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2012-01-27T04:33:00.001-05:00

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.

2011-12-20T14:18:00.000-05:00

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.

2011-12-13T16:25:00.000-05:00

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

2011-12-12T07:25:00.000-05:00

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.

2011-12-09T12:47:00.000-05:00

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.

2011-12-08T09:51:00.002-05:00

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.

2011-11-04T15:52:00.000-04:00

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.

2011-10-23T06:44:00.001-04:00

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.

2011-10-14T07:39:00.000-04:00

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.

2011-10-05T16:55:00.000-04:00

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.

2011-10-05T15:49:00.000-04:00

After Christie.

Mitt Romney's "luck" held. His campaign can breathe again.

Chris Christie was a long-shot to win the GOP nomination. But he was an IED on Mitt Romney's path to power. Had Christie entered the race, he likely would have forced Romney out of Iowa altogether. Which, in turn, might have allowed Christie to win Iowa. Which, in turn, would have almost certainly propelled Christie into a very strong showing in New Hampshire. Which, in turn, might have ended Romney's New Hampshire "fortress strategy" right then and there. Christie was an existential threat to the Romney campaign.

Now we're back to basics. There are three Republican primary (and caucus-attending) electorates. They are traditional conservative Republicans, who comprise about 35% of the total electorate. They are libertarians, who comprise about 10% of the electorate. And they are socially conservative, evangelical Republicans who comprise about 55% of the electorate.

Romney is trying to leverage the 35% to a majority and win the nomination. His appeal to those not in his "natural constituency" is that he is: (a) electable, and (b) capable of turning around the American economy. He has no other credible messages with (roughly) two-thirds of his party's constituents. They think he's a Northeastern moderately-minded conservative Republican masquerading as a hard-line conservative. They're right about that.

Nevertheless, Romney's positioning is good enough so long as no one is competing in his "space." Christie would have competed (and then some) in that space. It's an open question whether Christie might have expanded his reach beyond the GOP's "traditional conservative base." We'll never know. It's clear that Romney cannot do so, unless it is part of a "transaction."

The transaction is fairly simple: you (Romney) agree to our platform, you appoint a socially conservative vice presidential running-mate, you appoint judges we approve of, you appoint certain people to the cabinet and we'll (grudgingly) support you in common cause to toss President Obama out of office. Romney will take that deal in a heartbeat.

In the meantime, voters within the majority evangelical base of the GOP are trying to wrap their minds around the concept of a "not-ready-for-prime-time" Rick Perry and a wild-card named Herman Cain. In those states where the evangelical, socially conservative vote is most densely packed (that would be the South), the idea of nominating Herman Cain has real appeal in a kind of "fuck-you, eastern liberal media assholes" sort of way.

But as we get closer to primary days, such whimsy usually gives way to more hard-headed calculations. The evangelical base's leadership wants Obama out. They wanted Perry "in," and the base was down with that. That is, until he let down the team with three consecutive awful debate performances. What made it especially disappointing was that he was awful in the first debate, more awful in the second debate and most awful in the third. The more he did it, the worse he got.

Since then, the troops have taken a shine to Herman Cain. That's fine, from the evangelical leadership's point of view, but it's risky. The Herminator is a one-man band. Presidential campaigns are massively networked, highly sophisticated enterprises. A one-man band, the evangelical leadership knows and understands, isn't going to get the job done.

So unless Perry can somehow put Humpty-Dumpty back together again, which Texas observers think unlikely ("What you saw was what we've seen for 10 years," said one Texas GOP statewide official at a recent gathering in Austin), then Romney is the last viable option for the evangelical leadership, if they want to win.

Which they do. They entered politics way back in the early 1970s, after Roe vs. Wade, and have expanded their influence throughout the party ever since. They're old pros now. They'll do what they have to do. And Romney will do what he has to do. So a deal is there to be made.

The only question is whether the troops will go along or stage an uprising.

The evangelical community is largely made up of "followers." They take seriously what their ministers say. They follow their leaders, as a rule, but only up to a point.

We're at that point in American politics. It really could go either way. If the troops decide to take matters into their own hands and nominate someone who speaks their language, then Herman Cain has a real shot, incredible as that may seem.

