Steve Kornacki believes a little pork is necessary to grease politicians and the public would be foolish to undercut the man they voted into the Oval Office so rush the Stimulus Bill through and let's be on our merry way. (See 1 below.)
Our great orator is going to sell voters on the crying need for prompt action, the fact that no bill is perfect, the time has come and anyone who disagrees is partisan. It might be a convincing argument for a nation frightened by a worsening economy but would it be an effective closing argument to present to a jury with half a brain? (See 1a below.)
Furthermore, Obama's choice as Presidential Press Secretary has proven less than inspiring. He has a lot of 'uh's' to offer but then Obama has made cleaning the stable tougher.(See 1b below.)
Greg Sheridan of The Australian, is more clear eyed than most when it comes to concluding the prospect of a meaningful peace between Israel and Palestinians is unobtainable as long as Hamas and weak Palestinian leadership remain in place.
Sheridan has a dour view of anything President Obama will be able to do about this fact. (See 2 below.)
A writer for the New York Times raises the unthinkable and then rejects it because being from the New York Times what else could he write or think. (See 3 below.)
Dodd took himself off the hook with some slick maneuvering by allowing a few hand picked journalists to glance at some documents drawn up by his attorneys. Dodd did not even offer a Geithner/Daschle type apology for his sweetheart interest deal from the agency over which he had oversight responsibility.
Now it's old Charlie Rangel's time to try to exricate his t-- from the ringer. Rangle is far slicker than Dodd and no doubt will escape with nothing more than a wrist slap, if that. Seems old Charlie conveniently omitted some items in his filing forms for the past 30 years. No doubt just a simple oversight.
What we are witnessing is the incapacity of politicians to give straight answers because so many of them are crooked. (See 4 below.)
Jon Entine discusses the problem of unfunded pensions and the impact of social investing. An area where the next financial grenade is likely to explode. A Must read. (See 5 below.)
When people become increasingly dependent they project their own shortcomings. Evil Wall Street and Captialism are certainly convenient dogs to kick. Now that the government is taking over control of our once 'free economy' you ain't seen nothing yet so (read 6 below.)
I have likened our economic state to being in a hurricane and we are now in the donut phase. I believe it foolheardy for anyone to believe the recovery will come as soon as the end of the year and Melloan sees what I see, rabid inflation as the consequences of what a panicky Congress and President are proposing. (See 7 below.)
Have a great weekend.
Dick
1) It's Rally Time: Obama Needs to Sell the Nation on Stimulus, or Bust
By Steve Kornacki
Republicans in Congress, who paid a dear price in the last two elections for their fealty to George W. Bush, are well on their way to proving—again—just how much easier it is to be the minority party.
Exhibiting a level of public and private partisan loyalty glaringly absent in the dying days of their majority, they've spent the first few weeks of Barack Obama's presidency loudly and persistently raising a series of trivial—but—digestible objections to the economic stimulus package now stuck in the Senate. Their message is easy to understand—the price tag is obscene!—and they've hyped a series of proposed expenditures, like a since-dropped provision that would have used Medicaid money for contraceptive programs, to stoke public outrage and to portray bill as little more than a giant tray of pork.
Never mind that that the "pork" they've itemized accounts for a statistically insignificant portion of the proposed spending and that they oversaw a veritable orgy of spending in their majority years (during which time the national debt swelled to nearly $10 trillion): People are buying it. An eye-opening Rasmussen poll released on Wednesday found that a plurality of Americans—by a 43 to 37 percent spread—now oppose the stimulus package.
This raises two previously improbable questions: Is it actually possible for Republicans to defeat the stimulus package (or at least force alterations that would render it unrecognizable)? And even if he does get his way in the end, will Obama actually suffer for it in the court of public opinion?
Previously, it was taken as a given that an Obama-backed stimulus plan would work its way through Congress, even without measurable Republican support. Obama's popularity, the dire state of the economy, and overwhelming Democratic majorities had, it seemed, congealed into an unstoppable force. Even when every House Republican voted against that chamber's version of the stimulus plan last week, it didn't matter: Just 11 Democrats defected and the measure easily went through, 244-188.
In the Senate, the road seemed similarly clear. If they can keep their caucus together, Democrats need just two Republican votes on any measure to kill a Republican filibuster. And the chamber includes a number of potentially pliable moderate Republicans, like Maine's Susan Collins and Olympia Snowe. Surely, they'd be persuaded to do the right thing at the end of the day. Then the Senate version could be reconciled with the House version and compromise package could be rushed to the Oval Office for the presidential signature.
But it hasn't quite worked that way. On Wednesday, The Washington Post reported that Senate Democrats are still short of their magic 60 votes. Republicans are digging their heels in, demanding reductions in spending. Collins was summoned to the White House on Wednesday to meet with Obama. A compromise still seems likely, given how few Republicans it will take for Democrats to hit their number. But significant reductions in spending—senators have been considering a package with $100 billion more in spending than the House version, which was priced at $819 billion—will be necessary.
The wild card, though, is the public's reaction. Republicans in the House and the Senate were already presenting a unified front before Wednesday's polling news, back when most of the public seemed to be behind the bill. Now, they may feel emboldened to resist with more intensity. And the bill still has a long way to go: It has to clear the Senate, go through conference committee, and then pass both chambers again. That's a lot of time for Republicans to rally even more opposition among the general public—opposition that could translate into more Democratic defections in Congress.
Still, the most likely outcome is a compromise in the Senate that pares back spending, followed by a speedy passage of a compromise bill in both chambers. Even accounting for some more defections in the House, Democrats probably have too much of a numbers advantage. But if public opposition to the stimulus mounts in that time, forcing such an unpopular bill through could threaten Obama's popularity. Something like this happened to Bill Clinton in 1993, when he won party-line votes in the House and Senate for what Republicans demagogued as "the largest tax increase in American history."
But here might be an opportunity for Obama. Unlike Clinton, he has entered office with wide and deep popularity and respect. And there remains universal consensus among voters that the country is facing a serious economic crisis. There is an obvious opening here for Obama to harness the moral authority he now enjoys and to use his public platform to connect the stimulus package to voters' fears about the economy.
The last president to power into office with the momentum Obama now enjoys showed how this is done. As a critical vote on his first budget was nearing in 1981, Ronald Reagan faced fierce opposition from House Democratic leaders, who enjoyed a 244-191 majority. Public support for Reagan's plan was slipping, too, so he scheduled a prime-time address to appeal directly to Americans. The country rallied around Reagan and momentum against the budget was killed on the spot; it cleared the house on a 253-176 vote. When his tax cuts came up for a vote a few months later, Reagan resorted to the same trick—and prevailed again.
Obama has the same unique potential to shape public opinion. Late on Wednesday, the White House did announce that Obama will deliver an address to Congress—not a State of the Union speech—on Feb. 24. This is a good start, but Obama would be well advised to do more. For instance, he has yet to address the nation in prime time from the Oval Office. It may not bring Republicans in Congress around, but it will rally the country—and ensure that the new president's poll numbers don't collapse over a stimulus bill that has been effectively demagogued by his partisan opponents.
1a)1)So Much For Hope Over Fear
By Charles Krauthammer
"A failure to act, and act now, will turn crisis into a catastrophe."
-- President Obama, Feb. 4.
WASHINGTON -- Catastrophe, mind you. So much for the president who in his inaugural address two weeks earlier declared "we have chosen hope over fear." Until, that is, you need fear to pass a bill.
