My instant reaction to what may have been the most important speech of Obama’s candidacy is that it was excellent. Not, for once, because it was all that well delivered. Especially at the beginning, he seemed not just calm and collected, as usual, but downright subdued. He got more comfortable as he went on, but the whole thing felt more like a statement announced under some duress (which I suppose it was) than a speech he was ever keen to deliver. On the substance, though, my feeling is that he hit every target. Perhaps the association with Wright will still prove to be a net negative. We will find out in due course. But I thought Obama dealt with the issues so well that, at least for me, the whole fuss over Wright might turn out to work to his advantage.

In my previous post on the Wright affair I called Obama’s first line on the matter–”I wasn’t present when he said those things”–a transparent evasion. I was very glad to see no trace of that in the speech:

I have already condemned, in unequivocal terms, the statements of Reverend Wright that have caused such controversy. For some, nagging questions remain. Did I know him to be an occasionally fierce critic of American domestic and foreign policy? Of course. Did I ever hear him make remarks that could be considered controversial while I sat in church? Yes. Did I strongly disagree with many of his political views? Absolutely – just as I’m sure many of you have heard remarks from your pastors, priests, or rabbis with which you strongly disagreed.

Rather than pretending he was unaware of Wright’s views, he confronted them:

But the remarks that have caused this recent firestorm weren’t simply controversial. They weren’t simply a religious leader’s effort to speak out against perceived injustice. Instead, they expressed a profoundly distorted view of this country – a view that sees white racism as endemic, and that elevates what is wrong with America above all that we know is right with America; a view that sees the conflicts in the Middle East as rooted primarily in the actions of stalwart allies like Israel, instead of emanating from the perverse and hateful ideologies of radical Islam.

As such, Reverend Wright’s comments were not only wrong but divisive, divisive at a time when we need unity; racially charged at a time when we need to come together to solve a set of monumental problems – two wars, a terrorist threat, a falling economy, a chronic health care crisis and potentially devastating climate change; problems that are neither black or white or Latino or Asian, but rather problems that confront us all.

That seems to me exactly right. But having criticised his pastor so frontally, Obama then had to explain why he nonetheless has remained a member of his church and evidently holds the man in such high regard. He did this too–first in a very personal way, but then in an explanation that broadened out to touch on the main themes of his campaign.

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I continue to be astonished by Alan Greenspan’s timing. It is quite uncanny. In a column for National Journal last September (pasted after the jump, if you’re curious) I applauded the timing of both his departure from the Fed and the subsequent publication of his memoirs, which coincided beautifully with a spike in concern for the mess he left behind. And now—a smaller achievement, admittedly, but impressive nonetheless—he has a long column in the FT on the very day that the paper leads with news of the extraordinary “rescue” of Bear Stearns by J.P. Morgan and the Fed (something which nobody saw coming when the column was commissioned and written). The man is a magician.

In this new article Greenspan says that the current financial implosion is mainly due not to poor regulation but to the inescapable complexity of modern finance, and to the fact that the science of risk management has not yet caught up.

The essential problem is that our models – both risk models and econometric models – as complex as they have become, are still too simple to capture the full array of governing variables that drive global economic reality. A model, of necessity, is an abstraction from the full detail of the real world. In line with the time-honoured observation that diversification lowers risk, computers crunched reams of historical data in quest of negative correlations between prices of tradeable assets; correlations that could help insulate investment portfolios from the broad swings in an economy. When such asset prices, rather than offsetting each other’s movements, fell in unison on and following August 9 last year, huge losses across virtually all risk-asset classes ensued.

The answer, Greenspan says, is not to move away from “counterparty surveillance and, more generally, financial self-regulation as the fundamental balance mechanism for global finance”. He is less clear on what the answer actually is, except to be patient while the finance experts improve their models.

I do not count myself among the claque of registered full-time Greenspan critics, but I have to say it takes some nerve to contemplate conditions in the financial markets today and talk of the virtues of self-regulation. If that view has not been discredited by recent events, one has to wonder what it would take.

The fundamental problem, in my view, was not insufficiently clever risk-management models. It was moral hazard (operating at multiple levels); a gross failure of regulation in mortgage lending (for which Greenspan is substantially responsible: remember that he was a cheerleader for the subprime lending business); a structure of finance-industry incentives that rewarded greed and recklessness indulged at others’ expense (itself a failure of regulation); and last but not least the most credit-friendly tax regime in the world.

