Tuesday, October 14, 2008

Gordon Does Good

Original Link: http://www.nytimes.com/2008/10/13/opinion/13krugman.html


Has Gordon Brown, the British prime minister, saved the world financial system?

O.K., the question is premature — we still don’t know the exact shape of the planned financial rescues in Europe or for that matter the United States, let alone whether they’ll really work. What we do know, however, is that Mr. Brown and Alistair Darling, the chancellor of the Exchequer (equivalent to our Treasury secretary), have defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up.

This is an unexpected turn of events. The British government is, after all, very much a junior partner when it comes to world economic affairs. It’s true that London is one of the world’s great financial centers, but the British economy is far smaller than the U.S. economy, and the Bank of England doesn’t have anything like the influence either of the Federal Reserve or of the European Central Bank. So you don’t expect to see Britain playing a leadership role.

But the Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn’t been matched by any other Western government, least of all our own.

What is the nature of the crisis? The details can be insanely complex, but the basics are fairly simple. The bursting of the housing bubble has led to large losses for anyone who bought assets backed by mortgage payments; these losses have left many financial institutions with too much debt and too little capital to provide the credit the economy needs; troubled financial institutions have tried to meet their debts and increase their capital by selling assets, but this has driven asset prices down, reducing their capital even further.

What can be done to stem the crisis? Aid to homeowners, though desirable, can’t prevent large losses on bad loans, and in any case will take effect too slowly to help in the current panic. The natural thing to do, then — and the solution adopted in many previous financial crises — is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership.

This sort of temporary part-nationalization, which is often referred to as an “equity injection,” is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.

But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path, saying, “That’s what you do when you have failure.” Instead, he called for government purchases of toxic mortgage-backed securities, based on the theory that ... actually, it never was clear what his theory was.

Meanwhile, the British government went straight to the heart of the problem — and moved to address it with stunning speed. On Wednesday, Mr. Brown’s officials announced a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks, a crucial part of the financial mechanism, running again. And the first major commitment of funds will come on Monday — five days after the plan’s announcement.

At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts. And whaddya know, Mr. Paulson — after arguably wasting several precious weeks — has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).

As I said, we still don’t know whether these moves will work. But policy is, finally, being driven by a clear view of what needs to be done. Which raises the question, why did that clear view have to come from London rather than Washington?

It’s hard to avoid the sense that Mr. Paulson’s initial response was distorted by ideology. Remember, he works for an administration whose philosophy of government can be summed up as “private good, public bad,” which must have made it hard to face up to the need for partial government ownership of the financial sector.

I also wonder how much the Femafication of government under President Bush contributed to Mr. Paulson’s fumble. All across the executive branch, knowledgeable professionals have been driven out; there may not have been anyone left at Treasury with the stature and background to tell Mr. Paulson that he wasn’t making sense.

Luckily for the world economy, however, Gordon Brown and his officials are making sense. And they may have shown us the way through this crisis.

Thursday, October 9, 2008

Afghanistan facing 'downward spiral'

Original Link: http://seattletimes.nwsource.com/html/politics/2008244645_apafghanistanintelligence.html

By PAMELA HESS Associated Press Writer

The situation in Afghanistan now is the worst since the U.S.-led invasion of 2001 and the country is in danger of a "downward spiral" into violence and chaos, according to an intelligence report draft.

The nearly completed National Intelligence Estimate, the work of 16 intelligence agencies, says Afghanistan's deterioration has accelerated alarmingly in past two months. Bush administration officials say privately that Afghanistan is now the single most pressing security threat in the fight against terrorism.

"We are doing a review to look to see what more we can do," Secretary of State Condoleezza Rice told reporters Thursday. "We are looking to see where some of the strengths are and how we can support those strengths and also how we can help the Afghans when there are weaknesses."

A senior U.S. commander with recent experience in Afghanistan characterized the situation as "stagnant" rather than deteriorating.

"We're not making progress. And we're not making progress because of a lack of capability in the government and because the Taliban have a safe haven from which to plan, train, and launch attacks into Afghanistan," said the commander, who like others spoke on condition of anonymity because of the sensitive material.

A second military commander, who read the draft of the intelligence report, said it warns that action is needed quickly to prevent Afghanistan from heading into the "downward spiral." The secret report is expected to be completed mid-November and some conclusions could change.

Military figures show that Afghanistan has become far more dangerous for American troops than Iraq. More than twice as many Americans have died in Afghanistan than in Iraq since May, even though there are more than five times the number of U.S. troops in Iraq.