And so much for the promise to banish the money changers and influence peddlers from the temple. An ostentatious executive order banning lobbyists was immediately followed by the nomination of at least a dozen current or former lobbyists to high position. Followed by a Treasury secretary who allegedly couldn't understand the payroll tax provisions in his 1040. Followed by Tom Daschle, who had to fall on his sword according to the new Washington rule that no Cabinet can have more than one tax delinquent.
The Daschle affair was more serious because his offense involved more than taxes. As Michael Kinsley once observed, in Washington the real scandal isn't what's illegal, but what's legal. Not paying taxes is one thing. But what made this case intolerable was the perfectly legal dealings that amassed Daschle $5.2 million in just two years.
He'd been getting $1 million per year from a law firm. But he's not a lawyer, nor a registered lobbyist. You don't get paid this kind of money to instruct partners on the Senate markup process. You get it for picking up the phone and peddling influence.
At least Tim Geithner, the tax-challenged Treasury secretary, had been working for years as a humble international civil servant earning non-stratospheric wages. Daschle, who had made another cool million a year (plus chauffeur and Caddy) for unspecified services to a pal's private equity firm, represented everything Obama said he'd come to Washington to upend.
And yet more damaging to Obama's image than all the hypocrisies in the appointment process is his signature bill: the stimulus package. He inexplicably delegated the writing to Nancy Pelosi and the barons of the House. The product, which inevitably carries Obama's name, was not just bad, not just flawed, but a legislative abomination.
It's not just pages and pages of special-interest tax breaks, giveaways and protections, one of which would set off a ruinous Smoot-Hawley trade war. It's not just the waste, such as the $88.6 million for new construction for Milwaukee Public Schools, which, reports the Milwaukee Journal Sentinel, have shrinking enrollment, 15 vacant schools and, quite logically, no plans for new construction.
It's the essential fraud of rushing through a bill in which the normal rules (committee hearings, finding revenue to pay for the programs) are suspended on the grounds that a national emergency requires an immediate job-creating stimulus -- and then throwing into it hundreds of billions that have nothing to do with stimulus, that Congress' own budget office says won't be spent until 2011 and beyond, and that are little more than the back-scratching, special-interest, lobby-driven parochialism that Obama came to Washington to abolish. He said.
Not just to abolish but to create something new -- a new politics where the moneyed pork-barreling and corrupt logrolling of the past would give way to a bottom-up, grass-roots participatory democracy. That is what made Obama so dazzling and new. Turns out the "fierce urgency of now" includes $150 million for livestock insurance.
The Age of Obama begins with perhaps the greatest frenzy of old-politics influence peddling ever seen in Washington. By the time the stimulus bill reached the Senate, reports The Wall Street Journal, pharmaceutical and high-tech companies were lobbying furiously for a new plan to repatriate overseas profits that would yield major tax savings. California wine growers and Florida citrus producers were fighting to change a single phrase in one provision. Substituting "planted" for "ready to market" would mean a windfall garnered from a new "bonus depreciation" incentive.
After Obama's miraculous 2008 presidential campaign, it was clear that at some point the magical mystery tour would have to end. The nation would rub its eyes and begin to emerge from its reverie. The hallucinatory Obama would give way to the mere mortal. The great ethical transformations promised would be seen as a fairy tale that all presidents tell -- and that this president told better than anyone.
I thought the awakening would take six months. It took two and a half weeks.
1b) The What and How of Obama If he really wanted to curb lobbyists he'd shrink government.
By KIMBERLEY A. STRASSEL
Here's a little flavor of the questions White House Press Secretary Robert Gibbs has been fielding two weeks running:
Is this going to be bipartisan? What happened to the vetting process? Does this undercut the president's rhetoric on an era of responsibility? Will this restore the president's credibility on changing the culture in Washington? What's the point of having policies if you're going to have waivers? What kind of message does this send? Is the president embarrassed by this? Is this more Washington as usual?
The knock on Candidate Obama was that he put style ahead of substance. Who knew what he was going to do (and who cared)? It was all about how he was going to do it -- with bipartisanship and ethics and a new era of "responsibility." Now comes the reckoning. President Obama is being judged not on the what, but the how.
That's one way to make sense of these tumultuous first days -- from the furors over Tim Geithner's and Tom Daschle's taxes, to the howls over waivers for lobbyists, to the teeth gnashing over the Democrats' "stimulus" bill. Somewhere, deep in this administration, somebody is working on serious policy. Not that you'd know it from the debate over Mr. Obama's self-imposed standards for governing. It's an early glimpse of the challenges he faces going forward.
Mr. Daschle didn't get done in by his taxes. The administration stuck with Mr. Geithner, and would've stuck with Mr. Daschle (and his limo) right up through confirmation. Given the deference accorded to presidential nominees and Mr. Daschle's Senate history, Mr. Obama might rightly have expected success.
What Mr. Daschle didn't survive was his boss's own pronouncements about rich people and special interests. As the media dug into Daschle taxland, it discovered that (wow) he was a rich person, routinely paid by special interests to help them navigate the giant federal government.
Wait, wait, cried Mr. Obama, let's focus on the what -- namely, my health-care agenda, to which I believe Mr. Daschle is integral. No, no, roared the mob, we want to talk about the things you used to talk about, namely, how you could ever justify this. He couldn't. Next up: Leon Panetta and Hilda Solis.
His first full day in office, Mr. Obama imposed the "most sweeping ethics reform in history," barring officials from working on issues on which they'd lobbied in recent years. Then came the realization that a lot of really smart people hadn't just sat around for years waiting for him to give them government jobs, but had used their expertise for private profit.
What followed was a succession of waivers granting several top officials immunity from the rules. And what followed that was all the fury that could be collectively spewed by good-government types, left-wing blogs, and Senate Republicans. The administration attempted to explain that what mattered was that it was in the "public interest" to have qualified individuals running government. True. But that's not how Mr. Obama said he'd do things.
All this has put the president on defense, just as he should be nurturing something that really is related to policy -- his "stimulus." Not so long ago -- say, last month -- the measure of a president's success was whether he passed his agenda. George W. Bush would've been grateful to occasionally overcome a Senate filibuster. But this administration, riffing off its pledge to cross the aisle, set out an early standard of achieving 80 Senate votes. The White House outlined this aspiration, even as it handed over authorship to House Democrats -- partisans all.
What predictably emerged was a colossal spending embarrassment -- long on condoms, short on stimulus -- that justified every House Republican (and 11 House Democrats) in voting no. Mr. Obama didn't like the result, but since he's supposed to be changing the tone, couldn't gripe at his own party. Majority Leader Harry Reid knows this, and has ignored pleas to fix the mess in the Senate. Public support is ebbing away, giving the GOP more cover to run. Mr. Obama will get his stimulus, but what is in it will at most rank equally with headlines about how it was so many voted against it.
The president is reassuring the public that it takes time to change Washington. It also takes an understanding of the problems. Bipartisanship isn't just Super Bowl cookies; it requires Mr. Obama forcing his own party to make ideological concessions. More rules won't curb lobbyists. That requires cutting back the influence of government -- on which lobbying thrives. Will Mr. Obama go there?
Unless he does, it isn't clear how he navigates these problems -- which aren't going away. His promises to change the way Washington worked weren't throwaway lines tacked to an otherwise meaty agenda. They were his agenda. From now until 2012, he'll be flyspecked for every interaction with a special interest, lobbyist, wealthy individual, or Republican. The problem with lofty aspirations is that at some point they meet reality.
2) There May Be the Will but Not Necessarily the Way
By Greg Sheridan
Barack Obama will not bring peace to the Middle East. He will not end the Israeli-Palestinian dispute. Though he may part the waves, cool the planet, stop the oceans from rising, this dispute will prove beyond him.
