Strengthening Constitutional Self-Government

No Left Turns

Fitting Juxtaposition?

By the way, Peter and I are presently attending the fall regional meeting of the Philadelphia Society in San Antonio (I’m actually president this year), and we’re holding our meeting across the street from the Alamo. Which someone took note of given the current election outlook--conservatives. . . the Alamo. Sounds about right just now.

Osama for President??

Apparently in New York.

The $250,000 Maginot Line

George Packer’s New Yorker article on the working-class voters of Ohio contains an illuminating exchange – more illuminating than the author intended. He spoke with Barbie Snodgrass, a single mother who works two jobs in Columbus as a receptionist and cleaning lady. She is barely keeping her head above water on a little more than $40,000 a year. Packer notes that Barack Obama’s acceptance speech in Denver had policy details on the economy and health care, “which seemed tailored to attract a voter like Snodgrass, but they filled her with suspicion.”

Why? Snodgrass did not believe Obama’s promise to rescind the Bush tax cuts for high-income households: “How many people do you know who make two hundred and fifty thousand dollars? What is that, five per cent of the United States? That’s a joke! If he starts at a hundred thousand, I might listen. Two hundred fifty—that’s to me like people who hit the lottery.”

We don’t know what Packer said to Snodgrass during the interview, but he tries to correct her editorially: “In fact, only two per cent of Americans make more than a quarter of a million dollars a year, but that group earns twelve per cent of the national income. Nonetheless, the circumstances of Snodgrass’s life made it impossible for her to imagine that there could possibly be enough taxable money in Obama’s upper-income category—which meant that he was being dishonest, and that she would eventually be the one to pay.”

Although Packer is evidently conversant with the Census Bureau statistics and Snodgrass sounds too busy to look them up, it turns out that her fears are more realistic than his reassurances. The data Packer was referring to comes from the Census Bureau’s table showing “Income Distribution to $250,000 or More for Households” in 2007. A little calculator work bears out two of his points. First, the 2,245,000 households with incomes at or above $250,000 constitute 1.92% of the 116,783,000 households in America last year. Second, the $938.55 billion those households received last year amounts to 11.89% of the $7.895 trillion that all American households received.

Neither fact, however, renders the Obama tax and spending plans realistic. The $938.55 billion received by the households making more than $250,000 can be broken down into two parts: They get $561.25 billion to get from zero dollars per year to $250,000 per household; and then they get $377.30 billion in excess of $250,000 per household. The petty cash drawer Obama and Packer want to reach into to pay for new and bigger social policies doesn’t have $939 billion, but only $377 billion. That’s not 11.89% of all household income; it’s 4.78%.

$377 billion also represents 13.8% of total federal outlays in Fiscal Year 2007. Even if an Obama administration could capture every one of those 377 billion dollars for the U.S. Treasury, the effect would be to modestly augment what the federal government is already doing, rather than dramatically expand its role and presence in American life, as FDR and LBJ did.

But, of course, Obama can’t and won’t tax all, or most of those $377 billion. In the first place, much of this $377 billion is already taxed by the federal and state governments, meaning that the portion of that money left to be captured by new federal taxes is considerably less than $377 billion. In the second place, a 100% tax bracket on income over $250,000 will yield zero revenue – this is the one postulate of supply-side economics that no one disputes. Third, Obama is proposing what his top economic advisors describe as merely “partial rollbacks” of the Bush tax cuts for families making more than $250,000. The top tax bracket, for example, would return to 39.6%, not the 70% that greeted Ronald Reagan in 1981, or the 90% bracket JFK encountered in 1961. The revenue stream to the Treasury from such tax increases will be a small fraction of $377 billion per year. Fourth, the Obama campaign proposes tax cuts for people making less than $250,000 per year that will cost the Treasury less than the tax increases on the rich folks will bring in, “making the proposal as a whole a net tax cut,” according to his advisors. A net tax cut is a difficult basis on which to enact a net spending increase.

Candidate Obama promises to close loopholes and tax havens, and to “go through the federal budget, line by line, eliminating programs that no longer work and making the ones we do need work better and cost less.” This reformulation of Ronald Reagan’s promise in 1980 to scour the budget for “waste, fraud and abuse” is certain to be as futile. The federal government does its share of stupid things, of course, and its share of things stupidly. But every one of those things has a tenacious constituency defending its favorite program, a constituency that rightly believes presidents come and go but interest-groups fight forever . . . and prevail.