And he has an argument. Which is basically this: "doing the same thing over and over again and expecting a different result is the definition of insanity. The results are in. They could not be worse. We are broke. Our model is broken. We are mired in hugely expensive overseas engagements. Washington is completely dysfunctional. They can't change a light bulb and we don't even want them to.
Do something different! I'm different. I'm different in every imaginable way. A black Tea Party Republican talking 9-9-9! That's different! Send them a message. Send them a message they'll never forget."

There's never been a GOP presidential campaign quite like this one.

2011-09-28T09:52:00.002-04:00

The Chris Christie Fantasy.

There are (at least) three reasons that Chris Christie will not be a candidate for the 2012 GOP presidential nomination.

First, he doesn't know anything about the wider world. Second, he's not even trying with the GOP's evangelical base. Third, he's in no condition to run for president.

Begin at the end. I would guess that Christie is 50-75 pounds overweight. Maybe more. That means he needs to quit drinking, exercise for an hour or more every day and reduce his calorie intake to 1200-1500 per day. He has shown no interest in doing anything like this. That tells you he really doesn't want to run.

Christie can have all the fat cats in the world begging him to run, but it isn't going to get him anywhere if he can't build a relationship with the party's evangelical base. Christie has made zero effort to do anything of the sort. That tells you he really doesn't want to run.

Finally, every successful presidential candidate has a stream of foreign policy, national security, economic policy and domestic policy wizards and experts doing briefings every week to keep the candidate on top of the news and in some cases ahead of it. Is anyone doing that for Christie? There appears to be no Christie brain trust.****

Add it up and you have a guy who is not up to the task, who is not working the GOP's most important constituency and who is not getting up to speed on the major policy issues that are of critical importance to the nation's future.

To be fair to Christie, he has said from day one that he is not and will not be a candidate for the 2012 GOP presidential nomination.

Addendum****: Oops! Turns out that Christie has been receiving briefings on a regular basis and from some of the smartest, most capable people in the areas of national security and foreign policy. My mistake. Points 1 and 2 stand.

2011-09-27T21:12:00.000-04:00

A Map Of Debt.

Actually, it's a map of every town in the state of Rhode Island. It shows the "shortfalls in money set aside for pensions and other retirement benefits for government employees."

It almost goes without saying that the largest burden falls on those towns whose citizens have the least ability to pay.

Rhode Island is emblematic of the state and municipal crisis. Numerous towns inside its borders will soon go bankrupt or need to be bailed out. There is the distinct possibility that cascading municipal bankruptcies could bring the state itself to the brink of default (and perhaps default outright).

State Treasurer Gina Raimondo (D) (along with Rhode Island Governor Lincoln Chafee) is trying to forestall this unfolding disaster. It's an enormously difficult political challenge.

2011-09-26T15:35:00.001-04:00

What Do You Fancy?

Joe Einhorn set out a couple of years ago to create "the Google of things" or "the Google of stuff." The idea being that if you were searching for some thing (like a particular chair or an old movie poster or whatever thing you might be looking for), Joe Einhorn's website would be the place to do that.

Today, I got in the mail an invitation to join something called "TheFancy.com." It is, I assume, Joe's first step toward becoming the "Google of things."

I don't know if he's going to get there, but I hope he does. He's a good guy and he's truly ambitious, in the best sense of that word.

2011-09-26T15:28:00.000-04:00

The Euro SPV

The irreplaceable Wolfgang Munchau wrote today that he had never seen European policymakers as terrified as they are right now. The grip of the eurocrisis is fast becoming a stranglehold.

The most recent "news" regarding what those policymakers are planning comes from Steve Liesman of CNBC. I don't have the link but I do have the CNBC press release:

WHEN: TODAY, MONDAY, SEPTEMBER 26TH

WHERE: CNBC’S “STREET SIGNS”

Following is the unofficial transcript of breaking news from CNBC’s Steve Liesman. All references must be sourced to CNBC.

