Defining democratization down

The Times today, noting the congruity of realist outlook between Obama and Robert Gates, credits Gates with bringing Obama "to earth" on goals for Afghanistan. Gates, according to Eliabeth Bumiller, has a "discomfort with lofty democracy rhetoric":

“If we set ourselves the objective of creating some sort of Central Asian Valhalla over there, we will lose,” Mr. Gates recently told Congress.

The remark ricocheted around the city as a startling break from the second President Bush, but it was also a departure from Mr. Obama’s comments during the campaign when he spoke grandly of rebuilding Afghanistan’s civil institutions. Friends say that Mr. Gates’s thinking may have been a factor in bringing Mr. Obama’s goals down to earth or at the very least that there was a meeting of minds.

“Who got there first, I don’t know,” said Lee Hamilton, president of the Woodrow Wilson International Center, “but they really have sought a kind of middle ground between making Afghanistan a model of democracy and stability on the one hand, and a slide into chaos on the other.”

Something is slightly off here. Obma may have spoken soaringly of the need to focus U.S. military efforts on Afghanistan, away from Iraq, and broadly about the need to win the war for hearts and minds in the Muslim world, but did he wax eloquent about creating a model democracy? I don't think so. In fact, as I've noted before, Gates defining success down from Bushian heights in Afghanistan sounds almost exactly like Obama doing the same with regard to Iraq. Here's Gates on Afghanistan this January:

I think one of the -- one of the points where I suspect both administrations come to the same conclusion is that the goals we did have for Afghanistan are too broad and too far into the future, are too future-oriented, and that we need more concrete goals that can be achieved realistically within three to five years in terms of reestablishing control in certain areas, providing security for the population, going after alQaeda, preventing the reestablishment of terrorism, better performance in terms of delivery of services to the people, some very concrete things.

And Obama on Iraq, to Ryan Crocker, last April:

And, see, the problem I have is if the definition of success is so high, no traces of Al Qaida and no possibility of reconstitution, a highly-effective Iraqi government, a Democratic multiethnic, multi- sectarian functioning democracy, no Iranian influence, at least not of the kind that we don't like, then that portends the possibility of us staying for 20 or 30 years.

If, on the other hand, our criteria is a messy, sloppy status quo but there's not, you know, huge outbreaks of violence, there's still corruption, but the country is struggling along, but it's not a threat to its neighbors and it's not an Al Qaida base, that seems to me an achievable goal within a measurable timeframe, and that, I think, is what everybody here on this committee has been trying to drive at, and we haven't been able to get as clear of an answer as we would like.

It's a meeting of realist minds.

Obama's "loose ends" theory of leadership

Many economists, advocates of free trade and students of the Great Depression have understandably been on red alert for signs that that countries worldwide will respond to economic crisis by raising trade barriers, as they did in the 1930s. Alarms have been sounded about the "buy American" provisions in the stimulus bill, softened though they were by stipulation that the U.S. would honor WTO and other treaty obligations; by the postponement of a pilot program to allow Mexican trucking in the U.S.; and by various protectionist measures taken by countries around the world.

In an interview with the Financial Times, Obama effectively suggests that democracies will have to toss out a few protectionist bones, but that the impulses can be contained. In the process, he sketches out an interesting theory of democracy:

FT: You mentioned the risks and dangers of protectionism. 73 separate measures have been identified by the World Bank since the last G20 summit so what again in practical terms can your administration do at the G20 to stop this - and I’m thinking to whether there are real risks that people worry in Europe a lot about what is going on, on Capitol Hill, with “Buy American” provisions.

Obama: Well first of all I think it’s important to note that here in the United States, despite some protectionist rhetoric and very real economic frustration growing out of the collapse of the financial markets and the huge rise in unemployment that the “Buy American” provision that was in the stimulus package was specifically written that had to be consistent with WTO. That the Mexican trucking provision is now subject to negotiations to ensure that we don’t see an escalating trade war.

I have sent a very clear signal that now is not that time to offer hints of protectionism and I will continue to discourage efforts to close off the US market. I think that in a democracy, there are always going to be some loose ends out there. That’s true here, that’s true around the world but overall I don’t think that we’ve seen a huge rush to protectionism that that isn’t the rhetoric that is emanating from the leaders that will be gathering in London.

And to the extent that the American people or Europeans or Asians, Africans, Latin Americans all feel confident that their leaders are doing everything that they can to encourage and promote economic [..] and that they have their populations interests at heart, I think we are going to be able to hold the line on any significant slippage (my emphasis).

Throughout the interview Obama expresses a similar confidence that he can ride the tiger of populist rage on several fronts - contain the anger over Wall Streeet bonuses if executives accept some constraints on pay, and win popular support for bailouts if people see the banking system begin to reboot:

I think it is very important for us to show that the money that has already been authorised is being well spent. That it is helping to result in loans going to small business and large business that are in turn investing and creating jobs. If voters perceive that it’s a one way street that we are just pouring more and more money into institutions and seeing no return other than avoiding catastrophe then it’s harder to make an argument for further intervention.

If on the other hand people start saying that they can refinance their house, and their child can get a student loan and that small business is able to retain its credit line, so that there is a tangible and meaningful result from our measures, then I think we can win back the confidence of the American public.

Obama also expresses tolerance for the way that democratic pressures shape different policies in different countries, suggesting that the G20 can embrace common goals without moving in policy lockstep. His respect for political process is similar in the international and national arenas. There's always going to be some loose ends out there.

"Such a grasp of the range and limits of violence"...

Time for the kind of soppy tribute that will no doubt embarrass in later years.

I thought of this

such hands might carry out an unavoidable violence
with such restraint, with such a grasp
of the range and limits of violence
that violence ever after would be obsolete.

-- Adrienne Rich, 21 love poems, VI

When I read this:

Many people in the United States – and many in partner countries that have sacrificed so much – have a simple question: What is our purpose in Afghanistan? After so many years, they ask, why do our men and women still fight and die there? They deserve a straightforward answer.

So let me be clear: al Qaeda and its allies – the terrorists who planned and supported the 9/11 attacks – are in Pakistan and Afghanistan. Multiple intelligence estimates have warned that al Qaeda is actively planning attacks on the U.S. homeland from its safe-haven in Pakistan. And if the Afghan government falls to the Taliban – or allows al Qaeda to go unchallenged – that country will again be a base for terrorists who want to kill as many of our people as they possibly can.

The future of Afghanistan is inextricably linked to the future of its neighbor, Pakistan. In the nearly eight years since 9/11, al Qaeda and its extremist allies have moved across the border to the remote areas of the Pakistani frontier. This almost certainly includes al Qaeda's leadership: Osama bin Laden and Ayman al-Zawahiri. They have used this mountainous terrain as a safe-haven to hide, train terrorists, communicate with followers, plot attacks, and send fighters to support the insurgency in Afghanistan. For the American people, this border region has become the most dangerous place in the world.

But this is not simply an American problem – far from it. It is, instead, an international security challenge of the highest order. Terrorist attacks in London and Bali were tied to al Qaeda and its allies in Pakistan, as were attacks in North Africa and the Middle East, in Islamabad and Kabul. If there is a major attack on an Asian, European, or African city, it – too – is likely to have ties to al Qaeda's leadership in Pakistan. The safety of people around the world is at stake.

For the Afghan people, a return to Taliban rule would condemn their country to brutal governance, international isolation, a paralyzed economy, and the denial of basic human rights to the Afghan people – especially women and girls. The return in force of al Qaeda terrorists who would accompany the core Taliban leadership would cast Afghanistan under the shadow of perpetual violence.

As President, my greatest responsibility is to protect the American people. We are not in Afghanistan to control that country or to dictate its future. We are in Afghanistan to confront a common enemy that threatens the United States, our friends and allies, and the people of Afghanistan and Pakistan who have suffered the most at the hands of violent extremists.

So I want the American people to understand that we have a clear and focused goal: to disrupt, dismantle, and defeat al Qaeda in Pakistan and Afghanistan, and to prevent their return to either country in the future. That is the goal that must be achieved. That is a cause that could not be more just. And to the terrorists who oppose us, my message is the same: we will defeat you.

Vive the full-throated debate from all sides about whether Obama's Afghanistan/Pakistan strategy can work. I'm sure I don't know. But there's no one living I would better trust to deploy all the resources of American power, including military, in support of clearly defined and articulated goals.

From financial shotgun marriages, miscarriages

Perhaps Federal takeovers of large banks ain't so easy. A little foretaste in fallout from the FDIC-directed shotgun marriage of Washington Mutual to JP Morgan Chase. From American Lawyer's Litigation Daily:

Battle Brewing over Fire Sale of WaMu Banking Assets

In one sense, at least, Lehman Brothers's precipitous Chapter 11 filing was a blessing in (very heavy) disguise: The investment bank was involved in the sale of its assets in the days and weeks after it entered bankruptcy. Washington Mutual wasn't as fortunate. Seized by the Federal Deposit Insurance Corp. on September 25 last year, the bank had no control over the disposition of its core banking assets, which were quickly sold to JPMorgan Chase & Co. for $1.9 billion.