The White House has accelerated a review of how to reverse the security slide and shore up Afghan President Hamid Karzai's struggling government. Heading the review is Lt. Gen. Douglas Lute, President Bush's deputy national security adviser for Iraq and Afghanistan.

Gen. David Petraeus, fresh from Iraq and tapped to head U.S. Central Command, which oversees both war zones, was in Washington on Thursday to discuss the situation.

"They are trying hard not to do anything that boxes in or locks in the next administration," said a military official familiar with the review. "We want to make sure that when we emerge into the next fighting season, the Bush administration has done as much as it can to help." Fighting in Afghanistan abates during the winter snows because of the rough mountain terrain.

The administration has announced plans to send 3,500 additional Marines to Afghanistan before year's end and then an Army brigade of about 5,000 soldiers early in 2009. As many as three additional Army brigades could follow in the months after that. Currently the U.S. has 31,000 troops in Afghanistan. There also are 31,000 troops from NATO countries and other allies.

In addition to increasing troops strength, the review covers nonmilitary options including possible expansion of the effort to combat the heroin trade, which raises up to $100 million a year for the Taliban, according to the U.S. military.

Al-Qaida and the Taliban move freely in the border area of Pakistan, enabled by friendly militant tribes. They are conducting raids into Afghanistan with increasing impunity.

Defense Secretary Robert Gates pushed NATO allies at a meeting in Hungary to target the narcotics production to stem the flow of cash.

The draft national intelligence estimate also blames waning Afghan support for Karzai's government on corruption, a military official said. He said the corruption primarily involves bribery, rather than government cooperation with the Taliban.

Tuesday, October 7, 2008

New U.S. intelligence report warns 'victory' not certain in Iraq

Original Link: http://www.mcclatchydc.com/homepage/story/53605.html

By Jonathan S. Landay, Warren P. Strobel and Nancy A. Youssef McClatchy Newspapers

WASHINGTON — A nearly completed high-level U.S. intelligence analysis warns that unresolved ethnic and sectarian tensions in Iraq could unleash a new wave of violence, potentially reversing the major security and political gains achieved over the last year.

U.S. officials familiar with the new National Intelligence Estimate said they were unsure when the top-secret report would be completed and whether it would be published before the Nov. 4 presidential election.

More than a half-dozen officials spoke to McClatchy on condition of anonymity because NIE's, the most authoritative analyses produced by the U.S. intelligence community, are restricted to the president, his senior aides and members of Congress except in rare instances when just the key findings are made public.

The new NIE, which reflects the consensus of all 16 U.S. intelligence agencies, has significant implications for Republican John McCain and Democrat Barack Obama, whose differences over the Iraq war are a major issue in the presidential campaign.

The findings seem to cast doubts on McCain's frequent assertions that the United States is "on a path to victory" in Iraq by underscoring the deep uncertainties of the situation despite the 30,000-strong U.S. troop surge for which he was the leading congressional advocate.

But McCain could also use the findings to try to strengthen his argument for keeping U.S. troops in Iraq until conditions stabilize.

For Obama, the report raises questions about whether he could fulfill his pledge to withdraw most of the remaining 152,000 U.S. troops _ he would leave some there to deal with al Qaida and to protect U.S. diplomats and civilians _ within 16 months of taking office so that more U.S. forces could be sent to battle the growing Taliban insurgency in Afghanistan.

Word of the draft NIE comes at a time when Iraq is enjoying its lowest levels of violent incidents since early 2004 and a 77 percent drop in civilian deaths in June through August 2008 over the same period in 2007, according to the Defense Department.

U.S. officials say last year's surge of 30,000 troops, all of whom have been withdrawn, was just one reason for the improvements. Other factors include the truce declared by anti-U.S. cleric Muqtada al Sadr, the leader of an Iran-backed Shiite Muslim militia; and the enlistment of former Sunni insurgents in Awakening groups created by the U.S. military to fight al Qaida in Iraq and other extremists.

The draft NIE, however, warns that the improvements in security and political progress, like the recent passage of a provincial election law, are threatened by lingering disputes between the majority Shiite Arabs, Sunni Arabs, Kurds and other minorities, the U.S. officials said.

Sources of tension identified by the NIE, they said, include a struggle between Sunni Arabs, Kurds and Turkmen for control of the oil-rich northern city of Kirkuk; and the Shiite-led central government's unfulfilled vows to hire former Sunni insurgents who joined Awakening groups.

A spokesman for Director of National Intelligence Mike McConnell, whose office compiled the estimate, declined comment, saying the agency does not discuss NIE's.

The findings of the intelligence estimate appear to be reflected in recent statements by Army Gen. David Petraeus, the former top U.S. commander in Iraq, who has called the situation "fragile" and "reversible" and said he will never declare victory there.

