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August 2007

John Berry Says that the Fed *Might*--Not *Will*--Cut Interest Rates

The Fed doesn't want to be locked in to any particular policy path right now:

Commentary by John M. Berry: Aug. 21 (Bloomberg) -- Federal Reserve policy makers haven't acted hastily in dealing with the financial market upheavals of the past two weeks, and they aren't going to. Neither the U.S. nor the world economy is collapsing, so Fed officials are doing exactly what they should be doing now: taking measured steps to ensure that creditworthy borrowers can get credit.

Whether the Fed's 5.25 percent target for the overnight lending rate gets cut in coming weeks will depend on how soon markets stabilize and how much the outlook for growth turns out to deteriorate. The Fed has added liquidity to the financial system through open market operations, and on Aug. 17 it announced a 50-basis point cut in the discount rate, to 5.75 percent. Moreover, in a highly unusual conference call, officials encouraged banks to borrow at the regional Fed banks' discount windows for 30 days or longer rather than just overnight....

The discount rate cut and the encouragement to borrow were intended "to ensure the smooth functioning of the financial system," Jen said. The [FOMC statement] was "to properly respond to changing risks to growth and inflation" without promising a series of rate cuts....

Economists at Deutsche Bank Securities drew a parallel between this market turmoil and the stock market crash of October 1987.... This time around... if central banks "make it clear that they stand ready to keep credit open to credit-worthy borrowers, there is still a chance that the dynamics of 1987 will reassert themselves, leading to a stabilization of markets and a continuation of the world economic expansion."...

The remarkable -- though not unprecedented -- thing about the past two weeks is how doubts about the scope of losses on securities backed by packages of subprime mortgages spread fear throughout credit markets. At $50 billion to $250 billion, the estimated likely losses associated with the default of U.S. subprime borrowers are small compared with the assets of private investors and commercial banks.... "Corporate balance sheets are healthy," Geithner said. "The six-month trailing bond default rate has stayed near zero this year, and the delinquency rate on commercial and industrial loans at banks remains extremely low."

All of that is still true. It may not remain so.... [Nevertheless the] real economy hasn't gone into the ditch... a lot of assets remain ``fundamentally sound'' and moral hazard is a very real issue. So the Fed is taking only measured steps while ready to do more if necessary.

Since I was a rate cutter three months ago, I'm even more of a rate cutter now. But I can see how a FOMC that wasn't a rate cutter three months ago might not want to cut rates the next time it meets.

Willem Buiter, Anne Siebert, and Walter Bagehot

William Buiter and Anne Siebert write:

Maverecon - Willem Buiter's Blog: Central banks in a time of crisis: a preliminary scorecard: Martin Wolf, Chief Economics Commentator of the Financial Times is correct in stating, in his FT column of August 15, 2007,

Fear makes a welcome return, that in a crisis the central bank must save not specific institutions, but the market itself.

It is, however, necessary to be precise about what it means to save the market, about which markets may need saving and about how the central bank should go about saving the market in such a way as to minimise undesirable side effects.... [W]e have sketched the role of a modern central bank as ‘market maker of last resort’ (MMLR). This MMLR is the analogue, in a world where intermediation is increasingly through financial markets, to Bagehot’s lender of last resort (LOLR) in a world where most intermediation took place through banks.... The market maker of last resort function can be fulfilled in two ways. First, the central bank can make outright purchases and sales of a wider range of securities than they currently do. Second, central banks can accept a wider range of securities as collateral in repos, and in collateralised loans and advances at the discount window than they currently do. Following Bagehot’s rule, the MMLR should buy these securities outright or accept them as collateral only on terms that would imply a stiff financial penalty to the owner....

Making a market for a particular type of illiquid financial asset, say a collateralised debt obligation (CDO), may require knowledge that central banks currently do not have.... [T]he solution is not to hire the financial engineers and quants, who are so good at exploiting ‘arbitrage’ opportunities and extracting the large returns to risk bearing in ordinary times, but whose lack of consideration for and/or understanding of economic fundamentals significantly contributed to the current market disarray. Instead, central banks should hire economists with solid training in macroeconomics, financial economics, micro-market structure and behavioural economics and then encourage them to become interested in and knowledgeable about financial markets that may become illiquid.

From the perspective of saving or supporting markets, acting as market maker of last resort where appropriate and necessary, the recent actions of the Fed, the ECB and the Bank of England have all left something to be desired. The ECB simply drowned the markets in high-grade liquidity, adding well over $200bn worth of liquidity against high-grade collateral. As this did nothing directly to assist the markets for illiquid and low-grade securities.... The Fed cut the (primary) discount rate from 100bps above the Federal Funds target rate to 50bps above the Federal Funds target rate. This was a mistake and a missed opportunity. The problem was... that these financial institutions are holding a lot of assets which have suddenly become illiquid and cannot be sold at any price.... The Fed should instead have effectively created a market by widening the set of eligible collateral....

[O]n balance, the Fed and the ECB are addressing the credit crunch with a larger dose of liquidity-provision-as-usual under orderly market conditions. In addition, the Fed has provided an unnecessary subsidy to discount window users. There is a real risk that either or both may be pushed into cutting monetary policy rates not because they fear developments in inflation... but as a way of addressing a credit crunch and liquidity crisis....

On the whole, these central banks have not exactly covered themselves with glory...

I don't think this is right. Bagehot's rule has many formulations, but I think the central one is that the central bank should close down insolvent institutions and lend freely (at a penalty rate) to illiquid ones, where "illiquid" means that after the crisis passes and asset prices return to normal levels and the dust settles we will see that the institution is indeed solvent--it is just that right now the possibility that it will have to liquidate assets at distress prices means that we are not sure what would happen if it were closed down today.

The central bank doesn't need to make a market in dodgy assets, according to Bagehot--and there were lots of dodgy assets in the late nineteenth century. The central bank just needs to make normal-time solvency judgments. I don't think the central bank should get into the business of buying dodgy assets. But that seems to be what Buiter and Siebert want it to do with their "market maker of last resort."

I'm skeptical.

Jonathan Chait Is Driven into Shrillness by William Kristol

Somehow my first reaction to it is: "This is news?"

The Thuggery Of William Kristol: IT'S HARD TO BELIEVE that, not so long ago, neoconservative foreign policy thinking overflowed with ideas and idealism. The descent has been steep, and nowhere is it more apparent than in the pages of The Weekly Standard--particularly in William Kristol's editorials, which have come to consist of stubborn denials of any bad news, diatribes about internal enemies, and harangues against the cowardice of Republican dissenters....

The notion that TNR published a Diarist merely for the edification of readers, rather than to advance a political agenda, did not occur to Kristol, because he could not imagine doing any such thing himself. He once explained his belief in the philosopher Leo Strauss to journalist Nina Easton thusly: "One of the main teachings is that all politics are limited and none of them is really based on the truth." Whether or to what degree Beauchamp's Diarist is true could not matter less to him.

Two years ago, my colleague Lawrence Kaplan--who once co-authored, with Kristol, a book arguing for the war--wrote a poignant cover story describing how the dream of creating a liberal Arab state had died. Kristol, naturally, denounced his inconvenient observation. "The fact remains that it is today more possible than ever before to envision a future in which the Middle East and the Muslim world truly are transformed," he insisted. "For this, no one will deserve more credit than George W. Bush." Of course, this was an opinion, not a "fact." But the failure to distinguish between fact and opinion is typical of his mentality....

Then there is Kristol's accusation that critics of the war don't "support the troops." I wonder if, back in his youthful days teaching political philosophy, Kristol ever imagined he would one day find himself mouthing knucklehead slogans like this. I shouldn't need to say this, but apparently I do: I strongly support and respect the troops and would desperately like them to succeed. My respect, unlike Kristol's, extends to soldiers who don't share my politics, and isn't contingent on the fantasy that all of them are saints....

The theme of traitorous liberals is becoming a Standard trope. Last week's cover depicted an American soldier seen from behind and inside a circular lens--as if caught in the sights of a hostile sniper--beneath the headline, "DOES WASHINGTON HAVE HIS BACK?" The Weimar-era German right adopted the metaphor of liberals stabbing soldiers in the back. Kristol is embracing the metaphor of liberals shooting soldiers in the back. I suppose this is progress, of sorts.

There was a time when neoconservatives sought to hold the moral and intellectual high ground. There was something inspiring in their vision of America as a different kind of superpower--a liberal hegemon deploying its might on behalf of subjugated peoples.... Kristol's good standing in the Washington establishment depends on the wink-and-nod awareness that he's too smart to believe his own agitprop. Perhaps so. But, in the end, a fake thug is not much better than the real thing.

My second reaction is that the Jonathan Chait who believes that "not long ago... neoconservative foreign policy thinking overflowed with ideas and idealism" has clearly not been paying attention:

First the neoconservatives came for the Salvadorean archbishop, and I was silent, because I was not a Salvadorean archbishop.
Next the neoconservatives came for the Maryknoll nuns, and I was silent, because I was not a Maryknoll nun.
Then the neoconservatives came for this who wanted to trust Gorbachov, and I was silent, because I was not Gorbachov.
Then the neoconservatives came for the Clinton Health Care Task Force, and I was silent, because I was not on the Clinton Health Care Task Force.
Then the neoconservatives came to gin up a cold war with China, and I was silent, because I knew little about China.
And now that the neoconservatives come for New Republic writers...

Kevin Drum Enthusiastically Praises Jonathan Chait on Bush the Class Warrior

Kevin Drum writes:

Kevin Drum: fears of Bush the Fascist and Bush the Theocrat are little more than minstrel shows that distract us from truly taking notice of Bush the Plutocrat—and that’s the Bush that really matters. This, along with Chait’s trademark take-no-prisoners writing style, is the great strength of The Big Con.... Take supply-side economics. There are, it’s true, a few honest supply-siders.... [But] it has become little more than a carnival barker’s cure-all: Cut taxes and the economy will boom! There isn’t a practicing economist in the country who believes this, but that hasn’t stopped Republican primaries from becoming virtual meat markets where the candidates vie to outbid each other over their fealty to tax cuts today, tax cuts tomorrow, tax cuts forever.

Why? As Chait points out, the answer is simple if you don’t mind being thought unsophisticated: Republicans do it not because it’s defensible policy, but because tax cut jihadism is popular with both the rich donors and the corporate lobbying groups who contribute to their campaigns.

How do they get away with this?... [A] big modern Republican sin: their almost complete disregard for policy analysis.... Analysis is for wimps.... [T]he post-Gingrich discovery by Republicans that an awful lot of what happens in Washington isn’t governed by actual rules, but by mere traditions.... [A] single purpose: passing business-friendly pork as efficiently and as quietly as possible. Tax bills, energy bills, Medicare prescription bills: all become mere vehicles for corporate largesse.

There’s also the peculiar way in which Republicans publicly defend their policies: by talking like liberals. “Republicans simply can’t win office or get their plans enacted into law, without fundamentally misleading the public,” Chait says. “Lying has become a systematic necessity.” The reason is obvious: if you sell tax cuts on their actual merits (i.e., they help Enron and Rupert Murdoch), no one will support you.... And it’s not just tax cuts. Business-friendly environmental policies are sold as “Healthy Forests” and “Clear Skies.” Business-friendly legal policies are sold as a way to stop “lawsuit abuse.” Business-friendly Medicare legislation is sold as a way of helping out Granny and Gramps. And the whole thing is sold under the umbrella of “compassionate conservatism.” It turns out that the only way to sell business-friendly conservative policies is to pretend they’re actually liberal policies.

