pulled even with Democrats on the generic congressional ballot test, according to a survey by a respected pair of firms.

In the new National Public Radio poll conducted by the Democratic polling company Greenberg Quinlan Rosner Research and its Republican counterpart, Public Opinion Strategies, 42 percent of the 800 likely voters surveyed March 10 to 14 said that if the next congressional election were held today they would vote for the Republican candidate; an identical percentage of respondents said they would vote for the Democratic one. For several years, Democrats held a substantial lead on this question...

Many Democratic congressional leaders shake their heads with disdain or in disbelief over what they see as the Obama White House's preoccupation or even obsession with pleasing independent voters by promoting bipartisanship, but reaching across party lines is critical to Obama's success. Independent voters do not like partisanship, whether it is practiced by Democrats or Republicans. If Republicans really have pulled even or slightly ahead among independent voters, that is a very ominous sign for Democrats, an indication that Obama's talking the talk of bipartisanship isn't sufficient and that he and the Democratic majorities on Capitol Hill have to walk the walk.

Good banks, bad banks, nationalized banks

My new column for National Journal defends the administration's reluctance to nationalize banks outright, but argues that a straightforward RTC-type bad bank would be better than the proposed "public-private investment fund".

Few things about the banking crisis are clear even to the experts, and sadly the things that do seem clear, taken together, only compound the problem. One is that hundreds of billions of dollars of further taxpayer support, at least, are going to be needed to revive the financial system. Another is that taxpayers are deeply reluctant to pay one more cent. The gap between those facts is very wide, and fury over American International Group's bonuses has made it even more difficult to bridge.

Remembering what is at stake, it is surprising what a big role mere words can play. "Bonus," for instance. If the contracts offered to the financial engineers of AIG had simply promised so much cash in return for so many months of work, they might have aroused little controversy, even if the sums involved had been as large. What ignited the outrage was the idea that taxpayers should finance a bonus -- a special reward, as if in recognition of exceptional performance -- for the very people who helped destroy the firm in the first place. It does not matter that the promised payments were never intended to be bonuses of that sort. The word added insult to injury.

Another nuisance word that arouses irrationally strong feelings even though nobody seems to know quite what it means is "nationalization." One prominent school of thought holds that the administration's dithering over its financial rescue plan comes down to reluctance to use that dreaded term. The country's big insolvent banks need to be taken into immediate, outright, and temporary public ownership, in this view. Shareholders would lose everything, management would be replaced, and government would call the shots on lending policy, pay, and everything else until new private owners could be found.

In the long run, this would cost taxpayers far less than the present muddle, many argue. But much as voters hate bailing out banks with cash that promptly leaks abroad, or into bonuses, or who knows where, President Obama's Treasury Department apparently assumes that Americans hate "nationalization" even more.

Book review: The Myth of American Exceptionalism

Here is my review of "The Myth of American Exceptionalism" by Godfrey Hodgson (Yale University Press, $26); from the FT.

In a celebrated speech in 1974, Ronald Reagan quoted the words of a 17th century preacher. "Standing on the tiny deck of the Arabella in 1630 off the Massachusetts coast, John Winthrop said, 'We will be as a city upon a hill. The eyes of all people are upon us . . .'"

Godfrey Hodgson begins his debunking of American national mythology with this "urtext of American literature". Reagan got the name of the ship wrong: it was the Arbella. Winthrop most likely preached his sermon in Southampton, England, not off the coast of Massachusetts. "More important, he was of course not preaching to Americans about the future of the United States of America . . . He could not possibly have imagined a United States. He was preaching to Englishmen, and expressing his determination that the colony . . . [which] he and his friends were setting out to found would be an example to other English colonies."

A lot of what Americans think of as their history has been similarly repurposed, Hodgson shows, to serve the myth of US exceptionalism. The US is a great country - the author says he is an admirer - but less extraordinary than it thinks, much more rooted in European history, and for that matter not always an exemplar to the world. Indeed, Hodgson devotes one of his six chapters to "the other exceptionalism" - a catalogue of US failures in healthcare, education, inequality, race relations, crime and punishment, social mobility, international co-operation and human rights. To that list, given recent history, many would add capitalism itself.

