Saturday, January 08, 2011

Giffords Shooting.

Here's the best report I have read so far. I don't think Startfor's assessment of her immigration stance is entirely correct, but the detail about her support of health care reform is accurate. Whether her political positions had anything to do with her shooting is unknown.

Congresswoman Giffords' husband is a highly-decorated naval aviator who went on to become an astronaut. He has flown three missions in space, serving as the pilot on one.

Among those also shot: Judge John Roll.

Friday, January 07, 2011

Does This Sound Familiar?

The US Commodity Futures Trading Commission recently reduced the cap on retail leverage from 100:1 to 50:1 for major currencies (and 20:1 for other currencies). Japan’s Financial Services Authority also reduced leverage to 50:1, with plans to reach 25:1 by 2011. Greater regulation has led to consolidation in this industry, with the number of retail aggregators in the United States declining from 47 in 2007 to 11 today and in Japan from over 500 in 2005 to around 70 today. In the United Kingdom and continental Europe, however, there are currently no limits on leverage and limited regulation, creating the potential for regulatory arbitrage.

If you want to make your head hurt, read the whole report. As my friend Juan Enriquez said in an email, with that kind of leverage turbo-charging the market, one deadbeat counter-party can bring down the whole casino. Just like that.

It's as if we have learned nothing from what just transpired.

Here's Hoping.

There's been a lot of commentary about an interview that The New York Times conducted with Indiana Governor Mitch Daniels. It's worth reading in full. I was particularly struck by what Governor Daniels said at the end.


Mr. Daniels: I start from a premise that not everyone would agree with, I guess. I believe the American experiment is in mortal peril because of the debt we have coming….

This is more frightening than even the Soviet nuclear threat, which would have been more horrible. If we go broke, we’ll still be alive, but the probability was so small. In this case, the damage, the catastrophe, will be very, very severe, and the probability – I mean, and it’s inexorable

Q: Absent action.

Mr. Daniels: Absent action, yeah. The probability, I think, sadly, is very high.

I was struck by this because I think it's true and because I think a huge cross-section of the electorate also thinks it's true or that it might be true. And that this "mortal peril," as Daniels calls it, is the central political issue of our time. And that the probability that we, as a nation, will not take action is, indeed and sadly, very high.

I wrote about this last year in a somewhat ponderous piece about the disconnect between President Obama's political agenda and the reality of our situation. Someone wrote me an email yesterday asking if I was "relieved" that Bill Daley was taking over as White House Chief of Staff. I like and admire Bill Daley. He's arguably the best fixer in the Democratic Party and I have a keen appreciation of the role that fixers play in making government work. They are essential.

But I'll be a lot more relieved when President Obama starts saying that he too thinks "the American experiment is in mortal peril because of the debt we have coming." And then starts to take action to deal with the overwhelming obligations that loom, just around the corner. The truth is that only a Democrat can "fix" Social Security. Only a Democrat can restructure Medicare back into a much leaner "basic" health care coverage plan. Republicans don't have the political standing (on these two issues) to do so.

Social Security and Medicare/Medicaid are the mother of all unfunded liabilities and if we don't do something about them in the next seven years, they will literally eat us alive in the 2020s. The Bowles-Simpson Commission on Deficit Reduction did an admirable job of making clear what happens if we don't deal with these obligations. In three words, we'll go broke. And if we go broke, then the American experiment will come asunder and not gently.

These next 1-3 years will determine which way the tide turns. One hopes that President Obama understands this and addresses it forthrightly in his State of the Union Address. If he does, he will, in all future debates, have the truth on his side, since it is inarguable that we cannot continue down the path we are on.

From truth comes authority. Authority is what the Obama Administration has lacked since its inception. The President and his advisors completely misread their political situation when they first moved into the White House. They thought it enabled an ambitious liberal agenda; no crisis should ever go to waste, etc. The truth is that this moment in our history requires shared sacrifice nationally. Everybody has to give up something. Otherwise, it really is the tragedy of the commons.

The Simpson-Bowles plan is a reasonably good first draft for getting after what ails us. Hopefully, the president will make it, or something like it, his own. If he doesn't, then all the Bill Daleys in the world won't be able to fix what will be broken.

Krugman on Texas.

Paul Krugman's columns, regardless of what you think of his politics, are always worth reading because he's a very smart man. His column today on the fiscal mess in Texas is worth reading, as his "progressive" critique of the Obama Administration (co-authored with his wife Robin Wells), which appeared in The New York Review of Books.

Illinois Munis.

The "x" factor in the state and municipal bond market is this: what will the Federal government do? Will the Federal government run the risk of allowing, say, the state of Illinois to default on its debt obligations? Or will it decide that the risk of contagion in the bond markets outweighs the moral hazard of bailing out the deadbeats in Springfield and Chicago?

The President of the United States is from Illinois, as is his new chief of staff, his former chief of staff, his wife, his chief consigliere, etc, etc. It's an important electoral college anchor in his re-election campaign. As is New Jersey. As is California. As is Michigan, as is New York. Will he risk contagion and allow any of these states to default? Which they almost surely must do without Federal assistance.

Muni bond guys aren't the savviest investors in the world, almost by definition. But they are suddenly among the most important players in American fiscal governance. The Wall Street Journal has a good report on how the muni boys size up the situation in Illinois.

The Pentagon Meets Reality.

