The Great Debate

All of Washington lives in Newt’s swamp

By Jack Abramoff The opinions expressed are his own.

Last week, Republican presidential candidate Newt Gingrich romanced the Tea Party activists, who demand that the corrupt swamp of Washington be drained. His intrepid spokesman, R.C. Hammond, had a more arduous task: convincing the world that the former Speaker was not swimming in that same swamp. As facts emerged revealing that Gingrich took almost $2 million in “consulting” fees from the beleaguered Freddie Mac, Hammond delivered proof that the Gingrich operation was master of the inside-the-Washington-beltway game. Spinning Gingrich’s perfidious (yet legal) trip through the infamous revolving door to post public service riches, Hammond posited that taking millions in consulting fees was actually a positive: since Newt now understood “why the system is broken,” he now knew “how it could be fixed.” In other words, now that he had participated in legal corruption, he was more qualified to be our President.

By that metric, I should be announcing my cabinet choices any day now. After all, in 2004, my lobbying activities became the basis for the biggest corruption scandal to hit Washington since Watergate. Gingrich’s candidacy may or may not survive these revelations, but there is a bigger issue to consider than whether this late-night-talk show hosts’ dream politician makes it to the Oval Office.

America is sick of its political leaders raking in millions of dollars in fees from special interests. At a time when the average American can barely afford enough gasoline to get to work, our politicians are converting their elected positions into major paydays. Newt is not the first and won’t be the last to do this. He just has the bad luck to be surging in the polls. But the problem with this latest round of “shoot the leading Republican candidate” is that it deflects attention from the need to change the system. Every time one of these “gotcha” attacks becomes personal, it loses its capacity to engender real reform.

There is something sordid about converting public service to private boodle. Cashing in on government employment to help special interests increase their take at the public trough is even worse. Some politicians aim to become lobbyists the minute they arrive in the Congress. Others wait until defeat or retirement ends their legislative career.

Many – like Gingrich – try to disguise their role in the lobbying monolith by declaring themselves consultants. They cry that they’re not “lobbyists”, they are merely providers of strategic advice. I have news for them: that’s what lobbyists do! Sure, these petitioners only become lobbyists officially once they meet with Congressional members and staff, but the actual face-to-face meetings are usually only one component of lobbying campaigns. I was considered one of the nation’s top lobbyists, but I rarely met with Congressmen and staff about legislation. My forte was creating strategies and game plans, which my minions would implement. How is this much different from what Newt and almost every Democrat and Republican former Congressman and Senator claim to do in lieu of actual lobbying?

from Bethany McLean:

The euro zone’s self-inflicted killer

By Bethany McLean The opinions expressed are her own.

There were a lot of things that were supposed to save Europe from potential financial Armageddon. Chief among them is the EFSF, or European Financial Stability Facility.

In the spring of 2010, European finance ministers announced the facility’s formation with great fanfare. In its inaugural report, Standard & Poor's described the EFSF as the “cornerstone of the EU’s strategy to restore financial stability to the euro zone  sovereign debt market.”  The facility itself said in an October 2011 date presentation that its mission is to “safeguard financial stability in Europe.”

That of course hasn’t happened. And the evidence suggests that the EFSF may have only exacerbated the problems.

In theory, the facility is supposed to provide a way for a country that the market perceives as weak to still borrow money on good terms. The initial idea was that instead of the financially troubled country itself trying to sell its debt to live another day, the EFSF would be the one to raise the money and lend it to the country in question. The logic was simple: country X might be shaky, but the EFSF deserved a triple-A rating.

For all of its would-be financial firepower, the EFSF isn’t much to see—it’s just an office in Luxembourg with a German-born economist CEO named Klaus Regling, who oversees a staff of about 20. Its power—and that rating—is derived from the assumption that any debt it issues is guaranteed by the members of the euro zone. Initially, each member pledged unconditionally to repay up to 120% of its share of any debt the EFSF issued. (A country’s share is determined by the amount of capital it has in the European Central Bank.)