As Chait points out, however, Republicans could never have gotten away with this without some help from the media... trained to assume that the “center” is a reasonable place to be, and that the center is the midpoint between the two parties.... [And] most reporters really don’t care much about policy. In fact, they’re often contemptuous of it. Rather, they care about personalities, “character,” scandals, polling numbers, and backroom deal making. The result is that Republicans can engage in transparent class warfare with barely even a pretense at serious justification and the press either doesn’t notice or doesn’t really care...

Chris Mooney: Hurricane Dean Is the Ninth Most Intense Atlantic Hurricane Ever Measured

Chris Mooney writes:

Hurricane Dean: 1 Of 10 Most Intense Atlantic Hurricanes Ever Measured: Early this morning Hurricane Dean... slammed the Yucatan Peninsula around Chetumal as a Category 5 hurricane with winds upwards of 165 miles per hour and a minimum central pressure of 906 millibars.... Its pressure was the ninth lowest ever measured in the Atlantic, and the third lowest at landfall. Indeed, there hasn’t been a full Category 5 landfall in our part of the world since 1992’s Hurricane Andrew. Dean was in all respects a terrifying storm, and we can only hope that the damage will somehow be less than expected as it tears across the peninsula and then, after crossing the Bay of Campeche, moves on to a presumed second Mexican landfall.

No one storm says anything about climate change; but... let’s consider the storm from a climate perspective, bearing in mind the scientific expectation that global warming ought to intensify the average hurricane (by how much remains hotly disputed). How does Dean fit into that ongoing scientific argument? Well, first of all, Dean now takes its rank among the top ten most intense Atlantic hurricanes. If you look at that list you’ll see that six of the strongest (Wilma, Rita, Katrina, Mitch, Dean, and Ivan) have been in the past ten years. That’s not the kind of statistic that’s easy to overlook. According to these data we are getting more super-strong storms in the Atlantic basin than we ever have before.

To be sure, there’s a counterargument here: Data wasn’t as good on hurricane intensity in previous eras as it is today, when our measuring equipment is better than ever. Stronger storms may well have existed in the past, but we were simply incapable of detecting their true strength.

This is a serious objection, although it’s hard to know precisely how serious. Nevertheless, the fact remains that if you look at the official records, Dean now fits in to a staggering hurricane decade. That’s highly suggestive, if not definitive. And this staggering decade has occurred in part because of anomalously warm ocean temperatures in the hurricane-prone regions. Many scientists question whether you can explain these warm anomalies without invoking global warming as at least part of the cause. So once again, even though Dean was not “caused” by global warming, when considered in its Atlantic context the storm is certainly consistent with the argument that there’s something going on out there that’s new — and more than a little scary...

Yves Smith on the Fed's Choices

Yves Smith writes at

A gut-wrenching two weeks in the credit markets have been capped by unprecedented moves by central bankers... However, both the Financial Times and the Wall Street Journal report that the Fed's actions have done little to stem chaos in the money markets, begging the question of whether the Fed should do more, and if so, what. Opinion about the wisdom of the central bankers' actions is coalescing into what we will characterize, broadly, as four views.... we'll focus on the Fed....

First is the group that thinks that central banks should do whatever it takes to keep the markets afloat... Jim Cramer... Don Luskin, but they have some intellectually respectable company, such as economist Thomas Palley....

In bad times, such as we are now experiencing, the Fed is obliged to come to the rescue of lenders for fear that if they stop lending the economy will tank.... The threat posed by the current crisis is such that the Fed should meet this demand. That means immediately cutting rates and continuing to judiciously provide emergency liquidity. However, once the storm passes Congress and the Fed must address the systemic problems and policy distortions that have been exposed by the current crisis.

The second group is the cold water Yankees who think that any liquidity infusion is a bad idea. They see the Fed and its buddies as having enabled massively underpriced credit, which has in turn led to asset bubbles. While they don't deny that a refusing to mitigate the credit contraction will cause considerable pain, including a recession, they argue that lowering interest rates now will rescue the perpetrators as well as the victims, merely delaying the day of reckoning.... Despite the moralistic overtones, this group (members include Nouriel Roubini, Andy Xie, Michael Panzner, Marc Faber) has some logic behind its righteous-sounding views. Roubini's critique is particularly sophisticated. He has pointed out that the credit contraction isn't simply a liquidity crisis but also a solvency crisis. More credit can't salvage insolvency.... No amount of liquidity will solve an information problem.

The third camp is the realists. They... think a cold turkey approach creates too much collateral damage.... This view is particularly strong at the Financial Times, where its well regarded economics editor Martin Wolf and commentator Martin de Grauwe have both takes a page from Walter Bagehot, who advocated that central bankers needed to create some pain even as they were alleviating a crisis. They should lend, but at penalty rates, and only against good collateral.... Walter Buiter (among other things, a member of the monetary policy committee at the Bank of England) and Anne Siber (advisor to the Committee for Economic and Monetary Affairs of the European Parliament) hew more tightly to the Bagehot line and, say quite bluntly at VoxEu that the Fed blew it:

The Fed's 17-8-07 move was a missed opportunity. It should have effectively created a market by expanding the set of eligible collateral, charging an appropriate "haircut" or penalty interest rate, and expanding the set of eligible borrowers at the discount window to include any financial entity that is willing to accept appropriate prudential supervision and regulation..... We believe that this cut in the discount rate was an inappropriate response to the financial turmoil. The market failure that prompted this response was not that financial institutions are unable to pay 6.25 percent at the discount window and survive (given that they have eligible collateral). The problem is that banks and other financial institutions are holding a lot of assets which are suddenly illiquid.... [T]he Fed should have effectively created a market by expanding the set of eligible collateral and charging an appropriate "haircut" or penalty. Specifically, it should have included financial instruments for which there is no readily available market price to act as a benchmark for the valuation of the instrument for purposes of collateral...

The fourth view comes from those who believe the... solution isn't simply a matter of interest rate policy but of the larger regulatory framework, which needs to acknowledge and manage the risk of asset bubbles.... Australia's former Reserve Bank Governor Ian MacFarlane (who to our knowledge is the only central banker to successfully deflate an asset bubble) pointed out the dilemma central bankers now face, namely, the lack of a mandate to address asset inflation.... >However, even now it's not hard to point to a few things that in retrospect might have put a damper on the recent speculative frenzy. One is that the old "prudent man" and "prudent investor" rules that used to guide fiduciaries' behavior have gone out the window. If an institution used a fund consultant to invest in products it didn't understand, it escapes liability.

The formal reimposition of some commonsensical standards that have gone by the wayside might go a considerable way towards addressing the problem. One would be to prohibit fiduciaries from investing in funds or vehicles that fail to disclose their holdings (meaning assets and liabilities) to them on at least a quarterly basis.... An improved securities regulatory regime may similarly emphasize new respect for old rules that have been widely ignored to our collective peril.

Two comments. First, the Bagehot rule seems to be widely misunderstood. It is not "lend at penalty rates on good collateral," it is "lend at penalty trates on collateral that would be good in normal times." There is a difference.

Second, "prudent man" rules do much less good than reserve requirements and capital standards--which are then waived in a crisis. Reserve requirements and capital standards make a crisis much less likely, and then their waiver gives institutions many more tools with which to deal with the crisis when it does come.

Peter Baker of the Washington Post Does It Again

Kevin Drum directs us to Laura Rozen on the Washington Post's Peter Baker:

The Washington Monthly: DEMOCRACY DEMOTION....Peter Baker has a big article in today's Washington Post suggesting that the failure of George Bush's democracy promotion agenda is largely due to resistance from bureaucrats in the State Department and elsewhere. Laura Rozen is decidedly unimpressed:

The piece left out so many big examples of the contradictions — Musharraf/Pakistan, Saudi Arabia whose corrupt royal family is so close to the White House and Cheney's office, the Muslim Brotherhood in Egypt — of where Bush has decided he isn't quite sure he really wants democratic realities to be realized, and he just may prefer the tyrant, as Cheney openly does in Kazakhstan and Saudi Arabia.

....How would we know if Bush were really serious about democracy? If he told Riyadh to stuff it. That's never going to happen, so we can rest assured that Bush is quite content to live with the art of the possible, with a very high degree of realism, and any griping about the bureaucrats is something journalists should know better than to accept as more than a wink-nod excuse for the president's own decisions to compromise his vision of promoting democracy when it suits him.

Serious enough for you?

Why oh why can't we have a better press corps?

Here are selections from Peter Baker:

As Democracy Push Falters, Bush Feels Like a 'Dissident': By the time he arrived in Prague in June for a democracy conference, President Bush was frustrated. He had committed his presidency to working toward the goal of "ending tyranny in our world," yet the march of freedom seemed stalled. Just as aggravating was the sense that his own government was not committed to his vision.

As he sat down with opposition leaders from authoritarian societies around the world, he gave voice to his exasperation. "You're not the only dissident," Bush told Saad Eddin Ibrahim, a leader in the resistance to Egyptian President Hosni Mubarak. "I too am a dissident in Washington. Bureaucracy in the United States does not help change. It seems that Mubarak succeeded in brainwashing them."

If he needed more evidence, he would soon get it. In his speech that day, Bush vowed to order U.S. ambassadors in unfree nations to meet with dissidents and boasted that he had created a fund to help embattled human rights defenders. But the State Department did not send out the cable directing ambassadors to sit down with dissidents until two months later. And to this day, not a nickel has been transferred to the fund he touted.

Two and a half years after Bush pledged in his second inaugural address to spread democracy around the world, the grand project has bogged down in a bureaucratic and geopolitical morass, in the view of many activists, officials and even White House aides. Many in his administration never bought into the idea, and some undermined it.... The story of how a president's vision is translated into thorny policy is a classic Washington tale of politics, inertia, rivalries and funding battles -- and a case study in the frustrated ambition of a besieged presidency....

Bush did not wait long after reelection in November 2004 to begin mapping his second term. Relaxing from the burdens of the campaign, he leafed through galleys of a book given to him by Tom A. Bernstein, a friend and former partner in the Texas Rangers. The book, "The Case for Democracy," was a manifesto by Natan Sharansky, the Soviet refusenik, Israeli politician and favorite of neoconservatives.

Bush found it so riveting, he asked aides to invite Sharansky to visit. The next day, nine days after the election, the author was ushered into the Oval Office. He and Bush talked about the nature of democracy and how to advance it. Bush was struck by a metaphor in the book comparing a tyrannical state to a soldier pointing a gun at a prisoner until his arms tire, he lowers the gun and the captive escapes. "Not only did he read it, he felt it," Sharansky said last week.

Within weeks, according to several aides, Bush called his chief speechwriter, Michael J. Gerson, to discuss using his second inaugural address to "plant a flag" for democracy around the world.... Such sweeping rhetoric might have generated objections from the professional diplomats at the State Department who normally review presidential addresses. "That's why you don't show them the speech," Bartlett explained....

Defiance of Bush's mandate could be subtle or brazen. The official recalled a conversation with a State Department bureaucrat over a democracy issue. "It's our policy," the official said. "What do you mean?" the bureaucrat asked. "Read the president's speech," the official said. "Policy is not what the president says in speeches," the bureaucrat replied. "Policy is what emerges from interagency meetings."...

Less than two months later, Vice President Cheney went to Lithuania to deliver the toughest U.S. indictment of Putin's leadership. But the next day, Cheney flew to oil-rich Kazakhstan and embraced its autocratic leader, Nursultan Nazarbayev, with not a word of criticism. The juxtaposition made the talk of democracy look phony and provided ammunition to the Kremlin....

"If the president was announcing a grand strategy, it doesn't look like his goals are being attained," Zelikow said...

Joe Klein Is Shrill!

Good to see!