Now that hasty sale has become the subject of what promises to be protracted litigation. At its core is a question: What, exactly, did JP Morgan buy on that fall day?

Both sides are suing the FDIC, with WaMu's holding company "seeking to recover billions of dollars in tax refunds, capital contributions, and trust securities," while JPM looks to ""protect its economic interests in the assets."

Now, imagine those spats cubed in the wind-down of a global bank with assets and counterparties on every continent. The FT's John Gapper offers a preview.

Training in torture

Atul Gawande's long look at solitary confinement in U.S. prisons, Hellhole, asks, "is solitary confinement torture?" and provides overwhelming empirical evidence that the answer is yes. Solitary confinement brings on psychosis and hallucination; it makes the mind effectively disintegrate; it causes lasting psychological damage.

In addition to documenting this torture's effects, Gawande also chronicles its explosion in the U.S. prison system since the early eighties, the same period in which the prison population as a whole has exploded:

The number of prisoners in these facilities has since risen to extraordinary levels. America now holds at least twenty-five thousand inmates in isolation in supermax prisons. An additional fifty to eighty thousand are kept in restrictive segregation units, many of them in isolation, too, although the government does not release these figures. By 1999, the practice had grown to the point that Arizona, Colorado, Maine, Nebraska, Nevada, Rhode Island, and Virginia kept between five and eight per cent of their prison population in isolation, and, by 2003, New York had joined them as well. Mississippi alone held eighteen hundred prisoners in supermax—twelve per cent of its prisoners over all.

Reading this made me think that like most disasters, the Bush Administration's embrace of more physically abusive forms of torture in its treatment of hundreds if not thousands of detainees from Bagram to Guantanamo to Abu Ghraib had no single simple cause -- say, a rogue Vice President and Secretary of State -- but came at the end of a chain of systemic failures. In some sense that needs to be explored further, we have trained ourselves to accept brutal treatment of those we deem to have forfeited their rights. A politics and society that embraces ever more punitive measures against prisoners and illegal immigrants is part and parcel with one that removes regulatory restraint from elites, from Wall Street to the executive branch, that gleefuly redistributes wealth upwards, and that plots to privatize and eviscerate our common measures for sharing risk.

We have changed course. How successful, lasting and thoroughgoing will Obama's counterrevolution be? For better and worse, we're living in interesting times..

Obama's "Lincoln Defense" of Geithner

As Obama continues to channel Lincoln, Timothy Geithner might take some consolation in the intense vilification suffered by Lincoln's second Secretary of War, Edwin Stanton.

George McClellan, the charismatic general who was a battlefield failure but a brilliant political infighter, blamed his drubbing by Lee in the Seven Days Battles on a lack of troops, as was his wont -- he constantly estimated Lee's troop strength at double its actual number. Stanton was his chief scapegoat, and others piled on. Doris Kearns Goodwin tells the tale in Team of Rivals:

The drumbeat began with McClellan, who told anyone who would listen that Stanton was to blame for the Peninsula defeat. "So you want to know how I feel about Stanton, & what I think of him now?" he wrote Mary Ellen in July. "I think that he is the most unmitigated scoundrel I ever knew, heard or read of; I think that...had he lived in the time of the Savior, Judas Iscariot would have remained a respected member of the fraternity of the Apostles"...

Democrats, unwilling to fault McClellan, were the loudest in their denunciations of Stanton. Spearheaded by the Blairs, conservatives charged that Stanton had abandoned both his Democratic heritage and his old friendship with McClellan...Democrat John Astor could not refrain from cursing at the mere mention of Stanton's name. "He for one believes, Strong reported, "that Stanton willfully withheld reinforcements from McClellan lest he should make himself too important, politically, by a signal victory"....

The New York Times promised not to engage in the "very fierce crusade" against Stanton, but begged the president, "if we are to have a new Secretary of War, to give us a Soldier--one who knows what war is and how it is to be carried on...If Mr. Stanton is to be removed, the country will be reassured, and the public interest greatly promoted, by making Gen. McClellan his successor. Even those who cavil at his leadership in the field, do not question his mastery in the art of war." As the weeks went by, and the pressure to replace him mounted, Stanton must have wondered how long Lincoln would continue to support him (447-48).

Lincoln's support for his Secretary under duress is famous, and Obama probably has had it in mind while brushing off calls for Geithner's resignation. Kearns Goodwin again:

In fact, not once during the vicious public onslaught against the secretary of war did Lincoln's support for Stanton waver. During the hours he had spent each day awaiting battlefront news in the telegraph office, Lincoln had taken his own measure of his high-strung, passionate secretary of war. He concluded that Stanton's vigorous, hard-driving style was precisely what was needed at this critical juncture...

And as always, the president refused to let a subordinate take the blame for his own decisions. He insisted to Browning "that all that Stanton had done in regard to the army had been authorized by him the President. Three weeks later, Lincoln publicly defended the beleaguered Stanton before an immense Union meeting on the Capital steps...

"I believe there is no precedent for my appearing before you on this occasion," he affably began, "but it is also true that there is no precedent for your being here yourselves." Reminding his audience that he was reluctant to speak unless he might "produce some good by it," Lincoln declared that something needed to be said, and it was "not likely to be better said by some one else," for it was "a matter in which we have heard some other persons blamed for what I did myself." Addressing the charge that Stanton had withheld troops from McClellan, he explained that every possible soldier available had been sent to the general. "The Secretary of War is not to blame for not giving when he had none to give." As the applause began to mount, he continued, "I believe he his a brave and able man, and I stand here, as justice requires me to do, to take upon myself what has been charged on the Secretary of War" (453-454).

Compare Obama's defense of Geithner at another appearance for which "there is no precedent" -- a sitting President's on the Tonight Show on March 20:

MR. LENO: Now, Treasury Secretary Geithner, he seems to be taking a little bit of heat here. How is he holding up with this? He seems like a smart guy --

MR. OBAMA: He is a smart guy and he's a calm and steady guy. I don't think people fully appreciate the plate that was handed him. This guy has not just a banking crisis; he's got the worst recession since the Great Depression, he's got an auto industry on -- that has been on the verge of collapse. We've got to figure out how to coordinate with other countries internationally. He's got to deal with me; he's got to deal with Congress. And he's doing it with grace and good humor. And he understands that he's on the hot seat, but I actually think that he is taking the right steps, and we're going to have our economy back on the move.

MR. LENO: Now, see, I love that it's all his problem. (Laughter.)

MR. OBAMA: No, no, no --

MR. LENO: -- I mean, when he came in you probably said, hey, this is not a problem. Now, it's, hey, you got this, you got that, hey, good luck. (Laughter.)

MR. OBAMA: No, no, but this is the point that I made, I think two days ago, when somebody asked, well, do you have confidence in Tim Geithner. I said, look, I'm the president, so ultimately all this stuff is my responsibility. If I'm not giving him the tools that he needs to make sure that we're moving things forward, then people need to look at me.

On the AIG thing, all these contracts were written well before I took office, but ultimately I'm now the guy who's responsible to fix it. And one of the things that I'm trying to break is a pattern in Washington where everybody is always looking for somebody else to blame. And I think Geithner is doing an outstanding job. I think that we have a big mess on our hands. It's not going to be solved immediately, but it is going to get solved. And the key thing is for everybody just to stay focused on doing the job instead of trying to figure out who you can pass blame on to.

Of course, that Lincoln was right about Stanton doesn't in itself prove that Obama is right about Geithner. The devil can always quote history for his own purposes. But the country, having "taken the measure" of Obama's judgment over the course of two years, may ultimately trust his judgment of character and ability within his own cabinet. The analogy, whatever its limits, does highlight the eternal law that in a crisis, the deputy at the fulcrum of the action bears the brunt of the fury.

It must be said too that Obama fudged his "buck stops here" routine a bit. Lincoln took responsibility for a very specific decision that was being vilified - refusing to send McClellan the troops for which he begged. Obama rolled all recriminations together and took responsibility for all without specifying any single controversial decision -- such as removing from the stimulus a measure that would have precluded paying the AIG bonuses -- as his own.

Paul Krugman is overinvested

Paul Krugman genuinely thinks he knows how to clean up the bank mess. Maybe he does. He knows that Geithner is wrong to try to find ways to improve the banks' balance sheets without taking them over. Maybe he's right. But frustration is hardening his hypotheses into certainty:

Even more important, however, is the way Mr. Obama is squandering his credibility. If this plan fails — as it almost surely will — it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place.

Krugman is starting to sound a little like Rush Limbaugh. It's not fair to put in his mouth, "I hope he fails." But if Geithner's plan doesn't fail, then what happens to Krugman's credibility? Would he enjoy a stint on The Daily Show?

Update 3/24: Time's Justin Fox, responding to criticism of a post venturing that Geithner's plan could "provide a path to intelligent nationalization (cf. Andrew Leonard, below, and xpostfactoid, 2/21) voices a similar sentiment about Krugman:

it's entirely possible that Hempton and I are guilty of wishful thinking about Treasury's intentions. But it's also possible that Krugman is guilty of whatever the opposite of wishful thinking is.