One remedy that Greenspan does advocate in his article is larger “capital buffers” for banks and other lenders—he notes that private investors are already demanding this. Yes, that is putting it mildly. But whether private investors continue to demand it or not, a new and much tougher approach to capital adequacy is (among other changes) something regulators must now insist upon. The real lesson of this crisis is that the authorities will do anything—at any cost to taxpayers—to shore up a financial system on the point of being wrecked by greed and incompetence. For the sake of minimising the harm to innocent bystanders, they may very well be right to take that view. But the quid pro quo is stricter regulation. Implicit uncapped guarantees plus “self-regulation” is a formula for the very disaster now unfolding.

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On Friday Bear Stearns–even in the throes of a financial collapse that had driven its share price down by three-quarters–was still worth $3.5 billion. On Sunday night it was worth barely $200m, sold for two bucks a share to J.P. Morgan, in a deal brokered by the Fed. If this is a bail-out (and it is) the shareholders of Bear Stearns are not exactly thrilled about it. They will want to know why giving away their firm (whose book value, they had just been told, was in the neighbourhood of $80 a share, and whose headquarters building is said to be worth $1 billion) to J.P. Morgan was better for them than going bust.

It wasn’t. Bankruptcy would surely have recovered more value for shareholders than this give-away–but the Fed evidently feared that closure and disposal of Bear’s assets would have jeopardised other parts of the country’s teetering financial system. Preventing that was the Fed’s overriding goal. The firm had to be acquired in a hurry, shored up, and then run, so far as counterparties were concerned, as though nothing had happened. By any measure, Bear Stearns was not that big: it was surely not “too big to fail”. Apparently, though, it was deemed too delicately interconnected to fail. One wonders how many such institutions there now are, and who will carry the burden of keeping them in business.

The Fed, helping to answer that question, simultaneously announced a new lending facility for “primary dealers”–non-bank financial firms like Bear, which have hitherto been unable to borrow from the Fed. This constitutes a remarkable expansion of the Fed’s financial safety net. Something else Bear’s shareholders will want to know is why this facility was not created in time for them to take advantage of it. At the end of last week, they were having to borrow from the Fed indirectly, through the good offices of J.P. Morgan. Two days later, J.P. Morgan is getting Bear for nothing, and in addition has been promised as much as $30 billion in Fed loans, secured against Bear’s dodgy assets. If the assets turn out to be worth less than the loans, the Fed–ie, the taxpayer–bears the risk. (And that, by the way, is why these arrangements are indeed a bail-out, though not one that helps Bear’s original owners.)

On the face of it, this looks like a remarkably good deal for J.P. Morgan. We will see whether it turns out to be such good value for taxpayers.

The contest for the Democratic nomination has entered a period of suspended reality. The next big vote, in Pennsylvania, is five weeks away – and is unlikely to affect the race much in any case. This agonising, drawn-out sequence of primaries is not in the end going to choose the nominee. When it is over, Barack Obama will lead in elected delegates, but not by enough to settle the thing. The Democratic party’s unelected “superdelegates” will do that, quite possibly not before the party’s convention in August.

The Clinton campaign is already concentrating on making its best case to the superdelegates. For the moment, this means arguing that Hillary Clinton will be the stronger candidate against John McCain in November. Mr Obama and Mrs Clinton are both tied with Mr McCain in national polls – though these do not yet show the fall-out, if any, from the recent surge of interest in the racist demagoguery of Mr Obama’s spiritual mentor, Jeremiah Wright. Also, Mrs Clinton can argue that she has the edge in the swing states that the Democrats have to win.

Later, if she manages to eke out a lead in votes cast, she will bolster that argument with an impassioned line about the superdelegates’ duty to uphold the will of the people. (This is possible especially if the Florida and Michigan contests are rerun.) Of course, should Mr Obama hang on to his popular-vote lead (currently about 700,000), the will of the people will be his line and the Clinton team will challenge the legitimacy of the party’s electoral process.

The remainder of this column can be read here. Please post comments below.

Will the storm over Jeremiah Wright seriously hurt Obama’s campaign–and ought it to? This is no trumped-up attack, easy to dismiss. (So much for the Clintons playing the race card.) The video clip that has attracted most attention expresses rage against whites and contempt for the country that Obama is asking to lead. Wright is not another Farrakhan–somebody Obama barely knows and whose endorsement he would rather not have. Wright has been Obama’s spiritual mentor for many years: “The Audacity of Hope” is Wright’s phrase, chosen for Obama’s book as a homage to the man who coined it.

