The Fear Factor.

Felix Salmon had a good column the other day on fear gripping the Davos elite. "Europe," he wrote,"risks falling apart — and there’s nothing that anybody here can do about it, if it happens."

If you talk to people who circulate at gatherings like the World Economic Forum, what you find is that many if not most of these policy-makers and globo-bankers believe that Europe falling apart is an even bet.

The prospect terrifies them. As well it might. The consensus seems to be that it would make the collapse of Lehman Brothers in the autumn of 2008 look relatively tame by comparison.

It was interesting to note that President Obama, in his State of the Union address, said not one word about the crisis of the eurozone and the possible collapse of the European Union. It is, I suppose, a subject best avoided in a nationally televised address to a sullen and depressed electorate.

But the day is finally approaching when the crisis will hit its inflection point and muddling through with half-measures and kicking the can down the road apiece will no longer suffice. Greece cannot meet its obligations. Neither can Portugal. Neither can Spain, really, when you do the math.

When the day comes, President Obama will be faced with a choice: participate in a global bail-out or inherit the wind. At least $2 trillion USD in sovereign contributions and guarantees will be required to do the job. The President, having promised in a nationally televised address just two days ago, "no more bailouts," will face a choice between catastrophic policy and a combo package of hideous policy and breaking his word.

To make matters more acute, President Obama's prospects for re-election hinge on the outcome of the Euro crisis, in much the same way that Senator McCain's prospects for winning the presidency hinged on the Bush Administration's final decision on what to do about Lehman Brothers.

If Europe goes down, the president will go down with it. If he decides to rescue Europe, he stands an even chance of keeping his job, but at a not inconsiderable cost to his integrity and standing as a national political leader ("I meant no more bailouts here at home..." isn't a credible defense).

You would think that one of the many political geniuses (about whom so much has been written) advising President Obama would have said to him: let's leave the "no more bailouts line out of the SOTU. Keep our options open on Europe." That would have been sound advice.

Instead, they sent the president out there with a SOTU address that blithely ignored the most pressing and important global economic issue of our time and positioned the president in such a way as to insure maximum political damage to his credibility as a leader (should the eurozone crisis escalate, which it almost surely will).

Remember that the next time you read about the political geniuses managing the president's re-election campaign.

The Iowa Math.

Paul Tully, the late, great Democratic political operative, used to say about whatever state he happened to be organizing: "you gotta do the math." So, let's do the math for the 2012 Iowa Republican Presidential Precinct Caucuses Straw Poll.

For the sake of argument, let's say that 4% of the caucus attenders vote "undecided." Let's further stipulate that candidates Perry, Bachmann, Santorum and (I guess) Huntsman (bundled together) gather 26% of the total vote.

That leaves 70% up for grabs.

It seems safe to say that Ron Paul will garner something like 25% of the total Straw Poll vote. I imagine that the total electorate will be roughly 150,000 people, so 25% would be 37,500 votes. That seems maybe a tad bit high, but Paul is well-organized and well-financed and you have to believe that he will get every last one of his supporters to their assigned stations.

That leaves 45% (give or take) of the vote up for grabs.

If we assume that Gingrich is good for 30,000 votes and Romney is good for 30,000 votes then the remaining 7500 votes are decisive. If Romney goes below 30K, Gingrich wins. If Gingrich falls below 30K, Romney wins.

It's very few people, obviously, and not exactly representative of the national Republican Party electorate. But 10,000 votes either way will have a HUGE impact on the press narrative that is written immediately following the announcement of the Iowa Straw Poll results.

The press is dying to write the story of Newt Gingrich's second collapse. They can't stand him and they want him to lose. If he finishes third in Iowa, they will write his political obituary in acid.

If he wins Iowa, the narrative writes itself: Gingrich vs. Romney, with New Hampshire presumably boosting Romney a week later and South Carolina setting up as must-win for Gingrich.

The one thing we can be sure of is that a Paul victory in Iowa has already been "priced into" the political marketplace. No one will pay it any mind.

Iowa Expectations.

Let's go through the check list, shall we?