On paper, it all sounded great. The reality is that the EFSF wasn’t meant to be an active institution; it was supposed to be a fire extinguisher behind glass: never to be used. “The EFSF has been designed to bolster investor confidence and thus contain financing costs for euro zone member states,” wrote Standard & Poors in its initial report granting the triple A rating. “ If its establishment achieves this aim, we would not expect EFSF to issue a bond itself.”  Moody’s, for its part, wrote that the EFSF “reflects the political commitment of the euro zone member states to the preservation of the euro and the European Monetary Union.” That show of commitment alone was supposed to be enough to reassure the market.

from David Cay Johnston:

Closing Wall Street’s casino

The author is a Reuters columnist. The opinions expressed are his own.

A superb example of a sound rule in law and economics that needs reviving, because it can halt the rampant speculation in derivatives, is the ancient legal principle that gambling debts are not enforceable through court action.

Not so long ago -- before casinos, currency and commodities speculation, and credit default swaps became big business -- U.S. courts would not enforce gambling debts.

Restoring this principle offers a simple way to shrink the rampant speculation in derivatives that was central to the 2008 meltdown on Wall Street.

Professor Lynn Stout, a deeply principled Republican capitalist who teaches corporate law at the University of California, Los Angeles, raised this issue at a conference where we both spoke about the 2008 Wall Street meltdown.

"Derivatives are gambling," she said, referring to credit default swaps, at the University of Missouri-Kansas City law school conference on the financial crisis. "They are a zero-sum game in which one side loses the bet and one side wins," Stout said.

Actually they are worse than that, since the hefty fees Wall Street pockets for arranging the bets result in a less-than-zero-sum game.

from Ian Bremmer:

Why the U.S. is not—and never will be—Japan

By Ian Bremmer The opinions expressed are his own.

Though I’ve already written about the recent Munk debate in Toronto elsewhere, it’s worth taking some space to expand on my position, and why the U.S. truly is not going to experience a Japan-style lost decade of economic stagnation.

(The debate was on this resolution: Be it resolved North America faces a Japan-style era of economic stagnation. I joined Larry Summers in arguing the Con side against Paul Krugman and David Rosenberg.)

Let’s start with the political realities: Japan experienced 50 years of single-party rule. In the last 22 years, the country has had 17 prime ministers. Recently, the Democratic party there defeated the long-time incumbents, the Liberal Democrats, only to find that they had no idea how to govern the nation. They had no idea how the ministries worked, no relationships with industrialists or financial institutions, no grasp on the levers of power in society, and no strong policy apparatus. If the U.S.’s political situation looks bleak, consider that alternative.

In fact, the political situation in the U.S. may not be pretty or easy to watch, but it’s functioning. The President and Republicans continue to hammer out centrist deals on issues like tax hikes and the debt ceiling, albeit at the last possible minute after much gnashing of teeth. Ignore naysayers who say that budget supercommittee doom is coming; a deal will likely get done. And after the presidential election, things will get even better. That’s because Republicans are almost certain to retain the House and take the Senate. Whether Obama or the likely GOP candidate Romney wins the election, their dealings with a unified legislative branch will become far easier than the current divided government.

Our stable government is why foreign investors continue to flood into the dollar. Paul Krugman may have argued at the Munk debate that a strong dollar is what’s harming the U.S. economy, by making the country less internationally competitive, but I believe the confidence that foreign and sovereign investors continue to show in US debt outweighs that negative. Ask yourself what the better scenario is: a strong dollar that puts us at a slight relative disadvantage, or a pullout of investment dollars in the U.S. altogether? Investors continue to make bets in dollars, and that’s good for us. Yes, gold has risen dramatically in recent years, but "gold" is not a country. When investors need security and stability in currency, only the U.S. can still claim to provide it.

Krugman is also frustrated that the U.S. can’t move on a dime to enact policies needed to slam the country out of its current GDP growth lethargy. Looking around the world, there are only a couple countries of size that I can point to with that ability. One is Russia. Vladimir Putin has positively gutted that Moscow's fledgling institutions to let his will be done. Their growth rate has been phenomenal, but at what cost? No one can say what will happen to Russia when Putin exits the stage, and that’s not a situation the U.S. will ever be in. Our institutions endure.

from David Rohde:

China’s newest export: Internet censorship

Yet the days of Americans piously condemning China’s “Great Firewall” and hoping for a technological silver bullet that would pierce it are over. China’s system is a potent, vast and sophisticated network of computer, legal and human censorship. The Chinese model is spreading to other authoritarian regimes. And governments worldwide, including the United States, are aggressively trying to legislate the Internet.