Even if Krugman is right about the futility of Geithner's attempts to bolster banks, he may well have the political calculus wrong. Compare Andrew Leonard in Salon:

But all the sturm-und-drang expressed hither and yon about how the Obama administration is damning us all to a decade or more of economic doldrums by not pursuing immediate bank nationalization today, is just a bit overwrought. The U.S. economy is not going to stop shedding a half million jobs a month if we nationalize Citigroup today, instead of two months from now. We are deep in a recession and it will be quite awhile before we crawl out of it. Two months of caution do not mandate a "lost decade." Indeed, we will know in a matter of months whether the Obama administration's current efforts are gaining any traction, and if they aren't, then there will be no other alternatives. Perhaps the smartest thing that Geithner's critics could do is to just step aside and let him fail.

Never mind Geithner's critics. If it's true that megabanks must be nationalized, it may be smart politics for Obama to exhaust all other options before presenting that one to the country.

Geithner: man with a plan

I will cop to having no economic basis to judge whether Timothy Geithner's plan to create a market for today's "toxic" debt securities will work. But Salon's Andrew Leonard has the right take on how Geithner -- and by extension, Obama -- have handled the process of forging policy:

From the very beginning, when Paulson told us that the subprime meltdown would be contained, to the very end of his tenure, there was never the sense that the Bush administration had a coherent strategy of any kind.

The same cannot be said of the Obama administration. Geithner's plan may well not work, and it may be too beholden to Wall Street, but its rollout has not been an exercise in helter-skelter chaos. In dealing with the economic crisis as a whole, the Obama administration has put into play a steady flow of initiatives that should, in theory, all work together. In addition to the stimulus, the housing plan and credit relief for small businesses, there's also been a budget proposal addressing long-term issues that even Paul Krugman found impossible not to praise. The Fed has been doing its part by engaging in its own extraordinarily broad-scale stimulative monetary policy.

All along, it has been universally agreed that the most glaring weakness of the Obama portfolio has been the lack of detail on how Geithner intended to tackle the banking system. But there is a difference between a lack of detail and utterly contradictory confusion. If we can hold our breath long enough to calmly assess the last two months, one can see that amid all the noise, the Obama administration has been moving carefully forward in one direction.

Geithner was very careful not to pin himself down on details during his confirmation hearing, except to say that the goal of his eventual plan would be to encourage more lending than would otherwise happen without government intervention. His first speech was widely criticized because he neither endorsed bank nationalization or provided enough detail for Wall Street to chew on. But ever since that speech, he's done pretty much exactly what he said he would do. The banks are being stress tested to determine their ability to survive an even worse downturn than we are currently experiencing. Capital will be made available to them to weather that storm. A "public-private" venture to create a market for toxic assets has been laid out. We have timelines and we have a strategy. The scheme outlined in the Treasury Department's White Paper may share an intellectual heritage with Hank Paulson's original cockeyed dream -- except for a rather large difference. It exists. It is real. It will either work or it will not.

I suspect that when the history of this financial crisis is written, Obama and co. will be seen to have steered a rational course, shaped largely by a terrifying inside view of the risks of systemic failure -- and that their decision making process will be recognized as reality-based, adjusting to failures as they happen, embracing complexity, and unswayed by ferocious criticism on all sides.

Which is not to say that those who claim it's futile to try to find value in the toxic assets or prop megabanks that may prove to be insolvent are not right. Here, too, Leonard has perfect pitch:

There is every reason to believe it will not work, and may even make things worse. There is every reason to doubt the fundamental assumption being made by the Treasury -- that the "true" value of the toxic assets is higher than their current market value...

But all the sturm-und-drang expressed hither and yon about how the Obama administration is damning us all to a decade or more of economic doldrums by not pursuing immediate bank nationalization today, is just a bit overwrought. The U.S. economy is not going to stop shedding a half million jobs a month if we nationalize Citigroup today, instead of two months from now. We are deep in a recession and it will be quite awhile before we crawl out of it. Two months of caution do not mandate a "lost decade." Indeed, we will know in a matter of months whether the Obama administration's current efforts are gaining any traction, and if they aren't, then there will be no other alternatives. Perhaps the smartest thing that Geithner's critics could do is to just step aside and let him fail.

It's worth keeping in mind in this context that Nouriel Roubini, while forecasting/advocating the nationalization of a number of large banks, suggested that the time won't be ripe for approximately six months. I sometimes suspect that Obama, if not Geithner, suspects or knows that several of the largest banks can't be saved and is preparing the ground for the moment when nationalization emerges as "the worst possible option except for all the alternatives." If so, he would follow Roosevelt entering World War II and Lincoln issuing the Emancipation Proclamation - waiting for the moment when he can forge consensus around the inevitable.

Is Edward Liddy *our* fox now?

A timely reminder from Salon's Andrew Leonard that AIG is, in a certain sense, in "good hands":

According to at least one critic, Santa Fe attorney David Berardinelli, the author of "From Good Hands to Boxing Gloves," Allstate boosted its profits during the 1990s and early 2000s via a calculated strategy of getting tough on policy holders for the benefit of shareholders. Specifically, Allstate made it for difficult for policy holders to get what they were owed by playing several varieties of hardball -- including ramping up litigation against its own customers...

the Sarasota Herald-Tribune conducted is own extensive investigation last April, and came to a fairly compelling conclusion.

For more than a decade, Allstate Insurance Co. kept a secret from its auto policyholders -- a national strategy to force customers to accept reduced cash payouts or face years in court.

Thousands of pages of Allstate documents reviewed by the Herald-Tribune detail how the nation's second-largest insurer systematically cut payments to customers as a way to boost profits.

According to Berardinelli, Liddy "amassed a personal fortune of over $150 million in stock, options, and incentive bonuses" as a result of how the company restructured its claim system.

From the Herald-Tribune:

Allstate Chairman Ed Liddy touted the results at an international business conference in New York two years ago, showing Allstate had reduced its average check to a car accident victim by 20 percent, and held growth in other auto and home claims below industry averages.

Allstate and its property-casualty brethren have been similarly successful in reducing the real value of homeowners' insurance -- refusing to renew customers on the coasts, ramping up special deductibles for the worst risks, jacking up prices on the basis of new industry-favoring risk models -- and writing ever-more all-encompassing "anti-concurrent causation clauses" stipulating that if any excluded cause contributes to a loss, coverage is excluded notwithstanding "concurrent" covered causes.

Result for policyholders: according to J. Robert Hunter, former Texas insurance commissioner and director of insurance for the Consumer Federation of America, property/casualty (p/c) insurers now pay less than 60 cents in policyholder benefits for every dollar they take in, compared to over 70 cents twenty years ago. The results for insurers, also according to Hunter:

In 2004, with four hurricanes here in Florida, the Property/Casualty insurers set a record profit at $40.5 billion in net income. In 2005, even with Hurricanes Katrina, Wilma and the other hurricanes, they set another record profit, at $48.8 billion. Profits in 2006 were astonishing and totaled $67.6 billion. In 2007, profits continued at the excessive 2006 level We estimate that 2007 profits will be $65.0 billion, just short of the 2006 record but still remarkable. ..during the last five years [through 2007], the profits of insurers have totaled over $250 billion.

As Allstate's CEO, Liddy in 2006 led p/c insurers' rush to cut off coverage to homeowners in coastal areas. The Wall Street Journal's Liam Pleven reported in November 2006:

in many catastrophe-prone coastal areas, Allstate has stopped writing new homeowner policies and has dropped some existing customers altogether. Earlier this year, Allstate dropped 27,000 customers in coastal counties in New York. In Florida, it shed 120,000 customers, on top of 95,000 customers in 2005. And it's eliminating earthquake coverage for more than 359,000 homeowners nationwide.

That decision seems to have paid off. In its earnings report for the fourth quarter of 2008, Allstate boasts:

Our catastrophic risk management program includes reinsurance, policy changes that increased deductibles, and market share reductions in high risk coastal regions. These actions served us well. Allstate's analysis shows that our losses from Hurricanes Ike and Gustav would have been approximately twice the amount recorded without the catastrophe exposure management actions put into place beginning in 2005.

Liddy's overall strategy in 2005-2006 did have a downside, at least in the current short term. As Allstate pared back its homeowners exposure, it moved toward what was widely perceived by insurers at the time as the next pot of gold. Pleven again:

Behind the twist is a big strategic gamble for Allstate, one of the U.S.'s largest insurers, which has been chastened by recent hurricane losses. As he seeks to reduce the company's exposure to disaster losses, Mr. Liddy also wants his company to be a one-shop stop for middle-income baby boomers' financial planning, using an army of 14,000 sales agents to push an increased number of life policies, annuities and other products....

Allstate considers one segment of the market for financial products sold by its agents particularly alluring: Middle-income Americans with a household income of $35,000 to $200,000, which it says is more than half of U.S. households..

