Monthly Archives: January 2011

My first take on Barack Obama’s State of the Union address was to find it disappointing. The US president missed the perfect opportunity, I thought, to prepare the US for the fiscal squeeze that must come. Having read the speech more carefully, I feel I was unfair. I was too kind.

Do you have some free time this weekend? Here is something to read, if you can stand the excitement. The Financial Inquiry Commission has published its report. So far, I’ve only skimmed it, but it looks  thorough. It’s a shame that the split between Democrats and Republicans on the panel will lessen, as I suspect, both its readership and its influence. The Republican dissenters could be right to say that report was insufficiently focused–when everything is important, as they say, nothing is–but I’m already wondering whether this disagreement has been overdone. (Fannie and Freddie, for instance, were a main bone of contention. Yet the majority report is pretty scathing, and agrees that political demands for more lending to poor borrowers to buy cheap houses played a part in what went wrong.) This Washington Post report gives a nice summary. I might have more to say next week.

No doubt my thinking on the new Basel bank-capital rules is still fresh in your mind.  You’ll recall I said the new capital requirements were too low. I cited a terrific paper by Hanson, Kashyap and Stein which explains why. This new study by David Miles and others for the Bank of England comes to a similar conclusion, only more so.

We use empirical evidence on UK banks to assess costs;  we use data from shocks to incomes from a wide range of countries over a long period to assess risks to banks and how equity funding (or capital) protects against those risks.  We find that the amount of equity capital that is likely to be desirable for banks to hold is very much larger than banks have held in recent years and also higher than targets agreed under the Basel III framework.

Actually the capital ratio they come up with is 16 to 20 percent of risk adjusted assets, even if you ignore the most extreme low-probability events. This is more than twice as much as the new Basel ratios, let alone the old ones.

The bankers in Davos are apparently unimpressed.

The speech was fine in its way, but the timing was wrong. The president worked the required themes of optimism and unity, and did it as well as anybody could. He hit some inspiring notes. He talked about American exceptionalism as though he meant it. All this was well calculated to please his US listeners. Instant polling suggests it did.

But this was not the speech of a president focused, as Mr Obama should be, on the country’s fiscal condition. He expressed concern about it, but no great sense of urgency. The thrust of the speech, in fact, pushed the other way.

Greg Sargent and EJ Dionne separately hope that Obama’s State of the Union address will be less about moving his presidency to the centre than about moving the centre to where he is already standing. Good point, though it needn’t be one or the other, of course. It could be some of both. Obama and the centre could, you know, meet in the middle.

Like Sargent and Dionne, I would like to see the US centre moved far enough to embrace the principle of universal health insurance. But I would not want to see it moved so far as to make long-term deficit reduction along Bowles-Simpson lines impossible–an outcome that Sargent and Dionne appear to favour. Sargent quotes David Dayen approvingly:

I’d say that the President calling for new investments and staying silent on the Bowles-Simpson cat food recommendations is pretty darn good, all things considered.

Good for whom? Without those cat-food recommendations, or something quite like them, the ceiling might fall in on the US economy and whoever occupies the White House sooner than Obama would like. And though Obama, if he tried, might convince the middle of the country that universal health insurance is worth the cost, I’d guess his chances of persuading it that public borrowing is not a problem are pretty slim. It isn’t good politics for Democrats to seem unserious about long-term deficit reduction.

Absolutely, move the centre. That should be part of Obama’s ambition. But if he fails to take the fiscal problem seriously, he will be getting policy wrong and the politics wrong as well.

The Browser has a good interview with Robert Shiller–part of its FiveBooks series, in which authors recommend favorite reading on a topic they select. Shiller’s subject is human traits essential to capitalism, and his choices run from Smith’s Theory of Moral Sentiments to Raghuram Rajan’s Fault Lines.

Asked last week what was needed to revive the US economy, Jeff Immelt, chief executive of General Electric, told the Financial Times: “It’s a little bit on policy, a lot on tone.” Barack Obama, wondering what he must do to revive his presidency, may have come to the same conclusion.

Greg Mankiw mocks the muddled thinking of health-reform advocates.

I have a plan to reduce the budget deficit. The essence of the plan is the federal government writing me a check for $1 billion. The plan will be financed by $3 billion of tax increases. According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion.

Now, you may be tempted to say that giving me that $1 billion will not really reduce the budget deficit. Rather, you might say, it is the tax increases, which have nothing to do with my handout, that are reducing the budget deficit. But if you are tempted by that kind of sloppy thinking, you have not been following the debate over healthcare reform.

His point seems to be that if the healthcare law can be called fiscal reform, as advocates claim, then this ridiculous handout plan can also be called fiscal reform–which would be absurd, or so he asks us to believe.

This is not up to Mankiw’s usual standards.

I enjoyed Dana Milbank’s account of this awkward encounter.

As you would expect, Mike Kinsley’s article about the right’s “bait and switch” on Tucson makes some good points. His articles never fail to. It is quite true, as he says, that one should be able discuss who is to blame, or more to blame, for the breakdown of civil discourse in US politics without being accused of contributing to the problem. That subject should not be off-limits. Nor for that matter should Loughner’s motivations, unclear as these still seem to be. But Kinsley’s idea that the right did something very clever when it manoeuvred Obama into speaking as he did in Tucson leaves me puzzled.

The speech was widely praised and the country seemed to love it. Obama is back up in the polls. Yes, says Kinsley, but “the circumstances [that obliged Obama to speak as he did] were created largely by the political instincts of his political enemies, who are no less his enemies than they were a week ago”. Even supposing that is true, so what? “The vast right-wing conspiracy has played President Barack Obama like a violin,” Kinsley says. Really? If they can only keep it up, Obama will win re-election in a landslide. My advice to the president is: keep falling for it. Sometimes, conservatives are too damn clever for their own good.

I’ve another quibble. Kinsley:

It is, [Obama] said, “a time when we are far too eager to lay the blame for all that ails the world at the feet of those who think differently than we do.” This sounds like a noble sentiment. But who is to blame for what ails the world if not those who think differently? If those who think the same as you are responsible, it’s time to start thinking differently yourself.

Must either Democrats or Republicans be to blame for everything that ails the world?

A favourite line of the Republican party on Barack Obama’s leadership has been, “Making fine speeches is all very well. What counts is how you govern.” This is true, as a bewildered Grand Old Party is suddenly finding out.

Clive Crook’s blog

This blog is no longer updated but it remains open as an archive.

I have been the FT's Washington columnist since April 2007. I moved from Britain to the US in 2005 to write for the Atlantic Monthly and the National Journal after 20 years working at the Economist, most recently as deputy editor. I write mainly about the intersection of politics and economics.

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