I guess that in eight years -- like everyone I assume Obama will be re-elected -- we will still be yearning vainly for two states living in peace.
But first, Israel's election next week. Benjamin Netanyahu will likely become prime minister, perhaps in coalition with Labor, perhaps with a Russian immigrants' party and religious parties.
Netanyahu will be demonised by the usual suspects but he will be no barrier to peace. Within Israel there is a broad consensus on what a peace agreement would look like. Palestine gets all the land of the West Bank and Gaza except for the large Jewish settlement blocks that are effectively suburbs of Jerusalem or Tel Aviv. These house 80 per cent of the Jewish settlers on 5 per cent of the disputed land. The new Palestinian state would get land from Israel proper to make up for this 5 per cent.
But Israel cannot do that deal unless a credible Palestinian leadership can put an end to serious terrorism, especially cross-border rocket launches, and will accept that such a settlement is the end of Palestinian territorial claims, and unless the Arab world recognises Israel and makes peace with it as a Jewish state.
These conditions cannot be met. Israelis believe their recent operation in Gaza was necessary and successful. They are right. It has made peace more likely and it has greatly diminished the rocket fire from Gaza into Israel.
The cost in innocent Palestinian lives was heavy and tragic, and the fault for this rests entirely with Hamas, the terrorist death cult that rules Gaza. I do not believe a single story of Israeli war crimes or atrocities in Gaza. There is no evidence of any such story beyond Palestinian eye-witness accounts and on countless previous occasions these accounts have been fabricated. Remember the reports of the so-called massacre in the West Bank Palestinian town of Jenin in 2002, reports buttressed by eye-witness accounts? Did you know that it never took place, as later international investigations acknowledged?
Even in this recent Gaza operation, remember the outrage at the Israeli rocket fire on the school in the Jabaliya refugee camp? This dominated the news for days and now it turns out no Israeli munition ever hit the school. The Israelis are among the most disciplined troops in the world and go to great lengths to avoid civilian casualties.
The Gaza operation has advanced the possibility of peace in two ways. It has damaged the standing of Hamas and it has reassured the million people who live in southern Israel of their security. The Israeli population could not consider a peace agreement unless it was reassured about its security.
However, I still think the prospects for peace are almost nil. Hamas certainly wanted Israel to launch this action. Otherwise it would not have fired more than 6000rockets at Israeli civilian targets since Israel withdrew all settlers and soldiers from Gaza in 2005. Hamas knew what the rockets would bring. This column predicted the Israeli action more than a year ago. If commentators in Australia knew it, Hamas certainly knew it too.
It may be that Hamas gravely miscalculated Israel's resolve, and its own ability to inflict casualties on Israeli soldiers. But why did Hamas want such an Israeli response in the first place?
The answer is to have Israel painted again as the international villain. It also wanted to inflame Islamic opinion. In this it has succeeded. Even in moderate Islamic majority states such as Indonesia and Malaysia, Israel has been demonised in recent weeks. In the Arab world it is much worse. It is true that the leaders of key Arab nations, such as Egypt, Jordan and Saudi Arabia, fear the Muslim Brotherhood, of which Hamas is a branch, and fear Iran, which sponsors Hamas, much more than they hate Israel. Therefore their response to Israel's action was moderate. But this was only possible because there is no democracy in the Arab Middle East. In democratic Turkey the Prime Minister had to engineer a public confrontation with Shimon Peres. A number of the smaller Gulf states have been awash with virulent anti-Israel hatred. This all has something like the effect Hamas wants.
Hamas's goals and motivation are theological and filled with sectarian hatred and anti-Semitism. If you doubt this just google the Hamas charter and read gems such as: "The prophet, prayer and peace be upon him, said: 'The (end of days) will not come until Muslims fight the Jews and kill them; until the Jews hide behind rocks and trees, which will cry: O Muslim, there is a Jew hiding behind me, come and kill him!"'
Hamas has engaged in countless atrocities against Palestinians it doesn't like. It has murdered many Fatah men, but the media subjects this behaviour to very little scrutiny. Hamas is somehow accepted as just a force of nature, not held morally responsible for its actions.
Even if Hamas has been partly discredited by this conflict, the wider ideology of Islamist jihad, under various brands, has currency in the Palestinian population, and among the Shiites of southern Lebanon.
So Hamas has absolutely no desire to negotiate a peaceful Palestinian state living in neighbourly quiet next to Israel. Hamas, and many Palestinians, have effectively abandoned the two-state solution. They instead have a long-term demographic strategy. In 1950, there were 240,000 Gazans, Now there are 1.5 million. By 2040 there will be three million. Eventually, they believe, they will swamp Israel with sheer numbers. And they will never let Israel be free of responsibility for them, either by an association with Egypt, which is what Israel tried to achieve by its withdrawal in 2005, or by becoming an independent state at peace.
At the other end of the spectrum, I believe many moderate Palestinians don't really want two states either. If you were an Arab East Jerusalemite, would you really want to leave Israel, with its modern economy, world class hospitals etc, to be ruled either by the corrupt kleptomaniacs of Fatah or the totalitarian Islamists of Hamas?
To all this, Obama can bring prestige, goodwill and new energy. It won't be enough. Bill Clinton brought all this to the situation in 2000, with a less Islamised and polarised Palestinian population, and a less bitter Israeli public opinion. Clinton failed. So will Obama. Instead of a solution, we should look for Israel to manage the situation at the lowest level of violence possible, while encouraging any normalisation that can take place. It's not much, but at least it's possible.
2) There May Be the Will but Not Necessarily the Way
By Greg Sheridan
Barack Obama will not bring peace to the Middle East. He will not end the Israeli-Palestinian dispute. Though he may part the waves, cool the planet, stop the oceans from rising, this dispute will prove beyond him.
I guess that in eight years -- like everyone I assume Obama will be re-elected -- we will still be yearning vainly for two states living in peace.
But first, Israel's election next week. Benjamin Netanyahu will likely become prime minister, perhaps in coalition with Labor, perhaps with a Russian immigrants' party and religious parties.
Netanyahu will be demonised by the usual suspects but he will be no barrier to peace. Within Israel there is a broad consensus on what a peace agreement would look like. Palestine gets all the land of the West Bank and Gaza except for the large Jewish settlement blocks that are effectively suburbs of Jerusalem or Tel Aviv. These house 80 per cent of the Jewish settlers on 5 per cent of the disputed land. The new Palestinian state would get land from Israel proper to make up for this 5 per cent.
But Israel cannot do that deal unless a credible Palestinian leadership can put an end to serious terrorism, especially cross-border rocket launches, and will accept that such a settlement is the end of Palestinian territorial claims, and unless the Arab world recognises Israel and makes peace with it as a Jewish state.
These conditions cannot be met. Israelis believe their recent operation in Gaza was necessary and successful. They are right. It has made peace more likely and it has greatly diminished the rocket fire from Gaza into Israel.
The cost in innocent Palestinian lives was heavy and tragic, and the fault for this rests entirely with Hamas, the terrorist death cult that rules Gaza. I do not believe a single story of Israeli war crimes or atrocities in Gaza. There is no evidence of any such story beyond Palestinian eye-witness accounts and on countless previous occasions these accounts have been fabricated. Remember the reports of the so-called massacre in the West Bank Palestinian town of Jenin in 2002, reports buttressed by eye-witness accounts? Did you know that it never took place, as later international investigations acknowledged?