To build the business, Allstate is trying to boost the profile and training of its agents. Six years ago, few had licenses to sell securities, which are required for many annuity products. Now nearly half do, Mr. Liddy says.

Now Allstate is walking that push back. A goal for 2009, from the q4 '08 report:

Continued focus on improving returns and reducing Allstate Financial's concentration in spread based products, primarily fixed annuities and institutional markets products, will result in lower premiums and deposits and a smaller balance sheet.

On the other hand, even as it was making its annuities sales push in 2006, Allstate got out of the part of the business that's now most toxic for insurers, selling its variable annuity to Prudential Financial in March of that year. Conceived as a high-fee, heads-we-win-tails-you-win-less-that-you-should means of mining Americans' retirement savings, variable annuities that guarantee principal are killing some insurance companies. Prudential is now bleeding, while Allstate is in relatively solid financial shape.

Liddy may indeed be a fox guarding the henhouse. But, given taxpayers' 80% stake in AIG, is he our fox? Can he "claw back" the hens that AIG's past management let out -- on behalf of taxpayers?

Don't "don't blame us," Obama

A little touch of demagoguery from the President on Leno last night:

When you buy a toaster, if it explodes in your face there's a law that says your toasters need to be safe. But when you get a credit card, or you get a mortgage, there's no law on the books that says if that explodes in your face financially, somehow you're going to be protected.

C'mon now. What's wrong with this analogy? If a mortgage or credit card debt "explodes in your face," you're at least partly responsible, no matter how onerous the terms of the original contract. It may be "defective" in the sense that it was a bad deal for you. But it's working as it was designed to work. Those who are duped by bad deals are not the same as those who buy a physical product that doesn't work as it was supposed to.

John Gapper plumbs AIG's heart of darkness

The Financial Times' John Gapper has perfect pitch on the AIG bonus firestorm. He has sympathy for where both Geithner and Liddy were coming from in this collision, but highlights the myopia of both. And he comes up with an extended metaphor that plumbs the moral depths of Wall Street's perverted pay incentives.

Here's Gapper on a distracted Geithner:

If there is one thing everyone should have learnt about Wall Street by now, it is that the financial contract a trader takes the most care to hedge properly – and to ensure is profitable in the long term as well as the short term – is his or her own employment contract.

Tim Geithner, the benighted Treasury secretary, forgot this point when he approved the doling out of $30bn more in US government support to AIG at the start of this month. Hence he is now struggling to survive the Washington maelstrom.

Mr Geithner has excuses for this oversight, since he was trying to save the rest of the financial system at the same time, and has few senior officials in place to help.

Still, as a Wall Street figure – I count him as such because he used to work within a stone’s throw of the Street of Shame at the New York Federal Reserve – he ought to have known better than to overlook $165m in “retention bonuses” AIG has paid to those who made it fail.

And on Liddy, trapped inside the AIG black hole:

My sympathies are with Mr Liddy, who is being paid only $1 a year and is not responsible for the debacle at AIG. He is doing his best to sort out all the mess, while public servants with megaphones bellow into his ear and Chuck Grassley, a Republican senator, suggests bone-headedly that AIG traders should atone by committing suicide.

That said, his reasons for paying the bonuses share the characteristic of being internally logical yet ludicrous when one takes a step back to consider the context.

And then, picking up his opening trope: the derivative from which only the individual trader derives benefit:

Mr Liddy’s second point is that AIG is better off retaining the traders who wrote the disastrous CDS contracts because only they know them well enough to keep them safely hedged while winding them down. Some are so complex and bespoke that an outsider could be stumped.

A lot of people, including politicians who do not care much one way or the other about the truth of the matter, dismiss this as more self-serving Wall Street claptrap. Personally, I think the appalling thing is that Mr Liddy could well be correct.

Consider the implications. We are by now familiar with the trader’s option – that an employee of an investment bank has an incentive to take big risks to make money. If his trading strategy works he gets a bonus but if it fails, the bank (and ultimately the taxpayer) pays.

In recent years, a lot of traders, including those at AIG, exploited this by coming up with derivatives that were very profitable in the short term but had expensive long-term risks embedded in them. That allowed the traders to enjoy several years of large bonuses before the bill for their recklessness fell due.

Now, the ever-ingenious AIG traders have come up with a derivative of the trader’s option. Call it the trader’s option squared.

They had an incentive not only to sell financial contracts that paid out a lot of money immediately in return for assuming a long-term liability, but also to make these contracts very complicated and opaque.

This allowed them to charge big fees (which brought big bonuses) and it also made them irreplaceable at the institution that employed them. If you are the only one who can understand your own handiwork, it puts you in an enviable bargaining position.

Wall Street banks used to believe it was in their financial interest to keep the credit derivatives market as an over-the-counter, high-margin, complex business. It turns out to have been a financial disaster for everyone involved except – surprise, surprise – derivatives traders.

And the final irony: the institutions composed of these self-aggrandizing geniuses are devoured by their children:

But for the financial institutions involved in credit derivatives, it is worse than that. To be taken for such a ride by their employees is a humiliation, one that has been in the making since the old Wall Street partnerships went public in the 1980s (in Goldman’s case 1998).

The denouement is practically a consensus theme among FT Comment writers: pay-for-performance as currently practiced is the root of all financial industry evil:

But for the financial institutions involved in credit derivatives, it is worse than that. To be taken for such a ride by their employees is a humiliation, one that has been in the making since the old Wall Street partnerships went public in the 1980s (in Goldman’s case 1998).

Robert Frost said that a good poem was like a piece of ice that runs on its own melting. The same is true of a good opinion column. The trader's contract as derivative is only partially a metaphor. But it's one that takes us into the heart of darkness.

Capitalist redistribution

Every now and then, a short article brings thoughts that have been tugging at the edge of your consciousness into sharp focus In that category is Rob Atkinson's Where did all the wealth go? Eureka #1: devalued assets are still there:

Consider housing. When hurricane Katrina demolished more than 275,000 homes, America was $80 billion poorer. In contrast, after the recent financial hurricane demolished the value of homes, there were 750,000 more homes in America. Current owners will get $2.1 trillion less when they sell and will have to forgo that new car or vacation. But future buyers will save $2.1 trillion and that new car or vacation will go to them, rather than the seller...

Just like housing market, the fall in the stock market represents a shift in wealth from current owners to future buyers. People who buy stocks today get the same asset for $3.6 trillion less than those who purchased stock at the peak of the bubble...

One caveat: the housing boom distorted the housing market, and so created housing stock that may be intrinsically less valuable than it should be, because it's composed of the wrong kinds of houses (3,000-4,000 square feet, anyone?) in the wrong places - sprawled out into new exurbs. That means higher energy costs, m0re time in traffic, and perhaps less economically dynamic communities than more intelligent development might have produced. The detritus of the housing bubble is visible on any road trip -- for example, the long rows of behemoth single-family homes lining I-90 for dozens of miles west of Chicago's O'Hare Airport.

Another caveat: lots of stocks will disappear in a wave of bankruptcies. To say that that's part of the natural order of things begs the question of whether we come out the other end with a more- or less-dynamic set of companies, and whether those companies produce more or less sustainable wealth for more or fewer people. If the US. auto industry disappears, for example (or the U.S.-branded behemoths, in any case), that will create enormous hardship -- though whether that loss would prove to be a long-term good or evil is impossible to know at this point.

Still, no one ever said that creative destruction was efficient. Atkinson's larger point -- -- that this bust will transfer wealth from the old to the young, and from the wealthy to the middle class -- gives new resonance to the term correction:

The real issue is who bought high and who is now able to buy low. Generally, older people who hoped to sell their assets at high prices have been made worse off. But don't go clamoring for an increase in Social Security benefits for the AARP set quite yet. For most older Americans who bought houses before 2000, home values are exactly where they would be had the price increases between 1987 and 2002 continued in a straight line, instead of booming from 2002 to 2005 and subsequently crashing. The same applies to equity values. Even with the recent bear market, the S&P 500 is still higher than it would be had it increased from 1985 to the present at the rate it did from 1950 to 1985. Indeed, from 1980 to the present, the S&P 500 has increased in value 30 percent more than the economy as a whole.

The second set of "losers" are the rich. The fact that the top 10 percent of American households own at least 70 percent of American assets means that the recent decline in asset prices hit the richest the hardest..

The fact that the losses are concentrated among the rich and baby boomers is not a bad thing. The last several decades have seen the wealthiest Americans get wealthier much faster than the average American. If they lose more now, it just helps reverse a longstanding inequitable trend. Likewise, if the collapse in stock prices means that more people now in their 50s and 60s (including me) have to work an extra few years before retiring, it is all to the good.

I'm reminded of the alleged mantra of Rahm Emanuel: a crisis is a terrible thing to waste. The core of Obama's campaign was a commitment to reverse the 30-year trend of rising income inequality, to restore "balance" and "fairness" to our economy. His whole budget is oriented toward that overriding goal This correction, if it doesn't spiral into political instability, authoritarianism and war, may provide a gigantic shove in the right direction.