An Obama victory in November appears likely. It appears even more likely that an Obama presidency has already been pre-trivialized by the nominee’s contradictory campaign promises. He should have turned to Barbie Snodgrass for advice.

The Anointed One

“Reality-based community,” according to Wikipedia, “is a popular term among liberal political commentators in the United States. [It] was first used to suggest the commentator’s opinions are based more on observation than faith, assumption, or ideology. . . . Some commentators have gone as far as to suggest that there is an overarching conflict in society between the reality-based community and the ‘faith-based community” as a whole.”

One Obama worker, however, must have missed a memo. Donna Steele, campaigning for Obama out of Service Employees International Union headquarters in Ohio, was asked by the New Yorker’s George Packer how she would make the case to working-class voters who were wavering between McCain and Obama, or thinking of not voting at all. She said that McCain would tax health benefits and cause oil prices to increase, but, “I think gas prices are going to miraculously go down because of [Obama’s] policies. . . . When something good happens, faith has a positive effect, the aura of it. It’s called hope, faith, and it’s change, and you get enough people together and it’s massive change.”

Re: Random Observation #5

Concerning Peter’s Random Observation #5 below--yes, the stock market is really bad. I’m not a rich guy, but I crossed the six figure loss mark several weeks ago, and you don’t even want to know how ugly today’s 700 point loss was. I won’t know to total for another half hour yet, until mutual fund prices settle and are posted for the day. BUT, I’m drooling. Remember Warren Buffett’s axiom that the time to buy is when there is blood running the street and everyone else is panicking. He’s been waiting ten years for this moment, and that’s why he’s now buying up GE, Goldman, Constellation Energy, etc. Remember that shareholders have been beating on him for years about holding 40 to 50 billion in low-return cash. Just wait, he said.

Even if there is a really deep recession, the risk level now being priced into stocks and bonds is absurd. See this piece by my pal Kevin Hassett on just how absurd it is getting.

So yes, I have been buying stock every day this week, a little at a time. I’m still getting pounded of course and am almost out of new money to throw in. But the stock market has never turned in a negative ten year return even during the Great Depression. I figure I’m going to get a great return. I did in 2002 when I threw in big both times the market dipped to 7,500 or so.

And hey, if it doesn’t work out, my losses will allow me to escape Obama’s intended higher tax rates he wants to throw at me. So it’s win-win either way!

FRIDAY UPDATE: Looks like I’ll be going with the tax loss strategy!

Random Observations

1. I’m up in the DC area, but haven’t gotten in the Beltway yet.

2. But I did get two emails this afternoon with something like this message: McCain’s housing scheme is nuts. It now looks like Obama is more the more fiscally conservative of the two socialists running.

3. My quick reponse: But Obama with a Democratic Congress...?

4. We really do need some straignt and smart talk about what happened to our economy. It’s not going to come from our national candidates, it appears.

5. This may seem dumb and obvious: But this stock market thing is really, really bad. It’s in a way worse than 1929, because ordinary Americans are now so dependent on the price of stocks for their future. And talk about a force beyond the ordinary guy’s comprehension and control...
There are limits to what might be expected from personal responsibility.

Forget Your Father’s "Dreams" . . .

. . . how about some good old-fashioned "Wisdom" from our fathers or, failing that, from our grandfathers? Victor Davis Hanson offers some today at the close of an article discussing the lessons to be learned from the financial mess we’ve all created: "Save your money. Don’t borrow what you can’t pay back. Look first at a man’s character, not his degrees. And if a promised return on an investment seems too good to be true, it probably is." Good advice like this is hard to come by these days because we have gotten out of the habit of understanding it. It is even harder to take such advice when we have gotten out of the habit of desiring to deserve our gains more than we desire the gains themselves. But perhaps, in the end, this mess will have a chastening effect as the baubles of illusory gain appear more and more illusory and it becomes clear to more and more people that the only reliable way to achieve some level of material success is to put the bulk of one’s effort into the service of deserving it.

Judges, International Law, and the Next Administration

Peter often brags (deservedly) about the notable accomplishments of Ashbrook Scholars. Here is another post that he can add to his bragging list. Deborah O’Malley, an alumni of the Ashbrook Scholars program has joined the ranks of the legal center at Heritage. She just published a timely op-ed discussing the Supreme Court’s unseemly attraction to international law, and warning that this trend could get worse if advocates of "transnational" jurisprudence like Obama advisor and Yale Dean Harold Koh were to join the court.