1. Gingrich is leading in virtually every poll of alleged caucus attenders in Iowa by a double-digit margin.

2. He polls better than he will actually perform in the straw poll balloting (that precedes the actual caucuses and that is the reported "result" on January 3rd).

3. He will under-perform because he does not have a substantial statewide organization. And he doesn't have any money to buy telemarketing services and the like to insta-build a statewide organization.

4. Ron Paul, on the other hand, has a substantial "field" organization and so is likely to somewhat "over-perform" in the actual balloting. If we say that he has 18% of the vote going in, he might actually win as much as 22% in the straw poll.

5. Mitt Romney has a better organization in Iowa than people (in the national press corps, at least) think. This is due to his prior presidential campaign in Iowa four years ago and the fact that his campaign is now spending money on organization in Iowa (while doing everything it can to lower expactations). It's possible that he could break into the low 20s, which would be just fine by Boston's calculations.

6. The key for Romney is for Paul to out-perform and for Gingrich to under-perform. This sets up a press narrative of the Gingrich souffle. The Newtster rose and then he fell. The normal laws of political gravity apply. Unstated conclusion: Gingrich is doomed.

7. This is exactly the narrative that Romney needs going into New Hampshire.

8. Rick Perry has to throw everything he's got at Iowa or he gets written out of the story. If he can finish third, he might (as former Senator Fred Harris famously said in 1976) get "winnowed in." But if he's fourth, then he's done.

Hat Tip: Arnon Mishkin

Saturday Night's Debate

I didn't watch it, but I read most of the transcript. The best analyses of what happened were written by Ron Brownstein, John Heileman and Dan Balz. Click on the names to read what they wrote.

Unifying theme: Gingrich won the debate, handily. See below for more on why he's running circles around his opponents.

Euro Endgame.

The old adage states that if you owe the bank $1 million, the bank owns you. If you owe the bank $1 billion, you own the bank. This is the Eurozone crisis in a nutshell.

The Italians and the Greeks (just to pick two) owe the "bank" tens of billions of Euros. Amongst their creditors are French and German banks. If Greece and Italy go down, so do those banks. Ergo: they own the banks. The Italians (especially) and the Greeks understand their leverage.

Angela Merkel understands it as well. She is being told by all right-thinking persons that she must commit her nation to the bailout of the deadbeats. She knows that if she does as she is told, she will (a) lose her her job, and (b) leave Germany laden with even more bad debt than it already holds.

Unsurprisingly, she is requiring that before she does what all right-thinking persons think she must, she be given control over all deadbeat budgets. She is doing this in part to placate domestic constituencies. She is doing this in part because it's the very German (uber alles) thing to do. But she is doing this mostly to buy herself time.

The first rule of effective executive management is: procrastinate. If a business or a government or a global economy depends in large measure on what the most senior executive decides, then there is every reason for that senior executive to take his or her time before making final decisions. Merkel has resisted every effort to stampede her toward a right-thinking decision.

She has, in fact, been procrastinating for months, in large measure to increase the "circle of concern" to include the two wealthiest nations on earth, the United States and China. Her leverage is that if the eurozone collapses in a heap, the global financial system will collapse with it. And if that happens, the recession of recent years will, by comparison, feel like boom times.

As a result, Merkel owns the bank, which is to say that she is in a very strong position to insist that the United States and China step up to help shoulder the burden of bailing out the deadbeats. She has already had considerable success in getting the US to dance to this tune; the coordinated central bank "dollar swaps" led by the US Federal Reserve were executed to "assuage" Merkel and "save" ( at least for the time being) the eurozone.

She is now putting the screws to US Treasury Secretary Timothy Geithner, letting him know in so many words that the IMF (led by the US) has to step in and take a "leadership role" (as they say in G7 speak). Mr. Geithner is a known believer in bailouts; he was one of many insiders who thought the decision to let Lehman Brothers fail was a "disaster."

Merkel knows this, of course. She is sketching out for his consideration a much larger "disaster," a game-ender of cascading financial collapse. The longer he has to think about it, the more urgently he will argue that the US cannot sit idly by.

Former Treasury Secretary and former Obama national economic policy advisor Larry Summers, thinking several steps ahead, concedes Merkel's point in today's Financial Times. One suspects he was sending a message to President Obama which essentially read: "you're going to have to do this anyway, so you might as well get out in front of it and get control of the term sheet."