READ THIS NOW! - Swampland - TIME: This is the most accurate and courageous--the authors are all non-commissioned officers--account of the war in Iraq that I've seen. It puts to shame--and shame is the appropriate word--all the Kristol, McCain, Lieberman, Pollack and O'Hanlon etc etc cheerleading of the past two months. I'll have more to say about the road out of Iraq in my print column this week.

Here is what he is talking about:


VIEWED from Iraq at the tail end of a 15-month deployment, the political debate in Washington is indeed surreal. Counterinsurgency is, by definition, a competition between insurgents and counterinsurgents for the control and support of a population. To believe that Americans, with an occupying force that long ago outlived its reluctant welcome, can win over a recalcitrant local population and win this counterinsurgency is far-fetched. As responsible infantrymen and noncommissioned officers with the 82nd Airborne Division soon heading back home, we are skeptical of recent press coverage portraying the conflict as increasingly manageable and feel it has neglected the mounting civil, political and social unrest we see every day. (Obviously, these are our personal views and should not be seen as official within our chain of command.)

The claim that we are increasingly in control of the battlefields in Iraq is an assessment arrived at through a flawed, American-centered framework. Yes, we are militarily superior, but our successes are offset by failures elsewhere. What soldiers call the “battle space” remains the same, with changes only at the margins. It is crowded with actors who do not fit neatly into boxes: Sunni extremists, Al Qaeda terrorists, Shiite militiamen, criminals and armed tribes. This situation is made more complex by the questionable loyalties and Janus-faced role of the Iraqi police and Iraqi Army, which have been trained and armed at United States taxpayers’ expense.

A few nights ago, for example, we witnessed the death of one American soldier and the critical wounding of two others when a lethal armor-piercing explosive was detonated between an Iraqi Army checkpoint and a police one. Local Iraqis readily testified to American investigators that Iraqi police and Army officers escorted the triggermen and helped plant the bomb. These civilians highlighted their own predicament: had they informed the Americans of the bomb before the incident, the Iraqi Army, the police or the local Shiite militia would have killed their families.

As many grunts will tell you, this is a near-routine event. Reports that a majority of Iraqi Army commanders are now reliable partners can be considered only misleading rhetoric. The truth is that battalion commanders, even if well meaning, have little to no influence over the thousands of obstinate men under them, in an incoherent chain of command, who are really loyal only to their militias.

Similarly, Sunnis, who have been underrepresented in the new Iraqi armed forces, now find themselves forming militias, sometimes with our tacit support. Sunnis recognize that the best guarantee they may have against Shiite militias and the Shiite-dominated government is to form their own armed bands. We arm them to aid in our fight against Al Qaeda.

However, while creating proxies is essential in winning a counterinsurgency, it requires that the proxies are loyal to the center that we claim to support. Armed Sunni tribes have indeed become effective surrogates, but the enduring question is where their loyalties would lie in our absence. The Iraqi government finds itself working at cross purposes with us on this issue because it is justifiably fearful that Sunni militias will turn on it should the Americans leave.

In short, we operate in a bewildering context of determined enemies and questionable allies, one where the balance of forces on the ground remains entirely unclear. (In the course of writing this article, this fact became all too clear: one of us, Staff Sergeant Murphy, an Army Ranger and reconnaissance team leader, was shot in the head during a “time-sensitive target acquisition mission” on Aug. 12; he is expected to survive and is being flown to a military hospital in the United States.) While we have the will and the resources to fight in this context, we are effectively hamstrung because realities on the ground require measures we will always refuse — namely, the widespread use of lethal and brutal force.

Given the situation, it is important not to assess security from an American-centered perspective. The ability of, say, American observers to safely walk down the streets of formerly violent towns is not a resounding indicator of security. What matters is the experience of the local citizenry and the future of our counterinsurgency. When we take this view, we see that a vast majority of Iraqis feel increasingly insecure and view us as an occupation force that has failed to produce normalcy after four years and is increasingly unlikely to do so as we continue to arm each warring side.

Coupling our military strategy to an insistence that the Iraqis meet political benchmarks for reconciliation is also unhelpful. The morass in the government has fueled impatience and confusion while providing no semblance of security to average Iraqis. Leaders are far from arriving at a lasting political settlement. This should not be surprising, since a lasting political solution will not be possible while the military situation remains in constant flux.

The Iraqi government is run by the main coalition partners of the Shiite-dominated United Iraqi Alliance, with Kurds as minority members. The Shiite clerical establishment formed the alliance to make sure its people did not succumb to the same mistake as in 1920: rebelling against the occupying Western force (then the British) and losing what they believed was their inherent right to rule Iraq as the majority. The qualified and reluctant welcome we received from the Shiites since the invasion has to be seen in that historical context. They saw in us something useful for the moment.

Now that moment is passing, as the Shiites have achieved what they believe is rightfully theirs. Their next task is to figure out how best to consolidate the gains, because reconciliation without consolidation risks losing it all. Washington’s insistence that the Iraqis correct the three gravest mistakes we made — de-Baathification, the dismantling of the Iraqi Army and the creation of a loose federalist system of government — places us at cross purposes with the government we have committed to support.

Political reconciliation in Iraq will occur, but not at our insistence or in ways that meet our benchmarks. It will happen on Iraqi terms when the reality on the battlefield is congruent with that in the political sphere. There will be no magnanimous solutions that please every party the way we expect, and there will be winners and losers. The choice we have left is to decide which side we will take. Trying to please every party in the conflict — as we do now — will only ensure we are hated by all in the long run.

At the same time, the most important front in the counterinsurgency, improving basic social and economic conditions, is the one on which we have failed most miserably. Two million Iraqis are in refugee camps in bordering countries. Close to two million more are internally displaced and now fill many urban slums. Cities lack regular electricity, telephone services and sanitation. “Lucky” Iraqis live in gated communities barricaded with concrete blast walls that provide them with a sense of communal claustrophobia rather than any sense of security we would consider normal.

In a lawless environment where men with guns rule the streets, engaging in the banalities of life has become a death-defying act. Four years into our occupation, we have failed on every promise, while we have substituted Baath Party tyranny with a tyranny of Islamist, militia and criminal violence. When the primary preoccupation of average Iraqis is when and how they are likely to be killed, we can hardly feel smug as we hand out care packages. As an Iraqi man told us a few days ago with deep resignation, “We need security, not free food.”

In the end, we need to recognize that our presence may have released Iraqis from the grip of a tyrant, but that it has also robbed them of their self-respect. They will soon realize that the best way to regain dignity is to call us what we are — an army of occupation — and force our withdrawal.

Until that happens, it would be prudent for us to increasingly let Iraqis take center stage in all matters, to come up with a nuanced policy in which we assist them from the margins but let them resolve their differences as they see fit. This suggestion is not meant to be defeatist, but rather to highlight our pursuit of incompatible policies to absurd ends without recognizing the incongruities.

We need not talk about our morale. As committed soldiers, we will see this mission through.

Buddhika Jayamaha is an Army specialist. Wesley D. Smith is a sergeant. Jeremy Roebuck is a sergeant. Omar Mora is a sergeant. Edward Sandmeier is a sergeant. Yance T. Gray is a staff sergeant. Jeremy A. Murphy is a staff sergeant.

Law Professor Mark Graber Strikes Again

When last we saw law professor Mark Graber, he was celebrating Martin Luther King, Jr. birthday weekend by asserting that Roger Taney's opinion in Dred Scott was sound--an act of judicial statesmanship--and had wedged himself into a position to the right of John C. Calhoun, arguing that the 1787 U.S. Constitution incorporated principle of "concurrent majorities" that made it substantively unconstitutional for legislation affecting slavery to be passed by a section-specific majority.

Now Mark Graber is back: This time it is one of the most bizarre ripping-of-quotations-from-context I have ever seen, asserting that the differences on slavery between Roger B. Taney and Abraham Lincoln were "almost trivial." In making this argument, Graber lets Lincoln speak for one single clause before silencing him and hustling him offstage:

Balkinization: A good case can be made for tearing down the bust of Roger Brooke Taney that stands in front of the city hall in Frederick.... Taney wrote the opinion for the Supreme Court in Dred Scott v. Sandford (1856)... that persons of color could not be American citizens and that slavery could not be prohibited in American territories.... While the bulldozers are rented, we might get our money’s worth and tear down all statues honoring Abraham Lincoln. Lincoln insisted he "never complained especially of the Dred Scott decision because it held that a negro could not be a citizen..."

From a contemporary perspective, the differences between Lincoln and Taney seem almost trivial. The sixteenth president opposed making persons of color citizens of Illinois, advocated federal fugitive slave laws, endorsed slaveholding in the nation’s capital, and insisted that the federal government had no power to interfere with slavery in any state in which human bondage was legal. Their only serious dispute was over whether slaveholders could take their human property to North Dakota, a place few if any slaveholders had expressed interest in settling...

Let us bring Abraham Lincoln back on stage, and let him say more than the nineteen words from his Alton speech that Graber lets him say. Here is what Lincoln said about the "almost trivial" differences between him and the anti-anti-slavery Democrats like Stephen Douglas (let along the pro-slavery Democrats like Roger Taney):

Last Joint Debate, at Alton. Mr. Lincoln's Reply. Lincoln, Abraham. 1897. Political Debates Between Lincoln and Douglas: Judge Douglas... says he “don’t care whether [slavery] is voted up or voted down” in the Territories. I do not care myself, in dealing with that expression, whether it is intended to be expressive of his individual sentiments on the subject, or only of the national policy he desires to have established. It is alike valuable for my purpose. Any man can say that who does not see anything wrong in slavery; but no man can logically say it who does see a wrong in it, because no man can logically say he don’t care whether a wrong is voted up or voted down. He may say he don’t care whether an indifferent thing is voted up or down, but he must logically have a choice between a right thing and a wrong thing. He contends that whatever community wants slaves has a right to have them. So they have, if it is not a wrong. But if it is a wrong, he cannot say people have a right to do wrong.... You may turn over everything in the Democratic policy from beginning to end, whether in the shape it takes on the statute book, in the shape it takes in the Dred Scott decision, in the shape it takes in conversation, or the shape it takes in short maxim-like arguments, it everywhere carefully excludes the idea that there is anything wrong in [slavery].

That is the real issue. That is the issue that will continue in this country when these poor tongues of Judge Douglas and myself shall be silent. It is the eternal struggle between these two principles—-right and wrong—-throughout the world. They are the two principles that have stood face to face from the beginning of time, and will ever continue to struggle. The one is the common right of humanity, and the other the divine right of kings. It is the same principle in whatever shape it develops itself. It is the same spirit that says, “You work and toil and earn bread, and I’ll eat it.” No matter in what shape it comes, whether from the mouth of a king who seeks to bestride the people of his own nation and live by the fruit of their labor, or from one race of men as an apology for enslaving another race, it is the same tyrannical principle...

Mark Graber may think this difference is "almost trivial." I cannot find anybody else who does.

links for 2007-08-21

Andrew Samwick on Health Care and the U.S.-Canada Border

Andrew Samwick notes a family driving five miles from Calgary to Great Falls, Montana to deliver quadruplets:

Vox Baby: Perhaps Michael Moore Should Run a Taxi Service: I don't know which of the following statements is more surprising. From the AP:

A 35-year-old Canadian woman has given birth to rare identical quadruplets, officials at a Great Falls[, Montana] hospital said Thursday. Karen Jepp of Calgary, Alberta, delivered Autumn, Brooke, Calissa and Dahlia by Caesarian section Sunday afternoon at Benefis Healthcare, said Amy Astin, the hospital's director of community and government relations.

The four girls were breathing without ventilators and listed in good condition Thursday, she said. Wonderful. And this part:

The Jepps drove 325 miles to Great Falls for the births because hospitals in Calgary were at capacity, Key said.

