End Game in Greece and for the Euro

I am normally loathe to link to anything in the Huffington Post, but this article by Simon Johnson brings such clarity to the Greek/Euro situation that I feel compelled to quote the article. (H/T The Grumpy Economist):

. . . the Greek failure mostly demonstrates how wrong a single currency is for Europe. The Greek backlash reflects the enormous pain and difficulty that comes with trying to arrange "internal devaluations" (a euphemism for big wage and spending cuts) in order to restore competitiveness and repay an excessive debt level.

Faced with five years of recession, more than 20 percent unemployment, further cuts to come, and a stream of failed promises from politicians inside and outside the country, a political backlash seems only natural. With IMF leaders, EC officials, and financial journalists floating the idea of a "Greek exit" from the euro, who can now invest in or sign long-term contracts in Greece? Greece's economy can only get worse.
. . .
The ECB has always vehemently denied that it has taken an excessive amount of risk despite its increasingly relaxed lending policies. But between Target2 and direct bond purchases alone, the euro system claims on troubled periphery countries are now approximately 1.1 trillion euros (this is our estimate based on available official data). This amounts to over 200 percent of the (broadly defined) capital of the euro system. No responsible bank would claim these sums are minor risks to its capital or to taxpayers. These claims also amount to 43 percent of German Gross Domestic Product, . . .

For the last three years Europe's politicians have promised to "do whatever it takes" to save the euro. It is now clear that this promise is beyond their capacity to keep -- because it requires steps that are unacceptable to their electorates. No one knows for sure how long they can delay the complete collapse of the euro, perhaps months or even several more years, but we are moving steadily to an ugly end.

Sorry for the extended quotes, that is not normally my style; but it is becoming clearer by the day that this crisis is inevitable. Funny thing about financial crises, once they are seen as inevitable, they arrive sooner than later.

Hopefully Team Romney is studying the situation and is readying a plan. I maintain my long held position (here and here) that McCain could have won the 2008 election if he had proposed a radically different plan than the TARP and stimulus that both Bush and Obama supported. If I know anything about Team Obama, they will triple down on these failed policies if the coming euro crisis hits before the election. They might even be foolish enough to try and pledge U.S. aid to help save the euro. We need to keep an eye on the Fed as well. Romney should be ready with his own plan. If it embraces the free market, he wins in a walk.

Dealing with Iran

If there is one thing I know about bullies, the only thing they respect is one's ability to hit them back. I think this applies especially to Iran. The military dictatorship there has calculated that America has no appetite for military engagement with Iran, so they move blithely forward on their nuclear weapons program, occasionally offering the prospects of negotiation to forestall the unpleasantness of tougher sanctions. In the meantime, the Obama administration started its relationship with the Iranians on the assumption that the President's oratory would leave the Iranian leadership so spell bound that there would be serious negotiations on the issue of nuclear weapons. We know how that worked out.

A little analysis of the self interest of the leadership is in order. First, Iran has turned into a military dictatorship. Order is maintained by Hezbollah thugs imported from Syria and Lebanon, suggesting the regime is fundamentally weak, because it is unpopular. In the same linked article, Michael Ledeen points out the inability of the regime to turn out to celebrate the anniversary of the death of Ayatollah Khomeini. From history we know that such regimes use foreign adventures and war to maintain popularity at home. Here is where the nuclear program comes in. First, by bringing the regime into sharp conflict with the United States, it shores up its own legitimacy. Iranians may loathe Ahmadinejad, but they also remember that the U.S. propped up the Shah. Second, if they were to obtain nuclear weapons, it would give them much greater freedom of action in the middle east. Their adversaries and the U.S. would have to add the risk of nuclear war to the calculus of confronting Iran. I am not convinced they would attack Israel, except as a last resort; unfortunately, I contemplate a future that includes last resorts for this brutal regime.

I frankly don't know what the latest sanctions that been proposed for Iran to deter them are. I don't care, because unless they stop the flow of dollars for oil, or prevent Iran from importing gasoline, they will have little effect. We aren't going to war either, certainly not under this President; but I never thought that a prudent course of action anyway.