Even in this recent Gaza operation, remember the outrage at the Israeli rocket fire on the school in the Jabaliya refugee camp? This dominated the news for days and now it turns out no Israeli munition ever hit the school. The Israelis are among the most disciplined troops in the world and go to great lengths to avoid civilian casualties.
The Gaza operation has advanced the possibility of peace in two ways. It has damaged the standing of Hamas and it has reassured the million people who live in southern Israel of their security. The Israeli population could not consider a peace agreement unless it was reassured about its security.
However, I still think the prospects for peace are almost nil. Hamas certainly wanted Israel to launch this action. Otherwise it would not have fired more than 6000 rockets at Israeli civilian targets since Israel withdrew all settlers and soldiers from Gaza in 2005. Hamas knew what the rockets would bring. This column predicted the Israeli action more than a year ago. If commentators in Australia knew it, Hamas certainly knew it too.
It may be that Hamas gravely miscalculated Israel's resolve, and its own ability to inflict casualties on Israeli soldiers. But why did Hamas want such an Israeli response in the first place?
The answer is to have Israel painted again as the international villain. It also wanted to inflame Islamic opinion. In this it has succeeded. Even in moderate Islamic majority states such as Indonesia and Malaysia, Israel has been demonised in recent weeks. In the Arab world it is much worse. It is true that the leaders of key Arab nations, such as Egypt, Jordan and Saudi Arabia, fear the Muslim Brotherhood, of which Hamas is a branch, and fear Iran, which sponsors Hamas, much more than they hate Israel. Therefore their response to Israel's action was moderate. But this was only possible because there is no democracy in the Arab Middle East. In democratic Turkey the Prime Minister had to engineer a public confrontation with Shimon Peres. A number of the smaller Gulf states have been awash with virulent anti-Israel hatred. This all has something like the effect Hamas wants.
Hamas's goals and motivation are theological and filled with sectarian hatred and anti-Semitism. If you doubt this just google the Hamas charter and read gems such as: "The prophet, prayer and peace be upon him, said: 'The (end of days) will not come until Muslims fight the Jews and kill them; until the Jews hide behind rocks and trees, which will cry: O Muslim, there is a Jew hiding behind me, come and kill him!"'
Hamas has engaged in countless atrocities against Palestinians it doesn't like. It has murdered many Fatah men, but the media subjects this behaviour to very little scrutiny. Hamas is somehow accepted as just a force of nature, not held morally responsible for its actions.
Even if Hamas has been partly discredited by this conflict, the wider ideology of Islamist jihad, under various brands, has currency in the Palestinian population, and among the Shiites of southern Lebanon.
So Hamas has absolutely no desire to negotiate a peaceful Palestinian state living in neighbourly quiet next to Israel. Hamas, and many Palestinians, have effectively abandoned the two-state solution. They instead have a long-term demographic strategy. In 1950, there were 240,000 Gazans, Now there are 1.5 million. By 2040 there will be three million. Eventually, they believe, they will swamp Israel with sheer numbers. And they will never let Israel be free of responsibility for them, either by an association with Egypt, which is what Israel tried to achieve by its withdrawal in 2005, or by becoming an independent state at peace.
At the other end of the spectrum, I believe many moderate Palestinians don't really want two states either. If you were an Arab East Jerusalemite, would you really want to leave Israel, with its modern economy, world class hospitals etc, to be ruled either by the corrupt kleptomaniacs of Fatah or the totalitarian Islamists of Hamas?
To all this, Obama can bring prestige, goodwill and new energy. It won't be enough. Bill Clinton brought all this to the situation in 2000, with a less Islamised and polarised Palestinian population, and a less bitter Israeli public opinion. Clinton failed. So will Obama. Instead of a solution, we should look for Israel to manage the situation at the lowest level of violence possible, while encouraging any normalisation that can take place. It's not much, but at least it's possible.
3) The Unthinkable Option
By ROGER COHEN
“I would never take a military option off the table,” Barack Obama declared during the campaign, a position unchanged since he became president.
“We are not taking any option off the table at all,” Secretary of State Hillary Clinton said at her Senate confirmation hearing.
As for Secretary of Defense Robert Gates, he tweaked the mantra this way: “The military option must be kept on the table.”
All three have also talked up dialogue with Iran. But the question, more pressing since Iran fired its Islamic satellite into orbit this week, remains: what in reality is this threat of force and what purpose does it serve?
I’ve read think-tank scenarios that have the United States bombing Iran’s nuclear installations at Natanz, hitting Iranian military bases to limit the response, imposing a naval blockade and infiltrating special forces from Iraq or Afghanistan. After eight Bush-Cheney years, such plans exist at the Pentagon.
To which my response is: Hang on a second.
The United States’ role in the 1953 coup here that deposed the Middle East’s first democratically elected government lives in memory. Any U.S. attack would propel 56-year-old Iranian demons into overdrive and lock in an America-hating Islamic Republic for the next half-century.
From Basra through Kabul to the Paris suburbs, Muslim rage would erupt. The Iranian Army is not the Israeli Army, but its stubborn effectiveness is in no doubt. Rockets from Hezbollah and Hamas, and newly tested Iranian long-range missiles, would hit Israel.
Chaos would threaten Persian Gulf states, oil markets and the grinding U.S. campaigns in Iraq and Afghanistan. The U.S. war front, in the first decade of the 21st century, at a time of national economic disaster, would stretch thousands of miles across the Muslim world, from western Iraq to eastern Afghanistan.
It is doubtful that a bombing campaign would end Iran’s nuclear ambitions, so all the above might be the price paid for putting off an Iranian bomb — or mastery of the production of fissile material — by a year or so.
In short, the U.S. military option is not an option. It is unthinkable.
This is the poisoned chalice handed Obama by Bush, who responded to Iranian help in Afghanistan in 2001 by consigning Iran to the axis of evil, rebuffed credible approaches by the former moderate president, Mohammad Khatami, and undermined European diplomacy.
No, the real “Red Line” will be set by Israel.
Benjamin Netanyahu, Israel’s leading candidate to become prime minister after elections next week, has said “everything that is necessary” will be done to stop Iran going nuclear. I believe him.
Never again is never again. There’s no changing that Israeli lens, however distorting it may be in a changed world. That could mean an Israeli attack on Iran within a year. If the U.S. military option is unthinkable, equally unthinkable is the United States abandoning Israel.
That is Obama’s dilemma. Netanyahu is right about one thing. The Iranian nuclear program, which Iran implausibly says is for civilian purposes, is “the greatest challenge” now facing 21st-century leaders. If Obama fails, his “new era of peace” will become the bitterest phrase of his inaugural.
I asked Mohsen Rezai, the former commander of Iran’s Revolutionary Guards and secretary of one of its highest state organs, the Expediency Discernment Council, how he sees the U.S. threat. “America will not do anything military within the next 10 years,” he said. “What the U.S. needs to do now is regroup, repair, reconstruct.”
And an Israeli attack? “Maybe, but it would be one of its stupidest decisions.”
There is little time to lose. Vice President Joseph Biden and senior Iranian officials, including Ali Larijani, the speaker of Parliament, will mingle at the Munich Security Conference this weekend. They should talk.
But only Obama can overcome the gridlock. He must break with the Bush years in more than words. That requires a solemn declaration that the United States recognizes and no longer seeks to destabilize the Islamic Republic — an implicit renunciation of force.
A threat, in Iranian eyes, can only come from a domineering power, the very U.S. attitude this country cannot abide.
I think the tightened sanctions being contemplated by Obama are a bad idea.
The sanctions don’t work; they enrich the regime cronies who circumvent them. Plunging oil prices are a cheaper weapon. They will concentrate Iranian minds as the economy nose-dives.