Here is Obama’s response: first his statement on the subject, then an interview he gave to Fox.

Most importantly, Rev. Wright preached the gospel of Jesus, a gospel on which I base my life. In other words, he has never been my political advisor; he’s been my pastor. And the sermons I heard him preach always related to our obligation to love God and one another, to work on behalf of the poor, and to seek justice at every turn.

The statements that Rev. Wright made that are the cause of this controversy were not statements I personally heard him preach while I sat in the pews of Trinity or heard him utter in private conversation. When these statements first came to my attention, it was at the beginning of my presidential campaign. I made it clear at the time that I strongly condemned his comments. But because Rev. Wright was on the verge of retirement, and because of my strong links to the Trinity faith community, where I married my wife and where my daughters were baptized, I did not think it appropriate to leave the church.

Let me repeat what I’ve said earlier. All of the statements that have been the subject of controversy are ones that I vehemently condemn. They in no way reflect my attitudes and directly contradict my profound love for this country.

Obama does all right in the interview. (It is good that he laughs at one point at the questioner’s comically portentous and inquisitorial demeanour. I thought that was funny too.) But does he bury the issue? By no means. His claim in the interview and in the statement that most of Wright’s anger and (in my view) bigotry comes as news to him is just not credible. Tactically speaking, that is a transparent evasion, and will keep the problem alive.

But what I most want to know is why the Obama we thought we knew could hold this man in such esteem. Perhaps it is just a matter of loyalty to a father-figure, flaws and all–which is both understandable and, up to a point, admirable. But does Wright’s bitter resentment in fact resonate with Obama, despite all appearances to the contrary? That is a question that will trouble a lot of less-than-fully-invested Obama supporters.

A subsidiary question–one I have been asking of myself–is why the most recent Wright videos seemed to come as such a shock, when neither Obama’s close links to the pastor nor the preacher’s views about the ongoing evil of white America were any secret. Here is an interesting take on that from Politico:

The fracas started Thursday morning, when ABC’s “Good Morning America” ran a Brian Ross expose on Wright that included old video of him saying: “The government gives them the drugs, builds bigger prisons, passes a three-strike law and then wants us to sing ‘God bless America’? No, no, no. Not God bless America. God [expletive] America.”

On Friday night, there was Leno on NBC’s “Tonight Show” joshing: “McCain was running so fast from President Bush, he ran into Barack Obama, who was running from his minister.”

The story had burst onto the radar screen of average Americans with as much velocity as any other story during the 2008 campaign.

Political reporters and editors were inundated with e-mails from red-state friends and relatives wanting to know why the brouhaha wasn’t getting more instant and constant coverage from every news outlet.

To reporters who had followed the campaign, it was an old, oft-written story. But this time it had video of Wright saying things like “U.S. of K.K.K.A.,” available on YouTube and played endlessly by cable news channels.

In the deluge of commentary on the Spitzer scandal, I thought this piece by Alan Dershowitz in the Wall Street Journal was the best. As he says, what we know of the investigation so far is very odd—not as odd as Spitzer’s behaviour, I grant you, but strange nonetheless.

There is no hard evidence that Eliot Spitzer was targeted for investigation, but the story of how he was caught does not ring entirely true to many experienced former prosecutors and current criminal lawyers. The New York Times reported that the revelations began with a routine tax inquiry by revenue agents “conducting a routine examination of suspicious financial transactions reported to them by banks.” This investigation allegedly found “several unusual movements of cash involving the Governor of New York.” But the movement of the amounts of cash required to pay prostitutes, even high-priced prostitutes over a long period of time, does not commonly generate a full-scale investigation…

In this case, if the serendipitous bank audit really led federal agents to Mr. Spitzer, and Mr. Spitzer led them to the Emperor’s Club, and federal prosecutors really wanted to get the Club, they could easily have sent an undercover cop to pose as a john, instead of tapping phones and reading emails — tactics designed to catch and embarrass Mr. Spitzer with his own recorded words, which could be, and were, leaked to the media. As this newspaper has reported: “It isn’t clear why the FBI sought the wiretap warrant. Federal prostitution probes are exceedingly rare, lawyers say, except in cases involving organized-crime leaders or child abuse. Federal wiretaps are seldom used to make these cases …

What exactly were the Feds investigating in the first place, and why? Summing up, Dershowitz quotes Beria, I think aptly:

Lavrenti Beria, the head of Joseph Stalin’s KGB, once quipped to his boss, “show me the man and I will find the crime.” The Soviet Union was notorious for having accordion-like criminal laws that could be adjusted to fit almost any dissident target. The U.S. is a far cry from the Soviet Union, but our laws are dangerously overbroad.