The book is interesting and lucid as it examines the errors and exaggerations in the national self-image. But it lacks balance. Most, if not all, nations cherish national myths and, standing back from the current economic crisis, the US still has better grounds than most to be pleased with itself.

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Overload is not Obama's main problem

A new conventional wisdom is forming in Washington and it spells trouble for Barack Obama's administration. Coming from the president's own side as well as from his enemies, the argument says he has taken on far too much. This has been the theme of a torrent of recent commentary.

The criticism has instant superficial plausibility and it is bipartisan, which makes it dangerous for the administration. But is it fair? I understand the criticism but I think it is not quite right.

The White House felt it had to respond directly at the end of last week. "The truth is that these problems In the financial market, as acute and urgent as they are, are only part what threatens our economy," said Mr Obama. "And we must not use the need to confront them as an excuse to keep ignoring the long-term threats to our prosperity: the cost of our health care and our oil addiction; our education deficit and our fiscal deficit... We must build this recovery on a foundation that lasts."

Mr Obama's effort to fold the wider agenda of healthcare reform, new investment in education, and a quasi-tax on carbon emissions into the short-term plans for addressing the economic crisis is not at all convincing. These are patently separable issues. Moreover, the administration surrendered its credibility on this early when it said, in the words of the White House chief of staff, "You never want a serious crisis to go to waste."  The administration itself thus declared, in memorably hubristic terms, that it is seizing an opportunity, rather than battling on all fronts because it has no choice.

However, suppose for the sake of argument that the administration is right--as I believe it is--to want to reform healthcare, bring in a quasi-tax on carbon, and invest in an upgraded education system. At the same time we can take it for granted that the overriding short-term priority is to mend the financial system and promote economic recovery: nobody disagrees with that. The crucial calculation is then about momentum on one side and capacity on the other.

Mild-mannered remarks on tax deductions

My friend Matt Miller defends Obama against my wounding accusation that the president is a bold progressive liberal. I've got it all wrong, says Matt, who is also a fairly progressive liberal (though paid by public radio to pose as "the voice of the political centre"). In fact, he says, the president is a defender of the status quo.

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Quipping and chuckling

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The education agenda: actions and words

Barack Obama affirmed the key themes of his education agenda on Tuesday.

1) "Investing in early childhood initiatives" like Head Start;

2) "Encouraging better standards and assessments" by focusing on testing itineraries that better fit our kids and the world they live in;

3) "Recruiting, preparing, and rewarding outstanding teachers" by giving incentives for a new generation of teachers and for new levels of excellence from all of our teachers.

4) "Promoting innovation and excellence in America's schools" by supporting charter schools, reforming the school calendar and the structure of the school day.

5) "Providing every American with a quality higher education--whether it's college or technical training."

Good stuff. And there was this characteristically Barackian sentiment too:

It is time to start rewarding good teachers and stop making excuses for bad ones.

But then on Wednesday he signed the omnibus spending bill. Aside from being laden with thousands of  earmarks he had earlier promised to stop, this included something else, as Roland Martin notes:

When President Obama signs the $410 billion omnibus spending bill, there will be shouts of joy from both sides as Republicans and Democrats get their cherished earmarks. Yet tucked into that bill is an amendment pushed by the president's former colleague in the Senate, Illinois Democrat Dick Durbin, who used his influence to essentially kill the District of Columbia school vouchers program.

Oh sure, it will be portrayed that the Democrats aren't killing the program, but the initiative calls for no new students to be allowed entry, unless approved by Congress and the District of Columbia City Council. And considering that the teachers union has such a death grip on both Democratic-controlled institutions, you can forget about that happening.

Recession? What recession?

When I checked the New York Times mid-morning, I was surprised to see that this was the most emailed story:

As the rain slanted down onto the vineyard around Copain Wine Cellars, just outside this town in northern Sonoma County, Wells Guthrie, the proprietor, poured a glass of one of his 2006 pinot noirs. The wine was fresh and light with aromas of flowers and red fruit. Even in the gray dimness of his tasting room I could see my fingers on the other side of the glass through the pale ruby wine.