“There is a growing trend toward Internet censorship in a range of countries,” said Rebecca MacKinnon, a prominent online democracy advocate and author of the forthcoming book “Consent of the Networked: The Worldwide Struggle for Internet Freedom.” “The same technology that helps secure your network from attack, that actually enables you to censor your network also.”

The problem is not software or hardware developed in a secret Chinese government laboratory. Recent news reports have uncovered American and European companies selling surveillance technologies to Libya, Syria, Bahrain, Thailand and other governments that block the web and brutally suppress dissent.

While the Egyptian government’s attempt to shut down the Internet during the Tahrir Square protests drew headlines, western governments are increasingly using the web for law enforcement surveillance. In a biannual transparency report released earlier this month, Google reported a 70 percent increase in requests for content removal or user information from the American government or police in the first half of 2011. Brazil filed the most requests, followed by Germany, the U.S. and South Korea, according to The Guardian.

Western companies are also under fire. Research in Motion, the Canadian firm that produces Blackberry smartphones, acceded to demands from The United Arab Emirates, Saudi Arabia and India for access to its users’ email messages. And the Electronic Frontier Foundation, an Internet free speech group, has accused Cisco of selling surveillance equipment to the Chinese government that is used for human rights abuses.

A core problem is the pursuit of the almighty online dollar. An extraordinary story in The Guardian introduced readers to Jerry Lucas, the president of TeleStrategies, a Virginia company that organizes conferences around the world where firms sell surveillance and other technologies to governments. In an interview, Lucas said companies have no ethical obligation to determine if their products are being sold to regimes that will use them to suppress dissent.

“That's just not my job to determine who's a bad country and who's a good country,” he told the reporter. “We’re a for-profit company. Our business is bringing governments together who want to buy this technology."

from Jack Shafer:

Morning prayer: CBS’s latest last-ditch attempt to beat GMA and Today

You could fill a graveyard with the bodies that CBS has posed in front of its morning show cameras over the decades in its ratings pursuit of NBC's Today show and ABC's Good Morning America. The latest dead-anchors walking, appointed yesterday by CBS News Chairman Jeff Fager, are Charlie Rose and Gayle King.

Wikipedia stacks the names of former CBS morning show hosts like cordwood. In the 1950s, Walter Cronkite, Jack Paar, John Henry Faulk, Dick Van Dyke, and Will Rogers Jr. helped chair the show. When Cronkite was anchor, a segment was devoted to a lion puppet named Charlemagne discussing the news with him, as this picture proves. Cronkite remembers his cotton colleague warmly, writing in his biography, A Reporter's Life, "A puppet can render opinions on people and things that a human commentator would not feel free to utter. It was one of the highlights of our show, and I was, and am, proud of it."

In the 1960s, hosts Mike Wallace and Harry Reasoner were fed to the morning band-saw, and in the 1970s, John Hart, Hughes Rudd, Bernard Kalb, Bruce Morton, Faith Daniels, Lesley Stahl, Richard Threlkeld, and Washington Post Style section sensation Sally Quinn were similarly sacrificed. (Nora Ephron interviewed at the same time as Quinn for a co-anchor slot and luckily lost.)

CBS cleared its bench in the 1980s and 1990s to feed the morning shift: Bob Schieffer, Charles Kuralt, Diane Sawyer, Bill Kurtis, Jane Wallace, Meredith Vieira, Phyllis George, Maria Shriver, Forrest Sawyer, Mariette Hartley, Rolland Smith, Bob Saget, Harry Smith, and Kathleen Sullivan.

"We've been changing people like shirts," the VP of a CBS affiliate told the Los Angeles Times in 1986.