Decisiveness is foreign to the many-faceted Iranian system. Ayatollah Ali Khamenei, the supreme leader and ultimate arbiter, will not easily be swayed from a course that would shred the nuclear nonproliferation treaty, of which Iran is a signatory, among other disasters. But reason can still prevail.
It was Rezai, back in the late 1980s, who wrote Ayatollah Ruhollah Khomeini, telling him the course he had vowed never to alter — prosecuting the war against Iraq until victory — had to be abandoned or disaster would follow. Khomeini changed his mind. Peace came.
Khamenei’s ultimate duty is to preserve the revolution by being true to Khomeini’s example. Obama might, obliquely, remind him of that.
4) Rangel's Ethics Woes Continue
Already under investigation by the House ethics committee for various tax-related issues, Rep. Charles Rangel (D-N.Y.) could face increased scrutiny from the panel after new reports of discrepancies in his financial disclosure forms.
The committee had already needed to expand its investigation in December after more ethics issues surfaced -- specifically, that he allegedly helped obtain a tax loophole for a donor to the Charles B. Rangel Center at the City College of New York.
The new report comes from Sunlight Foundation, which released its finding yesterday that Rangel had "failed to report purchases, sales or his ownership of assets at least 28 times since 1978 on his personal financial disclosure forms."
"Assets worth between $239,026 and $831,000 appeared and disappeared with no disclosure of when they were acquired, how long they were held, or when they were sold, as House Rules require," the group reported. Sunlight is a private, nonpartisan watchdog group.
The New York Times reported yesterday that "Mr. Rangel's spokesman, Emil Milne, said the congressman had already acknowledged the errors and was seeking to correct them."
Rep. John Carter (R-Texas) has introduced a resolution that would remove Rangel from his post as chairman of the tax-writing Ways and Means Committee, pending completion of the ethics committee investigation.
"If Mr. Rangel is cleared of wrongdoing, I will be the first to congratulate him back to the Chairmanship," Carter said in a press release. "But we must show we are serious about enforcing the ethics rules of this House, instead of using stall tactics to thwart the process."
5)The Next Catastrophe:Think Fannie Mae and Freddie Mac were a politicized financial disaster? Just wait until pension funds implode.
By Jon Entine
Funds worth trillions of dollars start to plummet in value. Political pressure to be “socially responsible” distorts the market decisions of government-related enterprises, leading to risky investments. Investors who once considered their retirements safely protectedwake up to a sinking feeling of uncertainty and gloom.
Sound like the great mortgage-fueled financial crisis of 2008? Sure. But it also describes a calamity likely to hit as soon as 2009. State, local, and private pension plans covering millions of government employees and union workers with “defined benefit” accounts are teetering on the brink of implosion, victims of both a sinking stock market and investment strategies influenced by political considerations.
From January to October 2008, defined benefit funds—those promising a predetermined amount of retirement money to the payee—averaged losses of 26 percent, according to Northern Trust Investment Risk and Analytical Services, making it the worst year on record for corporate and public pension funds. The largest public pension fund in the United States, the California Public Employees Retirement Security System (CalPERS), lost a staggering 20 percent of its value in just three months last year. In May 2008, Vallejo, California, became the largest city in the state ever to file for Chapter 9 bankruptcy, thanks largely to unmanageable pension obligations. The situation in San Diego looks worryingly similar. And corporations with defined benefit plans are seeking relief in Washington as part of a bailout season that shows no sign of slowing down.
If the stock market remains in a funk for even a few more months, corporations that oversee union pension funds and state and municipal leaders responsible for public retirement pools may be faced with difficult choices. First on the docket might be postponing cost-of-living increases and reducing health care coverage for retirees. Over the longer term, benefits for new employees will have to be shaved and everyone is likely to see an increase in personal payroll contributions. Corporations will have to resort to more cost cutting and layoffs of their own just to guarantee the solvency of their pension funds. And things could go from bad to terrible if the managers of those funds do not quickly revise their investment practices.
During melting markets, all pension funds come under siege. If you’re covered by a “defined contribution” plan, contributions are invested, usually by your employer and usually in the stock market, and the returns are credited to the employee’s account. Your retirement savings grow if the market rises or, as is the case now, bleed when it crashes. You carry the risk on your shoulders.
The risk shifts to the employer under “defined benefit” plans, in which future outlays are guaranteed. That seemed like a great idea for business as recently as 2007, when the market was rising and the pension funds of America’s 500 largest companies held a surplus of $60 billion. Now they’re at a deficit of $200 billion, with fund assets dropping like a lodestone.
The Pension Protection Act of 2006 requires that companies keep the accounts fully funded over time, meaning that they have to have enough money to pay all of their retirees should they decide to withdraw their funds. Yet more than 200 of the 500 big-company plans are nowhere close to meeting that standard, and those dire numbers are increasing.
Companies with defined-benefit pensions may soon find themselves choosing between making payroll or pumping money into their pension plans. If companies are forced to make up the shortfall out of their assets, which seems likely, that would send profits tumbling even more, further destabilizing the stock market. And even with a cash infusion, many businesses might still have to freeze or even cut benefits.
Both the corporations and the pensioners are victims of a market meltdown whose depth and duration almost no one predicted. Yet the investment performances of their corporate pension funds, while dismal, are holding up better than the returns of many public and union defined benefit plans. Those funds are facing their own reckoning, but in this case a lot of the pain is self-created and exacerbated by politics.
Social Investing Shenanigans
There is about $3.5 trillion sloshing through the U.S. retirement system, scattered across more than 2,600 public pension funds and federal retirement accounts. Another $1 trillion or so covers union workers at corporate jobs in which the union has key management control of the fund. These public and union-based defined benefit plans cover 27 million people and represent more than 30 percent of the $15 trillion dollars held in U.S. retirement accounts.
Traditionally, public investments and union-based corporate pension funds were managed according to strict fiduciary principles designed to protect workers and taxpayers. For the most part they invested in safe government securities, such as bonds or U.S. Treasury bills. Professional managers oversaw the funds with little political interference.
But during the last 30 years, state pension funds began playing the market, putting their money into riskier and riskier securities—first stocks, corporate bonds, and foreign investments, then real estate, private equity firms, and hedge funds. Concurrently, baby boomers whose politics were forged in the 1960s and ’70s began using those pension funds to advance their social visions. Investments designed for the long-term welfare of retirees began to evolve into a political hammer. Some good occasionally came from the effort, as when companies were pushed to become more accountable in their practices. But advocacy groups often used their clout to direct money into pet social projects with dubious fiduciary prospects. Sometimes the money went to the very companies and financial instruments that, in the wake of the market meltdown, are now widely derided.
Many union funds and larger state pension plans screen stocks and investment opportunities based on what are known as “socially responsible investing,” or SRI, principles. Instead of focusing solely on maximizing value, fund managers have used the economic clout of concentrated stock holdings to make a statement by divesting from companies that don’t make it through certain “sin screens.” These included companies involved with weapons, nuclear energy, tobacco, alcohol, natural resources, and genetic modifications on agriculture, many of which did well over the past decade. Stocks of public companies deemed to have poor records on labor, environmental issues, women’s rights, and gay rights are also frequently screened out, as are corporations that do business with regimes that activists consider unsavory. In some cases, investments have been withheld altogether from some of the markets expected to best weather the current financial storm, including China and India, because of perceived transgressions.