It was vibrant and refreshing, nothing like the dark, plush, opulent wines that have made California pinot noir so popular. Mr. Guthrie used to make wines more along those heavier lines, but not anymore. After the vinous equivalent of a conversion experience, with his 2006 vintage he renounced the fruit-bomb style in favor of wines that emphasize freshness and delicacy. "It got to the point where I didn't want the wine to be fatter than the food," he said. "Wine should make you think of what you want to eat."

From Mendocino and Sonoma through the Santa Cruz Mountains and Arroyo Grande south to the rolling hills of Santa Barbara County, a rebellion is brewing...

Going off the deep end?

On this page last week I argued that Barack Obama's first budget showed him to be more of a left-leaning liberal than I and many others - sceptics and admirers alike - had previously supposed. People I respect have accused me of going off the deep end about this, or of neglecting Mr Obama's tactical finesse, or both.

Mr Obama is calling for little that he did not promise in the campaign, I am reminded, so he cannot be accused of springing a surprise. I welcome many of the budget's main elements, notably healthcare reform and the cap-and-trade system for carbon emissions, and the president made it clear all along that he wished to reverse the Bush tax cuts for the high paid. So the revelation that Mr Obama is a progressive liberal must arise from the proposal to curb high earners' income-tax deductions. That was a surprise, but a small matter: hence the charge that I am getting carried away.

Alternatively, I am told, Mr Obama is playing a shrewder game. Like any good negotiator, he has adopted a maximalist opening position. He expects to be walked back from it, ending up where he wanted to be in the first place, with a more centrist plan than the one he pitched.

On the first point, the tax-deduction proposal is not so small. Instead of applying the highest marginal rates of tax to each deduction, the plan would apply a 28 per cent rate. This is equivalent to a tax increase of roughly $35bn (€28bn, £25bn) a year on households earning more than $250,000. Hardly chicken feed, it is roughly half of the amount raised by returning high earners' marginal rates to their pre-Bush levels.

Not everybody would regard two-earner households with an income of $250,000 a year as rich; and many of the taxpayers in question have seen their retirement savings, college funds and housing equity destroyed. The scandal of widening inequality that still animates the Democrats' thinking is a story about the top fraction of one per cent of the income distribution, not the top end of the middle class. Also, it is out of date: as though the housing and stock market meltdowns had never happened, the budget raises taxes on the "rich" to where they were before the Bush administration - and then some.

The end of the American Exception?

My column in the current National Journal discusses some of the lessons that Europe has for the Obama administration [the link expires in two weeks].

During PBS's NewsHour With Jim Lehrer last Friday, the program's resident pundits, David Brooks and Mark Shields, had an interesting exchange about President Obama's first budget. They agreed that the administration aimed to be "transformative" -- and Brooks conceded, "I think we all want that." The real question, he said, is how transformative.

Brooks: "The debate will be over the nature of it. If it's a transformative relationship that basically keeps the American model with repair, you'll get a lot of people in the center for it. If it's a transformative relationship that turns us into France, with a consumption tax and a much bigger federal government, you will not."

Shields: "That's a straw man, turning it into France. That's not the case."

Is it really a straw man? I was hoping that Brooks would press Shields to say what exactly it is about France he objects to, what makes him recoil at the parallel. Where has France gone too far, in the view of an American liberal?

Presumably, liberals approve of the universal health care, the generous and extensive welfare state, the comprehensive worker protections, the stricter regulation, the vastly more-generous subsidies for higher education, the stronger unions, the higher taxes, and especially the higher taxes on the rich. At least I assume they do, since they advocate all of those policies for the United States. Have I left something out?

As far as social and economic policies are concerned, Democrats really ought to be holding up France (or maybe Italy or Germany) as the model to which they aspire. The fact that they do not -- that they even deny the validity of the comparison -- seems revealing. No doubt it is partly a matter of tactical calculation. The idea that the United States should model itself on any other country, rather than offer itself as the model for the world, would be new to most American voters and would take some getting used to. But I do not think it is just that.

You can read the rest of the column here.

Reviving the Home Owners' Loan Corp.