"The difficulty is that Calgary continues to grow at such a rapid rate. ... The population has increased a lot faster than the number of hospital beds," he said.

For those of you unclear on the geography, their trip... would take about five hours.... About halfway through the trip, they would pass through Lethbridge, which is home to Chinook Regional Hospital, which claims to offer a "high level neonatal intensive care unit." Not good enough? No beds there either? When they were in Lethbridge, they were about an hour away from Medicine Hat, home to this fine institution and its NICU, or two and a half hours plus a border crossing away from Great Falls. They chose the latter.

But nobody says who paid for it...

Richard Brookstaber: Blowing up the Lab on Wall Street

Richard Bookstaber writes:

Blowing up the Lab on Wall Street -- Printout -- TIME: Looks like Wall Street's mad scientists have blown up the lab again... [by] the alchemy of creating collateralized debt obligations (CDOs) compounded by the enormous amount of leverage applied by big hedge funds.... Here's the recipe... you package a bunch of low-rated debt like subprime mortgages and then break the package into pieces, called tranches.... Some of the pieces are the first in line to get hit by any defaults, so they offer relatively high yields; others are last to get hit, with correspondingly lower yields. The alchemy begins when rating agencies... wave their magic wand over these top tranches and declare them to be a golden AAA rated.... The problem is that CDOs were untested; there was not much history to suggest CDOs would behave the same way as AAA corporate bonds. After all, the last few stress-free years have not exactly provided much of a testing ground.... t's not the first time this has happened.... One August day nine years ago, Russian bonds defaulted. A surprising result of this default was the spectacular failure of Long-Term Capital Management (LTCM), a hedge fund in Greenwich, Conn. Surprising because LTCM had nary a penny in Russian bonds....

A number of hedge funds are failing; others are seeing returns plunge. Among these is Goldman Sachs's flagship Global Alpha Fund, which burned a quarter of its $10 billion value.... Global Alpha was not a player in subprime junk. Indeed, Global Alpha's problems have not come from mortgages at all, but from a portfolio of stocks.

Why does this happen?.... [H]igh leverage. For example... every dollar of investor capital claimed six dollars of positions. This is the dry kindling for a market firestorm. When things go bad for a highly leveraged hedge fund, it gets a margin call and has to sell... prices drop. The falling prices mean a further decline in the fund's collateral.... And so goes the downward cycle.... It can be difficult to sell the stuff that's causing the problem.... So if you can't sell what you want to sell, you sell what you can sell....

As the subprime crisis propagates, it doesn't matter that some instruments are fundamentally strong and others are weak. What matters is who owns what, who is under pressure and what else they own.... A world in which highly leveraged hedge funds share similar strategies makes it inevitable that what we are seeing now will occur again. And the more complex the strategies, the more surprising the linkages that will emerge.... These funds hired the best and the brightest, yet they became embroiled in crises largely of their own making. If it could happen to them, it will happen again. And we'll all share in the consequences. Again.

Blowing up the lab strikes me as OK--as long as it doesn't blow up the economy. If people who took large leveraged positions without sufficient capital find that they have to sell at fire sale prices to those who do have sufficient capital, that is not necessarily a bad thing. It is a bad thing only if the consequences hit the prices of underlying assets, and thus hit spending flows. And so far that hasn't happened.

Joshua Micah Marshall Is Very Unhappy with the Los Angeles Times

It is one of those stories that you would condemn as unbelievable and unrealistic if you were to see it acted upon the stage. Josh writes:

Talking Points Memo | Annals of Reporting:[T]this morning I was alerted to an opinion column in the Los Angeles Times by Michael Skube.... The sum of the piece is that the blogosphere is as rife with disputation as it is thin on information, or more specifically, reporting, writing that demands "time, thorough fact-checking and verification and, most of all, perseverance."... [I]n a column bewailing how blogs don't do any real reporting one of the four bloggers he mentioned was me.... I sent Skube an email telling him that I found it hard to believe he was very familiar with TPM if he was including us as examples in a column about the dearth of original reporting in the blogosphere.... I got a reply: "I didn't put your name into the piece and haven't spent any time on your site. So to that extent I'm happy to give you benefit of the doubt..."

This seemed more than a little odd since, as I said, he certainly does use me as an example -- along with Sullivan, Matt Yglesias and Kos. So I followed up noting my surprise that... he wrote about sites he admits he'd never read.

To which I got this response: "I said I did not refer to you in the original. Your name was inserted late by an editor who perhaps thought I needed to cite more examples..."

And this is from someone who teaches journalism?

And Matthew Yglesias says:

time for another weblogger ethics panel!

Why oh why can't we have a better press corps?

Naked Capitalism Wants to Insure Himself Against Gillian Tett Having a Bus Accident

She is indeed one of the reasons why Jeff Sachs once called the Financial Times "the real newspaper--the best newspaper in the world":

naked capitalism: Explaining Last Week's Credit Seize Up: If the Financial Times' Gillian Tett were hit by a bus, I'd be in a lot of trouble. With all due respect to her colleagues, she is the best source of financial news.

Today, in "Structured investment vehicles’ role in crisis," Tett probes what went wrong in the credit markets last week.... [T]he commercial paper market, a short-term (typically under 90 day) market for corporate IOUs dried up. As these IOUs mature, they are often rolled... rather than repaid.... However... a new product called asset backed commercial paper is a major culprit in last week's crisis. Hungry for earnings, banks borrowed short and lent long by putting proceeds of their commercial paper issuance into structured investment vehicles that invested in, duh, structured credits (CDOs, anyone?).... German bank IKB had one of these vehicles that had some subprime holdings. Some counterpaties had gotten stringent about asset quality.... The sub tried to draw down the line of credit with its parent. IKB did not have sufficient cash.... The fact that one ABCP player was proven to have inadequate backup facilities ratcheted up the concern about counterparties up to a full blown panic. As Tett explains:

So early this month some European banks – and a few US institutions as well – quietly started trying to raise new credit lines themselves. That, however, triggered additional alarm.... Consequently, by the middle of last week, some banks started shutting credit lines to a sweeping list of institutions. “Commercial paper is now being funded on an overnight basis. The banks will not roll paper for three months.”... [T]he problems – perhaps ironically – were extreme in US markets, since SIVs typically raise a large proportion of their finance in dollars....

Policymakers hope that some of this panic will dissipate this week following the massive emergency injections of liquidity by the ECB and US Federal Reserve. And indeed, by the end of last week, borrowing rates were stabilising..... However, nobody close to this sector expects to see a quick solution soon. Commercial paper interest rates have not yet fallen, irrespective of central banks’ actions. In New York on Friday, they closed at their highest level for six years. There is deep uncertainty about what the central banks will do next – making ABCP players even more reluctant to start issuing and trading again. “Nobody is going to handle commercial paper if they think the Fed could be about to cut rates or do some thing else completely unexpected overnight,” explains one...

However, the third, most pernicious problem is that it is becoming clear central banks cannot resolve the biggest problem – a lack of clarity about valuations in structured credit markets and the almost complete loss of confidence that is infecting even the biggest and most diversified of conduit-type programmes.

Objects in My Calendar Are Closer than They Appear...

It's eight days before the start of classes, and the lecturer slot in Political Economy 101 here at Berkeley is still open.

So it is time for me to start thinking about how I would do the course if I wind up teaching it myself:

Political Economy 101: Introduction:

This is--at least the way those who designed the major thought of it, which is often very different from how things work on the ground--the last core course for the political economy major.

Political economy, at least as we here at Berkeley define it, is a group of four interlinked intellectual bets:

  • that the separation a century ago of the social sciences into walled, warring camps was--at least for undergraduates and at least for bird's-eye synthetic understanding--a mistake.

  • that there is, nevertheless, great value in the individual social sciences' analytical modes.

  • that there is even greater value in the classical social theory tradition--that set of thinkers from Nicky Machiavelli to Barry Moore who we retrospectively identify as grappling for the first time how a modern human society--one not dominated by louse-riddem thugs with spears and perfumed thugs with styluses, and composed overwhelmingly of malnourished peasants living and dying early in the small villages in which they were born--actually worked.

  • that there is great value in studying the nineteenth and early twentieth-century history of western Europe and North America: Charlie Marx was wrong in claiming that the "more advanced" shows the "less advanced" the image of its own future, but they do provide a very useful set of benchmarks, yardsticks, and comparisons.

Now that was a mindful. Catch your breath and think about that for a while.

This course--this last core course--is supposed to be the payoff. This is where we cash in our winning intellectual bets, tie all the threads together, and come up with running code for a rough-and-ready framework for thinking about everything that happens at the crossroads where history and politics meet economies and sociologies in a world where village elders along the Zambezi lecture the principal deputy managing director of the Imternational Monetary Fund on the implications of the Republican convention.

However, each version of Political Economy 101 is different. We agree that these are winning intellectual bets. We do not agree on what the winnings are. My version of PE 101 is different from Bev Crawford's or Alan Karras's or Dariush Zahedi's. This is, I think, a constructive tension.

This is my version...

iPhone as Xompitor

I am getting quite good at typing on the iPhone.

Now if only it had a functional spreadsheet.

But as is it is a functional handheld Xompitor.

A Question for People Taking Econ 113 This Fall: Resources and Pre-Civil War Growth

This question is for those who have previously exercised their economic theory-growth accounting muscles...

Read Brad DeLong and Marit Rehavi's handout on growth accounting for the pre-Civil War United States compared with Britain. Britain was the heartland of technological innovation and industrialization in the years before 1860. Yet the United States not only started out richer in per capita terms, but its income levels grew faster. How could this be? Do you find DeLong and Rehavi's solution to this puzzle satisfactory? What does it say about how different American economic growth would have been had European superpowers Britain and France continued to seek American empires--had France not sold the Louisiana purchase to Jefferson, and had Britain succeeded in grabbing the old northwest territories north and west of the Ohio River for Canada?

A Question for People Taking Econ 113 This Fall: Amerindian Numbers

Roughly 14000 years ago rough 1000 humans made it to the Americas across the Bering Land Bridge.

A Malthusianly-unstressed preindustrial human population with reasonable access to food (whether hunter-gatherer, herder, or settled agriculture) roughly doubles in a generation of 25 years or so.

If the incipient Amerindian population had remained unstressed, how many Amerindians would there be today?

What implications does this have for how we think about the human history of the Americas between ca. 12000 BC and 1492?

Objects in Your Calendar Are Closer than They Appear...

About a month ago Jim Powell came to me and said that through a bureaucratic process the registrar had listed Econ 113, American Economic History, to be taught this fall while the economics department had made no provision at all for anybody to teach it. Would I, he asked, mind picking it up?

Not at all, I said.

And now the first class is ten days away, in VLSB 2040, 4-5:30 PM...

A Question for People Taking Econ 113 This Fall: Amerindian Migration

Hunter-gatherers who are exploring a previously-unsettled frontier can walk a mile a week.

How long after their arrival in the new world ca. 14000 years ago do you think it took the Amerindians to spread out and essentially cover the entire two continents of the Americas?

What implications does this have for how we think about the human history of the Americas between ca. 12000 BC and 1492?

Objects in Your Calendar Are Closer than They Appear

Economic History Association Annual Meeting

Sheraton Austin Hotel, Austin, TX:

5:00-6:30 PM: Plenary Session B: What remains after 50 years: The role of economic history as a guide to economic development.