LIESMAN: MANDY, THANKS VERY MUCH. CNBC HAS LEARNED FROM A TOP EUROPEAN FINANCIAL OFFICIAL ABOUT A DETAILED PLAN THAT IS CURRENTLY IN THE WORKS ON LEVERING THE MONEY FROM THE EUROPEAN FINANCIAL STABILITY FACILITY. THE PLAN WOULD USE AS WE UNDERSTAND IT SOME OF THE EFS MONEY TO SHORE UP BANK CAPITAL VERY SIMILAR TO A TARP. NOW THE VERY NEW PART THAT WE ARE HEARING IS THAT THE PLAN WOULD ALSO USE SOME OF THIS MONEY AS SEED MONEY FOR A EUROPEAN INVESTMENT BANK THE EIB IS A BANK THAT IS OWNED BY THE MEMBER EUROPEAN GOVERNMENTS THAT DOES RECONSTRUCTION PROJECTS. NOW UNDER THE PLAN THE EIB WOULD FORM A SPECIAL PURPOSE VEHICLE AN SPV THIS WOULD ISSUE BONDS AND PURCHASE SOVEREIGN DEBT WITH THE BONDS IT USED SO IT WOULD TAKE THE CAPITAL FROM THE EFSF LEVER IT UP THESE BONDS COULD ALSO BE USED AS COLATERAL AT THE ECB. OUR UNDERSTANDING IS THE PLANS FOR LEVERING THE EFSF ALREADY WELL ADVANCED. HERE’S THE PLAN LET ME GO THROUGH IT ONE MORE TIME SOME EFSF MONEY WOULD BE USED TO SHORE UP BANK CAPITAL, ALSO SOME OF THAT MONEY WOULD BE USED TO GO TO THE EIB THE EUROPEAN INVESTMENT BANK THE EIB WOULD FORM A SPECIAL PURPOSE VEHICLE THIS SPV WOULD ISSUE BONDS THOSE BONDS COULD BE USED TO PURCHASE EUROPEAN SOVEREIGN DEBT AND THE BONDS ISSUED BY THE EIB COULD BE USED AS COLLATERAL AT THE ECB. OUR UNDERSTANDING IS AN ANNOUNCEMENT OF THESE PLANS CONFIDENTIAL KEPT UNDER WRAPS IS AWAITING APPROVAL OF THE EFSF BY THE EURO GOVERNMENTS GERMANY HAS A MAJOR VOTE ON THIS SEPTEMBER 29TH I BELIEVE IN THE LOWER HOUSE OF PARLIAMENT SO MANDY THOSE ARE A FEW DETAILS OF THIS PLAN WHICH WE UNDERSTAND IS BEING KEPT CONFIDENTIAL AS THE WAIT APPROVAL FROM THE EFSF.

I don't know about you, but they lost me at "the EIB" becomes an "SPV."

2011-09-22T23:22:00.000-04:00

What We Learned From Orlando.

1. The Perry campaign has a candidate problem. Governor Perry was handed numerous opportunities this evening to exhibit command -- of the subject matter, of the political environment, of the situation. He didn't do that.

Instead of closing the door on Mitt Romney, whom most GOP primary voters would rather not nominate, he kept opening the door instead. That's not what they're looking for! They're looking for someone who can slam the door shut.

Perry's answer on Pakistan was "painful," to borrow Michelle Malkin's tweet. Painfully ignorant and utterly inept. He had no idea what he was talking about. The post-game analysis of Perry's inability to close the door, much less close the deal, will be the dominant "after-story" of Orlando.

2. Is it really possible that we went through an entire two hours of debate and the subject of the imminent (possible) collapse of the global financial system never arose? Answer: Yes!

3. Michele Bachmann is finished.

2011-09-20T08:34:00.000-04:00

Why China Won't Invest In The Eurozone.

Yao Yang in the Financial Times:

"Put simply, investing in Greek, Portuguese, Irish and even Italian government bonds is now a hazardous activity. China is not going to go ahead without some form of iron guarantee from Germany and France which seems equally unlikely."

2011-09-20T07:09:00.000-04:00

Everything You Didn't Like About Team Obama In One Paragraph!

From the Washington Post (via Kausfiles):

"Meeting over dinner at the Bombay Club one night, Summers told Orszag that “we’re really home alone,” according to the book. “I mean it,” Summers said. “We’re home alone. There’s no adult in charge. Clinton would never have made these mistakes.”"

2011-09-19T21:44:00.003-04:00

Just Pretend.

It used to be called Extend and Pretend; the idea being that if you pushed out the due dates on loans, economic growth would restart and cure the "credit problem."

Extend and Pretend lasted about 3 years.

Now we're in the era of Just Pretend.

Just Pretend is multi-faceted. We pretend that we're surprised by S&P's downgrade of Italy, even though everyone knows that Italy is a basket case. We pretend that Greece is not insolvent. We pretend that Angela Merkel has the political muscle to save the day. We pretend that there is no run on the French banks.

One day soon, the markets are going to stop pretending.