At a recent seminar at the Aspen Institute I was intrigued and impressed by a proposal of Stuart Brafman, a retired executive from the mortgage insurance industry and a regional director of the Office of Thrift Supervision during the S&L crisis. He applauded the Obama administration's plan to avoid mortgage foreclosures, but argued that a revived Depression-era initiative needed to be put in place to cope with the still-significant number of foreclosures that would happen regardless. He has written the idea up for American Banker magazine [you need to register to get a free trial].

Though the Obama administration's foreclosure prevention plan promises to help some homeowners meet their mortgage payments, many foreclosures are still expected from borrowers who fall outside the plan or who default despite receiving financial assistance. These foreclosures will impede the real estate market's recovery, which economists agree is necessary for the economy to rebound.

Meanwhile, families should not have to agonize over relocating when the foreclosed property's early sale is unlikely. It is best for the borrower to remain in the house, because vacant properties attract vandals, deteriorate more rapidly and promote neighborhood degradation.

There is a way to stem the tide of foreclosures while generating cash for lenders to make new loans and to enhance capital.

Simply put, the government should step in and purchase from lenders, at a discount, properties underlying mortgages that are about to be foreclosed. This is a new twist on a program that worked during the Great Depression.

A government agency should be organized for the mortgage rescue. It might be named the Mortgage Recovery Corp. The MRC would agree to purchase homes securing the defaulted mortgage for 80% of the dwellings' current, fair market value. A participating lender would be required to complete the foreclosure, thereby wiping out the borrower's interest and all secondary liens, and deliver marketable title to the MRC. The borrower would not be evicted in the process.

The borrower could elect to stay in the house as a tenant. The rent paid to the MRC would be 25% of the household's gross income, even if it is nominal. That amount is a time-honored, prudent benchmark for family housing expense. The tenant would have the opportunity, but not the legal right, to repurchase the residence at its then fair market value before the government sells it to another party, provided the tenant is occupying the home and the rent is current.

Lenders should be willing participants, because they are unlikely to recover more than 80% of a mortgaged property's value net of the costs for loss of interest, maintenance, taxes, repairs and brokerage commission. Furthermore, a lender could recover as much or more from the MRC immediately instead of waging a prolonged sales effort in a severely depressed market. The up-front cash proceeds could be promptly reinvested in new loans to qualified borrowers, which would stimulate the economy. The new financing would improve a lender's earnings and capital position. Finally, the costly overhead associated with administering a portfolio of foreclosed, vacant houses in a declining market could be avoided.

The whole piece is well worth reading.

More like France

I lived for about a decade, on and off, in France and later moved to the United States. Nobody in their right mind would give up the manifold sensual, aesthetic and gastronomic pleasures offered by French savoir-vivre for the unrelenting battlefield of American ambition were it not for one thing: possibility.

You know possibility when you breathe it. For an immigrant, it lies in the ease of American identity and the boundlessness of American horizons after the narrower confines of European nationhood and the stifling attentions of the European nanny state, which has often made it more attractive not to work than to work. High French unemployment was never much of a mystery.

Americans, at least in their imaginations, have always lived at the new frontier; French frontiers have not shifted much in centuries.

Churn is the American way. Companies are born, rise, fall and die. Others come along to replace them. The country's remarkable capacity for innovation, for reinvention, is tied to its acceptance of failure. Or always has been. Without failure, the culture of risk fades. Without risk, creativity withers. Save the zombies and you sabotage the vital.

If America loses sight of these truths, it will cease to be itself.

Conservatism's worst nightmare

Barack Obama's first budget is a revelation. The US president's plans will not come to pass in the form he suggests. Congress writes the laws and will make a hash of it. Still, this first full statement of intentions speaks volumes, and leaves me in a paradoxical position. On one hand, I admire much of what the budget says. On the other, I feel I owe Republicans an apology.

As you recall, in the debate over the fiscal stimulus, Republicans accused the president of presenting a measure they could not support, disguising this with an empty show of co-operation. Bipartisanship, they said, is more than inviting your opponents round for coffee and a chat. I did not buy it: I accused them, in effect, of brainless rejectionism and a refusal to compromise, and congratulated the president for trying to come to terms with the other side.

This budget says the Republicans had Mr Obama right all along. The draft contains no trace of compromise. It makes no gesture, however small, however costless to its larger agenda, of a bipartisan approach to the great questions it addresses. It is a liberal's dream of a new New Deal.