Moderator: James K. Galbraith, UNIVERSITY OF TEXAS AT AUSTIN


During the post-Sputnik decade economic history flourished in part because it was seen as a guide to the then-salient issue of economic development in “underdeveloped” countries. Three scholars stand out in this regard: Alexander Gerschenkron, Simon Kuznets, and Walt W. Rostow. The link to development persuaded many departments to hire practitioners and require students to study economic history. Then or soon after, the influence of Annales and even Marxist thought also gave economic history a greater place within History. Both currents faded as other fashions and methodologies took over. Again, a re-examination is warranted, for instance by the rise of World History as a less “occicentric” approach to comparative performance, as well as by the contrasting recent experiences of Asian and other emerging economies.

Notes for KCBS Interview: Rebecca Corral: 1:20 PM Friday August 17, 2007

It's time to start documenting these. Needless to say, what I said had nothing to do do with my notes. But here they are:

Notes for KCBS Interview: Rebecca Corral: 1:20 PM Friday August 17, 2007:

  • Back at the turn of the twentieth century, governments became convinced that bank regulation was a good idea. Banks--institutions that leveraged themselves up and provided capital to governments, real estate, industry, and agriculture--needed to have the government impose on them (1) capital requirements (so that counterparties could be confident they would be repaid), (2) reserve requirements (so that creditors and investors could be confident of liquidity--that they could get their money out quickly even in an emergency), and (possibly) deposit insurance (so that creditors could sleep easy even in a really big emergency. Deposit insurance, of course, then creates the possibility of moral hazard: bank executives can gamble with the government's money. And so it requires an even tighter regulatory regime, rating, assessing, and limiting the kinds of investments that banks can make in order to safeguard the government's money that they might be risking.

  • Now we understand once again why our predecessors went down this institutional road. For a financial system to have rotten-apple institutions can cause pieces of the system through which savings flow to agriculture, industry, and construction to freeze up. And that is very bad: it might be worth imposing somewhat of a straitjacket on firms to limit the trouble they can get into. What kind of straitjacket would do the most good and the least harm? Now that is a very hard problem. It is made harder by the fact that (a) nobody expected the big losers from subprime mortgages to be quantitatively-sophisticated hedge funds, (b) quantitatively-sophisticated hedge funds don't really know why they are the big losers, and (c) quantitatively-sophisticated hedge funds don't know how big losers they will be--of if they will be losers at all, for many think (and I agree) that organizations that survive will look back on the next month as a time of opportunity to make $$$$$.

  • Our current situation is strange in a number of ways. First, usually you need to have something happen to the real economy--a gold drain, a flight of foreign capital, a recession, something--in order to trigger the scramble for liquidity that causes the crisis. Now we don't: no recession, no capital flight, no reserve problems, no massive waves of foreclosures in Riverside and Solano counties. Just the fact that we can no envision states of the world in which there might be waves of foreclosures has sent the high-risk end of the money market into a remarkable state of panic.

My side of what I actually said: Interview on KCBS about the Federal Reserve:

Federal Reserve Inter-Meeting Statement

Indicating that rate cuts are now on the table:

FRB: Press Release--FOMC statement--August 17, 2007: Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

Voting in favor of the policy announcement were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Richard W. Fisher; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Michael H. Moskow; Eric Rosengren; and Kevin M. Warsh.

Larry Meyers points out that St. Louis Fed president Bill Poole didn't make the (virtual) meeting: his seat was taken by his alternate, Richard Fisher.

The Fed Cuts the Discount Rate

Since the discount rate isn't "effective"--almost nobody is borrowing at it--cutting it is much more a symbolic than an actual move. Nevertheless, it is a symbolic move: / Home UK / UK - Wall Street set for boost from Fed move: by Hal Weitzman in New York: Published: August 17 2007 14:07 | Last updated: August 17 2007 14:07: Wall Street stocks were set to extend Thursday’s late rally into Friday morning, after the Federal reserve surprised investors by cutting the discount rate at which regional Feds lend to banks by 50 basis points. The Fed cut the primary discount rate by one half of a point to 5.75 per cent, indicating it was concerned about financing conditions and suggesting it will use a range of policies rather than simply cutting interest rates.

“Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward,” said the Fed. “In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.”

Rob Carnell, senior economist at ING Financial Markets, said: “This is effectively a move from a tightening bias to an easing bias. This opens the door to cuts of the Fed funds rate itself, should this be deemed necessary. There is still a possibility of an inter-meeting cut, or a cut at the September 18 meeting, though of course, if markets respond favourably this may be viewed as unnecessary."

Pretend You Don't See the Black Swans

Hoisted from Comments: Slocum writes;

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: "I had assumed that no-one was stupid enough to fall for this trick; one reason why I was underwhelmed by Taleb's The Black Swan - which laboured similar points - was that I thought he was just stating the bleedin' obvious. But perhaps I was wrong."

But the problem, of course, is that investment strategies that fail to take in account unlikely (but far from impossible) events will do better, most of the time, than those that conservatively factors in unlikely events.

Your strategy may have, say a 25% chance of going bust in the next decade, but that's OK for a fund manager -- because a 75% chance of being lucky enough to run the table and pocket enormous sums of cash and be considered a prince of Wall St is a good bet. And then even when the black swan event does happen, you've probably already pocketed a lot of cash AND you really won't be blamed anyway, since plenty of others will be in similar straits and many of your customers will accept the explanation that your strategy was perfectly sound but that nobody could have been expected to predict the financial equivalent of being struck on the head by an asteroid. Which is what Viniar is claiming -- and I don't think it's stupidity, it's spin. Although it's possible that he believes his explanation--sometimes you can deceive others more effectively if you're deceived yourself.

The incentives just aren't there for planning for black swans. The highest rewards and the greatest glory go to those managers who bring in the highest returns during 'normal' times at the expense of leaving their funds exposed to black swans.

As somebody-or-other once said, it's very hard for a fund to gain clients by exhibiting good performance in bad times. In bad times clients are bailing out of Wall Street, not putting money in or shifting money from one fund to another.

Being a Chicken Is a Low-Risk Business

Chris Dillow speaks:

Stumbling and Mumbling: Chebyshev and chickens: Mr Viniar can't be that stupid. He knows financial returns are not normally distributed, but have fat tails; extreme events are more likely than a bell curve suggests. More likely, he's thinking of Chebyshev's inequality. It says that in any data sample, no more than 1/k2 of the values are more than k standard deviations away from the mean. On this view, a 25 standard deviation event is a one in 625 probability.

Does this make Mr Viniar look less stupid? No, however we cut it, [Goldman Sachs's] Mr Viniar is talking wibble. He just under-estimated risk.

There's one very stupid way of doing this. Imagine you're a chicken. Every day, the farmer feeds you. After a while, you figure: "My returns from the farmer are pretty stable, as I seem to get roughly the same amount of corn every day. Being a chicken  is a low-risk business." The following day, the farmer breaks your neck.

Any hedge fund who took default risk (say by holding CDOs) and boasted about its Sharpe ratio based on post-2003 returns would have done much the same as this; you can't measure default risk by looking at past returns. I had assumed that no-one was stupid enough to fall for this trick; one reason why I was underwhelmed by Taleb's The Black Swan - which laboured similar points - was that I thought he was just stating the bleedin' obvious. But perhaps I was wrong.

Not only were they massively exposed to subprime risk, but they didn't know that they were massively exposed to subprime risk, and they don't seem now to be able to coherently explain why they didn't know that they were massively exposed to suboprime risk.

Hating on Richard Cheney

Let us give the mike to Brink Lindsey:

Cato-at-liberty » Invasion of the Cheney Snatchers: This eerie video clip of a 1994 interview with Dick Cheney... [he] defends the Bush 41 administration’s decision not to proceed to Baghdad after expelling the Iraqi army from Kuwait. His description of the downsides of occupation now sounds downright prophetic.

Seeing this clip reminded me of a personal experience along similar lines. Back in 1998, when I was running Cato’s then-new Center for Trade Policy Studies, we held a conference on unilateral economic sanctions called “Collateral Damage: The Economic Cost of U.S. Foreign Policy.” And our luncheon speaker at that event was none other than Halliburton CEO Dick Cheney.

Looking back at the transcript of his talk, you can see that it’s not just Cheney’s views of the wisdom of occupying Iraq that have undergone an amazing transformation. So has his attitude about engaging versus confronting Iran:

[O]ur sanctions policy oftentimes generates unanticipated consequences. It puts us in a position where a part of our government is pursuing objectives that are at odds with other objectives that the United States has.... An example that comes immediately to mind has to do with efforts to develop the resources of the... Caspian Sea area... rich in oil and gas. Unfortunately, Iran is sitting right in the middle of the area and the United States has declared unilateral economic sanctions against that country.... American firms are prohibited from dealing with Iran and find themselves cut out of the action.... Iran is not punished... development will proceed, but it will happen without American participation. The most striking result of the government’s use of unilateral sanctions in the region is that only American companies are prohibited from operating there.

Another good example of how our sanctions policy oftentimes gets in the way of our other interests occurred in the fall of 1997 when Saddam Hussein was resisting U.N. weapons inspections.... Administration officials in the area were trying to get Arab members of the coalition... to allow U.S. military forces to be based on their territory... in the event it was necessary to take military action against Iraq.... Our friends in the region cited a number of reasons for not complying... concerned with the fragile nature of the peace process between Israel and the Palestinians... had fundamental concerns about our policy toward Iran... [our] anti-Iranian policy... raised questions in their mind about the wisdom of U.S. leadership....

So, what effect does this have... all of the Arab countries... with the single exception of Kuwait, rejected our request to base forces... most of them boycotted the economic conference... in connection with the peace process that was hosted in Qatar.... Then... they all went to Tehran and attended the Islamic summit.... The nation that’s isolated in terms of our sanctions policy in that part of the globe is not Iran. It is the United States...

Note again that Cheney gave these remarks in 1998 — when Iran’s nuclear ambitions were already well known, and two years after the Khobar Towers bombing in which Iran was believed to be complicit.

9/11 may not have changed everything, but it sure changed Dick Cheney.

Impeach them all. Now.

Fed Watching...

David Wessel writes about speculation that the Federal Reserve will or has cut interest rates:

Speculation of Rate Cut Intensifies Even as Fed Offers No Such Signal - Speculation intensified that the Federal Reserve is going to cut interest rates soon -- or even has already done so secretly -- without any clear signal from the Fed to encourage it. The Fed's primary weapon is its influence over the federal funds interest rate, at which banks with excess reserves lend to banks that are short reserves. When demand swamped demand last week and the market interest rate rose above the target, the Fed pumped in extra cash. But at times of turmoil, it can be difficult for the Federal Reserve Bank of New York to fine tune its interventions. In recent days, the rate has traded well below the Fed's target at some points of the day – even coming close to zero at times. That has prompted some in the markets to deem this "a stealth Fed easing."...

But Federal Reserve Chairman Ben Bernanke, both in principle and in practice, has a commitment to increased transparency and the current Fed is extremely unlikely to change policy without announcement....

Trading in fed funds futures indicates markets[' expectations] are that the Fed will cut its rate target, now at 5.25%, by one-half percentage point by the end of October. St. Louis Federal Reserve President William Poole, in an interview with Bloomberg Television Wednesday, made no secret of his opposition to any Fed rate cut before its next scheduled meeting, Sept. 18.... Mr. Poole added that he sees no sign that the subprime-mortgage rout is harming the broader U.S. economy.... Fed spokesman Michelle Smith said, "President Poole is speaking for himself and not for the committee"...

Laura D'Andrea Tyson recalls something Alan Greenspan said a decade ago, during the last such liquidity event: "I feel as though I'm driving a brand-new car, and it stops, and I open up the hood and look, and under the hood doesn't look like it used too: I don't understand what I'm seeing..."