What we could do, however, is to hit back in a way that threatens the existence of the regime. From a Washington Post editorial (of all places):

But as Sen. John McCain (R-Ariz.) pointed out in a powerful speech before the group also on Thursday, the president has hesitated to "unleash America's full moral power to support the Iranian people." Mr. Obama clings to the hope that the radical clique in Tehran will eventually agree to negotiate in good faith -- "an assumption," Mr. McCain noted, that "seems totally at odds with the character of this Iranian regime."

The senator proposed "a different goal: to mobilize our friends and allies in like-minded countries, both in the public sphere and the private sector, to challenge the legitimacy of this Iranian regime, and to support Iran's people in changing the character of their government -- peacefully, politically, on their own terms and in their own ways."

I think there are some other things to be done. The same editorial discusses monies appropriated to help Iranians bypass the censors' firewalls, but of course our State Department has not spent that money. We can step up broadcasts from opponents of the regime, including over satellite. We can buy time on Persian language radio in Los Angeles, which is widely listened to Iran. Most importantly, we need to continue to show ordinary Iranians what an embarrassment Ahmadinejad is. Letting him address the U.N. and Universities should not be seen as a move for ourselves, but as playing to the Iranian public. Ethnic Persians make up the majority of Iran's population. They have a long and proud history as a people and a civilization. The current regime embarrasses them by its buffoonery and the use of foreigners to suppress dissent. Ridicule against this regime and providing practical help to the opposition is our best bet to defuse the current nuclear program.

Will the opposition wish to end the nuclear program? It is not guaranteed, but I guarantee you that the military dictatorship will not. Possessing nuclear weapons is not in the best interests of the Iranian people, who would gain no benefit from them and would incur considerable risk. If true democracy came to Iran, I believe that their leaders would come to believe that as well.

Losing the White House - The Turning Point

It is not often in politics that one can pin point an exact turning point in a campaign. It's not like an unsuccessful on side kick in football. Henry Paulson has published memoirs that paint John McCain in a bad light and help explain more clearly what happened in the fall of 2008 at the dawn of the first stimulus. I will admit upfront that Paulson has several axes to grind and his memoir is in all likelihood extremely self serving. However, there can be no doubt about the outcome of those events.

To set the stage, McCain had gotten a great bounce after nominating Sarah Palin as Vice President and at one point was leading Obama in the polls. He started to sink again, and the first debate on September 27 didn't seem to help. After the convention, the markets started to collapse and Paulson and Bush seemed panicked by the financial situation. There was some debate about bailing out AIG, and McCain initially spoke out against that, but didn't really follow through. AIG had been bailed out September 16. This seemed to stop his freefall in the polls. As the financial crisis seemed to deepen, McCain suspended his campaign and returned to Washington. He also suggested that the second debate be postponed. Further, McCain called for a meeting regarding the crisis, while Boehner was saying that he might not have the votes in the House to carry the TARP package for the President, and the Democrats were not going to pass it alone.

From the WSJ excerpt:

Then he sprang the trap that the Democrats had set: "Yesterday, Senator McCain and I issued a joint statement, saying in one voice that this is no time to be playing politics. And on the way here, we were on the brink of a deal. Now, there are those who think we should start from scratch. ... If we are indeed starting over, the consequences could well be severe."

But, of course, there was no deal yet. [Rep. Spencer] Bachus [R., Ala.] had been maneuvered into giving credibility to the appearance of one. But he, [House Minority Leader John] Boehner and [Senate Minority Leader Mitch] McConnell had since issued statements disclaiming the idea that there ever had been a deal. Now Obama and the Democrats were skillfully setting up the story line that McCain's intervention had polarized the situation and that Republicans were walking away from an agreement. It was brilliant political theater that was about to degenerate into farce. Skipping protocol, the president turned to McCain to offer him a chance to respond: "I think it's fair that I give you the chance to speak next."

But McCain demurred. "I'll wait my turn," he said. It was an incredible moment, in every sense. This was supposed to be McCain's meeting—he'd called it, not the president, who had simply accommodated the Republican candidate's wishes. Now it looked as if McCain had no plan at all—his idea had been to suspend his campaign and summon us all to this meeting. It was not a strategy, it was a political gambit, and the Democrats had matched it with one of their own.