Andrew Cuomo's mojo

Andrew Cuomo is having full as much fun in the NY AG seat as Eliot Spitzer before him:

... New York Attorney General Andrew Cuomo asked AIG to provide details on who's receiving bonuses in its AIG Financial Products subsidiary by 4 EDT p.m. on Monday or face subpoenas:

In Mr. Cuomo's letter to AIG Chief Executive Edward Liddy on Monday, the New York attorney general requested a list of individuals who are to receive payments under the unit's retention plan, as well as details of each individuals job description, information on their performance and copies of any contracts requiring the payments. The attorney general asked that AIG provide the information by 4 p.m. EDT Monday.

"We were disturbed to learn over the weekend of AIG's plans to pay millions of dollars to members of the Financial Products subsidiary through its Financial Products Retention Plan," Mr. Cuomo said. "Financial Products was, of course, the division of AIG that led to its meltdown and the huge infusion of taxpayer funds to save the firm."

Mr. Cuomo said he's looking into whether any of the individuals receiving payments were involved in conduct that led to the insurer's near collapse; whether the contracts may be unenforceable for fraud or other reasons; and whether the payments may be consider fraudulent conveyances under state law.

"Covering up the details of these payments breeds further cynicism and distrust in our already shaken financial system," he said.

Does Cuomo still want to be governor? Why step down?

The incredible Mr. Cheney

Among a long litany of self-serving distortions in Dick Cheney's assessments of the Bush and Obama Administrations on CNN tonight, one in particular encapsulates Cheneythought: the conflation of diverse real and imagined threats into a monolith that justifies the most extreme response. Here's how he justified the invasion of Iraq to John King:

The circumstances, though, that in terms of whether or not this was worth doing, I think it was. I think if you hark back and look at the biggest threat we faced after 9/11, it was the idea of a rogue state or a terrorist-sponsoring state with weapons of mass destruction — say, nukes, for example — and providing those to terrorist organizations. What happened in Iraq is we’ve eliminated that possibility. We got rid of one of the worst dictators in the 20th century. We got rid of his government. There is no prospect that Iraq is going to become a place where once again they produce weapons of mass destruction or support terrorists..

This account conveniently omits a few facts: that Iraq did not support the terrorists who attacked on on 9/11, it did not have weapons of mass destruction when we attacked, and there was virtually no prospect that Saddam would either develop WMD or support al Qaeda.

Justifying the war for removing a nonexistent threat provides Cheney with the added benefit of justifying the Bush Administration's massive deficit spending:

Eight months after we arrived, we had 9/11. We had 3,000 Americans killed one morning by al Qaeda terrorists here in the United States. We immediately had to go into the wartime mode. We ended up with two wars in Afghanistan and Iraq. Some of that is still very active. We had major problems with respect to things like Katrina, for example. All of these things required us to spend money that we had not originally planned to spend, or weren’t originally part of the Stuff happens. And the administration has to be able to respond to that, and we did...We always said — I always said that wartime scenario is cause for an exception in terms of spending. It was appropriate in World War II, certainly, and I think it’s appropriate nowbudget. Stuff happens. And the administration has to be able to respond to that, and we did...

It's in this context that Cheney's claims that information gained from the torture regime he implemented prevented major terrorist attacks against the U.S., and that future attacks can't be prevented without torture, must be judged:

KING: But another 9/11, because of a tactic like waterboarding or a black site, can you say with certainty you stopped another attempt to do something on that level?

CHENEY: John, I’ve seen a report that was written based upon the intelligence that we collected then that itemizes the specific attacks that were stopped by virtue of what we learned through those programs. It’s still classified. I can’t give you the details of it without violating classification, but I can say there were a great many of them. The one that has been public was the potential attack coming out of Heathrow, when they were going to have several American planes with terrorists on board, with liquid explosives, and they were going to blow those planes up over the United States.

The claim that info gained through torture prevented further attacks can't be absolutely disproved, at least not without mountains of declassified evidence. But look at the way Cheney continues to misrepresent the threat posed by Saddam, and consider the source.

Update: against Cheney's insistence on the indispensability of torture stands the testimony of Khalid Sheikh Mohammed (courtesy of Andrew Sullivan, linking to a long review by Mark Danner of the International Committee of the Red Cross's Report on the Treatment of Fourteen "High Value Detainees" in CIA Custody):

I gave a lot of false information in order to satisfy what I believed the interrogators wished to hear in order to make the ill-treatment stop.... I'm sure that the false information I was forced to invent...wasted a lot of their time and led to several false red-alerts being placed in the US," - Khaled Sheikh Mohammed, one of the high-value terrorists tortured by president George W. Bush, to the ICRC.

Obama re-gifts a campaign candygram to Business Roundtable

This gesture from Obama to the Business Roundtable, reported in today's WSJ, should surprise no one:

Pressed on his proposal to rein in the indefinite deferral of corporate taxes on overseas earnings, Mr. Obama said he would be willing to consider lowering the 35% corporate tax rate as he closes other business-tax loopholes. "That's a very appealing conversation to me, and I'd like to pursue it," the president said.

On June 17, 2008, Obama told the Wall Street Journal:

On the corporate side, for example, one of the things I've asked my folks to look at is: Are there ways we can close existing loopholes in tax havens at the same time as we're lowering overall rates? We've got this new problem: The biggest problem with our tax code when it comes to the business side is that we have one of the highest tax rates -- corporate tax rates -- on paper but our effective tax rate is one of the lowest … You know, how much you pay in taxes as a corporation a lot of times is going to depend on how good your lobbyist is, as opposed to any sound economic theories. So those distorting effects I'd like to actually remove and eliminate from our tax system, but obviously that's a complicated and difficult task. The last time we did it was in 1986. We're going to have to, I think, revisit that.

I believe he said as much in debate with McCain, who had made lowering the corporate rate a central campaign plank: that lowering the rate would make sense if there weren't such a huge spread between the nominal corporate tax rate and what companies actually pay.

So once again, Obama showcases his willingness to compromise in a high profile forum without actually giving anything away.

Bracketing up: will Obama soak the superrich?

Given Americans' immersion in low tax ideology, how can Obama fund his ambitious plans long-term? Matthew Yglesias floats an idea that occurred to me years ago:

some day I should write again about the idea of making tax brackets infinitesimal so that there is no “top bracket.” This would have been unworkable 100 years ago, but with computers there’s no reason we can’t do it.

In other words, there should be an algorithm for perfectly progressive tax rates that ratchet up infinitesimally for every dollar earned, rather than bumping up abruptly at fixed thresholds.

More prosaically, Yglesias floats the idea of adding new marginal tax brackets above the current top level ($357k). While he minimizes the potential for raising significant revenue this way, Nate Silver starts the math and finds otherwise:

What the discussion over the top marginal tax rate ignores, however (and what Ygelsias picks up upon) is that this rate has been assessed at very different thresholds of income. In 1940, for example, the top marginal tax rate was 81.1 percent -- but this rate only kicked in once you made $5,000,000 or more in income, which is equivalent to about $75,000,000 in today's dollars.

But today, the threshold where the top tax bracket kicks in isn't $75 million, or $5 million, or even $1 million ... it's a mere $357,700. The progressivity of the tax code stops there....

The question, of course, is why there isn't a millionaires tax bracket now ... or even a multi-millionaires tax bracket. I haven't run the numbers, but I'm guessing that if you established a new tax bracket at, say, 40.5 percent, that started at incomes of $1,000,000 or more, this would bring in as much revenue to the government as restoring the $250K tax bracket (which is really $360K now given indexing to inflation) to 39.6 percent, as it was under Clinton.

Brushing this subject without quite hitting on it, meanwhile, Clive Crook gives the rationale for creating new upper-level brackets -- though he himself favors the regressive but broader-based VAT:

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.

I wonder if Yglesias hasn't in fact stumbled on Obama's as-yet-veiled long range tax plans. Obama claims that he is going to tackle the long-term sustainability of the Federal budget; he's meanwhile planning large increases in Federal spending while promising not to raise taxes on anyone earning under $250k; and a core commitment in his campaign was to roll back the galloping rise in income inequality that Crook alludes to. There is a lot of wiggle room to raise taxes on the superrich while staying well below past U.S. norms. It's probably either that or a VAT. Or both...

Macro-wreckonomics: a 30,000-foot view

Gillian Tett, the Financial Times' credit markets whiz, has a detailed account today of how credit derivatives markets went bad. Framing the sorry tale of bad loans packaged in opaque securities and parked off-balance sheet in special investment vehicles is a sidebar that drains a bit of blame by bringing the macroeconomic causes into sharp focus:

there is a strong case to be made that the current crisis is in the strictest sense a crisis of globalisation, fostered and transmitted by the rapid and deep integration of very different economies. Fast-growing developing countries with underdeveloped financial systems were exporting savings to the developed world for packaging and re-export to them in the form of financial products.