Steve Cecchetti's Recent Federal Reserve Actions FAQ

They aren't "frequently" asked questions, but they are good questions--and very good answers:

Subprime ‘crisis’: FAQs: Federal Reserve policy actions in August 2007: Here are the basic how's and why's of what the Fed has been doing to calm financial markets.

Let’s start with the facts: On Thursday 9 August 2007 the Federal Reserve’s Open Market Trading Desk (the “Desk”) injected $24 billion into the U.S. banking system. This was done in two equal size operations, one at 8:25am and a second 70 minutes later at 9:35am.1 On Friday 10 August 2007, the Desk was in the market three times (8:25am, 10:55am, and 1:50pm) putting in a total of $38 billion.

The Fed’s operations came on the heels of two even larger injections by the ECB in Frankfurt. On Thursday morning the European Central Bank (ECB) in Frankfurt, Germany had put nearly €95 billion ($130 billion) into European financial institutions, followed by a somewhat smaller operation of €61 billion ($83.6 billion) on Friday.

How is this actually done? What are the mechanics of the transactions? In all of these cases, the funds were put into the banking system using what are called “repurchase agreements” or “repos”... a short-term collateralised loan in which a security is exchanged for cash, with the agreement that the parties will reverse the transaction on a specific future date at an agreed-upon price.... The Federal Reserve Bank of New York’s Open Market Desk engages in repurchase agreements every morning (the exact time varies). The quantities normally range from $2 billion to $20 billion. Most of them are overnight, but it is standard to engage in repos that are as long as 14 days. The $35 billion on Friday 10 August 2007 was the largest since those in the aftermath of the 9/11 terrorist attacks. (The record is $81.25 billion on 14 September 2001.)

What happens if the bonds used in the repo fall in value overnight? When the Fed engages in a repo, the... “counterparty” agrees to repurchase the security at a fixed price regardless of what happens.... The only risk the Fed faces is that the counterparty in a repo goes bankrupt....

If the Fed has $35 billion to help the financial system, why can’t they use some of their money to help the poor? The Fed isn’t spending the money on bailing out banks, hedge funds, or helping rich people. It is making fully-collateralised loans that will be repaid the next day (or week). So, while it’s putting the funds in today, it’s taking them out almost immediately....

What is liquidity and why is it so important? The publicly stated rationale for these large interventions is that liquidity dried up.... I define liquidity as “the ease with which an asset can be turned into a means of payment such as money.” That is, when an asset is liquid it is easy to sell large quantities without moving market prices. When something is illiquid, it is hard to sell. People don’t want to buy things that they can’t sell easily.... For financial markets to function well, it must be cheap and easy to both buy and sell securities. When market liquidity dries up, the financial markets stop functioning.... Fall 1998 was the last time market liquidity dried up to a greater extent than we observe today....

$35 billion seems like quite a bit of money. Is it? When the Fed injects “money” into the financial system, what it does is create balances in something called “reserve accounts”.... Those are the bank’s checking accounts, with the exception that they don’t pay interest. Because there is no interest paid on reserve balances, banks try to economise on the quantities.... Total reserves in the US banking system for the two weeks ending 1 August 2007 averaged $45 billion, of which roughly $12 billion was held as deposits in reserve accounts at the Federal Reserve.... Excess reserves, those above what the Fed requires banks to hold, usually total less than $2 billion.... [T]he increase in reserves on Friday increased banking system reserves by more than 75%. More importantly, it increased the size of reserve accounts by a factor of 4... the increase was more than 10 times the normal level of excess reserves.... $35 billion is a very big number...

Why did the banks need this money? It is easy to explain why the Fed used open market operations to add $81.25 billion on 14 September 2001 in the aftermath of the 9/11 terrorist attacks. People’s inability to reach their offices in downtown New York had closed some very large banks. Though those banks could still receive payments from other banks, they couldn’t make any payments.... Funds were flowing into a few huge reserve accounts, but nothing was coming out. Some banks were sucking up the lifeblood of the financial system.

Last week the trigger seems to have been the continued fall in the value of certain mortgage-backed securities.... [U]p to now, the problems in the subprime mortgage market are relatively small. Currently, losses are estimated to be at most $35 billion – equivalent to a stock market decline of about 0.2%.... When people see that they have underestimated the risks in one place, they start to question their ability to accurately evaluate risks everywhere else. Then... prices of risky financial assets fall... people flee risky stuff that they find it hard to evaluate and put their money in safe assets – what’s called a “flight to quality”... an increase in prices of U.S. Treasury securities and an influx of funds into the banking system... bankers... become less willing to lend their reserves to other banks... [in] overnight loans.... Keeping the federal funds rate at its target level of 5.25% [on Friday] – that’s what the Open Market Desk at the Federal Reserve Bank of New York is supposed to do every day – meant engaging in huge operations.

I’ve heard that the Fed’s operation had something to do with mortgages. Did it? Yes.... On Friday 10 August the Fed accepted mortgage-backed securities as collateral for the entirety of the $35 billion in repos.... My speculation is that the Fed did this to demonstrate to the markets that they believe mortgage-backed securities are good as collateral. They were trying get financial market participants to value mortgage pools sensibly.

Who decides to do this? A number of people are involved in deciding the quantity of a daily open market operation. On a normal day there isn’t much to decide. The Desk staff makes a recommendation in a conference call and the participants agree.... Last week was obviously not normal. While I doubt that the entire Federal Open Market Committee decided on the action, they may have been consulted through a conference call. My guess is that Chairman Bernanke and New York Fed President Geithner had a say. What I can be sure of is that the decision was made by the Federal Reserve....

Why is this happening now? It is natural to ask whether there is some specific reason for these events to occur right now. Can we identify a specific trigger? While we can see something that has happened, as I suggested earlier there has been no fundamental deterioration.... Instead, what happened was analogous to a bank run.... [T]wo events... may have precipitated this... on 2 August... the German bank, IKB Deutsche Industriebank AG, was in trouble because of investment in US subprime loans. And then, on Wednesday, that one of Europe’s largest banks, BNP Paribas, had three funds with similar problems....

Does this have anything to do with discount lending? For those of you who have seen (and heard) Jim Cramer’s diatribe... you may be wondering about discount lending. Here’s the deal. The Fed has a standing offer to lend to banks (so long as they have collateral to pledge for the loan) at a rate that is 1 percentage point above the federal funds rate target of 5.25%.... [I]t seems unlikely that discount lending increased much last week... banks always have the option of borrowing from other banks at the federal funds rate, and the Federal Reserve Bank of New York reports that the highest rate charged for an overnight interbank loan late last week was 6%. I seriously doubt that a bank would borrow from the Fed at 6.25% when they can borrow more cheaply from another bank. I would guess that Cramer was really arguing for an interest rate cut....

The European Central Bank’s operation was much larger than the Fed’s. Is there a reason? The details of the European Central Bank’s (ECB) operating procedures are very different from those of the Fed.... When the ECB announced its intention to provide funds on Thursday 9 August 2007... they said that they would accept all bids at or above their 4% target. The result was that banks asked for and received €95 billion ($130 billion).... [I]n Europe a bank that has excess can redeposit it at the ECB at a 3% interest rate. That makes it far cheaper for European banks to err on the holding of too high a level of reserve balances. Now, put yourself in the position of a European bank.... [W]hen the ECB says that they are going to give you as much as you want on a day when they normally do nothing, you have to wonder what they know that you don’t.

Hating on William Safire!

Hoisted from comments, apropos of and

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: Isn't it artful of Safire to back up his portrayal of the demonstrators with a long quote from a Nixon speech he wrote himself? A shifty fellow worthy of Nixon, and perhaps a role model for either David Brooks or Tucker Carlson, Safire's deceptiveness is only slightly mitigated by his late opposition to expanded presidential prerogative. Posted by: Altoid | August 16, 2007 at 07:24 AM

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: I emjoyed Safire toward the end of his stint at the NYT. There was always at least one venomous little lie per column, often slipped in unobtrusively as an aside in a dependent clause. Something like " ... as the Democrats who tried to betray Nixon's peace efforts understood". Spotting the lie became a little puzzle, like the crossword. If he were still writing the column, I'd have to forego the amusement, since I refuse to contribute a farthing to Friedman or Brooks. Rich and Krugman can't compensate. Posted by: Roger Bigod | August 15, 2007 at 09:35 PM

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: It's very d*mning of the elite MSM that Fallows, who's done some good work, would think that Bush's speechwriter could be trusted. Posted by: Barry | August 16, 2007 at 04:50 AM

As I said, William Safire is very good at this business. You have to keep your hand on your wallet all the time

It starts, I suppose, with Walter Lippman. In 1968, Lippman wrote--in the kind of pointless contrarianism that makes me check my wallet every time I read something by Michael Kinsley--that he saw "a maturer, mellower man who was no longer clawing his way to the top." (David Greenberg's Nixon's Shadow immediately opposes this with a quote from the much wiser and more thoughtful Art Buchwald, quoting "Deep Toes": "there is no new Nixon and there never was... It was the old Nixon with makeup on.") This became the consensus narrative of the Very Serious Bipartisan People in Washington--with only the dirty hippies and the Washington Post metro reporters outside the charmed circle. Safire then writes Before the Fall to explain why this new Nixon disappeared--why the actual president Nixon was the same vicious bastard he had always been. Safire's narrative--that this, too, was ultimately the fault of the hippies--was false. But it was convenient because it allowed the Very Serious People to pretend that they hadn't taken a dive for Tricky Dick.

Dan Gross caught this narrative making yet another appearance last year:

Daniel Gross: June 11, 2006 - June 17, 2006 Archives: DEFEAT FOR AMERICA?: It wouldn't be a complete week without at least a few lines of shockingly stupid analysis from the Wall Street Journal editorial page, the kind of sentence (or sentences) that make you spit your coffee onto the desk and then launch into a paroxysm of sustained laughter. Thank you, Michael Barone, for making my week complete. He writes, in a piece about Vietnam, Watergate and Karl Rove.

Vietnam and Watergate were arguably triumphs for honest reporting. But they were also defeats for America -- and for millions of freedom-loving people in the world. They ushered in an era when the political opposition and much of the press have sought not just to defeat administrations but to delegitimize them. The pursuit of Karl Rove by the left and the press has been just the latest episode in the attempted criminalization of political differences. Is there any hope that it might turn out to be the last?

Read it again. Barone apparently believes Watergate was a defeat for America -- and for millions of freedom-loving people in the world.

Snatch the Pebble from My Hand, Grasshopper!

Tyler Cowen teaches Ezra Klein one of the arcana imperii:

Ezra Klein: Drinking Strategies: I'm not yet finished with my copy of Tyler Cowen's Discovering Your Inner Economist (it's very good, though!), so maybe this is included deeper into the book. But given that Cowen upholds that expensive drinks subsidizes food, particularly at fine restaurants where they make hefty margins off wine, etc, do we have any data on what the average mark-up is? If it's high, presumably the most cost-effective strategy be to forego drinking in fine establishments -- what you can't get at home is such fine cooking, and this way it's being subsidized for you. If it's relatively modest, there's certainly some added utility, even if it's partly imagined, to pairing a nice meal with good drink, so maybe it's worth it...

Alas, my highly favorable review of Discovering Your Inner Economist is still in the editorial process at the Chronicle of Higher Education.

But I will say that I did once try to convince Bob Hall at a restaurant in Palo Alto not to order wine: the fact that the wine would cost four times retail would, I said, depress me and lower my utility. Even though I wasn't paying for it, I would still feel as though I was being cheated, and as I drank the wine that would depress me more than the wine would please me.

He had two responses: (i) "You really are crazy." (ii) "Think, instead, that it's coming straight out of the Hoover Institution endowment, and order two bottles."