2011-09-19T17:58:00.000-04:00

Where Do You Put Your Money?

Apparently not in a large French bank. The Financial Times reports:

Siemens withdrew more than half-a-billion euros in cash deposits from a large French bank two weeks ago and transferred it to the European Central Bank, in a sign of how companies are seeking havens amid Europe’s sovereign debt crisis.

The German industrial group withdrew the money partly because of concerns about the future financial health of the bank and partly to benefit from higher interest rates paid by the ECB, a person with direct knowledge of the matter told the Financial Times.

Imagine what's happening at Italian banks.

Full report is here.

2011-09-19T08:20:00.000-04:00

Wolfgang Munchau.

If you don't read his weekly column in the Financial Times on Mondays, I recommend doing so. He provides the clearest view into what is going on in Europe and into the highest councils of policy-making therein.

Today's column is typically excellent. More generally, the Financial Times now houses the best analysis and commentary team in the print media business.

2011-09-19T08:12:00.000-04:00

How Much Does Owning A Dog Really Cost?

Bloomberg provides the definitive slideshow on the subject. Even if you don't do ridiculously expensive things for your dog, it runs into real money.

On the other hand, what would one do without one's dogs? (Item discovered via Paul Kedrosky)

2011-09-17T08:08:00.000-04:00

Heads I win, Tails You Lose.

That's the business proposition of the global banking elite. If they win, they get rich. If they lose, they get bailed out and maintain their lifestyles.

Anyone who thinks this is sustainable as a political model is insane.

John Gapper becomes the latest FT columnist to line up in support of "ring-fencing," as proposed by the Vickers Commission.

2011-09-17T08:02:00.000-04:00

Greece, Chapter 837.

From today's Wall Street Journal:

"Swiss drug giant Roche Holding AG has stopped delivering its drugs for cancer and other diseases to some state-funded hospitals in Greece that haven't paid their bills, and may take similar steps elsewhere, a stark example of how the European debt crisis that has jolted global financial markets is having a direct effect on consumers...."

There are hospitals "who haven't paid their bills in three or four years," (Roche CEO Severin) Schwan said. "There comes a point where the business is not sustainable anymore."

2011-09-17T07:57:00.000-04:00

McArdle on CLASS Act.

Back in the days when the Obama Administration was righteously insisting that Obamacare would "bend the cost curve" on healthcare, there was always the sense that the numbers had to be cooked to deliver more health care coverage at lower cost.

Turn out the numbers were cooked.

2011-09-16T13:01:00.000-04:00

Noonan on Obama.

The short version of the Obama collapse:

"How did it happen? It still comes down to three big mistakes: the president's spending decisions, his health-care bill, and the White House's strange inability to understand the breadth and depth of the economic crisis. Spending was both high and same-old-same-old: The 2009 stimulus and the budget proposals were Democratic wish lists. This at the exact moment voters were coming to fear that we are losing America, the strong country of old, and the first thing we must do to right things is stop the hemorrhagic spending in Washington. The health-care bill was huge, expensive, vaguely menacing and lacking in any serious reform. Most amazingly, the White House failed to understand what the financial crisis was. They did not understand it was systemic, world-wide, would last years, and would change everything. They seemed to think it would pass. But the crisis rendered old campaign promises null, and demanded new approaches."

Read the whole thing.

2011-09-16T05:06:00.000-04:00

Ellisblog Is Back.

Posting begins today. It feels good to be home again.

2011-08-25T12:49:00.000-04:00

Steve Jobs.

There's already been a flood of commentary regarding the retirement of Steve Jobs as CEO of Apple. It boils down to this: he was the most creative and most able business leader of his time. He was a giant.

Here's a link to his famous speech at Stanford University. It's worth watching in full.

2011-08-24T14:59:00.001-04:00

What Will Sarah Do?

Ellisblog believes she will endorse Texas Governor Rick Perry for the 2012 GOP presidential nomination. Ellisblog further believes that she will do this in late September.

If Ellisblog is right, then Bachmann's downward arc will accelerate and Perry will have effectively cleared the table in Iowa. That sets up New Hampshire as Mitt Romney's last stand. And makes South Carolina Sen. Jim DeMint the gatekeeper to the 2012 GOP presidential nomination.

2011-08-14T09:38:00.000-04:00

Four More Years.