The defense offered by Justice Breyer for his invocation of international law is fairly weak, and O’Malley calls him on it:

Justice Stephen Breyer insisted that the "enormous value...of trying to learn from the similar experience of others" justifies giving weight to foreign laws. It’s particularly valuable, he says, when addressing human rights issues. Why? Because "you’re asking a human question, and the Americans are human -- and so is everybody else."

It is rare that one sees the "I’m a Pepper; he’s a Pepper; wouldn’t you like to be a Pepper, too?" theory of constitutional adjudication. Yet this approach appeals not only to Justice Breyer, but also to Justice Ruth Bader Ginsburg, who admonishes that we "can join hands with others" by paying homage to international law.

Humor aside, the trend to rely upon international law is a major issue for the Court, and it should be a major consideration for the candidates to address. Definitely worth a read. 

Another Way to Pass Time During the Age of Obama

The Lingerie Football League??? Be sure to scroll down for the CNN video excerpt: "No, I don’t feel exploited at all." Must be one of Bill Clinton’s core constituency.

In the Age of Obama. . .

. . . it just might come to this. (A YouTube video--very funny; just 1:32 long.)

Smart Money or Tax Planning?

Now THIS is interesting: last night someone plunked down $140,000 on Intrade that Obama will lose. Does someone know something, or is this speculator simply hedging with a bet that will provide a big tax loss?

Near the Bottom?

An interesting analysis of where the housing sector and trade deficit are right now.

Hat tip: Richard Starr/Weekly Standard.

Pre-Mortem Postmortems

1. Well, the web is full of them. David Brooks allegedly said somewhere very recently, for example, that Obama would win by nine. That’s close to the predicton he made at Berry last April and one I made for different reasons in August. David said that the election would be close until the last couple of weeks, when there would be a sharp break one way or the other. The issue: Is Obama up to the job? If he shows he is, he wins. If not, McCain is a solid alternative. Well, David might say, if asked today, that the economic crisis just caused the break to happen early. I still 1980 is most relevant analogy. This election could morph into something much worse if the Republicans get too dispirited and their bases get de-energized. Still, there remains the ghost of chance that the early break will fade. The election in 1980 occured just the right week for Reagan, maybe this week is Obama’s peak.

2. Evans and Novak say the Republicans nominated the wrong candidate. A guy with high-powered economic expertise could carry the day for them. Well, until the economic crisis, it was thought that only McCain among the Republicans could win, because he could play the maverick card. And mobody much feels the love for Mitch. It is true that, knowing what we know now, Mitch might be a real match for Obama under these exact, unforeseeable circumstances.

3, Ivan the K suggested to me that one gimmick McCain might try now is to say he’ll make Mitt his Secretary of the Treasury/Bailout Czar. And then send him on the road for cogents partisan (yet still true) explanations of what caused and what can cure what ails us financially. I really think this would have more promise than screaming Ayers and Wright, although I still doubt it would work. Mitch could rule on the health care issue. He got it done, so to speak, in Massachusettts.

4. Any fair person has to admire the way Obama has negated McCain’s foreign policy advantage. He hasn’t said anything McGovernite or even European in a while, and it turns out to be an advantage for him that he doesn’t have much of an official voting record.

5. Good news: Rasmussen reports that McCain and Senator Chambliss have significantly widened their narrow leads in Georgia. And Al Franken’s lead is now within the margin of error.

Statistic Du Jour

Via Richard Epstein:

Pray tell, what patterned principle dictates that we should have 12% of all mortgages made to low-income borrowers in 1996, 20% in 2000, 22% in 2005 and 28% by 2008?

Ayers, the real issue

Many people have suggested that Senator Obama’s long-term working relationship with William Ayers suggests that Obama is more of a Lefty than he lets on. But it seems to me that, the real scandal is, as the New York Times reminds us, Ayers is not far out of the mainstream of the Education school. That’s why Mayor Daley reports that "he has long consulted Mr. Ayers on school issues."

Such rot as there is in the U.S. today begins largely at school.

Is Main Street Really "Bailing Out" Wall Street (or anybody, for that matter)?