Squirrels Wage Fifth-Generation Information Warfare Against Rattlesnakes!

Annals of science:

Squirrels wield a hot, secret weapon - life - 13 August 2007 - New Scientist: Jeff Hecht: Squirrel waves hot tail at rattle snake--Watch the full-size video; Squirrel waves cold tail at gopher snake--Watch the full-size video: It's Californian ground squirrel versus rattlesnake in a potentially lethal showdown. But the squirrel has a secret weapon that until now has remained invisible to the human eye. The ground squirrel heats up its tail then waves it in the snake's face - a form of harassment that confuses the rattler, which has an infrared sensing organ for detecting small mammals. This defensive tactic remained invisible to biologists until they looked at the animals through an infrared video camera. Now they believe that many other animals might be using infrared weaponry to ward off potential predators. Young California ground squirrels (Spermophilus beecheyi) are easy prey for snakes, so protective adults harass the predators while puffing up their tails and wagging them.

Graduate student Aaron Rundus and his supervisor Donald Owings of the University of California, Davis, wondered how this might affect the snakes’ interaction with the adult squirrels. So he borrowed a $35,000 infrared camera from another scientist and spied on squirrel-snake stand-offs. He saw the adults’ tails heat up, presumably due to increased blood flow, when they were warning rattlers away – making the squirrel appear larger to the snake’s infrared organ. Confronted with a gopher snake, which has no infrared sensory organ, the squirrels wagged their tails but didn’t bother to warm them up first.

Tests with robotic squirrels confirmed that a warmed squirrel tail made rattlesnakes more likely to act defensively, say Rundus and Owings.

The squirrels themselves do not see in infrared, so they cannot see another squirrel's tail heating up. But the snakes can, proving that the squirrels have evolved a specific way to deter rattlesnakes. “It taught us to focus on the perceptual world of the animal we’re studying” rather than thinking only of human perceptions, says Rundus.

Perhaps the scariest thing here is that UC Davis has developed "robotic squirrels"--I assume as part of a dual-purpose research project.


Duncan Black writes:

Eschaton: [Nouriel] Roubini talks about uncertainty and the increasing lack of transparency in the financial markets. Oh, and the magical leverage fairy. This is why they're praying for Helicopter Ben:

First, you take a bunch of shaky and risky subprime mortgages and repackage them into residential mortgage backed securities (RMBS); then you repackage these RMBS in different (equity, mezzanine, senior) tranches of cash CDOs that receive a misleading investment grade rating by the credit rating agencies; then you create synthetic CDOs out of the same underlying RMBS; then you create CDOs of CDOs (or squared CDOs) out of these CDOs; and then you create CDOs of CDOs of CDOs (or cubed CDOs) out of the same murky securities; then you stuff some of these RMBS and CDO tranches into SIV (structured investment vehicles) or into ABCP (Asset Backed Commercial Paper) or into money market funds. Then no wonder that eventually people panic and run - as they did yesterday – on an apparently “safe” money market fund such as Sentinel. That “toxic waste” of unpriceable and uncertain junk and zombie corpses is now emerging in the most unlikely places in the financial markets.

Second example: today any wealthy individual can take $1 million and go to a prime broker and leverage this amount three times; then the resulting $4 million ($1 equity and $3 debt) can be invested in a fund of funds that will in turn leverage these $4 millions three or four times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them three or four times and buy some very junior tranche of a CDO that is itself levered nine or ten times. At the end of this credit chain, the initial $1 million of equity becomes a $100 million investment out of which $99 million is debt (leverage) and only $1 million is equity. So we got an overall leverage ratio of 100 to 1. Then, even a small 1% fall in the price of the final investment (CDO) wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards. This unraveling of a Minskian Ponzi credit scheme is exactly what is happening right now in financial markets.

...according to an emailer, free market fairy fan Larry Kudlow was expressing a desire for Helicopter Ben to buy up subprime loan paper. Hilarious.

Matthew Yglesias Praises Chris Dodd

He is right to do so. Chris Dodd does good:

Matthew Yglesias (August 15, 2007) - The Cuba Factor (Foreign Policy): Not that it's going to make him president, but Chris Dodd is making sense:

For more than forty-six years, the United States has maintained an isolationist policy toward Cuba, which I believe has not achieved its intended objectives, namely to hasten a peaceful and democratic transition on the Island of Cuba. Rather, it has solidified the authoritarian control of Fidel Castro, and has adversely affected the already miserable living conditions of 11 million innocent men, women, and children on the Island.

I think Democrats due themselves a disservice when they pander to the absurd views of the Cuban exile lobby rather than saying these words that everyone knows to be true. Among other things, it makes it difficult for Democrats to argue for engagement with Iran or Syria or wherever when they can't point to the most clear-cut and famous example of the failure of isolation strategies.

More than "A Commercial-Paper Hit"

Randall Smith and Henny Sender write:

A Commercial-Paper Hit Close to KKR - The meltdown in mortgage markets hit Wall Street titan Kohlberg Kravis Roberts & Co. yesterday, as a KKR real-estate affiliate sought to delay repayment of $5 billion in short-term debt held by 15 money-market funds. The action at KKR Financial Holdings LLC is the biggest blowup to hit the market for commercial paper, a form of short-term debt used by companies to fund operations. Although it is designed as a haven for cash, some issuers of asset-backed commercial paper have been hit by declining values of collateral linked to subprime mortgages. The repayment delay and related losses of up to $290 million amount to a black eye for KKR founders Henry Kravis and George Roberts at a time when they are weighing a public offering and trying to complete several buyouts whose financing plans have been disrupted by the debt-market turmoil. KKR is also the latest big Wall Street name, after Bear Stearns Cos. and Goldman Sachs Group Inc., to face a situation in which an affiliate confronted losses and possible demands for debt payment or redemptions. Bear put up funds to repay creditors of a mortgage hedge fund, and Goldman pumped its own money into a money-losing hedge fund. But it wasn't clear whether KKR would consider such a step.

The news came as markets gyrated for a second day amid jitters over how far problems with the mortgage market might spread. An analyst downgrade of mortgage lender Countrywide Financial Corp. sent its shares lower and contributed to the hand-wringing over the credit markets. The Dow Jones Industrial Average fell below the 13000 mark for the first time in nearly four months, losing 167.45, or 1.3%, to 12861.47 after being up as much as 90 points during the day. KKR Financial has been hit by a pullback by banks and other lenders from investing in "jumbo" mortgages of more than $417,000, according to people familiar with the situation.... The KKR commercial-paper issuers, KKR Atlantic Funding Trust and KKR Pacific Funding Trust, asked to delay the repayment and extend the notes' maturity for up to six months, citing "the unprecedented disruption in the residential mortgage and global commercial-paper markets."

The two issuers raised money with $500 million in equity backing from KKR Financial and invested in mortgage securities based on a debt-to-equity ratio of about 20 to 1, said the people familiar with the situation. Such mortgages might fetch only 90% or less of their face value now, these people said.

KKR Financial sold some of the mortgages beginning in May, based on a decision to convert to a limited liability corporation from a real-estate investment trust, which offered favorable tax treatment but required that 75% of its assets be in real estate.... The repayment delay doesn't appear to pose an immediate threat to the money-market funds that hold the paper, said Peter Crane, a money-fund expert in Westborough, Mass. Mr. Crane said such funds must limit any single holding to 5% of assets... KKR Financial's strategy for KKR Atlantic and KKR Pacific was to issue triple-A commercial paper at low short-term rates and invest in triple-A mortgage securities, which paid slightly higher rates. However, the strategy depended on the ability to resell the mortgages on short notice, while demand has dried up unexpectedly...

This strikes me as more than a commercial paper hit: KKR must not want to borrow in the commercial paper market in the future, for it will be very hard for any bank executive to explain why they are holding it should something, anything go wrong in the future.

For KKR as an institution to want to shut itself off from this source of financing suggests that things are indeed dire in there.

It Would Be Good for the Republic If the Republican Party Dissolved Itself Today

Republicans: they are hurting the country. We badly need a very different alternative party to oppose the Democrats.

Here's BarbinMD from Daily Kos:

Daily Kos: A Question For Senate Republicans: Thu Aug 16, 2007 at 02:18:25 AM PDT: For the past few months, "We must wait for the September report from General Petraeus," has been the mantra from the White House whenever questions about Iraq were asked. Until yesterday that is, when we learned that that much ballyhooed report would be written by the White House rather than George Bush's top man in Iraq. And when asked about this during yesterday's press briefing, White House spokesman Dana Perino said:

Well, let me remind you of a couple of things. The Congress asked for these reports from the President; they asked for the President to report to the Congress.

Really?  That's not how I remember it.  And unless a virulent case of Alberto Gonzales-itis has stricken Senate Republicans, that's not how they remember it either.  Because, from the Congressional Record, here is what they had to say when they filibustered the Defense Authorization Bill last month:

Senate Minority Leader McConnell:

Let me remind the Senate of what we agreed to...We voted, and put into law, that General Petraeus and Ambassador Crocker would report in September on progress. The benchmarks report and the timeline we set in May was clear. It gave us, the troops, and our allies, clarity on what was expected.

Senator McCain:

The war will be discussed in September again—we all know that—when General Petraeus is ready to report to the Senate...General Petraeus and Ambassador Ryan Crocker will come to Washington in September to report on the status of their efforts and those of the Iraqis.

Senator Sessions:  

To press the point further, I strongly believe that whatever the inclinations of Senators on the conduct of the war in Iraq, to change our strategy now before we even hear from General Petraeus in September would be a colossal blunder for a host of reasons. To do so would be unthinkable...I am anxious to hear General Petraeus’s report.

Senator Coleman:  

Fifty-four days ago we sent a message to General Petraeus: Go forth with the surge, and then come back and report to us.

Senator Chambliss:  

I have never been more convinced that waiting for General Petraeus’s report in September was more right than yesterday afternoon...

Senator Craig:  

That’s why when we confirmed General Petraeus unanimously in the Senate, we said to him very clearly, you go to Iraq in relation to a surge that is being implemented and you come back to us and give us your honest and fair assesement in September.

Senator Cornyn:

But the fact is, Gen. David Petraeus...will come back and report to us in September.

Senator DeMint:

The Democrats agreed on that funding, but they requested that we have a report from General Petraeus in the middle of September to find out what progress we were making. We all agreed to that.

Senator Bunning  

I promised in person, in my office, to General Petraeus, that I would wait to hear his report this fall.

And of course I couldn't leave out everyone's favorite Republican:

Senator Lieberman

In fact, this amendment should not even be considered now...Because in that bill we required General Petraeus, along with our Ambassador to Baghdad, Ryan Crocker, to come back in September and report to us...I made a personal pledge to him. I am going to give him and the troops a fair chance, which this amendment would deprive him of, and I am going to give him until September to come back and tell me how it is going.

Which is it, boys?  We now know that the September report will be written by George Bush's White House, not Gen. David Petraeus.  So, did the White House lie to you, or did you lie to the American people?

Impeach George W. Bush. Impeach Richard Cheney. And don't vote for Republicans. There is no excuse for doing so. None.

Leila Fadel of McClatchy Is a Real Journalist

Leila Fadel writes:

McClatchy Washington Bureau | 08/15/2007 | Despite violence drop, officers see bleak future for Iraq : BAGHDAD — Despite U.S. claims that violence is down in the Iraqi capital, U.S. military officers are offering a bleak picture of Iraq’s future, saying they’ve yet to see any signs of reconciliation between Sunni and Shiite Muslims despite the drop in violence. Without reconciliation, the military officers say, any decline in violence will be temporary and bloodshed could return to previous levels as soon as the U.S. military cuts back its campaign against insurgent attacks. That downbeat assessment comes despite a buildup of U.S. troops that began five months ago Wednesday and has seen U.S. casualties reach the highest sustained levels since the United States invaded Iraq nearly four and a half years ago.