Every so often, a quote appears in a newspaper article that perfectly captures something that is happening in the news. The New York Times has just such a quote today. Here it is:

Administration officials, frustrated by the intransigence of House Republicans, have increasingly concluded that the best thing Mr. Obama can do for the economy may be winning a second term, with a mandate to advance his ideas on deficit reduction, entitlement changes, housing policy and other issues.

We here at Ellisblog have "increasingly concluded" that President Obama needs a whole new team of advisors.

2011-06-19T19:39:00.000-04:00

Rory!

The torch has passed to a new generation. Rory McIlroy's performance at this week's US Open stands as one of the greatest in the history of the sport.

Golf, which has been reeling from the fall of its greatest player, Tiger Woods, now has a new greatest player. What happened at Congo this week announced the arrival of the new Tiger Woods.

2011-02-16T14:27:00.000-05:00

Daniels Goes for Broke.

You can read my take on Mitch Daniels here.

2011-02-04T20:54:00.000-05:00

Content.

For those of you who still visit Ellisblog!, what follows are some direct links to my new home on the Internet, Business Insider Politics.

1. US policy makers worry about Pakistan most of all.

2. Wikileaks reported that Al Qaeda was trying to build a dirty bomb and get its hands on biological weapons. The bio-weapons worry US military strategists most.

3. The 2012 GOP presidential primary comes down to Iowa and New Hampshire and South Carolina, basically.

4. Favorite son strategies never work.

2011-02-01T22:17:00.000-05:00

Hope and Change

After almost a decade of working on start-ups and turn-arounds (and Ellisblog!), I have decided to return to political journalism. Last year, I contacted Henry Blodget, the founder and driving force behind Business Insider and asked him if he had any interest in adding a politics "vertical" (essentially, a sub-section) to his web-site. He said that he might and to keep in touch. We kept in touch and in January, he decided to give it a try.

The result is Business Insider Politics.

We're just getting started and it will take some time to get it to where we would like it to be. We will get there. The site will cover the waterfront of politics, debt, the restructuring of governance and destabilizing threats.

I will be writing quite a lot of original material (what used to be called "columns") as well as editing and contributing short items to the site. I invite you to visit "early and often."

I also hope that you will keep sending me your links, tips, analyses and ideas. They were instrumental in making Ellisblog! smarter and more interesting.

My new email address is jellis@businessinsider.com. I look forward to hearing from you.

2011-01-29T13:56:00.000-05:00

Some recent work:

The unraveling of regimes across the Middle East is worrying.

I thought the President would address the fiscal problem in his second SOTU. He didn't.

Of course Rahm should be on the ballot.

2011-01-21T13:58:00.001-05:00

Adult Supervision No Longer Needed.

If that's how you turn over the reins to your successor (and co-founder of the company), the likelihood is that it was time to go.

2011-01-19T21:02:00.000-05:00

Vallejo!

The news is not good. Bond Buyer reports:

Unsecured creditors will receive 5 cents to 20 cents on the dollar for their claims under a reorganization plan Vallejo, Calif., filed Tuesday in federal court.

The plan to exit bankruptcy outlines the reorganization of debt the city owes its largest creditors, Union Bank and National Public Finance Guarantee. It also sets aside a pool of $6 million to pay unsecured creditors about 5% to 20% of their claims over two years, according to court documents filed in U.S. Bankruptcy Court for the Eastern District in Sacramento.

“The city regrets that it cannot pay a higher percentage,” Vallejo officials said in the court filings. “The city lacks the revenues to do so while maintaining an adequate level of municipal services, such as the provision of fire and police protection and the repairing of the city’s streets.” (via Zerohedge)

2011-01-18T22:32:00.000-05:00

Record Sales of Silver.

Silver is the new gold, Zero Hedge reports.

2011-01-18T21:58:00.000-05:00

Coming Soon To A City Near You.

Nearly half of the city of Camden, New Jersey police force was laid off today, and they won't be coming back any time soon, if ever. Regularly referred to as the murder capital of the United States, Camden is broke and so is New Jersey and so is the United States. So there's no governmental source of cash. And no one in their right mind would buy a Camden, New Jersey municipal bond. Why would they? Why should they? The police union won't even bend the rules a bit to keep more cops on the street.

Camden therefore enters its death spiral. It will be terrible.

2011-01-18T21:14:00.000-05:00

Americans Need Not Apply.