The global economy during the period of boom and savings glut had something in common with the old communist workers' joke: we pretend to work and they pretend to pay us. The current variant for emerging economies was, we work, you pretend to pay us, we prop up the value of your pretend payments. Our banking system drowned in a flood of cheap money:

The collapse in market discipline and regulatory supervision was most extreme in securitised markets for US housing finance. Yet it is hard to see this as simply a crisis of financial innovation when there was excessive risk-taking in many other areas. At the same time that US and UK banks were amassing subprime mortgage securities, they were also making mispriced loans to private equity. Austrian banks were making risky loans to households in eastern Europe and Japanese banks were buying corporate equities. This suggests larger economic forces were at work.

Soft power hit from two sides

As the Bush Administration ran roughshod over multilateralism, human rights and the U.S. Constitution, invading Iraq without international sanction and establishing its torture gulag, critics for years lamented the decline of U.S. influence throughout the world, its undercut authority to protest and deter human rights abuses, nuclear proliferation, and environmental depredation.

How ironic that a swifter and more tangible erosion of U.S. (and western) influence struck from a completely different -- and seemingly unrelated -- direction. Here's the FT's Martin Wolf, assessing one of many seismic effects of the world financial meltdown:

The ability of the west in general and the US in particular to influence the course of events will also be damaged. The collapse of the western financial system, while China’s flourishes, marks a humiliating end to the “uni-polar moment”. As western policymakers struggle, their credibility lies broken. Who still trusts the teachers?

In more detail, one of the erstwhile "students," the U.S.-trained president of the China Investment Corporation, Gao Xiqing, told James Fallows last December:

The simple truth today is that your economy is built on the global economy. And it’s built on the support, the gratuitous support, of a lot of countries. So why don’t you come over and … I won’t say kowtow [with a laugh], but at least, be nice to the countries that lend you money.

Talk to the Chinese! Talk to the Middle Easterners! And pull your troops back! Take the troops back, demobilize many of the troops, so that you can save some money rather than spending $2 billion every day on them. And then tell your people that you need to save, and come out with a long-term, sustainable financial policy.

To an extent, this change is natural and healthy. The unipolar moment had to end; permanent domination of the world economy by a country with 5% of earth's population is not sustainable. Four billion people can't emerge from grinding poverty in a world where the U.S. controls a quarter of the world's wealth. In the short term, too, the financial crisis has heightened U.S. power, since the great emerging economies (and several wealthy countries) depend on U.S. demand to sell their exports. But the violent blow to U.S. soft power, in finance as in politics, is the Bush Administration's singular legacy.

Is there a common thread in the erosion of U.S. credibility in these different arenas? There is: radical Republicans' malign contempt for the rule of law. Conservatism is supposed to be about conserving a society's most valuable norms and traditions. As a political force in the real world, however, conservatism is usually a matter of maximizing the power of those already in power -- ultimately, a lawless proposition. The country with the largest military calls the shots and can't let itself be constrained by the clamor of lesser nations. The President is responsible for the nation's security and can't let himself be constrained by a whining pusillanimous legislative branch. The financial masters of the universe are uniquely qualified to allocate capital where it's most productive and can't be constrained by a bunch of petty curbs on leverage and lending practices.

At the moment when risk management in the financial world radically failed, democracy's ultimate risk management tool -- the ballot box -- kicked in. The Bush Administration's assault on the U.S. Constitution and governmental norms was unprecedented. Obama, on multiple fronts, is trying to implement the most sudden about-face in our history. In his inaugural address, he told the world, "we reject as false the choice between our safety and our ideals...and we are ready to lead once more." We'll learn sooner or later whether it's too late.

C.S. Lewis, democrat by default

A Sullivan reader loves and is exasperated by C.S. Lewis -- loves the heavenly imagination, chafes at the faux rationalism :

I think Lewis was so compelling because, first, he was incomparable at evoking "joy" as he defined it. Whatever idea and yearning for "heaven" I ever had came from Narnia. Second, I think he had an intuitive -- not theoretical -- grasp of psychology -- he was one of those people who reads his own mind so well, he knows a good deal about how all human minds (and wills and emotions) work.The bickering of the children in The Magician's Nephew, Eustace's redemption in Dawn Treader, the seeds of human hatred elucidated by Screwtape -- and above all, the parental love turned to jealous gall in Till We Have Faces -- his greatest imaginative leap and rendition of the romance of the soul --have a kind of easy, intimate verity that give his spiritual dramas life.

At the same time, when it came to doctrine and apologetics, I think he was an unwitting sophist -- an honest sophist, if that makes any sense, because he fooled himself first...

What's palpably ridiculous are his warmed-over medieval arguments for the objective truth of Christian doctrine. One was that Christ had to be "either a God or a devil" - or self-delusive megalomaniac, as we'd now say. While sniping at the imperfections of scientific Biblical scholarship, Lewis shut his eyes to the painstaking work of two centuries that convincingly discerned different voices, sources, periods, influences on Biblical text...

The reader sees Lewis as a sort of quintessential "conservative soul" in the sense Sullivan uses the term:

Lewis's politics in the broadest sense, I suspect, inform yours. He's one of your conservatives of doubt -- dubious about the efficacy of human attempts to permanently improve human life. He's a democrat (small d, believer in democracy) by default, of the Churchillian school that democracy is the worst form of government except for all the alternatives. His own formulation was that democracy is necessary because human corruption means that no individual or small group can be trusted with power. That's true, and salutary. What Lewis lacked was any sense that participating in political life is part of what makes us fully human -- and the corollary, that a people's meaningful participation in politics could permanently advance human welfare. Strange, for a man steeped in Greek literature -- no sense that man is a political animal.

P.S., I love EU: Rachman's startled valentine to the European Union

It's time for another Wolf Munch Rock Award - so named because the truth is often hard to digest.

It's also named for Financial Times columnists Martin Wolf, Wolfgang Munchau and Gideon Rachman, mainstays of that oasis of dispassionate analysis the FT Comment page. It goes to an observer of world news and trends whose writings exhibit deep (if understated) expertise, fact- and evidence-based exposition, wide-angle perspective on large-scale trends, and theses based more on observation and analysis than ideology.

This week's award goes to Gideon Rachman, for a column that exemplifies those virtues, garnished with Rachman's own signature understatement, irony, self-deprecation and contrarianism -- in this case directed against himself. A backhanded tribute to the European Union, the column is also a blackflipped mea culpa: I was wrong because I was right:

I am ready to retire as a eurosceptic. The European Union is in trouble. But rather than smirking – which would be the normal reaction of a sceptic – I am alarmed.

The premise is simple enough. European political union is a pipe dream, and a dangerous one. European economic union, on the other hand, "is the best example we have of international governance," a pillar of stability and prosperity. If protectionist pressures unravel the benefits of the common market, the results could be catastrophic.

What's so very interesting, though, is Rachman's personal journey from loving to hate the EU for its political pretensions to learning to love its now-endangered economic accomplishments. Even more interesting, it's the very weaknesses entailed by incomplete political union than now endanger economic cooperation. Rachman despised the pretensions, recognized the weaknesses and now trembles for the Rube Goldberg contraption that fostered European prosperity and freedom in spite of it all:

In January 2001, I arrived in Brussels with several firm and unfavourable convictions about the EU. I believed that most ordinary Europeans felt far more loyalty to their nation than to Europe. I thought that steadily enlarging the powers of Brussels was undemocratic and dangerous. I reckoned that in a crisis, nationalist instincts would come to the fore. I suspected that the EU’s new currency – the euro – was liable to run into trouble. And I believed that the Brussels-based elite was a “new class” that had confused its own interests with those of the continent of Europe.

Eight years on, I look back at these old prejudices – and smile at my foresight. The past few years have provided a graphic demonstration of the feeble popular support for the European project....The strain of the economic crisis is indeed opening up divisions within the Union. An emergency EU summit was called this weekend to combat protectionism. Several of the new EU members from central Europe are facing banking and financial crises – and the older members have refused to bail them out....

Arguably, all my darkest suspicions about the European project are about to be vindicated. So it is an odd time to renounce euroscepticism.

But it is precisely the threat to the EU that has focused my mind. Plans for a political union in Europe were always crazy. But the four freedoms already established by the EU – free movement of goods, people, services and capital – are huge and tangible achievements. It would be terrible to see them rolled back.

Appreciation for those "huge and tangible achievements" under stress focuses the mind indeed:

If Europe starts rolling back the four freedoms, the implications will stretch well beyond economics. Protectionism and nationalism are close cousins. The principles of consultation, co-operation and open borders within the EU have helped to repress the old, nationalist demons.

Protectionism and nationalism are close cousins. Variations on that warning have been plentiful on the FT comment page. It's the overriding back-to-the-future fear haunting the current crisis. But this phrasing is particularly resonant -- filtered as it is through Rachman's longstanding respect for European nationalist resistance to EU political ambitions.

Rachman closes with a trope that captures the full irony of his turnaround:

Strangely enough, I now feel a certain protective warmth towards the embattled eurocrats in their Brussels skyscrapers. This would have been hard to imagine when I arrived in the city all those years ago. But it has finally happened. I love Big Brother.

"Big Brother," it seems, has turned out to be King Log rather than King Stork.