Steven Malanga writes a must-read piece on the reality of who pays what in our convoluted tax system today. All the shrieks of outrage from politicians eager to exploit the disgust of voters for the excesses of Wall Street neglect the following fact: "Many Americans probably won’t pay a cent of the cost of this bailout. That’s because a rapidly increasing percentage of U.S. households legally pay no income taxes, and many others pay so little in taxes that they already get back more from the federal government in services than they send to Washington." As Malanga says, if you want to see who is really paying for the bailout (and most everything else) you need to drive through the area where the mansions are in your town.

While this information ought to cause some number of pitchforks to be lowered, it also ought to cause some deep questioning of our tax policies--to say nothing of our spending. Malanga notes, "Of the 138 million households who file tax returns, only about 16 million, or 11 percent, earn enough to pay more to the feds in taxes than they get back in services."

Neither Barack Obama nor John McCain are promising any kind of tax reform that seeks to reverse this trend. Indeed, according to Malanga, Obama would increase the number of households not paying any federal income tax to 44% while McCain’s plan comes in at just one percentage point lower. As we move ever closer toward a situation where more and more people have a "stake in growing government entitlements" and fewer people contribute to the financing of these entitlements, at what point do those paying the freight begin to ask, "Since when did it become just for me to work while you eat?" They will, trust me, find ways around such a disproportionate tax system . . . none of which will be of benefit to those of us most in need of their best efforts.

Malanga sums it nicely: "That’s a prescription for a static economy largely bereft of opportunity. On the other hand, we probably won’t have to worry about volatile markets in such a world." Indeed. Welcome to the stability of stagnation.

The FDR Strategy

In the 1930s, Franklin Roosevelt, and a sympathetic Congress, passed laws that kept the Depression going which, after blaming the rich for not investing, he used to justify more laws that kept it going still longer. All that was following what Hoover did. Am I the only one who worries that we could wind up making the same mistakes?

The classic understanding of the Depression is that it was exacerbated from Recession to Depression for three reasons:

1. The Federal Reserve not backstopping a major financial freeze (they kept waiting until it was a "real crisis")

2. Hawley-Smoot tariff hike.

3. Tax hikes in a futile effort to balance the budget in bad times.

The Fed has avoided mistake number one. I fear both candidates, plus the new Congress, will do two and three.

Arthur Schlessinger once said, "There seems no inherent obstacle to the gradualadvance of socialism in the United States through aseries of New Deals.”
Each step represents a further weakening of our liberty, and ain’t good for the economy either.

The Real Downside of American Productivity explained by ME. These remain the best times ever to be young, smart, pretty, and industrious, but I’m starting to notice that we all get old.

Polls Apart?

Steve H. is right to say that today’s polls don’t seem so bad for McCain. He’s still within the margin of error more than not. The CNN poll on the debate show, I think, that Mac may well have been right not to have been tougher on Obama than he was. Even his tentative forays caused him to be judged less likeable than before, but not more of a leader. McCain has to go the authentic, honorable, character route, which is somewhat incompatible with even perfectly legitimate negative camapaigning. McCain is doing as well as he can do in the debates, and Obama, unfortunately, has mastered his new unthreatening, centrist demeanor. Mac is the candidate we have, although not the best imaginable one in our situation, and at least he’s unlikely to tank completely. That means there’s more than enough uncertainty not to declare the election over. Other good news, two of the weakest R senate candidates, Dole of NC and Stevens of Alaska, are now both up 1.

It Ain’t Over. . .

. . . until the fat lady sings that it’s over. Or something like that. In today’s news you can use, today’s tracking polls show the race tightening again--what’s up with that?

An arrest has been made of the person who hacked Palin’s private e-mail account. Son of a Democratic politician in Tennessee.

And Larry Johnson marshalls the evidence that Obama is indeed a real socialist. Caveats in order, though: Johnson was so far in the bag for Hillary that he couldn’t see daylight by the end of primary season. He’s also the guy who wrote in July 2001 in the New York Times that there was little or no prospect of a terrorist strike occurring inside the U.S. Right, Larry. And why should we still listen to you?


I didn’t watch the darn debate. Did something fun instead. Experts say it was boring and muted. Highlights for McCain seem to be holding his own on health care and a classy closing statement. Boring equals safe and Obama wins if he comes away a safe choice. Not a game changer, maybe not even a bleeding stopper. It’s almost always the case that the first debate sets the tone. Maybe I’ll change my mind when I get around to watching the whole thing.

The Secret Word

Was the word "liberty" spoken in tonight’s debate?