That was a good op-ed piece by President Obama in today's Wall Street Journal, didn't you think? Sort of a fresh look at things, backed up by an executive order. To wit:

This order requires that federal agencies ensure that regulations protect our safety, health and environment while promoting economic growth. And it orders a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive. It's a review that will help bring order to regulations that have become a patchwork of overlapping rules, the result of tinkering by administrations and legislators of both parties and the influence of special interests in Washington over decades.

Not bad.

But just for the hell of it, let's say that some kid starts a company and in a very short period time builds an elegant (and simple) user interface which delivers a great customer experience. And in no time, 500 million people from all around the world sign up and enjoy the amazing network effect that is Facebook.

Facebook becomes a national treasure; a triumph of American ingenuity and entrepreneurial zest, arguably one of the greatest companies created in the last 50 years.

Knowing that, would you say: "let's make sure that no Americans are allowed to own a piece of Facebook, because of Rule 502c-a-3-b-12?" Or would you say: "Gee, there are a lot of pension funds out there that are under a ton of pressure to deliver high rates of return to their retirees and those soon to be retired. Maybe we should bend Rule 502c-a-3-b-12 a bit so that each one (if they so chose) could own a small piece of Facebook. That way, a lot of Americans could benefit from this national treasure.

500 million customers, monetization averaged at $200 per customer, would equal a valuation of $100 billion. Goldman Sachs is offering shares against a valuation of $50 billion. So, a possible 2x! There would be takers.

Back in the real world, what has happened is this: Goldman Sachs cannot sell shares to Americans. Too much "regulatory risk," it is said, learnedly.
Goldman is free to sell shares to Russians and Chinese and Libyans and Omanis and Somalian pirates, if they can be found off their skiffs. But sell it to Warren Buffett or Mitt Romney and its Sullivan & Cromwell on the line for you, Lloyd, $1000 an hour per lawyer, times 24 lawyers.

This is insanity.

This is Washington, DC.

2011-01-18T16:53:00.000-05:00

Hiatus.

Beginning next week, Ellisblog! will begin an extended hiatus. Details to follow. Thanks to all who visited, especially the regulars. I will post my new coordinates on the web shortly.

2011-01-18T08:06:00.002-05:00

Vallejo!

The town of Vallejo, California will submit its "after-bankruptcy" spending plan to a Federal judge this week. Ordinarily, a story like this would be of little interest to anyone other than Vallejo-ans. But with hundreds and perhaps thousands of US municipalities teetering on the edge of default, the Vallejo case, along with the Pritchard, Alabama case, are being watched very, very closely.

2011-01-18T07:55:00.000-05:00

Demon in the Freezer.

The US and Russia want to keep their smallpox supplies. The WHO would like to see those stockpiles destroyed forever. The story is reported here. The book on this subject was written by Richard Preston.

2011-01-18T07:19:00.000-05:00

Liberalism 5.0.

One of the more interesting conversations going on on the web these days is being led by Walter Mead. The conversation concerns the demise of what Mead calls the "blue social model" and what might replace it (Liberalism 5.0). You can get in on this conversation by clicking here.

2011-01-14T08:07:00.000-05:00

The Four Faces of Al Qaeda.

Useful backgrounder on Al Qaeda's global reach by Bruce Reidel, one of the nation's leading experts on Afghanistan and Pakistan. Worth reading.

2011-01-14T07:13:00.000-05:00

Munis On Edge.

If "municipals" and "states" (broadly speaking) can't roll over their debt, they will be unable to meet their obligations. Some will have to default. What's happening in the muni market is that it is getting harder and more expensive to roll over debt. And it will get harder and more expensive still.

2011-01-14T06:52:00.000-05:00

US Sovereign Debt Crisis.

As it stands today, the US borrows about 40 cents of every dollar it spends. At some point, that number declines or the United States has a sovereign debt crisis. Read the link, it's worth your time.

2011-01-13T20:07:00.000-05:00

Inside the Palin Bubble.

Could the contrast have been more stark?

President Obama was, to borrow John Podhoretz's phrase, "pitch perfect" in his speech at the Memorial "service" in Tucson, Arizona. He focused on those whose lives were cut short, those whose lives were shattered, what we might learn from this searing atrocity and why it's important that we do so. The President rose to the moment with dignity and grace.

Sarah Palin, on the other hand, chose to respond to the atrocity by proclaiming that she was the victim of a "blood libel," attacked by evil meanies on the television set, when there was no evidence that her actions had anything to do with the actions of the loon who committed the atrocity. Factually true enough, I would say. But who cares? And why bother even mentioning it? It couldn't be less important. It couldn't be more self-absorbed.

