Capitalism without capital!

Thanksgiving is drawing near and I want to wish everyone the Happiest of Thanksgivings. These are not the happiest of times and I hope everyone has something they can be grateful for.

As for myself, I am grateful to be healthy, have a wonderful family and many friends and live in a beautiful part of the world. I still have the opportunity to be productive and intend to continue speaking my mind and posting my thoughts.

Apparently Hillary has accepted the Sec.of State post. She can't be worse than Albright or Christopher and might even be an improvment over Rice. What is ironic is how Doris Kearn Goodwin's book about Lincoln's Cabinet has become a guidepost for Obama. Secondly, Clinton and Obama tore into each other's foreign policy experience during the campaign. Apparently politicians have become adept at saying anything to win whether they believe it or not.

What is ahead - a world of conflict or order? (See 1 below.)

As one force begets another, The Economist sees a very restrained American consumer, a long and deep recession. What are the consequences for the world as the consumer, states and the federal government all try to rebuild their respective balance sheets, purchasing power and credibility. (See 2 below.)

Comment from a long time friend and fellow memo reader: Dick, a long overdue hello! We are a consumerist society which led us to become a nation that lacks capital. Thus we are trying to push on a string --- Capitalism without capital.

More views about Waxman. (See 3 below.)

Strassel deems Obama's ploy of pitting McCain against McConnell an interesting move. Will McCain revert to being the Republican's Peck's Bad Boy and will the press and media relish supporting him in that role? (See 4 below.)

Dick

1) World confronts a choice between chaos and order
By Philip Stephens


It seems only yesterday that scarcity was the story. Energy and commodity prices were heading into the stratosphere. The oil was running out, food shortages loomed, Russia was resurgent and China was marching into Africa amid a scramble for dwindling resources.

Now? Prices everywhere are falling as recession bites. Investment banks have disappeared; and the global credit system is on life-support. The big threat is deflation rather than inflation. The oil price has slumped, wiping the smirk from authoritarian leaders such as Russia’s Vladimir Putin and Venezuela’s Hugo Chávez.

When Barack Obama won the Democratic nomination for the presidency he expected Iraq and healthcare would be the priorities of his presidency. No one told him the banks were facing bankruptcy and the US an economic shock as severe as any since the Great Crash.

The scale and speed of this turnround offers a stiff warning of the perils of seeking to peer beyond the present. Think back also to all that stuff a few years ago about the unipolar moment and the new American imperium. The mistake always is to project the here-and-now into an indefinite future. History rarely travels in straight lines.

So what should the president-elect make of the hefty tome that has landed on his desk courtesy of the cleverest minds at the US National Intelligence Council? After all, Global Trends 2025*, the NIC’s four-yearly exercise in crystal ball-gazing, tries to map the contours of the world more than 15 years hence.

The answer is that Mr Obama would do well to read it closely: not because he gets a top-secret version denied to the rest of us; nor because the authors have discovered the philosopher’s stone of forecasting, but because understanding the forces driving political and economic change should be the starting point for his decisions as president.

The NIC does not pretend to have all the answers. Its stated purpose is to explore the forces and factors driving events rather than to predict the destination. The authors rightly eschew the determinism peddled by the snake oil salesmen of futurology. The world may be travelling in this or that direction now, but that does not mean the trajectory is preordained.

One of the report’s important messages is that political leaders, and Mr Obama most particularly, have the capacity to chart alternative paths. Another – this one implicit – is that the decisions taken in the White House during the next four or eight years will be critical.

At first glance, the core conclusion – that the world is witnessing the emergence of a new multipolar system – seems unremarkable. But it matters that the president-elect is being told by his foremost intelligence analysts that the US faces relative decline. There are plenty of people in Washington who dismiss such a prospect as the malevolent thinking of woolly-headed Europeans; the more so, perhaps, when France’s Nicolas Sarkozy keeps trumpeting it.