In the 1990s and in the current century, Paula Zahn, Russ Mitchell, Bryant Gumbel (for whom they built a new $26 million studio), Hannah Storm, Maggie Rodriguez, and a dozen lesser lights took the morning beating for CBS.

Over this time, Today has remained the dominant morning show, with Good Morning America the strong second and sometimes first program, while the CBS's The Early Show has blundered its way into second place in only a handful of ratings periods. In one week last month, Today got about 5.4 million viewers, Good Morning America got 4.8 million, and The Early Show got 2.5 million viewers.

Why Bloomberg evicted Occupy Wall Street

By Joyce Purnick

The views expressed are her own.

The Occupy Wall Street movement has been a headache for mayors around the country. For Michael Bloomberg of New York, the encampment-like protest in a privately-owned park in lower Manhattan was more like a chronic migraine.

It would not go away, and despite some false starts, Bloomberg could not, or would not, stop it for weeks on end. In the interim, his reputation suffered. Even the New York Post, otherwise devoted to Bloomberg, admonished him for his attack of indecision.

What was it about the increasingly annoying and messy protest that got to the normally impatient mayor, stopping him from clearing out Zuccotti Park until this week—two months after the demonstrators took it over? He didn’t want a street riot on his hands, for one. Nor did Bloomberg, who prides himself on protecting free-speech rights, want it to look as though he was cracking down on protesters in the communications capital of the country (especially since he did not agree with them). But the strongest factor behind the delay may well have been what wasn’t happening: Bloomberg was trying to negotiate an agreement, but the OWS protesters were having none of it. Bloomberg can be flexible—as brusque as he is—but you have to play by his rules. The occupants of Zuccotti Park weren’t even playing the same game.

Bloomberg says he finally authorized a police raid because of deteriorating conditions in the park, 33,000 square feet in the city’s busy financial district, packed with tarps and tents and hundreds of people living there day and night as if it was a campsite. The place was becoming a public health hazard, the mayor contended, attracting vagrants and crime. The park’s owner, Brookfield Properties, documented the problems in a letter to Bloomberg this week, triggering, he said, his decision to put an end to the occupation.

Cutting out the banker middleman

By Don Tapscott The views expressed are his own.

In the wake of the 2008 global financial crisis, we need to rethink and redesign many organizations and institutions that have previously served us well but are now beginning to falter. Fortunately, the Internet lets us do this. It slashes collaboration costs and makes possible completely new models of combining people, skills, knowledge and capital for economic and social development. Around the world, individuals and groups are working together, developing new businesses based on peer-to-peer (P2P) collaborative networks.

The financial services industry has always been the antithesis of P2P collaboration. Hierarchy is deeply entrenched in this industry, for good reasons such as security, auditing, and regulatory compliance. But we are now seeing the rise of three types of P2P activities in this sector.

First, financial services companies are moving beyond electronic mail, document management and other primitive technologies to new collaborative software suites like Jive and Moxie Software Spaces, which encourage P2P collaboration within corporate boundaries.

Second, financial services companies themselves are beginning to act as peers, and are collaborating rather than treating one another as superiors or subordinates in the supply chain. This is good. The industry needs a new modus operandi, where all of the key players (including banks, insurers, investment brokers, rating agencies and regulators) embrace principles of transparency, integrity, collaboration and sharing of information. For example, banks should open up financial modeling and make pertinent assumptions and data transparent to all interested parties. Among other things, such P2P collaborations could enable banks to value the trillions of dollars in toxic assets that are weighing down their balance sheets.

But the third and most interesting of P2P innovations in financial services is the growing number of lenders and borrowers connecting directly via the Internet and avoiding the cost and frustration of dealing with banks altogether. The goal is to benefit both the lender and the borrower. For example, if one person is now receiving one percent interest on a savings account and another is paying 29% on a credit card, a mutually-agreed 10% rate is a match made in heaven, giving the lender a tenfold increase in return while affording the borrower a chance to begin paying down the principal.  Typical P2P borrowers want to consolidate debts and pay off credit cards.