Socially responsible investing now claims a market of more than $2 trillion, according to the Social Investment Forum, the trade group for social investors. There are dozens of mutual funds and investment advisory companies that incorporate ideological screens. Most of them are liberal, although there are now a few conservative funds and some based on religious principles, such as Islamic law. Activist treasurers and pension fund managers in numerous states and municipalities, most notably in California, New York, and Connecticut, have incorporated social screens into their investment strategies.
Many of these funds prospered in the 1990s, when the basic material stocks that they frowned upon swooned, while the favored sectors—mostly technology and financial stocks, which were considered “clean investments”—did great. But the technology and communications bust of 2000–02 knocked out one of SRI’s pillars, and now the crash in financial stocks has destroyed the other. Despite much hype to the contrary, socially responsible stocks, as measured by major broad-based SRI stock funds, have significantly underperformed the market this decade, and some of the most aggressive pension funds that use “responsible” screens—such as the California Public Employees’ Retirement System—have taken some of the largest hits.
“Investing in socially responsible stocks just because they are socially responsible is not—underline not—a valid investment thesis,” says Steven Pines, a senior investment consultant for Northern Trust. Many of the largest socially responsible mutual funds, including a leading benchmark, the Domini Social Index, have been laggards for years. The Sierra Club’s high-profile social fund, which had regularly trailed the benchmark S&P 500 index by about 6 percent a year, liquidated in December, a victim of its poor performance record. As recently as last November, 76 out of the 91 socially responsible stock funds were underperforming the Dow, according to the investment research company Morningstar.
“This crisis highlights the limitations of social research methods,” says Dirk Matten, who holds the Hewlett-Packard chair in corporate social responsibility at York University’s Schulich School of Business. Although some socially responsible research models are more sophisticated than others, particularly ones that eschew simplistic screens, social investors have downplayed the actual business of a business, including whether it can create jobs and spread wealth, while overweighting what Matten believes are more symbolic concerns, such as announced programs to combat climate change.
Sometimes corporate social responsibility can mask or come at the expense of responsibility to shareholders. Fannie Mae, for instance, was named the No. 1 corporate citizen in America from 2000–04, based on datacompiled by the top U.S. social research firm, KLD Research and Analytics in Boston. Well, it does have a great diversity program.
As recently as mid-2008, three of the top eight holdings by the leading social investing organizations in the country were financial stocks: AIG, Bank of America, and Citigroup. AIG was praised for its retirement benefits and sexual diversity policies; Bank of America strove to reduce greenhouse gas emissions and promote diversity; and Citigroup donated money to schools and tied some of its loans to environmental guidelines. The stock prices of all three companies tanked in 2008.
From South Africa to the Shop Room Floor
The catalyzing event that changed pension funds from boring retirement pools to political operators was the international boycott of apartheid South Africa in the 1980s and the campaign to limit investments in companies that did business with Johannesburg. The success of the campaign energized baby boomers, now entering their prime earning years, who were committed to “making a difference” with their dollars. Taking a cue from these social investors, pension funds began dabbling in what came to be known as economically targeted investments—injecting money into communities or projects that addressed social ills, with healthy returns becoming a secondary concern.
The earliest pension fund social investing initiatives were often cobbled together during crises, with little appreciation for unintended consequences. In the 1980s, for example, the Alaska public employee and teacher retirement funds loaned $165 million—35 percent of their total assets—for the purpose of making mortgages in Alaska. When oil prices fell in 1987, so did home prices in the nation’s most oil-dependent state. Forty percent of the pension loans became delinquent or resulted in foreclosures.
While unions and social investors often work together, their investment strategies are not always in sync. In 1989, under union pressure, the State of Connecticut Trust Funds invested $25 million in Colt’s Manufacturing Co. after the beleaguered gun maker—hardly a favorite of the SRI crowd—lobbied the state legislature to save jobs. Colt’s filed for bankruptcy just three years later, endangering the trust funds’ 47 percent stake.
In the late 1980s, the Kansas Public Employees Retirement System, then considered a model of activist social investing, placed $65 million in the Home Savings Association, after its lobbyists told top officials that this would help struggling segments of the state economy. That investment evaporated when federal regulators seized the thrift. All told, the Kansans wrote off upward of $200 million in economically targeted investments.
Olivia Mitchell, executive director of the Pension Research Council at the Wharton School, has reviewed the performance of 200 state and local pension plans from 1968 to 1986 . She found that “public pension plans earn[ed] rates of return substantially below those of other pooled funds and often below leading market indexes.” In a study of 50 state pension plans during the period 1985–89, the Yale legal scholar and economist Roberta Romano concluded that “public pension funds are subject to political pressures to tailor their investments to local needs, such as increasing state employment, and to engage in other socially desirable investing.” She noted that investment dollars were directed not just toward “social investing” but also toward companies with lobbying clout.
Because of poor returns, these early experiments in economically targeted investments lost their allure. Most states and municipalities steered clear of social investing for a time. That hesitancy eroded during the 1990s, partly as a result of a new strategy employed by organized labor.
With their membership falling, union leaders found it harder to influence companies or politics from the factory floor. The new approach was to ally with social investors and adopt one of their key tactics: lobbying through shareholder resolutions intended to pressure corporations. “The strengthening of shareholder democracy promises to further empower investors to address governance issues such as out-of-control executive pay as well as environmental and social issues such as climate change,” Jay Falk—president of SRI World Group, which advises pension funds on social investing—said in 2007, as the tactic was gaining traction.
Union-led pension funds are also trying to rattle political cages, but they’re running closer to empty every day. Even before the sell-off, in the summer of 2008, while nearly 90 percent of nonunion funds met minimum safe funding thresholds—meaning they had adequate cash on hand to pay their benefits—40 percent of union funds were at risk. “These are high risk numbers even in a steady economy,” writes Diana Furchtgott-Roth, a pension fund specialist with the conservative Hudson Institute, in a recent study. Furchtgott-Roth notes that union fund management practices are opaque, costs are higher than at nonunion funds, and the plans have promised more than they can ever hope to deliver. “When workers entrust their retirement assets to an outside party, it is important that this party’s only interest be achieving the best returns possible,” she argues. “Unions clearly do not do this.”
California Screamin’
The biggest comeback of socially responsible investing also took place in the 1990s, when elected officials in New York, Connecticut, Minnesota, and—most notably—California began to dabble in asset allocation decisions based on a growing list of social concerns. CalPERS is the 800-pound gorilla among public pension funds. At its peak value in October 2007, CalPERS and its sister fund, CalSTRS (the state teachers’ pension system), held over $400 billion in assets. Their portfolios have more global influence than the entire economies of most sovereign nations. And during just three months last fall, more than 20 percent of the funds’ combined value evaporated—a horrendous performance for public investments designed to minimize risk and protect retirees. “We have ups and we have downs,” said Pat Macht, CalPERS assistant executive officer, as the fall 2008 massacre unfolded.
CalPERS and CalSTRS began flexing their financial muscles by demanding corporate governance reform, publicly excoriating companies they deemed to be poorly managed. It was an aggressive, almost unprecedented demonstration of the growing corporate transparency and accountability movement. The state’s pension fund meddling went into high gear in 1998 with the election of Phil Angelides as California treasurer. If there is a face to pension fund activism, it’s Angelides’. As political issues go, treasury and pension fund investments are not the sort of hot-button topics that ambitious California politicians usually ride to glory. But Angelides had a vision: to use retirement dollars as a way to change the world, and the state treasurer position became his tool.