Tonight’s debate

Again, not a "game changer." Barack Obama was good enough to hold his advantage, and John McCain not good enough to diminish it.

McCain had an opportunity to pin some of the blame for our current woes on the Democrats in Congress--the same Democrats, he could have said, who chair committees now and will be even more influential should Obama win next month--and, while he didn’t exactly blow it, he didn’t exactly forcefully hammer it home.

That Other Sort of Depression

We haven’t seen a lot of great comedic writing about the ongoing credit crisis. Megan McCardle, however, reminds us that economics is, ultimately, a branch of psychology. She then unpacks the various psychological tendencies that piled up the kindling for the financial markets. One of them is "optimistic bias," which she defines: "People tend to be overconfident about their own abilities and the outcome of their plans. Something like 90% of people think that they are above average drivers less likely to get into an accident than the average joe. This is so pervasive that there is actually a scientific name for the few people who accurately assess their own future, their abilities, and what other people think of them: clinically depressed."

What is a "School Reformer"?

Sol Stern takes up the substance of "reforms" proposed by the likes of William Ayers. The Annenberg Challenge and Barack Obama’s association with it sound innocuous enough on the face of it. If the only objection were that Obama had been "paling around" with a bad guy (Ayers), held a fundraiser in his home and happened to serve on a board with him--it would be one thing. It is certainly enough to show that Obama lied when he characterized Ayers as just "some guy in my neighborhood." But the real question must be to what extent does Barack Obama agree with the thinking of William Ayers? Obama has denounced the terrorism for which Ayers remains unrepentant. But will he denounce the praise Ayers lavished on Hugo Chavez? Will he denounce the agenda Ayers promotes of getting schools to teach that America is an inherently racist and militaristic country with a capitalist system that is inherently unfair and oppressive? Does Barack Obama support that narrative? It is a fair question given that it now appears that the foundation for which Obama and Ayers worked did support such a view of America.

So the real question for Obama is not so much "Who are your friends?" but, rather, "What do you believe about America?" Is it really unfair to suggest that his associates provide us some clues on that score?

Has the Bleeding Stopped?

As usual, I don’t really know. I will say that two of three tracking polls that include 10/6 have McCain within the margin of error. And the newest polls from the battleground states do too. The econmic news, of course, remains really bad, and McCain really hasn’t gotten his anti-Obama message down yet. So I think there’s reason for hope, as there’s also reason to fear a Democratic landslide. I agree with Mike Murphy that the three McCain talking points about Obama should be--too weak, too liberal, too inexperienced. To be balanced, let me add that if I were Obama, here would be my three McCain points--too old, too unbalanced, too Bushie.

BLOODY UPDATE: The Gallup tracking now has Obama up by 9. And he is up by 15 in PA. Things aren’t get better, and they may be getting slightly worse.

Any Openings for McCain?

As we look back, a cycle of the McCain campaign is discernable. From roughly mid-July to the week after the Republican convention McCain was running circles around Obama on a daily basis, culminating in a slight lead in the polls on early September after the Palin nomination.

But with the financial crisis obviously the wheels have come off the Straight Talk Express Bus. Right now McCain-Palin think Obama is vulnerable on the fact that many voters still don’t know that much about him, and especially how left he may or may not really be. Fine and dandy, but it may be too late for this to work. I suspect Obama has a strong answer in the can to use tonight about William Ayers if McCain brings it up. Will McCain have a hide-ripping riposte?

Suggestion for McCain for tonight: Go after Obama on the union card-check wish list. McCain should say that Obama wants to take away union members’ right to a secret ballot--an issue that polls 90-10 against among union households, and allow union goons to show up at your house to "help" you fill out and turn in your card. Why hasn’t the McCain campaign made an issue of this at all? Baffling.

As Ohio goes....

This WaPo article describes the results of a poll showing Barack Obama leading John McCain in Ohio.

These numbers could be turned around, but the strategy for doing so--making Obama himself the issue--is high-risk, with little margin for error and no more (perhaps even less) prospect for success.

Congressional Approval Ratings

The Harry Reid/Nancy Pelosi directed Congress now has an approval rating of just slightly less than 17% . . . Nearly 76% of the American people disapprove of the way Congress is doing its job.

These are numbers that would be very interesting to me if my name were John McCain. It’s fair to say that the "Republican" brand is weak because of the low approval numbers for President Bush. But his ratings, low though they are, outdistance the ratings of Congress by more than the spread between Obama and McCain.