Initial attempts at Internet-enabled loans banks were a disaster. From 2005 (when P2P lending launched in the U.S.) till 2009, P2P startups experienced a boom and then went bust, culminating with regulators shutting them all down. Many investors were burned. In the case of one company, Prosper.com, angry investors launched a class-action lawsuit.

from Jack Shafer:

Stop the Chelsea moaning; she’s “somebody”

Allow me to be among the first working journalists to welcome Chelsea Clinton to the Fourth Estate. Clinton, as you probably read in this morning's New York Times, has taken a job with NBC News as a full-time special correspondent and will cover stories for the network's do-gooder "Making a Difference" series.

Please read no snark into my Clinton welcome.

Yes, I know that many of you will deplore the fact that somebody like Clinton with no real journalistic experience but plenty of connections has won a high-ranking reporting position at a broadcast network. Your thought balloons about cronyism, already passing over my office, read, If Chelsea wanted to be a journalist she should have gone to journalism school or gotten an internship and parlayed that into a job covering crime for a paper in the boonies, and then over the years worked her way up.

But Clinton, who will turn 32 in February, isn't the first high-profile political spawn to use the family name as a media-career springboard. The Times article notes that President George W. Bush daughter Jenna Bush Hager is an NBC Today correspondent, and presidential candidate Sen. John McCain's daughter Meghan McCain contributes to MSNBC. Caroline Kennedy has published nearly a dozen books about patriotism, the Bill of Rights, courage, and poetry and Susan Ford, daughter of President Gerald Ford, has published two volumes of mystery fiction. Ron Reagan, Michael Reagan, and Maureen Reagan all leveraged their father's prominence into jobs behind the microphone. Maria Shriver, whose uncle was President John Kennedy and whose father, Sargent Shriver, ran for vice president, capitalized on her family connections to get a job as a reporter at a Philadelphia TV station in 1977 straight out of college at the age of 22. She moved to CBS News six years later. You know the rest.

The promotion of the under-talented sons and daughters of the politically connected to fancy media jobs seems to violate our great, national, meritocratic creed, as does the assignment of politicians such as Joe Scarborough, Susan Molinari, Jesse Jackson, Al Sharpton, Eliot Spitzer, and George Stephanopoulos to their respective media slots, and the addition of Republican hacks Palin, Huckabee, Kasich, Santorum, and Gingrich to the Fox News Channel payroll.

But the reflexive disdain for cronyism ignores the essence of TV news: Like the movies, TV news thrives on a star culture that is so devolved that almost anybody with name-recognition, positive or negative, can be considered a star, as hooker-happy Eliot Spitzer proved. And there's nothing a network likes to do more than to steal a star from another network.

Only as a last resort will TV producers put nobodies on screen. They want somebodies, and even a minor member of Congress can qualify if they're not too ugly, not too old, and not too tongue-tied. The political somebodies listed above may look like nobodies to you, but in the world of TV news they're rainmakers whose status as semi-celebrities makes it easier to book other semi-celebrities on their political talk shows.

Should economists be “imagineers” of our future?

By Mark Thoma The opinions expressed are his own.

This essay is a response to Roger Martin’s “The limits of the scientific method in economics and the world” (part one and part two), recently published on Retuers.com.

Roger Martin is unhappy with the state of economics. One charge is that:

[an economist] predicts a future that is based on the past.  And when it is anything but, he returns to the same tools to do it again, believing that in doing so he is being meritoriously scientific. … Extrapolating the future to be a straight-line projection of the past is neither accurate, nor is it helpful in creating better understanding and newer ideas.

As I will discuss further below, I agree that macroeconomists need to fix their models. But I don’t think that predicting the future based upon “a straight-line projection of the past” is the problem. Let me explain why, first in a relatively narrow sense, and then more broadly.

This year’s Nobel prize award to Thomas Sargent and the previous award to Robert Lucas were partly in recognition of their development of the tools and techniques that economists need to go beyond simply trying to extrapolate the future from the past, a procedure that can lead forecasters astray.

Prior to Robert Lucas, economists analyzing policy interventions by monetary or fiscal authorities did exactly as charged above, they extrapolated based upon the past and an assumed unchanging future. But the (often false) assumption that the future would be like the past is at the heart of what is known as the Lucas critique.