Both Democrats and Republicans have targeted political adversaries over the years. The weapons of choice are almost always elastic criminal laws. And few laws are more elastic, and susceptible to abuse, than federal laws on money laundering and sex crimes. For the sake of all Americans, these laws should be narrowed and limited to predatory crimes with real victims.

This is one reason I find the chorus of exultation over Spitzer’s downfall hard to take. Another is that it is wrong in any case, in my view, to criminalize prostitution—a victimless crime if ever there was one. But having said all this it is difficult to summon much sympathy for the man. You could never accuse Spitzer of having exercised restraint in his use of broadly framed laws, not to mention the awesome and largely unchecked powers of his office, to coerce his targets into submission without the nuisance of a trial. He was on the right side of a lot of the investor-protection issues he chose to champion as a prosecutor, I think, but still by word and deed he always struck me as a tyrant. It is dangerous to trust that kind of man with that kind of power. It is still a great shame that it took this to stop him in his tracks

The Clinton campaign’s offer of the VP slot to Obama is clever politics. Bill pressed the idea more explicitly than before over the weekend, saying that the ticket would be “almost unstoppable“. The idea gels nicely with the Clinton’s argument that Obama is inexperienced: here is his chance for some on-the-job training as number three in the Clinton White House. In due course, they are saying, he might be a pretty good candidate for president.

Best of all, from a tactical point of view, it affirms the idea that Hillary is winning the race — implying there is nothing odd about her offering the VP place to the man who just happens to have the most delegates at the moment, and still will after Pennsylvania. The press mostly went along with this imposture — and so, in a way, did the Obama campaign. Instead of rejecting the overture out of hand, they said that such talk was “premature”. That was a mistake. If I were Obama, I’d be saying that the question of accepting the VP slot on Hillary’s ticket will never arise; if it did I wouldn’t accept it; and that there are no circumstances in which I’d offer her the VP slot on my ticket. (Isn’t it telling that Hillary doesn’t even need to say she’d reject such an offer from Obama?) Even to signal the possibility that he might come around to this idea looks weak.

Update:

Good. This is more like it.

Months into the subprime meltdown, economists and policymakers in the US seem no closer to agreement about what, if anything, to do. Last week Hank Paulson, Treasury secretary, and Ben Bernanke, Federal Reserve chairman, were at odds over how to stem mortgage foreclosures. Mr Bernanke called on banks to be more willing to reduce principal. Mr Paulson said voluntary adjustments to mortgage rates and payment schedules were working.

For the moment, both men are merely exhorting – moral suasion, it used to be called. Mr Bernanke is not yet proposing that banks should be compelled to write down loans, and Mr Paulson notes that voluntary writedowns are among the options his “Hope Now” alliance of mortgage lenders and servicers can choose if they wish. Still, the tone of their comments was different. Whether he means to or not, Mr Bernanke continues to signal mounting alarm at the economy’s prospects.

As well he might. February saw the biggest drop in non-farm payrolls for five years – 65,000, more than twice what the market expected. In the fourth quarter of 2007, more than 2 per cent of the country’s 46m mortgages were in foreclosure, and nearly 6 per cent past due date – both sharply higher than a year ago. For subprime mortgages, the numbers were 13 per cent in foreclosure and 20 per cent past due. House prices have much further to fall – maybe another 20 per cent, analysts say. That will drive many more borrowers into negative equity and force the pace of foreclosures still higher.

Continue reading “Column: In the grip of implacable subprime forces”

In a new column for National Journal I argue that John MCain’s fiscal arithmetic does not add up.

Not long ago John McCain was almost boasting that he knew little about economics. That kind of candor, a distinctive McCain trait, is likable but has its limits. His days of making jokes about his ignorance appear to be over. Worries about the economy began to dominate public opinion even before the current slowdown was properly under way.