This column epitomizes what I value in the FT Comment page. FT columnists write "essays" in the original sense -- trials, thought experiments. Often, they visibly think their way through to a conclusion -- and it's not just an empty rhetorical exercise leading us to a false eureka. Rachman, Wolf, Stephens, Munchau et al often take readers through their own uncertainties, ambivalences, fears: they frame policymakers' dilemmas with sensitivity and an appreciation for hard choices. I'm not sure how a crew with such congruent sensibilities was assembled. But in this era of newspaper meltdown, I look at the page with the same anxious don't-know-what-you've-got-till-its-under-siege regard that Rachman casts on the EU.

Obama: Republican budgeting = Wall Street risk management

As Republicans scream "socialist" at Obama, he is outflanking them by tying Republican stewardship of the economy to Wall Street's reckless mismanagement -- and dramatically contrasting his own budgeting practices and priorities.

While Obama spent two years as a candidate contrasting his proposed menu of investments and tax hikes on the wealthy with "the failed policies of the last eight [seven, six] years," his own budget enables a new level of sophistication in the contrast. Now, the Republicans in his telling are poor risk managers -- while Obama is a long-range planner and investor. From today's weekly address:

My administration inherited a $1.3 trillion budget deficit, the largest in history. And we've inherited a budgeting process as irresponsible as it is unsustainable. For years, as Wall Street used accounting tricks to conceal costs and avoid responsibility, Washington did, too.

These kinds of irresponsible budgets -- and inexcusable practices -- are now in the past. For the first time in many years, my administration has produced a budget that represents an honest reckoning of where we are and where we need to go.

It's also a budget that begins to make the hard choices that we've avoided for far too long -- a strategy that cuts where we must and invests where we need. That's why it includes $2 trillion in deficit reduction, while making historic investments in America's future. That's why it reduces discretionary spending for non-defense programs as a share of the economy by more than 10 percent over the next decade -- to the lowest level since they began keeping these records nearly half a century ago. And that's why on Wednesday, I signed a presidential memorandum to end unnecessary no-bid contracts and dramatically reform the way contracts are awarded -- reforms that will save the American people up to $40 billion each year.

While the budget itself proposes huge outlays for stimulus, health care reform, education, alternative energy and infrastructure, Obama here emphasizes so far rather theoretical and distant planned spending cuts and spending-as-percentage-of-gdp projections dependent on optimistic growth predictions. He has skillfully hedged ambitious spending plans with commitments -- and rhetorical emphases --on long-range budget planning. If promises of future frugality seem a bit easy, it's also true that Obama has laid down a marker, imposing ambitious deficit reduction targets on himself by which he will be measured before his term is out.

Meanwhile, he is only too happy to help Republicans tie themselves to the crony capitalism that enabled the bubblenomics of recent years.

Talking to each other about health insurance failure

Serendipity: flipping to two websites at lunchtime, I first read a Wall Street Journal article about under-insured Americans saddled with crushing health care costs. The stories concern families with serious illnesses who have jobs and "health insurance" -- and medical bills in tens and hundreds of thousands of dollars over and above what insurers will pay.

The three Cox children have a rare disease called Shwachman Diamond Syndrome, which curtails the production of bacteria-fighting blood cells and digestive enzymes needed to absorb nutrients properly. It can lead to life-threatening infection, bone-marrow failure or a deadly form of leukemia.

After Samuel, 7, Grace, 12, and Jake, 15, were diagnosed with the genetic disease earlier this decade, landing a job with good health benefits became the biggest priority for Mr. Cox. He gave up plans to run his own home respiratory-care business to work as a salaried medical-equipment salesman. In 2006, the family moved to North Carolina from Kansas City to be closer to specialists at Duke University.

But the Coxes' insurance covered only part of the children's care, which includes regular gamma globulin injections to boost their immune systems. At times, the children have seen specialists outside their insurer's network, requiring the Coxes to pay 30% of the bills. The companies that have insured the Cox children deemed some of their treatments experimental, which they don't tend to cover.

Until recently, the Coxes stayed afloat on a patchwork of Good Samaritan efforts and rising home prices. The parish of their former church, Abundant Life Baptist of Lee's Summit, Mo., rallied around them, even after they moved from the Kansas City suburb to North Carolina. A medical fund set up by the church raised tens of thousands of dollars. A separate annual fund-raiser organized by neighbors has generated more than $50,000. And the Coxes tapped more than $100,000 of equity from their former Kansas City home to finance travel to far-flung hospitals before selling it in 2006.

But the economic crisis is rattling their makeshift network of assistance...The Coxes face more than $40,000 in unpaid medical bills as the commissions that Mr. Cox makes on top of his $47,000 base salary dwindle. At the same time, the family's medical and dental premiums at Fisher & Paykel Healthcare, the respiratory-device maker that employs Mr. Cox, jumped about 13% to $876 a month for 2009.

Next, I flip to Swampland, and find that Karen Tumulty is bringing the health care crisis home -- to herself and to her readers:

Like most journalists, I do my best to operate in a comfort zone of detachment. But the subject of my cover story in the upcoming edition of TIME is one about which I won't claim the slightest bit of objectivity. It is about my brother Patrick. Last summer, he found out his kidneys were failing; a few weeks later, he found out his health insurance wasn't going to pay for his treatment.

I used to think I was something of an authority on health care; I've covered its policy and its politics for 15 years. But when my family took its own trip through the frustrating maze that is this country's health care system, I discovered how much I had to learn. Health problems are behind half the bankruptcies in this country, and three-quarters of those bankrupt people had health insurance when they got sick. Just about anyone could be one diagnosis away from catastrophe. My editors decided to put this story on the cover not because it is so extraordinary, but because it is so common, and becoming more so every day.

So please read this story. And after you do, go find your health insurance policy and read it, too.

UPDATE: A number of Swampland commenters have suggested that we give our readers a chance to share their own stories. That's a terrific idea. There's now a link in the third paragraph of the story where Facebook users can share their own experiences. (You then scroll to the bottom of the page.) It's not perfect, technologically, but it does give us a way to gather feedback. Please give it a try.

Perhaps the nation is reaching a tipping point, at which we recognize that we are all vulnerable -- if not uninsured, then underinsured, or potentially under- or uninsured. The stories are everywhere, and they are Dickensian, as sharp a shame to our society as brutal orphanages and child factory labor became to Victorian England.

Meanwhile, over at TNR, Jonathan Chait notes that Obama, as he seeks to marshall the country in support of health care reform, is avoiding focusing solely or primarily on the plight of the uninsured. Not only is he spotlighting health care costs -- a matter of the country's long-term fiscal viability -- but he's also speaking in terms of Jacob Hacker's great risk shift:

But Obama also presented the cost problem as a problem for individuals--one that was crushing the insured as well as the uninsured, and in many cases transforming the insured into the uninsured:

In the last eight years, premiums have grown four times faster than wages. An addition 9 million Americans have joined the ranks of the uninsured. The cost of health care now causes a bankruptcy in America every 30 seconds. By the end of the year, it could cause 1.5 million Americans to lose their homes. Even for folks who are weathering this economic storm, and have health care right now, all it takes is one stroke of bad luck--an accident or an illness, a divorce, a lost job--to become one of the nearly 46 million uninsured or the millions who have health care, but really can't afford what they've got."

The emphasis is mine, because that's the argument Obama and other reformers need to make. Pollsters will tell you, accurately, that the phrase "universal health care" does not play that well with the voters. That's because, when it's phrased that way, middle-class voters thinks that simply means paying more taxes so that people without insurance now can get it. What Obama is trying to do here is to suggest that everybody--the uninsured and insured--are vulnerable today, and that neither will be totally secure until we do something to guarantee coverage and make health care less expensive.

If Time and the WSJ are indicators, Obama may have the media behind him as he drives this message home.

Two cheers for Nineveh

At this moment, when the stock market has fallen faster than in the early thirties and we've learned in new detail that for eight years we lived under a President who authorized himself to abrogate the First and Fourth Amendments and unilaterally violate any law or treaty he chose, what's to feel good about?

This: our political system is working again. Has worked. Over two elections, we threw the bums out. The political safety nets held -- for the present. Collectively we lost a quarter of our worldly wealth. But we have our (political) health.

Thinking about the resilient if slow-moving wisdom of the electorate, I find Jonathan Chait's unsentimental view of how democracy works oddly reassuring:

Rush Limbaugh is drawing some ridicule for saying, "One thing we can all do is stop assuming that the way to beat [the Democrats] is with better policy ideas." But I think he's basically right. Good ideas are meritorious. But being meritorious isn't what wins elections. Most voters have only the faintest idea what policy ideas candidates advocate when running or implement when in office. External conditions (such as the economy, but war and scandal matter also) have much more influence over which party wins...

I think it's pretty clear that the Democratic comeback since then has had next-to-nothing to with developing "new ideas" and almost everything to do with Republican failure, the state of the economy, and a really effective presidential nominee. yes, Democratic ideas proved more popular, but they really were the same basic ideas the party had advocated for years.