In the NIC’s view, the rise of China, India and the rest will mean that by 2025 the US will be “one [my emphasis] of a number of important actors on the world stage, albeit still the most powerful”. For more than 200 years, even when challenged, the US has been a rising power. The adjustment will not be easy.

New great power rivalries, though, are only one part of the emerging picture. Nations face challenges from non-state actors empowered by globalisation. Businesses, religious zealotry, criminal networks and non-governmental organisations are all testing state power.

Overlay these changes, geopolitical and societal, with an array of transnational forces – climate change, terrorism, unconventional weapons proliferation, demographic bulges, migration, resource competition – and you begin to see how complicated things are getting. Add in all the unknowns – of both the known and unknown variety – and you start to get a headache. The other day Mr Obama said that sometimes he asks himself where on earth he should start as president. Reading the NIC report one can understand why.

What can be said with moderate certainty is that a global system designed in 1945 will not survive the coming age of discontinuities. An order centred around the political, cultural and economic hegemony of the west can scarcely outlive the redistribution of global power.

The rising powers are unlikely to want to tear down the system as did, for example, Germany and Japan during the 20th century. More likely, the trend will be towards fragmentation and instability as the new powers take what they want from the existing order while preserving a freedom of manoeuvre outside it.

This “multipolarity without multilateralism” points to the absence of any over-arching system of global governance. Instead, current trends point to a “patchwork of overlapping, often ad hoc and fragmented efforts” with shifting coalitions of member nations and international organisations undermining the capacity of the United Nations for effective multilateral action. In this respect, the NIC adds, speaking of the “the international order” may become something of a misnomer.

The key phase in the last paragraph, though, is “current trends”. The extent to which coherence prevails over chaos in a changing system will depend to a large extent on the decisions taken between now and then by political leaders. To do nothing is to invite disorder. Doing something demands the imagination to create a new and inclusive architecture.

As for the US, its relative decline should neither be exaggerated nor underestimated. Its power will be constrained by the economic and military muscle of other great powers and, perhaps, by disenchantment among its own citizens with America’s role as global policeman.

On the other hand, the enthusiastic clamour that has greeted Mr Obama’s victory testifies to the fact that much of the world still sees the US as an essential guardian of security. For the next two decades at least America will remain the only real superpower. Decisions taken in Washington will have a greater impact than those of any other global actor on how the international system evolves.

This is what the political scientists call human agency. Look back at the past century and most of the good and the bad flowed from the ideas and decisions of political leaders. The same will be true of the coming decades. Bad outcomes, as the NIC concludes, are not inevitable.

2) The end of the affair: America’s return to thrift presages a long and deep recession


DEBBIE JEFFRIES could see it coming. When she manned the cash register at Linens ’n Things, the household-goods chain where she has worked for 14 years, a customer would sometimes open her wallet and display 15 credit cards. “That people can pull out that many credit cards—that’s insane. You say, whoa, maybe that’s why we’re here. We have so much debt.”

Ms Jeffries cut up her own credit card several years ago when the balance became unmanageable, but still became an indirect victim of the credit crunch that is now dragging America into recession. Linens ’n Things filed for bankruptcy protection in May; in October, unable to find a buyer for its stores, it began to liquidate itself. A sign in the window of Ms Jeffries’ store in suburban Maryland invites anyone interested in buying the fixtures to see the manager. Ms Jeffries expects to be out of a job by the end of December.

An important reason why the American economy has been so resilient and recessions so mild since 1982 is the energy of consumers. Their spending has been remarkably stable, not only because drops in employment and income have been less severe than of old, but also because they have been willing and able to borrow. The long rise in asset prices—first of stocks, then of houses—raised consumers’ net worth and made saving seem less necessary. And borrowing became easier, thanks to financial innovation and lenders’ relaxed underwriting, which was itself based on the supposedly reliable collateral of ever-more-valuable houses. On average, consumers from 1950 to 1985 saved 9% of their disposable income. That saving rate then steadily declined, to around zero earlier this year At the same time, consumer and mortgage debts rose to 127% of disposable income, from 77% in 1990.