The fact is that the eurozone sovereign debt issue (which is a solvency issue, not a liquidity issue) won't resolve itself (because it can't possibly do so) unless the IMF steps up and provides an avalanche of cash. The situation is so bad, in fact, that it might also require the Chinese to step up as well.

The Chinese won't step up directly, but they might find it in their interest to buy yet more US debt if that debt is specifically used to alleviate eurozone financial stress. That would enable the Chinese to elide the question of bailing out deadbeats, increase their leverage with both the United States and Europe and have the US on the hook (instead of the deadbeats) for paying back the money. A smart deal for them, it would seem.

Ms. Merkel doesn't care how the money arrives, of course, she just needs the money to arrive. We are now entering the endgame -- decision time -- to prevent the markets from seizure. So the next two days are likely to engender a lot of "doomsday" press coverage and commentary, much of it spoon-fed by unnamed German ministerial types. It's manifestly in her interest to take this all the way to the edge.

At the breaking point, she truly owns the bank. She can say, with complete credibility, that the eurozone is going down unless the IMF stands up. She can say, with complete credibility, that the collapse of the eurozone will take the entire world down with it.

And, at that very point, the IMF (which is to say the United States of America) will have to fold its hand and do what she asks. And then and there, Germany, without firing a shot, owns Europe.

The Question of the Moment.

Actually, it's two questions. Question #1 is: Can Newt Gingrich win the GOP presidential nomination? Question #2 is: what does he need to do to close the sale?

The answer to the first question is yes, he can win.

These are terrifying times. The global financial system hangs in the balance of ever-expanding counter-party risk. An avalanche of debt is cascading down upon us, everywhere. The Middle East is off the rails. The Israelis expect war there in the next 45 days. Jihadists seek to detonate a nuclear device on Broadway. Iran may soon supply them with the means. The European Union could, next week, disintegrate before our eyes. Mexico may soon be a narco-state. That's just a few items on a very long agenda of distress.

Desperate times demand something different. In the 2012 GOP presidential campaign, that demand has created Gingrich, who unlike his rivals, recognizes the peril of our times as we see it.

It is this recognition that propels him forward, makes him credible, confounds his opponents and critics alike. They wonder: How can he stay aloft? Surely this undisciplined, vainglorious, narcissistic opportunist must come crashing back to earth. Everything we know tells us so.

Gingrich has been running circles around his opponents and critics for months now. He has won every debate. He has been the only consistently positive candidate in those debates. He has talked fluently about the enormity of the American challenge. He has dismissed the ridiculous press games of “gotcha” as unbecoming and beneath contempt. He has been resolute in his opposition to the appeasement of radical Islam, steadfast in his support for modern science, and wide open to any idea that might lead to the unshackling of America’s future from the broken and soon-to-be bankrupt social model that now serves as an emblem of national dysfunction.

The wonder is that he isn’t further ahead.

The others argue that past is prelude: Romney says he will turn it around, as he has other ventures. Perry will Texify and re-Christianize America, thus making it prosper. Huntsman insists that the Utah prosperity model works best.

Gingrich argues that it’s much, much bigger than that; it isn’t a “turn-around” that’s needed, it’s reinvention. The economy needs powerful new locomotives to pull the freight, foreign policy needs to be “completely rethought,” the Blue Social Model is doomed and must be replaced by something that invigorates and expands all the human potential that is wasting away in bad schools, horrible social “programs,” dead-end jobs and doomed industries. Government and government policy, Gingrich argues, needs to be completely re-imagined. Like GE, he positions himself as “imagination at work.”

Can he close the sale? He need only win Iowa and New Hampshire and he’s the nominee. If Romney loses New Hampshire, the Romney campaign collapses in a heap.

How does Gingrich close the sale? First, he must acknowledge what he and the voters know: we wouldn’t vote for him under ordinary circumstances. It’s the moment that makes him and it’s the moment that matters.

Second, he must remain positive, both about the possibilities of the future and about his rivals. There is really only one positive argument that anyone can make about the global economy. It is that a very big locomotive is coming that will pull the economy forward and gather pace. That locomotive is science and technology; the genomics revolution turbo-charged by almost infinite computing power.