There it is. McCain had no alternative. You can disagree all you want about the details of that meeting, but the fact remains that McCain could have derailed the first stimulus and distanced himself from both Obama and Bush. Obama had called McCain's bluff. But McCain did not have the free market economics team in place to call "all in." After that it was all down hill for McCain and he never came any closer than that day to catching Obama.

In hindsight, I don't think the TARP was needed to stabilize the system. I am not an expert, but I know that financial institutes are judged by different standards for bankruptcy than are other businesses. Emergency action may have been needed, but it might have been a holiday on financial institution bankruptcy filings or some other fix that didn't commit the taxpayers to unlimited liability. I know for a fact that the TARP was a bad policy.

The voters went on to make a rational choice. Polls at the time showed the TARP plan to be unpopular, but given that both candidates ultimately supported a continuation of Bush policies, they voted for the one who appeared to have handled the crisis calmly, not the one who grandstanded like Michael Scott, but couldn't back up his play.

Poll history here, if you want to check my time line.

My initial thoughts at the time here and here.

Obama to Congress: "Go Shopping"

Play the YouTube embed to hear Obama criticize Bush for telling Americans to go shopping after 9/11. Today we are faced with a crisis of our own making. But Obama is keeping up his theme of continuing the Bush policies by encouraging some shopping of his own. Unfortunately, Obama is telling congressional Democrats to do the shopping, so we're unlikely to pick up any swag that we might enjoy, like that ipod I shelled out five bucks trying to win from my nephew's school fund-raiser raffle. This from Maureen Dowd no less:

"In one of his disturbing spells of passivity, President Obama decided not to fight Congress and live up to his own no-earmark pledge from the campaign."

From the same article, here is a partial list of democrat goodies:

• $2.1 million for the Center for Grape Genetics in New York. “quick peel me a grape,” McCain twittered.

• $1.7 million for a honey bee factory in Weslaco, Tex.

• $1.7 million for pig odor research in Iowa.

• $1 million for Mormon cricket control in Utah. “Is that the species of cricket or a game played by the brits?” McCain tweeted.

• $819,000 for catfish genetics research in Alabama.

• $650,000 for beaver management in North Carolina and Mississippi.

For a second, I misread that last one as "beer management" and was wondering why the heck they needed to manage beers for those rednecks, they seemed to do fine on their own. But then I saw it was beaver management and it all made sense.

McCain let rip on tweeter over this pokulus and Obama breaking another promise; good for him. Turns out he can use technology after all.

What Happened to This Guy? UPDATED

Back in February, after John McCain clinched the Republican nomination, I wrote approvingly of his efforts to reach out to conservatives and by extension, libertarians. I was specifically delighted by this rhetorical flourish:

"...I share with you that most basic of conservative principles: that liberty is a right conferred by our Creator, not by governments, and that the proper object of justice and the rule of law in our country is not to aggregate power to the state but to protect the liberty and property of its citizens. And like you, I understand, as Edmund Burke observed, that whenever a separation is made between liberty and justice, neither . . . is safe."

There was more:

"I believe today, as I believed twenty-five years ago, in small government; fiscal discipline; low taxes; a strong defense, judges who enforce, and not make, our laws; the social values that are the true source of our strength; and, generally, the steadfast defense of our rights to life, liberty and the pursuit of happiness, which I have defended my entire career as God-given to the born and unborn."

When the credit crunch, which became a manufactured crisis, hit, John McCain's instincts were dead on. He initially opposed the bail out of AIG. He announced the suspension of the campaign to go to Washington to deal with the crisis. I had real hope that he was going to again out-maneuver Obama and propose a better, less intrusive, less costly solution to the problem at hand. It would have simultaneously played to his strengths, small-government conservative and maverick and would have properly framed the debate. But in the end, he offered nothing different from Bush or Obama and it was game over. I am not sure if it was timidity or lack of confidence in his own judgement on economic issues. Too bad, because the nation is going to suffer for it.

UDPATE:

Apparently, Senator Jim DeMint (R-SC) read my blog and agrees that McCain's support of the bailout was at least partly responsible for his loss. From CNN:

'And of course, his embrace of the bailout right before the election was probably the nail in our coffin this last election."

Dang, I may have to retract the whole post.