Those forces have now reversed. The stockmarket has fallen to the levels of a decade ago. House values have fallen 18% since their peak in 2006. Banks and other lenders have tightened lending standards on all types of consumer loans.

As a consequence, consumer spending fell at a 3.1% annual rate in the third quarter (in part because tax rebates boosted spending in the second), the steepest since the second quarter of 1980 when Jimmy Carter briefly imposed credit controls. More such declines are likely to follow. Richard Berner of Morgan Stanley projects that in the 12 months up to the second quarter of next year real consumer spending will fall by 1.6%—a post-war record. “The golden age of spending for the American consumer has ended and a new age of thrift likely has begun,” he says.

Even before this crisis hit, saving was bound to rise. Baby-boomer Americans have saved far less than their parents, according to McKinsey Global Institute, the consultancy’s affiliated think-tank, and are unprepared for retirement. Drawn out over many years, a rise in saving would be a good thing. But compressed into a matter of months, it would be downright dangerous. But the possibility cannot be dismissed. Bruce Kasman and Joseph Lupton of JPMorgan predict that the saving rate will jump to around 4.5% by the end of next year, the sharpest jump in so short a time in the post-war period.

Patricia Baker, a part-time hostess at a Maryland country club, is spending $1,000 on Christmas this year compared with $3,000 last year. She worries about the economy. People at the club still play golf, but instead of ordering lunch and a beer, many just buy crackers and a soda. She also has less to spend. Illness kept her husband off work for a bit, and they fell behind on payments on their two credit cards. The credit-card company docked his wages to pay off the first, and she is still battling over the second. She expects her monthly mortgage payment to reset next year from $1,700 to $2,000 or more, and doubts she can find anything better: “Banks aren’t going to touch anyone that doesn’t have perfect credit.” She now pays cash—as she did for two pillows in the Linens ’n Things closing sale.

This compulsory return to thrift will be deeply painful; consumer spending and housing are almost three-quarters of GDP. Of the 1.2 million, or 0.9%, decline in jobs since December, about 700,000 are directly related to consumers: retail trade, transportation manufacturing and home-building. The rise in unemployment, from 4.4% in 2006 to 6.5% in October, is nearing that of 2001-03 and is not over. On November 19th Federal Reserve policymakers disclosed they expect the recession to last until mid-2009. Their inflation worries have evaporated; indeed, consumer prices plunged a record 1% in October from September, and by 0.1% excluding fuel and food, the first such decline since 1982. The Fed’s vice-chairman, Donald Kohn, said outright deflation “is a risk out there but it’s still small”.

The risk is that the recession will be longer and the recovery weaker than expected as consumers retrench. Until 1982 recessions were often induced by the Fed to weaken demand and reduce inflation. Declines in GDP were dominated by business inventories and interest-sensitive spending such as cars and houses. Once the Fed eased money, spending sprang back.

Since then inventories have become less important to the business cycle and deregulation and financial innovation mean higher interest rates take longer to affect spending. Expansions are marked by sizeable growth in assets and debt. When the cycle turns, falling asset values and debt reduction weaken the kick of lower rates, producing anaemic recoveries with rising unemployment. The Fed has already lowered its interest-rate target to 1%, but it is fighting gale-force headwinds as lenders reduce their loan portfolios. Citigroup recently told many of its credit-card holders that it was raising their interest rates by up to three percentage points.

Lenders once routinely pooled credit-card, student and car loans into securities and sold them to capital-markets investors. Joseph Astorina of Barclays Capital says no one wants to buy such securities now for fear that some overextended investor will dump its own holdings a week later, driving their values down sharply. The issuance of credit-card-backed securities, which averaged $8 billion a month in 2007, was zero in October, he says.

Alan Greenspan, the former Fed Chairman, told The Economist this week that banks were satisfied with capital equal to 10% of their assets in the past. Now, to soothe depositors and investors, they will need a much higher ratio—perhaps around 15%. Until they get there, through a combination of raising new capital, reducing dividends and share buybacks, and shedding assets, lending will be constrained.