Pete Wehner argues, among other things, that they should be pointing out the ways in which a President Obama would work in association and agreement with Reid and Pelosi.

Sarah’s More Right Than Joe on Judicial Activism

...says ME. That’s because one party nominated lawyers, and the other aimed higher.

One Economic Argument for McCain

1. The national polls have Obama at 50% or better and an average of about 7% over McCain. The senate polls suggest a real possibility that the Democrats could win 62 seats, including MN, MS, and GA. That would include Senator Al Franken (who hasn’t even been funny for a decade), a possibility that deserves but will not get a hilarious SNL skit.

2. One reason can be seen in the article from the WaPo below: Obama seems to be more competent when it comes to things economic, his advisors more expert, etc.

3. But the author of said article may have a clever "subtext" that "subverts" what he actually says: The evidence suggests that deregulation is not the real cause of our financial crisis. The main damage came from the risky business of the intensely partisan and hyper-regulated Fannie and Freddie. The main danger is that the crisis will produce an angry and really completely misguided overreaction against deregulation.

4. Obama himself could conceivably be prudent enough to manage that anger and not come forward with too many perverse new policies. But Obama with a heavily Democratic Congress? Wrongheaded animosity is bound to run amok in Congress, and a Democratic president can’t be expected to control it. The Democratic Congress, as the author says, will deeply compromise what MIGHT be the personal prudence of the president and his advisors. A united Democratic government is bound to mess up the economy more.

5. So the only way to really manage wrongheaded animosity is to elect McCain, who will veto the most outrageous overreactions. This position will become much more credible if Mac exhibits a lot more economic competence and more real sense of the causes of the crisis. The economist who wrote the POST article seems open-minded enough, for example, to be turned around.

Fun with Anagrams

Did you know that "Obama-Biden" offers up the following anagram: "Bomb an Idea"? I’m working on snipping up and rearranging a bumper sticker and lawn sign now.

I’m open for entries for McCain-Palin.

Fannie, Freddie, and us

No shill for the McCain-Palin campaign, the WaPo’s Sebastian Mallaby shows how the Obama campaign’s deregulation narrative is either stupid or mendacious.

In so doing, he cites two papers written by Columbia University economist Charles Calormis. I’ve read the second one, not (yet) the first (which is 113 pp. long). Suffice it to say that the deregulation of the financial services industry by Republicans in the last eight years is obviously not the problem. On the other hand, a major contributor is Fannie Mae’s and Freddie Mac’s management of "political risk," which involved enormous lobbying expenditures and the adoption of a new mission--the aggressive promotion of affordable housing--that ensured Democratic opposition to Congressional efforts to rein these GSE’s in.

Here are two snippets from the second paper:

In June 2003, in the wake of the failures of Enron and WorldCom, Freddie’s board of directors suddenly dismissed its three top officers and announced that the company’s accountants had found serious problems in Freddie’s financial reports. In 2004, after a forensic audit by OFHEO, even more serious accounting manipulation was found at Fannie, and Raines, its chairman, and Timothy Howard, its chief financial officer, were compelled to resign.

It is eloquent testimony to the power of Fannie and Freddie in Congress that even after these extraordinary events there was no significant effort to improve or enhance the powers of their regulator. The House Financial Services Committee developed a bill that was so badly weakened by GSE lobbying that the Bush administration refused to support it. The Senate Banking Committee, then under Republican control, adopted much stronger legislation in 2005, but unanimous Democratic opposition to the bill in the committee doomed it when it reached the floor. Without any significant Democratic support, debate could not be ended in the Senate, and the bill was never brought up for a vote. This was a crucial missed opportunity. The bill prohibited the GSEs from holding portfolios of mortgages and mortgage-backed securities (MBS); that measure alone would have prevented the disastrous investment activities of the GSEs in the years that followed. GSE immunity to accounting scandal is especially remarkable when it is recalled that after accounting fraud was found at Enron (and later at WorldCom), Congress adopted the punitive Sarbanes-Oxley Act, which imposed substantial costs on every public company in the United States. The GSEs’ investment in controlling their political risk--at least among the Democrats--was apparently money well spent.