Secretary of State Condoleezza Rice echoed that tone on Monday during a State Department awards ceremony for Petraeus and U.S. Ambassador to Iraq Ryan Crocker.

"Ladies and gentlemen, nothing is certain in this life. And success in Iraq is not a sure thing," Rice said in an uncharacteristically downbeat comment.

The NIE findings parallel a Defense Department assessment last month that warned that despite "promising developments, security gains in Iraq remain fragile. A number of issues have the potential to upset progress."

Trouble spots include whether the former Sunni insurgents, also known as the Sons of Iraq, find permanent employment; provincial elections scheduled for January; Kirkuk's status; the fate of internally displaced people and returning refugees; and "malign Iranian influence," the unclassified Pentagon report said.

The intelligence agencies' estimate also raises worries about what would happen if Sadr, the anti-U.S. cleric, attempts to reassert himself, according to senior intelligence officials familiar with its contents.

If Sadr abandons his cease-fire, it is unclear whether his former followers would rejoin his cause or whether his movement is permanently fractured, and thus harder to control.

The embattled Sons of Iraq program may prove to be the ultimate challenge to sustained stability in Iraq. The U.S. program to pay mostly Sunni former insurgents to protect their neighborhoods or in some cases to stop shooting at Americans is now moving into the hands of the Shiite-led government.

Many of the roughly 100,000 men of the mostly Sunni paramilitary groups have fled to Syria, while others remain in Iraq, worried that the Shiite government will disband and detain the men. The U.S. military has promised not to abandon the men, of whom about 54,000 were transferred to Iraqi government control this month.

(Leila Fadel contributed from Baghdad.)

America's $53 trillion debt problem

Original Link: http://www.cnn.com/2008/POLITICS/10/06/walker.bailout/index.html

By David M. Walker

Editor's Note: David M. Walker served as comptroller general of the United States and head of the Government Accountability Office (GAO) from 1998 to 2008. He is now president and CEO of the Peter G. Peterson Foundation.

David Walker says the $700 billion bailout is a pittance compared with the debt facing the United States.

The Emergency Economic Stabilization Act contains plenty to make lawmakers on the left and right shudder. On the right, it's the apparent abandonment of free-market principles. On the left, it's the absence of punishment for high-flying Wall Street CEO's.

Looking down the middle, what I found downright unnerving was how hard Washington struggled to pass a bill that, in reality, represents less than 1 percent of our current federal financial hole.

Don't get me wrong. Congress and the Bush Administration are to be commended for acting to relieve the credit crunch and trying to minimize any immediate, adverse effect on our economy and by consequence, on American jobs and access to credit.

The ultimate cost of the act should ring up at less than $500 billion, less than the advertised $700 billion because of anticipated proceeds from the government's sale of the assets it will acquire with the appropriated funds.

The nation's real tab, on the other hand, amounted to $53 trillion as of the end of the last fiscal year. That was the sum of our public debt; accrued civilian and military retirement benefits; unfunded, promised Social Security and Medicare benefits; and other financial obligations -- all according to the government's most recent financial statement of September 30, 2007.

The rescue package and other bailout efforts for Fannie Mae, Freddie Mac, AIG and the auto industry, escalating operating deficits, compounding interest and other factors are likely to boost the tab to $56 trillion or more by the end of this calendar year.

With numbers and trends like this, you might ask, "Who will bail out America?" The answer is, no one but us!

Since we're going to have to save ourselves, recent events could hardly be called encouraging. It took an additional $100 billion in incentives -- some would call them "sweeteners;" others might call them bribes -- to get lawmakers to pass the rescue package. Regardless of what you call these incentives, ultimately the taxpayers will have to pick up the tab, with interest.

The process that was employed to achieve enactment of this bill was hardly a model of efficiency or effectiveness. The original proposal represented an over-reach and under-communication by the administration.

Neither lawmakers nor ordinary citizens had enough information to properly assess the real risks, the need for action and what an appropriate course of action might be. Furthermore, the key players allowed the legislation to be characterized as a $700 billion bailout of Wall Street, which was neither an accurate nor a fair reflection of the legislation.

Passage of the credit-crunch relief provisions in the act was understandable, not just because of what risks and needed actions the Treasury and the Federal Reserve were aware of, but more importantly, because of what policymakers didn't know and eventually might have to address.

Let's face it -- the regular order in Washington is broken. We must move beyond crisis management approaches and start to address some of the key fiscal and other challenges facing this country if we want our future to be better than our past.