This makes a strong case for more government stimulus. Lawrence Summers, the former treasury secretary and a candidate for the same post under Barack Obama, said on November 17th that it should be “speedy, substantial and sustained over a several-year interval”. Fiscal stimulus at this stage would replace some of the demand which has been wiped out by the credit crunch. It won’t prevent a recession; but without it, the recession is guaranteed to be far worse.

3)The Waxman Democrats: What the coup against Dingell means for business.

John Dingell's fall from power yesterday is an important inflection point in the history of the modern Democratic Party. The House purge marks the final triumph of the Congressional generation that came of political age during the 1970s over the last lion of New Deal liberalism, and it is symbolic of the party's change in culture and policy priorities in the Barack Obama era.


Sitting chairmen are nearly impossible to depose, never mind one with the seniority and record of Mr. Dingell, who has served longer than anyone else in the House. The Democratic caucus nonetheless stripped him of his 28-year position atop the Energy and Commerce Committee, which has great power over the climate change and health-care bills that Mr. Obama hopes to pass next year. Instead, California's Henry Waxman, who was elected by a reported 137 to 122, will do the honors. (We say "reported" because the vote was by secret ballot, which in a rich irony Democrats want to prevent for union organizing votes.)

Speaker Nancy Pelosi claimed to be neutral, though it was clear all along that she was twisting arms on Mr. Waxman's behalf. "I assume that not playing a role is playing a role," as Charlie Rangel, another venerable committee chairman, put it yesterday. Ms. Pelosi loathes Mr. Dingell's independence -- especially on environmental matters.

That fissure neatly separates the Waxman Democrats from the old vanguard that Mr. Dingell represents. He was first elected in 1955 and has always tried to protect his hometown Detroit auto makers from the eco-mandates that ultimately helped to land them in their present predicament. Mr. Dingell's rough-hewn candor about the realities of "doing something" about climate change also helped to make him a green pariah. He knows that carbon regulation and taxes will fall most heavily on domestic manufacturing and Midwest states that rely on coal-fired power. His sympathies lie with the people who work near (or in) factories and drive Fords or Chevys.

Mr. Waxman, speaking for the upscale precincts of Beverly Hills, wants to phase out coal and cars that use gasoline. The coastal elites who now dominate Democratic politics will happily trade the blue collar for the green collar.


We should add that Mr. Dingell is hardly some business apologist. At Energy and Commerce in the 1980s and early 1990s, Mr. Dingell would burn the paint off the committee room walls with his interrogations of energy, insurance and drug company executives. The irony is that Democrats have found, in Mr. Waxman, an even more extreme antibusiness tribune, who will no doubt use his new powers to go after any concern that turns a profit but refuses to pay his party the obeisance of campaign cash and regulatory submission. In short, the Democrats have ousted the dean of the House for the spleen of the House.

Meanwhile, in another sign of the Waxman ascendancy, President-elect Obama has named Philip Schiliro, a Waxman loyalist and his former chief of staff, as the new White House director of Congressional relations. Robert Sussman, who leads the transition's Environmental Protection Agency "review team," has been an astringent critic of Mr. Dingell on carbon regulation. And Carol Browner, Al Gore's protégé turned Clinton EPA administrator turned director of Mr. Obama's "energy working group," is another old Dingell foe.

It's obvious who now pulls the Democratic levers of power, and anyone in the energy or health-care business had better erect the barricades. In the small favors department, Mr. Waxman will allow Mr. Dingell to hold the title "chairman emeritus."

4)Obama's Senate Play If the president wants 60 Senate votes, he'll have to fight for them one by one.
By KIMBERLEY A. STRASSEL

Contrary to most reporting, Mr. Obama's meeting with his rival wasn't aimed at a cabinet post, or even at a show of national healing. It was directed, pure and simple, at co-opting Mr. McCain's help against what Mr. Obama understands is now his biggest obstacle: Senate Minority Leader McConnell.