The events in 2003 and 2004 had undermined the legitimacy of the GSEs. They could no longer claim to be competently--or even honestly--managed. An important and respected figure, Alan Greenspan, was raising questions about whether they might be creating excessive risk for taxpayers and systemic risk for the economy as a whole. Greenspan had suggested that their most profitable activity--holding portfolios of mortgages and MBS--was the activity that created the greatest risk, and three Federal Reserve economists had concluded that the GSEs’ activities did not actually reduce mortgage interest rates. It was easy to see at this point that their political risk was rising quickly. The case for continuing their privileged status had been severely weakened. The only element of their activities that had not come under criticism was their affordable housing mission, and it appears that the GSEs determined at this point to play that card as a way of shoring up their political support in Congress.

From the perspective of their 2008 collapse, this may seem to have been unwise, but in the context of the time, it was a shrewd decision. It provided the GSEs with the potential for continuing their growth and delivered enormous short-term profits. Those profits were transferred to stockholders in huge dividend payments over the past three years (Fannie and Freddie paid a combined $4.1 billion in dividends last year alone) and to managers in lucrative salaries and bonuses. Indeed, if it had not been for the Democrats’ desire to adopt a housing relief bill before leaving for the 2008 August recess, no new regulatory regime for the GSEs would have been adopted at all. Only the Senate Republicans’ position--that there would be no housing bill without GSE reform--overcame the opposition of Senators Christopher Dodd (D-Conn.), the banking committee chairman, and Schumer.

The GSEs’ confidence in the affordable housing idea was bolstered by what appears to be a tacit understanding. Occasionally, this understanding found direct expression. For example, in his opening statement at a hearing in 2003, Representative Barney Frank (D-Mass.), now the chairman of the House Financial Services Committee, referred to an "arrangement" between Congress and the GSEs that tracks rather explicitly what actually happened: "Fannie and Freddie have played a very useful role in helping to make housing more affordable, both in general through leveraging the mortgage market, and in particular, they have a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing."[12] So here the arrangement is laid out: if the GSEs focus on affordable housing, their position is secure.

I suppose I can hope that a President Obama won’t do the what he’s promising, that he is simply saying what it takes to get elected. But I suspect that much of what he says (both awful and not-so-bad) falls into that category, which is to say, we’re not getting much guidance for what he’s going to do from what he says he’ll do. Reminds me of another eloquent and "empathetic" Democratic politician.

The Presidency and the Courts Conference

Down in Cincinnati--trying not to get in anyone’s way--stage being built, sound, lights, never mind the Secret Service--as Roger works his prudence. The scribbled sign behind me reads "T-1, One day to POTUS." The President’s speech will conclude the conference and you can listen to him and the rest of it live by going here:

Give Me a Bleeping Break!

Sarah’s accusation of Obama’s association with a terrorist, as an isolated campaign point, will surely hurt more than help. The advice coming from the WEEKLY STANDARD and elsehwere that the campaign can be turned around simply by going negative on Obama the man is ridiculous. The comparison between this election and 1976 is pretty weak: Obama is far superior to Carter, and Ford was a fairly trusted and respected incumbent. McCain’s ghost of chance would come from showing that he understands the real cause of the financial crisis in fairly partisan Republican way (which means implicating the Democrats), taking on Biden’s lies on judicial activism (while showing that Obama is far to the left even of Biden on abortion etc.), defending in detail his quite defensible health-care reform as real and desirable change, getting real tough and specific on the real differences between the two parties on energy policy (which means embracing the Palin let’s do everything policy), trumpeting the dangers of a very liberal united government (taking people’s eyes away from Obama’s baloney platform and toward what a very liberal Democratic Congress would actually do and roll back), and driving a wedge between Obama’s and Biden’s record on war, foreign policy etc., showing, from the record, that Obama is actually pretty much of a McGovernite, and generally attack politically correct boboism on the level of "cultural" and educational policy. Right now what people really think is McCain doesn’t have a clue and Obama does, and going after Obama’s character isn’t the ticket at this point. None of this plays to McCain’s strengths, but it’s still all about ways he would be a better president than Barack, despite Obama’s obious intelligence and, so far, tactical and strategic superiority as a compaigner.

The end of prosperity?

Apparently Niall Ferguson wrote this just before Congress passed the bailout bill, but it seems to me to be one of the clearest pieces I have read on the international economy and how the crisis may have been averted. I think it includes a pretty good explanation of the cause of the Great Depression and how our situation may differ. 

Also note this morning’s news that Europe’s four largest economies have rejected a joint strategy on their bank crisis. The Germans and the Brits insisted on going it alone. Note that the other EU members were not included in the discussions.