A good place to start would be for the presidential candidates to acknowledge our $53 trillion (and growing) federal financial hole and commit to begin to address it. Their endorsement of the need for a bipartisan fiscal future commission along the lines of the one sponsored by Rep. Jim Cooper, D-Tennessee, and Rep. Frank Wolf, R-Virginia, also would make sense.

Any such commission should, at a minimum, address the need for statutory budget controls, comprehensive Social Security reform, a first round of tax reform and a first round of comprehensive health care reform. It should hold hearings both inside and beyond the Beltway. And, its recommendations should be guaranteed to receive an up-or-down vote by Congress if a super-majority of the commission's members can agree on a comprehensive proposal.

Our fiscal time bomb is ticking, and the time for action is now!

Friday, October 3, 2008

Edge of the Abyss

Original Link: http://www.nytimes.com/2008/10/03/opinion/03krugman.html


As recently as three weeks ago it was still possible to argue that the state of the U.S. economy, while clearly not good, wasn’t disastrous — that the financial system, while under stress, wasn’t in full meltdown and that Wall Street’s troubles weren’t having that much impact on Main Street.

But that was then.

The financial and economic news since the middle of last month has been really, really bad. And what’s truly scary is that we’re entering a period of severe crisis with weak, confused leadership.

The wave of bad news began on Sept. 14. Henry Paulson, the Treasury secretary, thought he could get away with letting Lehman Brothers, the investment bank, fail; he was wrong. The plight of investors trapped by Lehman’s collapse — as an article in The Times put it, Lehman became “the Roach Motel of Wall Street: They checked in, but they can’t check out” — created panic in the financial markets, which has only grown worse as the days go by. Indicators of financial stress have soared to the equivalent of a 107-degree fever, and large parts of the financial system have simply shut down.

There’s growing evidence that the financial crunch is spreading to Main Street, with small businesses having trouble raising money and seeing their credit lines cut. And leading indicators for both employment and industrial production have turned sharply worse, suggesting that even before Lehman’s fall, the economy, which has been sagging since last year, was falling off a cliff.

How bad is it? Normally sober people are sounding apocalyptic. On Thursday, the bond trader and blogger John Jansen declared that current conditions are “the financial equivalent of the Reign of Terror during the French Revolution,” while Joel Prakken of Macroeconomic Advisers says that the economy seems to be on “the edge of the abyss.”

And the people who should be steering us away from that abyss are out to lunch.

The House will probably vote on Friday on the latest version of the $700 billion bailout plan — originally the Paulson plan, then the Paulson-Dodd-Frank plan, and now, I guess, the Paulson-Dodd-Frank-Pork plan (it’s been larded up since the House rejected it on Monday). I hope that it passes, simply because we’re in the middle of a financial panic, and another no vote would make the panic even worse. But that’s just another way of saying that the economy is now hostage to the Treasury Department’s blunders.

For the fact is that the plan on offer is a stinker — and inexcusably so. The financial system has been under severe stress for more than a year, and there should have been carefully thought-out contingency plans ready to roll out in case the markets melted down. Obviously, there weren’t: the Paulson plan was clearly drawn up in haste and confusion. And Treasury officials have yet to offer any clear explanation of how the plan is supposed to work, probably because they themselves have no idea what they’re doing.

Despite this, as I said, I hope the plan passes, because otherwise we’ll probably see even worse panic in the markets. But at best, the plan will buy some time to seek a real solution to the crisis.

And that raises the question: Do we have that time?

A solution to our economic woes will have to start with a much better-conceived rescue of the financial system — one that will almost surely involve the U.S. government taking partial, temporary ownership of that system, the way Sweden’s government did in the early 1990s. Yet it’s hard to imagine the Bush administration taking that step.

We also desperately need an economic stimulus plan to push back against the slump in spending and employment. And this time it had better be a serious plan that doesn’t rely on the magic of tax cuts, but instead spends money where it’s needed. (Aid to cash-strapped state and local governments, which are slashing spending at precisely the worst moment, is also a priority.) Yet it’s hard to imagine the Bush administration, in its final months, overseeing the creation of a new Works Progress Administration.

So we probably have to wait for the next administration, which should be much more inclined to do the right thing — although even that’s by no means a sure thing, given the uncertainty of the election outcome. (I’m not a fan of Mr. Paulson’s, but I’d rather have him at the Treasury than, say, Phil “nation of whiners” Gramm.)

And while the election is only 32 days away, it will be almost four months until the next administration takes office. A lot can — and probably will — go wrong in those four months.

One thing’s for sure: The next administration’s economic team had better be ready to hit the ground running, because from day one it will find itself dealing with the worst financial and economic crisis since the Great Depression.