Cynical? Nah. If Mr. Obama has demonstrated anything, it is that he always has a smart eye on the future. He knows his big agenda is headed straight for the bitter trenches of the Senate. Democrats aren't likely to get the 60 seats they need to automatically cut off a filibuster. They will have to pick off Republicans.

Standing in the way is Mr. McConnell, one of the shrewdest Senate operators in recent history, and a man who knows the institution inside-out. He also knows what his members want, and what he can demand in return.

The minority leader is already crafting ways to keep his caucus together to block Mr. Obama's more destructive proposals. If the new president wants 60 votes, he's going to have to fight for them, vote for vote.

And Mr. Obama is betting Mr. McCain is ripe for some easy picking. The Arizonan wore his conservative cloak heavily in the campaign. While his concession speech was certainly gracious, it also hinted at a man itching to get back his reputation as a "maverick." His presidential ambitions now finished, Mr. McCain will also be looking to use his remaining Senate time to ensure his place in political history.

A few of the passions to which Mr. McCain will turn to cement his legacy are shared by the president-elect. The most obvious is global warming. Senate Democrats' most recent attempt to break a filibuster on climate-change legislation, in June, had the support of at least 54 senators. After this month's Senate reshuffle, Harry Reid is going to be tantalizingly close to breaking the barrier. Mr. Obama wants Mr. McCain's help.

The question is this: What else might Mr. McCain be prevailed upon to fulfill his pledge to help the new president? He won't likely budge on issues that he has used to build a career -- say, controlling spending and earmarks. But others? He ran on a free market health-care plan, but it wasn't a comfort zone. He promised to retain the Bush tax cuts but once voted against them. He was the architect of the Gang of 14, a Senate dodge on stalled Bush judicial nominees. On these questions and more, Mr. Obama's hope is not just to win over Mr. McCain, but to set him up as an example that other GOP members should follow.

If the Democrat has any grasp of history, he also knows Mr. McCain and Mr. McConnell are not pals. This grump dates back more than 10 years, when Mr. McCain tried to pass a federal settlement for tobacco-related lawsuits. Mr. McConnell, who hails from the tobacco state of Kentucky, was instrumental in blocking that bill.

– William Snyder The minority leader also annoyed Mr. McCain by refusing to join his campaign-finance pilgrimage. As head of the National Republican Senatorial Committee in the late 1990s, Mr. McConnell stymied Mr. McCain's efforts to outlaw money. When Mr. McCain finally birthed his campaign-finance baby, it was Mr. McConnell who sued to have it repealed. While the minority leader was a soldier in the recent McCain run, the Arizonan is known for nursing grudges. He may not go out of his way to help Mr. McConnell. He might, in fact, use his super-senator status to trump him. This, at least, is Mr. Obama's hope.

Finally, the new president knows he can count on help from the media. Mr. McCain once joked that the press corps was his true "base," only to see that constituency turn on him when he dared to act like a Republican. From the sounds of the cooing noises that greeted his concession speech, the media are now urging Mr. McCain to get back in their good graces. They will help by making sure that on any occasion Mr. McCain joins with his party he is ignored, while any time he strikes out on his own he is elevated to the "Republican standard bearer," who is "leading" his party in a bipartisan direction. We're about to discover if Mr. McCain's long-term memory for slights extends to the Fourth Estate.

The McCain wooing is in line with a broader Obama strategy to make nice for votes. Sen. Dick Lugar has been mentioned as a potential secretary of state, the mere suggestion of which might win Mr. Obama some gratitude. Independent Joe Lieberman was just allowed to keep his top job as chairman of the Homeland Security Committee, despite the desire of many Democrats to exact retribution for his support for Mr. McCain's presidential campaign. Mr. Lieberman singled out "an appeal by President Obama himself" as the key factor in his rescue. He will be reminded of that help often.

As for Mr. McConnell, he was just unanimously re-elected by his caucus to the top post. Let the games begin.