Between now and November, those worries will only mount: The faltering economy is likely to get worse before it gets better. McCain is going to need an economic program, and he had better get used to talking about this subject as though it matters.

He obviously understands that — but his recent statements and interviews suggest that he still has a lot of work to do. McCain is running as an orthodox fiscal conservative, with heavy stress on low taxes and tight control of public spending. He is pro-trade. He has modified, but not dropped, his support for personal retirement accounts alongside Social Security. On health care, he has a bunch of proposals for better cost control, but no plan that would deserve to be called comprehensive reform. And he is for stronger action on global warming: He aims to curb greenhouse gases with a cap-and-trade system that would oblige emitters to buy licenses for the privilege.

Stated that baldly, the platform looks all right. I think that the lack of any grander ambition on health care is a pity on the merits and a political mistake as well, but as for the rest, each element has plenty to recommend it. The problem is that the fiscal conservative core of the program, as it stands, is just not credible. McCain is promising to extend the Bush administration’s tax cuts — and cut some more. He is also promising to reduce and then eliminate the budget deficit. To do both of those things, McCain would need to make correspondingly savage cuts in spending, and he has not come close to saying how.

You can read the rest of the article here (link expires at the end of the week).

Curiouser and curiouser. Commenters on my previous post draw my attention to reports that the Clinton campaign also contacted Canadian officials to tell them the very thing that she excoriated Obama’s adviser, Austan Goolsbee, for saying–namely, to take all the anti-NAFTA stuff with a grain of salt, it was all just politics. This is from AFP:

OTTAWA (AFP) — US presidential hopeful Hillary Clinton’s campaign, while rapping rival Barack Obama for telling US voters he is anti-NAFTA and saying otherwise to Canada, tried to reassure Canada too, local media said Thursday.

A top aide of Canadian Prime Minister Stephen Harper meanwhile was identified as the likely source of an alleged leak that provoked a diplomatic fiasco involving both US Democratic presidential contenders.

Last month, Harper’s chief of staff, Ian Brodie, purportedly made impromptu remarks to journalists about Clinton’s US presidential bid, said Canadian reports.
The offhand comments apparently sought to downplay the potential impact on Canada of Clinton and Obama’s attacks on the North American Free Trade Agreement (NAFTA) during stops in the US state of Ohio.

Brodie told reporters that the Clinton campaign had called the Canadian embassy in Washington to tell officials to take her anti-NAFTA rhetoric “with a grain of salt,” said local media.

It beggars belief that if this is true, and Hillary knew about it, she would have made such a big deal about the Goolsbee meeting. This is what she said just before the Ohio vote:

NAFTA–I don’t just criticize it. I don’t have my campaign go tell a foreign government behind closed doors, “That’s just politics. Don’t pay attention to it.”

I thought this campaign had eroded my capacity to be surprised by politics. I was wrong.

Update:

The NYT says (after getting around to this in the story’s eighth paragraph) that the Canadian official who mentioned the Clinton campaign’s intervention was muddled–or created the appearance of being muddled. Or at least, I think that’s what it says.

But The Canadian Press said that this year Mr. Brodie did more than talk up the budget. According to the news agency, he also told a group of CTV employees that the campaign of Senator Hillary Rodham Clinton of New York had contacted the Canadian government and told it “not to worry” about her promise to reopen the trade agreement. Canada’s economy is heavily dependent on trade and most of its exports go to the United States, making Nafta a delicate issue.

The news agency suggests that CTV picked up on Mr. Brodie’s remarks and began reporting the story. It apparently found, however, that in fact it was the Obama campaign that had offered the reassurances to Canadian diplomats.

Further update:

Is this the last word on this bizarre tale? (Dumb question, no doubt.)

OTTAWA — Democratic presidential hopeful Hillary Clinton never gave Canada any secret assurances about the future of NAFTA such as those allegedly offered by Barack Obama’s campaign, Prime Minister Stephen Harper’s office said Friday.

With the NAFTA affair swirling over the U.S. election and Canadian officials skittish about saying anything else that might influence the race, it took the PMO two days to deliver the information.

After being asked whether Canadian officials asked for — or received — any briefings from a Clinton campaign representative outlining her plans on NAFTA, a spokeswoman for the prime minister offered a response Friday.

“The answer is no, they did not,” said Harper spokeswoman Sandra Buckler.