This department simply cannot risk continuing down the same path where our investment priorities, bureaucratic habits and lax attitudes toward costs are increasingly divorced from the real threats of today, the growing perils of tomorrow and the nation’s grim financial outlook.” -- Defense Secretary Robert Gates, at an afternoon news conference.

You can read summaries of Mr. Gates's plan to begin to rein in Pentagon spending by clicking here and here. It's a start.

Thursday, January 06, 2011

Tax Payers vs. "Tax Eaters."

This week's Economist has a good package on "the battle ahead." Simply put, generous pension and health benefits for public employees must be restructured or states (in the US and across the "developed" world) will go bust.

For those prone to reading grim detail, you can access a Brookings report that addresses this issue in four states of the American West (California, Colorado, Nevada and Arizona).


A moment of reckoning has arrived, after all. During much of the 1990s and again in the mid-2000s, California and the Mountain states had enjoyed years of strong economic growth that had produced what appeared to be robust budgets. This created a fiscal mirage that allowed several of these states to expand public service provision as well as implement permanent tax cuts—with seemingly little thought as to how they might be sustained over the longer term. But now the illusion has been shattered, as the length and depth of the economic downturn has at once created serious temporary or cyclical budget shortfalls in these states (associated with the business cycle) while also exposing the existence of long-term structural deficits that have resulted in large part from starry-eyed decision-making during better times. Such policy choices have now interacted with the base performance of the states’ fiscal systems (i.e. the structure of taxes and expenditures) and broader economic and demographic trends to produce in some cases massive chronic imbalances that have largely been overlooked in discussions of states’ current fiscal health....

Already these states have struggled to close (or nearly close) total budgetary gaps for Fiscal
Year (FY) 2011 that were nothing less than monumental.3 These gaps included: in Arizona, $3.1 billion or 36.6 percent of the final budget; in California, $17.9 billion or 21.6 percent of the final budget; in Colorado, $1.5 billion or 21.6 percent of the final budget; and in Nevada, $1.8 billion or an astonishing 54.0 percent of the final budget. In closing these holes, California has garnered the most attention for its use of a mix of deep spending cuts and a host of one-time maneuvers that balance budgets today but leave unattended the reality of future budget shortfalls. And yet other Western states have themselves deeply slashed aid to public education, state university systems, and social welfare programs while employing their own short-term devices and gimmicks. These include temporary tax increases like the voter-approved sales tax rate hike in Arizona, the sweeping use of idle fund balances across most states, and highly publicized asset sales in Arizona and California.

What is more, now that many of those quick fixes have been exhausted, a starker reality has set in in which deeper-going structural deficits will place continued extreme pressure on annual budgets even as economic health returns—albeit slowly—to the states. The forecast is bleak: With budgets already slashed but overhangs of hundreds of millions of dollars looming, state governments in the West are now going to be compelled to implement huge new cuts to budgets for education, innovation, economic development, health care, and services for the vulnerable, the old, and the young, all the while foisting greater burdens on local governments whose own budgets are in dire straits.

Census Report on State Finances.

It's now available on-line. In fiscal 2009, tax revenues (of every description) fell by 30%, while demand for social services (unemployment insurance, etc) rose. You can read a summary of the report's findings by clicking here.

The question that now looms for many states, from Arizona and Nevada to New Jersey, Illinois and New York is this: can the death spiral be broken? Or is the only remedy some kind of bankruptcy procedure?

Wednesday, January 05, 2011

E-Mail is for Oldsters.

If you're over fifty years of age, email is still cool. The younger you are, the less likely you are to think so.

Mortal Peril.

Indiana Governor Mitch Daniels gave an interview to the New York Times in which he said:

Daniels: I start from a premise that not everyone would agree with, I guess. I believe the American experiment is in mortal peril because of the debt we have coming….

This is more frightening than even the Soviet nuclear threat, which would have been more horrible. If we go broke, we’ll still be alive, but the probability was so small. In this case, the damage, the catastrophe, will be very, very severe, and the probability – I mean, and it’s inexorable.

Q: Absent action.

Mr. Daniels: Absent action, yeah. The probability, I think, sadly, is very high.

(via Andrew Sullivan.)

The Silver State

In the early 1930s, the state of Nevada had roughly 91,000 residents and was on the verge of bankruptcy. So it decided "to roll the dice." It legalized "quickie divorces" and gambling.**

Today, Nevada has roughly 2.6 million residents and is on the verge of bankruptcy. And there appear to be no magic solutions. (via Business Insider)

** Almanac of American Politics, 2000 by Michael Barone et alia.

Tuesday, January 04, 2011

The Birds.

H5N1 has reared its head again, killing birds in Japan. Meanwhile, birds are literally falling out of the sky in Arkansas and Louisiana. Spooky.

Rock/Hard Place.

Megan McArdle has a lucid summary of the challenge that faces New York Governor Andrew Cuomo. It's a challenge that will be faced by governors all across the country, mayors all across the country, county executives all across the country. Read the whole thing.

Monday, January 03, 2011

Jon Hunstman.

US Ambassador to China Jon Huntsman is mulling over a 2012 run for the GOP presidential nomination. Arguably one of the most talented man to serve in President George W. Bush's Administration (he was deputy US Trade Representative), Huntsman would be (if he runs) the second Mormon in the 2012 GOP field. (Mitt Romney is the other, obviously).

The biggest problem in American politics today is the talent deficit. Really smart, really able people don't want to get involved. When someone who is really smart and really able does get involved, it's welcome news. Huntsman for President would be very welcome news indeed.