Under Angelides’ direction, CalPERS emerged as a leading voice on behalf of shareholder rights, at least as he defined them. To this day, the California funds instigate a dizzying number of proxy fights at the companies in which they invest, focusing not just on governance-related issues like executive pay but on everything from carbon taxes to divestment from companies that do business with Sudan. This social activism has acted as a model for public pension funds in other states. Laws directing funds to scrap investments in companies that invest in disfavored countries have passed or are being considered in 20 states, including Texas, Maine, Tennessee, New Jersey, Florida, and Idaho.
In 1999 Angelides’ funds committed $7 billion to a program called Smart Investments to support “environmentally responsible” growth patterns and invest in struggling communities. As in Alaska and Kansas in the 1980s, however, there were no accountability provisions to measure the impact of the venture, let alone to determine its financial consequences.
Supported by labor unions and minority groups, Angelides argued that the state had too many billions stashed away in so-called emerging markets—Third World nations where democracy is weak and wages are low—and not enough invested at home creating jobs and housing. So in March 2000, he rolled out an ambitious social investing program, dubbed the Double Bottom Line, which included dumping $800 million in tobacco stocks and persuading fund managers to shed investments in countries that Angelides thought had questionable environmental or governance practices. He claimed the initiatives would not sacrifice investment returns, saying at the time: “I feel strongly that we wouldn’t be living up to our fiduciary responsibility if we didn’t look at these broader social issues. I think shareholders need to start stepping up and asserting their rights as owners of corporations. And this includes states and their pension funds.”
How has this social engineering worked out? Angelides left his job as state treasurer in 2006 for an unsuccessful run for governor, but his legacy of politicizing pension fund investing remains. In 2003 CalPERS rejected a recommendation from its financial adviser, Wilshire Associates, to invest in the equity markets of four Asian nations—Thailand, Malaysia, India, and Sri Lanka—based on their alleged misdeeds. That was a costly decision, as their stock markets roared in the ensuing years. Another decision to shun investment in China, India, and Russia cost the fund some $400 million in forsaken gains, according to the fund’s own 2007 internal report.
Under sharp criticism and amid devastating declines, CalPERS last August finally repealed the screening policy, claiming victory in its reform efforts. “Year by year, scores [of countries and corporations that invest in them] are improving, and many countries have responded to our standards for investing,” CalPERS President Rob Feckner said in a press release.
CalPERS’ tobacco boycott was equally disastrous. With the float of most large cigarette companies so large, disgorging even a sizable fraction of one company’s shares has little impact on the stock price; it’s akin to taking a thimble full of water out of the deep end of a pool, only to have it dumped back in the shallow end when the buyer makes his purchase. Since California sold its tobacco shares, the AMEX Tobacco Index has outperformed the S&P 500 by more than 250 percent and the NASDAQ by more than 500 percent. That one decision alone cost California pensioners more than $1 billion, according to a 2008 report by CalSTRS.
Some of the most steadily performing sectors, through both good and bad times, have been the very “vice” stocks that are no-nos for most social investors. When times get tough, the sinners get sinning. “Demand for drinking, smoking, and gambling remains pretty steady and actually increases during volatile times,” says Tom Glavin, chief investment officer at Credit Suisse First Boston. Alcohol, tobacco, and gambling stocks rallied solidly during two of the last three major recessions, in 1990 and 1982. “Many of these industry groups tend to be beneficiaries of the flaws of human character,” Glavin says.
So what stocks did the California funds buy instead? High on the list were financial stocks, which have been given a green bill of health by social investors. CalSTRS recently acknowledged it had lost hundreds of millions of dollars on Lehman Brothers, AIG, and other fallen icons that were recent favorites of social investors.
But those losses may pale when the tab comes due for misplaced bets on the boom-to-bust California real estate market. According to a report released last April, CalPERS had 25 percent of its $20 billion real estate assets in the California market, which has declined faster than the real estate markets in most of the rest of the country.
In the summer of 2007, CalPERS was more than 100 percent funded. It’s now under 70 percent funded and falling, and that doesn’t fully factor in its plummeting real estate investments. Funding levels stand near a dismal 50 percent for Connecticut, where State Treasurer Denise Napier has been a vocal proponent of social investing. Both states are far below mandated minimum funding standards, and they pale in comparison to even the beleaguered ratios of corporate defined contribution plans, which have mostly avoided using social screens.
Large public pension funds have a selfish notion of risk: heads they win, tails you lose. If they gamble on risky investments that pay off, they are heroes, although the predetermined benefits don’t increase. But if those investments go south, tax dollars will have to bridge the gap. “This is adding insult to injury,” says Jon Coupal of the Howard Jarvis Taxpayers Association. “At the same time we’re seeing our own 401(k)s get hit, we’re on the hook to make up the shortfalls for public employees who are guaranteed their full pensions without any risk.”
When public funds slide in value, taxpayers get hit from all sides. The municipalities and school districts that hire firefighters, police, teachers, and other workers have to cut their staffs to recapitalize funds. Last October the Los Angeles County Board of Supervisors learned that the county would have to come up with an extra $500 million to keep its pension fund whole. That means the county may have to raise local taxes and cut services to deliver on overextravagant promises it failed to safeguard.
Unsteady Future
Public and union pension funds will be increasingly important factors in financial markets for the foreseeable future. As part of their fiduciary mandate to maximize investment returns, their trustees certainly have a right and duty to lobby for changes in corporate behavior that could result in better returns for their pension holders. But judging by the words and actions of some pension activists, “shareholder value” has become synonymous with “cause-related investing,” justifying a range of actions that may put at risk, directly or indirectly, pensioners’ retirement holdings.
If the goals of pension managers and retirees are not the same—as is often the case—then pension plans should not engage in social investing. In many instances, SRI amounts to union leaders or politicians gambling with other people’s money in support of ideological vanity.
A few politicians have begun speaking out against risking pension funds on political causes, for fear of limiting returns in a difficult investment climate. New York state and New York City public funds prohibit investing in new tobacco stocks, a policy that has drawn the ire of Mayor Michael Bloomberg, even though he is a zealous opponent of smoking. “I don’t think we should be using the city’s investment policies…to advance social goals, no matter how admirable those goals are and no matter how much I believe in it,” he has said.
Pensions are being dragged into treacherous waters by investors who consciously choose to direct their money in socially conscious ways. It’s a questionable risk for cautious times. The use of political criteria may be fine for affluent investors and activists who gamble their own money and assume the extra risk, but pension funds should be held to a higher standard.
6) It's Going to Get Worse for Wall Street Execs
By Marie Cocco
Hot tip to Wall Street: We don't have Tom Daschle to kick around anymore. Or even Rod Blagojevich.
You may wonder what the now-withdrawn Cabinet nominee and the now-removed Illinois governor have to do with you. Well, a very good editor once told me that Washington can handle just two stories at a time.
She wasn't referring only to the news media. She meant the whole, hyperventilating media-political complex of reporters, television shouters, members of Congress, gossipy lobbyists, talk-radio blabbers, writers of partisan talking points, and yes, sometimes even presidents. With the political soap operas that have been playing out since the November election in a temporary lull, this means Washington is going to settle on two compelling narratives. One of them is the drama of Wall Street versus Main Street.
The other is the terrible, horrible, no good, very bad economy that has everyone so scared that in the run-up to Super Bowl the people who tell Americans what to cook were full of suggestions about how to feed a football crowd for 20 bucks.
The reason you are such a big story is that you've stolen our money. Or at least that's how most of the country sees it. First you broke just about everything you touched: mortgages, 401(k)s, the kids' college accounts, and even the employers who provide paychecks -- the chump change middle-class America counts on while you live high. Then we had to bail you out.