Violence remains endemic, with truck bombs on Tuesday claiming as many as 175 lives in northern Iraq and destroying a key bridge near Baghdad, the first successful bridge attack since June. And while top U.S. officials insist that 50 percent of the capital is now under effective U.S. or government control, compared with 8 percent in February, statistics indicate that the improvement in violence is at best mixed. U.S. officials say the number of civilian casualties in the Iraqi capital is down 50 percent. But U.S. officials declined to provide specific numbers, and statistics gathered by McClatchy Newspapers don't support the claim. The number of car bombings in July actually was 5 percent higher than the number recorded last December, according to the McClatchy statistics, and the number of civilians killed in explosions is about the same...

Jim Fallows Says Mike Gerson Should Imitate William Safire. I'm Not so Sure

Fallows writes:

James Fallows(August 15, 2007) - Michael Gerson, columnist: How could he solve both problems at once? With a column or article that honestly examined the tension between the goals he espouses now and those he worked for over the last eight years. Not hand-wringing. Not tale-telling. But an application of his considerable intelligence and character to say: how could a government have done things I now consider dangerous? Where were we right, but also where were we wrong? Here's proof that it can be done: the book that earned another former speechwriter (and advertising man) his legitimacy, William Safire's excellent analysis of Nixon, Before the Fall.

I have a somewhat different view of Safire and Before the Fall. As a piece of rhetoric, it is magnificent. It almost turned me into a Republican. Its thesis, you see, is that Nixon's fall was the fault of the hippies: if they--and their allies in the press--hadn't broken the bounds of political decency and honor and procedure, Nixon would not have concluded that the republic was in danger, overreacted, and so started on the road to Watergate:

Here's an extended passage from Before the Fall:

...The motorcade rolled into San Jose with the advance car of photographers shooting back at the President's limousine.... I was in the next to last bus, and could hardly believe what I saw.

Obscene signs were nothing new, and the chant of "One, two, three, four, we don't want your fuckin' war" had long since lost its shock value; demonstrators had plagued both parties since the late 1960s.... Ordinarily, they worked their disruptive schtick in groups of 20 or 30, popping up in an otherwise friendly crowd, but that night in San Jose was different.

Slowing down as we approached the civic auditorium, we were teated to the screams, howls, and roars of the representatives of the outer fringes of the counterculture. A screamer would look in our windows, lock onto one person's gaze, yell an oath, and make a gesture with arm or middle finger. Hundreds upon hundreds of them, faces contorted, worked up into a froth of hatred, doing everything a body can do with voice and gesture to express loathing and disgust. This was a lynch mob, no cause or ideology involved, only an orgy of generalized hate....

Their plan was to throw only epithets on our way in; a more serious onslaught was reserved for later. Inside the hall, five thousand tense and worried supporters made up the auditorium "rally"; Senator George Murphy and Governor Ronald Reagan spoke to warm them up, but even before the President came on, the sound of a battering ram was heard. The hall was actually, not figuratively, besieged; the demonstrators outside envisioned it as a drum to beat upon; the staff, after a few nervous self-assurances that this kind of thing only helped our cause, began to worry about getting out safely with the President. The people in that hall, ourselves included, were at once defiant and fearful, a state which is at the least a tribute to the success of the mob's attempted intimidation. The Secret Servicemen, who always had seemed too numerous and too officious before, now seemed to us like a too-small band of too-mortal men.

Let the President [Nixon] describe the scene, from the reading copy of the speech he gave on the subject a few days later....

Thursday night in San Jose, I spoke to a crowd of 5,000 fine Americans. They were exercising their right to assemble peaceably, to listen to political speakers, to weigh the issues in the campaign of 1970.

Outside the hall, a mob of about a thousand haters gathered. We could see the hate in their faces as we drove into the hall, and in the obscene signs they waved. We could hear the hate in their voices as they chanted their obscenities. Inside the hall, we could hear them pounding on the doors as if they could not bear the thought of people listening respectfully to the Governor of the State of California, the Senior Senator from California, and the President of the United States.

Along the campaign trail we have seen and heard demonstrators. But never before in this campaign was there such an atmosphere of hatred. As we came out of the hall and entered the motorcade, the haters surged past the barricades and began throwing rocks. Not small stones--large rocks, heavy enough to smash windows. And not just directed at me, though some hit the Presidential car--most of the rocks hit the buses carrying the Press and my staff, as well as the police vehicles....

Some say that the violent dissent is caused by the war in Vietnam. It is about time we branded this line of thinking--this alibi for violence, for what it is--pure nonsense. There is no greater hypocrisy than a man carrying a banner that says "peace" in one hand while hurling a rock or a bomb with the other hand....

The San Jose police had driven the demonstrators away from the doors of the auditorium and out of the official parking place. The motorcade was parked in a circle, much like that of a wagon train under siege, with the inside of the circle secured by motorcycle cavalry and the outside left to the savages.... The President came out and did his usual thing--climbed atop the car and wiggled the V sign to his cheering supporters and the cameras behind them.

The Nixon people ringing the car... were not the only ones who hollered at his signal. A reaction of fury and spleen was heard from outside the ring of buses in the parking lot. One reporter, Martin Schram of Newsday, said he heard the candidate "in a low, angry voice to a nearby confidant" say, "That's what they hate to see." This murmured remark, overheard by one reporter and by no other reporter or aide there at the time, amid shouts and jeering and cheering, became the basis of a point of view of many of those covering the event: that the President taunted the demonstrators into violence. The reponsibility for the attack, under this theory, was not so much the antiwar militants', but that of the President, who led them into rock-throwing in order to cast himself in a sympathetic role, and to focus public anger on the youthful dissidents.

The motorcade moved out of the parking lot and ran a guantlet of cursing demonstrators. As Time reported: "The eggs began to fly even before the motorcade moved out... Dozens of rocks were thrown, some the size of a potato. They bounced off the President's well-armored car, and they smashed windows in the press and staff buses tailing behind..." I was in the staff bus with Rose Woods, the President's secretary, when the rocks began to hit the steel sides. She said, "Just like Caracas"--she had previous experience along these lines when Nixon, then Vice President, was stoned in Venezuela--and she hit the deck in the aisle, shouting to the rest of us to do the same. I, like a jerk, kept looking out the window. When a rock slammed into the window on the opposite side of the bus, I was showered with glass splinters, but with my face turned away, I was unhurt and hastened to join my colleagues on the floor. In a minute, it was over and the buses were roaring toward the airport...

Notice Safire's claim that "...this murmured remark, overheard by one reporter and by no other reporter or aide there at the time, amid shouts and jeering and cheering, became the basis of a point of view of many of those covering the event: that the President taunted the demonstrators into violence..."? Well, the reporter was right. Here's Nixon's chief H.R. Haldeman, from his diary:

Thursday, October 29, 1970: The rough one [campaign trip]--Chicago, Rockford, Rochester, Omaha, and San Jose, with an added speech at his [President Nixon's] initiative in Chicago for the Junior League at breakfast.

San Jose turned into the real blockbuster. Very tough demonstrators shouting "1-2-3-4-etc." on the way into auditorium. Tried to storm the doors after we were in, and then really hit the motorcade on the way out. We wanted some confrontation and there were no hecklers in the hall, so we stalled departure a little so they could zero in outside, and they sure did. Before getting in car, P[resident Nixon] stood up and gave the V signs, which made them mad. They threw rocks, flags, candles, etc. as we drove out, after a terrifying flying wedge of cops opened up the road. Rock hit my car, driver hit brakes, car stalled, car behind hit us, rather scary as rocks were flying, etc., but we caught up and all got out. Bus windows smashed, etc. Made a huge incident and we worked hard to crank it up, should make really major story and might be effective.

After arrival in San Clemente, P[resident Nixon] went home, then kept calling with ideas about how to push the line...

"We wanted some confrontation and there were no hecklers in the hall, so we stalled departure.... Made a huge incident and we worked hard to crak it up, should make really major story..."

Am I supposed to believe that Safire really as out-of-the-loop as he appears? Was he really feeling "defiant and fearful... the success of the mob's attempted intimidation. The Secret Servicemen... seemed to us... a too-small band of too-mortal men," or was that part of the "cranking it up"? I understand that Safire made his bones as a thoughtful commentator with Before the Fall. But I don't know whether Before the Fall was on the level; I suspect not.

The Bush Administration Drives Rahm Emanuel Shrill!

Rahm says, about the September "surge report":

Quote Of The Day | TPMCafe: After years of slogans and soundbites Americans deserve an even-handed assessment of conditions in Iraq. Sadly, we will only receive a snapshot from the same people who told us the mission was accomplished and the insurgency was in its last throes. We’ve spent hundreds of billions of dollars and lost thousands of lives in Iraq. An honest report from our generals and diplomats about the status of the war isn’t too much to ask...

Renaissance Capital

Jim Simons of Renaissance says not that he is buying but that he will be buying soon: JIM SIMONS LETTER TO INVESTORS

Dear Renaissance Investor,

As promised in my July letter, posted today on the RIEF website, I want to share some thoughts on August-to-date performance in order to provide perspective on a most unusual period.

RIEF results through July 31 were below expectations, but not extraordinarily so. I’ve previously stated that the low volatility Basic System, to which our predictions are added, was not in sync with the market during much of this period. Nonetheless, we remain confident that over time the Basic System will match the return of the S&P and, enhanced by our predictive signals, should exceed it. Since we do not attempt to track this or any other index there will be periods of positive and negative relative returns.

August (down 8.7% through today) is a different story. The culprit is not the Basic System but our predictive overlay. While we believe we have an excellent set of predictive signals, some of these are undoubtedly shared by a number of long/short hedge funds. For one reason or another many of these funds have not been doing well, and certain factors have caused them to liquidate positions. In addition to poor performance these factors may include losses in credit securities, excessive risk, margin calls and others. All of this may not influence the direction of the overall market, but it may certainly alter the relationships of stocks to each other in a dramatic way. Given the undoubted partial overlap of our portfolios, these liquidations have had a negative impact on RIEF.

Other examples of such liquidations are the meltdown of risk arbitrage positions in the October 1987 crash, the forced liquidation of junk bonds around 1990 and the collapse of European bonds in 1994. Some of these were in the midst of a bear market, some not.

Such events tend to occur extremely infrequently. We cannot predict the duration of the current environment, but usually such behavior causes first pain and then opportunity. While we may hedge out some market risk, our basic plan is to stay the course and, as conditions revert to the norm, we anticipate the possibility of an attractive opportunity for RIEF. Our firm remains strong, and although Medallion has experienced some losses in August, it is solidly profitable year-to-date.

We are confident in our approach, and we urge you to contact our staff should you have any questions.

Jim Simons

The Premature Death of John M. Ford Was an International Tragedy

From Mike Ford:

Electrolite: Topic sentences.: John M. Ford ::: (view all by) ::: April 17, 2005, 04:32 PM: As weird as the bat bombs were, somebody in the US Department of Finding Obscure Ways to Win The War discovered a Japanese folk legend that, if you saw a glowing fox, it was an omen of death, and...

Foxes. Luminous paint. Submarine delivery. Do the math.

It's not that we try to get animals to fight for us (war dogs go way back), it's that we try to get militarized animals to do bizarre things.

The Baseball Test for Journalists

Hoisted from comments: Bernard Yomtov:

I repeat my previous suggestion for the "baseball test." A reporter should not be assigned to cover subject X unless he has as good an understanding of X as a baseball writer is expected to have of baseball.