Gingrich, second-rate futurist that he is, is well-positioned to popularize this argument and sell it through. What else, after all, is one to believe? That financial services can pull the train? That GM can pull the train? That Facebook can pull the train? No one believes that.

Third, he must address concerns about his ability to govern by embracing his opponents. These people are my cabinet, or part of it, he might say. Vote for me and you get them in the bargain. I will put them to work.

Fourth, he needs to remind people that he is the only 2012 GOP presidential candidate who has ever moved the needle rightward at the national level. Rick Perry hasn't. Mitt Romney hasn't. Ron Paul hasn't. Rick Santorum hasn't. Only Gingrich has moved the nation rightward. That matters.

Finally, he must answer the tactical question of the election generously. For Republican caucus attenders and primary voters that question is: which candidate has the best chance of ending President Obama’s political career?

Gingrich can answer this question by saying: “on paper, it’s Romney. No question. He’s got all the attributes that you look for in a winner.” But, he might continue, the fact is that victory or defeat will be arrived at the same way it has been arrived at in 2011: through debate. You can’t defeat President Obama in a general election, if you don’t defeat him first in open debate. “I’m ready,” Gingrich might say, “to debate him every every Sunday night, from now until election day. Just the two of us, no moderators, two hours on a different topic over the course of 6 months. I think we win that debate.”

The truth is that only thing that stands between Newt Gingrich and the 2012 GOP presidential nomination right now is Newt Gingrich.

Romney and Iowa.

John Heilemann writes the best "insider" column about the 2012 presidential campaign. In this week's issue of New York magazine, he reviews the Romney campaign's Iowa temptation.

The basics are this: Romney is currently running at about 25% in Iowa. He can probably get to 30% or even 33% -- if he decides to make a major investment in the state -- which might just be enough to win Iowa outright. (Iowa's caucuses are held after a straw poll is conducted. The straw poll results are what get reported on television the night of the caucuses.)

On the other hand, if Romney does make a major Iowa push and comes in second in the straw poll, he risks going into New Hampshire a week later on a 24/7 wave of television bad news. Because once Romney decides he's going to try to win Iowa, then that's the story. Political reporters have their angle. From that point forward, as one source told Heilemann, it's "all about Mitt."

So what does he do? The most likely answer: Romney sticks to his knitting, doesn't invest in Iowa and takes his 20%-25%.

Romney is running well in New Hampshire; his campaign has built a firewall there. His entire campaign is based on winning New Hampshire convincingly and then defeating not-Romney in a longish war of attrition thereafter. Anything that might jeopardize the New Hampshire firewall is by definition a bad idea.

God must be a Mormon this year, because events are making the Iowa go/no-go decision a lot easier. The Herman Cain "scandal," the addled Perry New Hampshire speech and the mini-rise of Newt Gingrich are providing more than enough copy to keep political reporters occupied. In three weeks, it's Thanksgiving. Then it's the Christmas season. Then it's January 3, 2012, which is when the Iowa caucuses are being held. The New Hampshire primary is January 10th.

The more the news focuses on the "not-Romneys," the easier it is for Romney to slide by Iowa and have his candidacy put to the test in New Hampshire. Romney's "luck" is holding.

Athens on the Narragansett

If you read the US press commentary on Greece and the EU, there's a vaguely superior tone, based on the presumption that it can't and won't happen here.

It can happen here and it is happening here. It's happening in Rhode Island right now.

It Keeps Getting Worse.

A year or so ago, Joshua Rauh of the Kellogg School of Management ran the numbers on unfunded state and local government pension liabilities. The final number was $3.1 trillion. $3.1 trillion short, if one need edit.

Mr. Rauh has updated his calculations. The new unfunded pension liability number is $4.4 trillion.

No Longer

A number of readers have written to ask why I'm no longer writing anything at Business Insider. Answer: I'm no longer working at Business Insider.

I'm working on two projects now. I'll let you know (here at Ellisblog!) if I end up writing somewhere else. In the meantime, I'll be posting at Ellisblog! when time allows.

Thanks for your emails.