Democracies are not immune from extended periods of misgovernment. They are resilient, and adaptive, because unless misgovernment erodes (or crushes in one fell swoop) the basic machinery of choice, they retain the ability to self-correct. And that ability swings not on the ideologies that juice the agents of power but on the cold, hard facts to which those ideologies are answerable.

Sometimes events do mow down the wrong guy, or even the right guy for the wrong reasons -- a recession falls unluckily, a helicopter crashes in the desert. And I think Chait's wrong to the extent that bad ideas, gussied up with slick Rovian sophistry and smears, can sway the swing voters at times. You can fool all of the people some of the time, and a bare majority for a bit longer. Electorates make mistakes. But eventually, the facts break through.

If America is a shining city on a hill, it's not Jerusalem (thank God!). It's Ninevah. We know how to repent, and change course.

Ed Kilgore fisks Brooks

Ah sweet incandescent exasperation...does Ed Kilgore have David Brooks' number. Writing of Brook's self-proclaimed Moderate Manifesto published in today's Times, Kilgore captures Brooks's essential disingenuousness:

Its main thrust is to agree with conservative arguments that the Obama administration's budget proposal is a radical big-government, class-warfare, tax-and-spend package that would remake the country in a horrifying fashion. Indeed, "moderates" are explicitly called upon by their would-be chieftain to join the Right in opposing the whole thing. But what makes the argument both distinctive and incoherent is Brooks' concession that the key components of the proposal all make sense:

We [moderates] sympathize with a lot of the things that President Obama is trying to do. We like his investments in education and energy innovation. We support health care reform that expands coverage while reducing costs.

So what's the huge beef? It's just all too much:

[T]he Obama budget is more than just the sum of its parts. There is, entailed in it, a promiscuous unwillingness to set priorities and accept trade-offs. There is evidence of a party swept up in its own revolutionary fervor — caught up in the self-flattering belief that history has called upon it to solve all problems at once....

We end up with an agenda that is unexceptional in its parts but that, when taken as a whole, represents a social-engineering experiment that is entirely new.

Like Joe Klein in a much more genteel key - and like yours truly, Kilgore points out that Obama's activism is a restoration after decades in which the government failed to fulfill essential functions such as maintaining infrastructure, protecting the populace from catastrophic health care costs, reducing fossil fuel consumption or regulating the financial industry:

[Brooks] knows that progressives aren't simply "using" the economic crisis to "focus on every other problem under the sun." They believe, as Brooks sometimes appears to believe, that you cannot separate "the economic crisis" from health care costs, an inefficient and unsustainable energy system, an underperforming education system, or indeed, from a tax code that undermines middle-class work and rewards upper-class wealth.

For a year and more, Brooks has been running a one-man good cop/bad cop routine on Obama: praising his alleged personal qualities in one column, ridiculing his political strategy and policy decisions in the next. As Kilgore suggests, Brooks is essentially establishing his good faith credentials so that when he sticks the shiv in, it will seem to some to strike home more in sorrow than in anger.

Buckley goes wobbly

Christopher Buckley is always very funny and generally fair-minded. But his equivocal indulgence in the audacity of nope in response to Obama's budget strikes me as knee-jerk conservatism:

One thing is certain, however: Government is getting bigger and will stay bigger. Just remember the apothegm that a government that is big enough to give you everything you want is also big enough to take it all away. And remember what de Tocqueville told us about a bureaucracy that grows so profuse that not even the most original mind can penetrate it.

If this is what the American people want, so be it, but they ought to have no illusions about the perils of this approach. Mr. Obama is proposing among everything else $1 trillion in new entitlements, and entitlement programs never go away, or in the oddly poetic bureaucratic jargon, “sunset.” He is proposing $1.4 trillion in new taxes, an appetite for which was largely was whetted by the shameful excesses of American CEO corporate culture. And finally, he has proposed $5 trillion in new debt, one-half the total accumulated national debt in all US history. All in one fell swoop.

It's that big government bogey -- government as Santa. But what is Obama proposing to 'give' us? Marginally adequate health insurance, so that tens of millions are not bankrupted by health care bills? Schools that aren't falling down, or that graduate more than 70% of teenagers (with something better than the 8th grade reading levels with which many are now passed through)? A few tax breaks to the working poor to subsidize our Dickensian minimum wage? A modernized electrical grid, and infrastructure that's not on a third world trajectory?

And about that debt before which Buckley professes to quail: how much of that is unavoidable bailout? Consensus-level (among the reality-based community) stimulus? Down payment on a long-term budget fixer like breaking health care inflation? War costs actually counted as part of the budget?

As for that $1.4 trillion tax bogey: over the ten years from 2001-2010, Bush cut taxes by $2.35 trillion, according to the Institute on Taxation and Economic Policy. Obama's increases are in fact too modest -- after eight years of Bush and nearly thirty in the grip of Reaganism this nation is seriously under-taxed.

I'll cop to a bit of Buckley's anxiety. The one thing about Obama's budgeting and long-term economic and political strategy that troubles me is his oft-repeated promise not to raise taxes on households earning less than $250,000 -- that is, on 95% of the country. That can't stand. I wish he hadn't been so read-my-lips about it. It's also true, as Buckley warns, that Obama's growth projections are too rosy.

But with all there is to fear out there, Obama's budget is low on my list.

Step back in that bubble, Sir

Am I wrong to get nervous when I read reports like this, about Obama's attendance of a Wizards game?

Obama was right on the floor in a corner seat that left him spending most of the game looking around the moving bodies of fans who kept walking by him for a glimpse.

It worries me that O intends to get out of the White House and mingle with people once a week. He wants reality infusions. I want him safe in that bubble.

Bring on the realists, part II: Gates on 'victory' in Iraq

After years of robotic insistence by the Bush Administration and its surrogates on 'victory' in Iraq, today Robert Gates gave us this on Meet the Press today:

MR. GREGORY: When the United States finally leaves Iraq, will it have achieved victory?

SEC'Y GATES: I think that we have--as I've said, I think we have, have had a significant success on the military side. There is still--the political side is still a work in progress in Iraq. And frankly, I think before you start using terms like "won" or "lost" or "victory" or "defeat," those are the kinds of things that I think historians have to, have to judge. But I think that from the standpoint of the military mission we will have enjoyed significant success.

MR. GREGORY: Is it fair to say that when the U.S. leaves President Obama will not be able to declare either victory or defeat, that it'll be something of a muddle?

SEC'Y GATES: The question is, what kind of position is Iraq in at the time that we pull out? If Iraq is basically stable, if the level of violence remains at the relatively low levels that it is now, if they have had national elections, if they are an ally of the United States, I would call that a substantial success.

Compare Obama last April, pushing Ryan Crocker toward an attainable definition of success in Iraq last April:

And, see, the problem I have is if the definition of success is so high, no traces of Al Qaida and no possibility of reconstitution, a highly-effective Iraqi government, a Democratic multiethnic, multi- sectarian functioning democracy, no Iranian influence, at least not of the kind that we don't like, then that portends the possibility of us staying for 20 or 30 years.

If, on the other hand, our criteria is a messy, sloppy status quo but there's not, you know, huge outbreaks of violence, there's still corruption, but the country is struggling along, but it's not a threat to its neighbors and it's not an Al Qaida base, that seems to me an achievable goal within a measurable timeframe, and that, I think, is what everybody here on this committee has been trying to drive at, and we haven't been able to get as clear of an answer as we would like.

And now contrast John McCain, in the September 26 debate:

This strategy has succeeded. And we are winning in Iraq. And we will come home with victory and with honor. And that withdrawal is the result of every counterinsurgency that succeeds.

And I want to tell you that now that we will succeed and our troops will come home, and not in defeat, that we will see a stable ally in the region and a fledgling democracy....

And thanks to this great general, David Petraeus, and the troops who serve under him, they have succeeded. And we are winning in Iraq, and we will come home. And we will come home as we have when we have won other wars and not in defeat.

This is not to denigrate McCain's commitment to staving off failure in Iraq -- a commitment on which he staked his political future -- or his intrepid and lonely support of the surge in early 2007. That was a call and a commitment that tapped McCain's strengths. Gates, in fact, shares that commitment, insofar as he has said that failure in Iraq would have catastrophic consequences. But when it came to envisioning an endgame and devising an exit strategy, or balancing the U.S. commitment in Iraq with the demands in Afghanistan and the military's overall capabilities,, McCain lacked the grasp of messy reality evinced by Gates and Obama above. As Joe Klein recalls today:

Actually, the path McCain wanted to formulate, with Scheunemann's assistance, was to establish permanent--100-year--US military bases in Iraq. That path, and the continual comparison of Iraq to South Korea, Germany and Japan, was always absurd. It was dismissed out of hand by the Iraqis last summer when Nuri al-Maliki came out in support of Obama's general timetable, which took a big issue that McCain hoped to exploit off the table in the presidential campaign.

The U.S. and the world are in deep trouble today. But we can still offer up a thanksgiving prayer that the realists are in charge.

Read Bring Bring on the realists, part I