You think those auto executives looked bad when they appeared shocked, shocked to find that Congress didn't really appreciate their traveling in corporate jets to come and beg for their bailouts?
Well, no one hates Detroit as much as they hate Wall Street. At least the Big Three make something people need to get to work and take their kids to soccer and pick up the groceries. What, exactly, do they do with a derivative?
I know that Wall Street is to New York what automakers are to Detroit and tourism is to Florida. I know that when your eye-popping paychecks plummet, the deli guy who rides the subway in from Queens to make your takeout gets hurt, and so do the waiters and bartenders and the owners of those black limos that idle at the curb and who have to make loan payments on the cars even when you cut down on your trips -- or cut out the car service altogether.
I know that when New York state Comptroller Thomas P. DiNapoli announced last week that 2008 bonuses were down 44 percent -- to $18.4 billion -- he did so in part to warn residents that the enormous loss in tax revenue was going to hurt the city and state. DiNapoli soberly reminded his constituents that the New York securities industry has shed about 20,000 jobs between October 2007 and last December -- about 10 percent of its work force.
DiNapoli justifiably saw lost tax revenue. Washington saw a very big slush fund for some very incompetent people -- and a powerful detonator of public resentment.
Now President Barack Obama wants to cap some of your executives' pay at $500,000 -- but strictly require such a limit only if you're doing as badly as, say, Citigroup and AIG, which would fall into the category of institutions that got "exceptional assistance" from taxpayers (about $450 billion between them). The limit applies only to companies that seek this much largesse in the future. And the "clawback" provisions require the return of excessive compensation only from top executives engaged in "deceptive practices" -- not extraordinarily stupid ones.
Your golden goose so far isn't cooked. It's only seared.
So things will get worse. Sen. Claire McCaskill of Missouri already has made clear she wants pay caps for all companies that get taxpayer money, not just "exceptional" firms. And there are hearings scheduled for next week where you will have to defend yourselves.
There is really nothing to be done except try not to do anything else that is incredibly dumb. Like get photographed at a glittery charity ball, thinking that this shows commitment to public service. Or try to justify bonuses as just compensation for long days and nights navigating through this crisis. Crisis is when you lose your job, your health insurance and your house.
And unless you're planning to pilot a plane yourself and stage a miraculous landing in the Potomac, don't even think about taking a private jet here. Try Amtrak.
7) Why 'Stimulus' Will Mean Inflation: In a global downturn the Fed will have to print money to meet our obligations.
By GEORGE MELLOAN
As Congress blithely ushers its trillion dollar "stimulus" package toward law and the U.S. Treasury prepares to begin writing checks on this vast new appropriation, it might be wise to ask a simple question: Who's going to finance it?
That might seem like a no-brainer, which perhaps explains why no one has bothered to ask. Treasury securities are selling at high prices and finding buyers even though yields are low, hovering below 3% for 10-year notes. Congress is able to assure itself that it will finance the stimulus with cheap credit. But how long will credit be cheap? Will it still be when the Treasury is scrounging around in the international credit markets six months or a year from now? That seems highly unlikely.
Let's have a look at the credit market. Treasurys have been strong because the stock market collapse and the mortgage-backed securities fiasco sent the whole world running for safety. The best looking port in the storm, as usual, was U.S. Treasury paper. That is what gave the dollar and Treasury securities the lift they now enjoy.
But that surge was a one-time event and doesn't necessarily mean that a big new batch of Treasury securities will find an equally strong market. Most likely it won't as the global economy spirals downward.
For one thing, a very important cycle has been interrupted by the crash. For years, the U.S. has run large trade deficits with China and Japan and those two countries have invested their surpluses mostly in U.S. Treasury securities. Their holdings are enormous: As of Nov. 30 last year, China held $682 billion in Treasurys, a sharp rise from $459 billion a year earlier. Japan had reduced its holdings, to $577 billion from $590 billion a year earlier, but remains a huge creditor. The two account for almost 65% of total Treasury securities held by foreign owners, 19% of the total U.S. national debt, and over 30% of Treasurys held by the public.
In the lush years of the U.S. credit boom, it was rationalized that this circular arrangement was good for all concerned. Exports fueled China's rapid economic growth and created jobs for its huge work force, American workers could raise their living standards by buying cheap Chinese goods. China's dollar surplus gave the U.S. Treasury a captive pool of investment to finance congressional deficits. It was argued, persuasively, that China and Japan had no choice but to buy U.S. bonds if they wanted to keep their exports to the U.S. flowing. They also would hurt their own interests if they tried to unload Treasurys because that would send the value of their remaining holdings down.
But what if they stopped buying bonds not out of choice but because they were out of money? The virtuous circle so much praised would be broken. Something like that seems to be happening now. As the recession deepens, U.S. consumers are spending less, even on cheap Chinese goods and certainly on Japanese cars and electronic products. Japan, already a smaller market for U.S. debt last November, is now suffering what some have described as "free fall" in industrial production. Its two champions, Toyota and Sony, are faltering badly. China's growth also is slowing, and it is plagued by rising unemployment.
American officials seem not to have noticed this abrupt and dangerous change in global patterns of trade and finance. The new Treasury secretary, Timothy Geithner, at his Senate confirmation hearing harped on that old Treasury mantra about China "manipulating" its currency to gain trade advantage. Vice President Joe Biden followed up with a further lecture to the Chinese but said the U.S. will not move "unilaterally" to keep out Chinese exports. One would hope not "unilaterally" or any other way if the U.S. hopes to keep flogging its Treasurys to the Chinese.
The Congressional Budget Office is predicting the federal deficit will reach $1.2 trillion this fiscal year. That's more than double the $455 billion deficit posted for fiscal 2008, and some private estimates put the likely outcome even higher. That will drive up interest costs in the federal budget even if Treasury yields stay low. But if a drop in world market demand for Treasurys sends borrowing costs upward, there could be a ballooning of the interest cost line in the budget that will worsen an already frightening outlook. Credit for the rest of the economy will become more dear as well, worsening the recession. Treasury's Wednesday announcement that it will sell a record $67 billion in notes and bonds next week and $493 billion in this quarter weakened Treasury prices, revealing market sensitivity to heavy financing.
So what is the outlook? The stimulus package is rolling through Congress like an express train packed with goodies, so an enormous deficit seems to be a given. Entitlements will go up instead of being brought under better control, auguring big future deficits. Where will the Treasury find all those trillions in a depressed world economy?
There is only one answer. The Obama administration and Congress will call on Ben Bernanke at the Fed to demand that he create more dollars -- lots and lots of them. The Fed already is talking of buying longer-term Treasurys to support the market, so it will be more of the same -- much more.
And what will be the result? Well, the product of this sort of thing is called inflation. The Fed's outpouring of dollar liquidity after the September crash replaced the liquidity lost by the financial sector and has so far caused no significant uptick in consumer prices. But the worry lies in what will happen next.
Even when the economy and the securities markets are sluggish, the Fed's financing of big federal deficits can be inflationary. We learned that in the late 1970s, when the Fed's deficit financing sent the CPI up to an annual rate of almost 15%. That confounded the Keynesian theorists who believed then, as now, that federal spending "stimulus" would restore economic health.
Inflation is the product of the demand for money as well as of the supply. And if the Fed finances federal deficits in a moribund economy, it can create more money than the economy can use. The result is "stagflation," a term coined to describe the 1970s experience. As the global economy slows and Congress relies more on the Fed to finance a huge deficit, there is a very real danger of a return of stagflation. I wonder why no one in Congress or the Obama administration has thought of that as a potential consequence of their stimulus package.
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