All presidents and all presidential candidates (announced and unannounced) live in what Richard Ben Cramer called "the bubble." It's an hermetically sealed environment which allows very few "outsiders" in and goes to great lengths to keep the number of "insiders" to a minimum. This is why such great emphasis is placed on the people around the President (who they are, what they think, what their skill sets are, etc) by the political community as a whole (including political journalists and opinion makers). The insiders "protect" the president from the hundreds and thousands of bothersome people who are clamoring to give him their ideas. The insiders control what the president reads, what he sees, who he sees. They make sure that very few people get inside the bubble for very good reason(s) and for reasons that are sometimes not so pure.

It is what it is. Once you're the president, you go with what you've got: your emotional intelligence, your political intelligence, your ability to think outside the box that the bubble people construct around you. When something terrible happens, the bubble is momentarily shattered and voters get a true glimpse of what the president is all about. Last night's glimpse of President Obama was reassuring.

Sarah Palin, on the other hand, made a fool of herself. She didn't rise to the moment, she missed it completely. She used it as an occasion for self-indulgence and self-aggrandizement. She dominated the news cycle until the president spoke. She was, I suspect to her everlasting regret, "part of the story."

One suspects that the principal reason for Mrs. Palin's disastrous performance is that the people who seal her bubble are inexperienced and insular; ignorant of what national politics requires and rather too proud of that ignorance. They gave her very bad advice. That she took it reflects badly on her. It says what George Will and many others have been saying privately and publicly since she was tapped by Senator John McCain to be his running mate: she doesn't have what it takes.

This is not to say that Mrs. Palin is no longer a force in GOP politics or a player in the 2012 Republican Presidential nomination campaign. She has a strong base. In many ways, she remains the candidate of the Republican base, a formidable starting point for anyone who seeks to be the GOP standard-bearer.

But what was made clear in the last 48 hours is that Mrs. Palin will not be elected President of the United States in 2012. Out of nowhere, an atrocity focused attention on two people. The incumbent passed the test. The pretender failed, miserably.

2011-01-13T07:51:00.000-05:00

President Obama.

But what we can't do is use this tragedy as one more occasion to turn on one another. As we discuss these issues, let each of us do so with a good dose of humility. Rather than pointing fingers or assigning blame, let us use this occasion to expand our moral imaginations, to listen to each other more carefully, to sharpen our instincts for empathy, and remind ourselves of all the ways our hopes and dreams are bound together. -- President Obama, January 12, 2011.

More here.

2011-01-12T08:14:00.000-05:00

Curation.

Paul Kedrosky has an excellent piece on the resurrection of curation in a post-search world.

2011-01-12T07:43:00.000-05:00

Muni Bond Derivatives!

Brought to you by Citibank! There's an almost perfect symmetry here.

2011-01-11T19:38:00.001-05:00

Illinois.

Decades of mismanagement and corruption and outright thievery have finally come home to roost in Illinois. And this is just the beginning.

2011-01-11T10:46:00.000-05:00

Wages Fall.

On the macro level, the Reckoning of 2007-2008 requires a restructuring of existing and future financial obligations. On the micro level, where people live, it has resulted in a reset. And the reset for many has come to mean lower wages.

In politics, it's not the action that matters so much. It's the reaction. And the reaction to falling wages will gather force in the coming months.

2011-01-10T12:13:00.000-05:00

Texas Taxes Tank.

But not totally. Nevertheless, the downturn in tax receipts means that the Texas state biennial budget is (projected to be) out of whack to the tune of $27 billion. So says the State Comptroller, Susan Combs, a Kay Bailey Hutchison Republican now in her second term.

2011-01-10T10:37:00.003-05:00

Illinois On The Brink.

Will the Illinois State Legislature approve a 75% increase in the state income tax to forestall defaulting on its obligations? The clock is ticking. This is a story that will have a real impact on the market for state and municipal bonds.

To give you some idea of where things stand in Illinois at the moment, consider this from today's Chicago Tribune:

As a measure of how desperate state government's finances are, Cullerton said the state would use the income-tax hike to borrow $12.2 billion. Of that, $8.5 billion would pay overdue bills and $3.7 billion would cover a government worker pension payment lawmakers skipped when putting together the current budget, he said.

"I think it's the right time to do it because we are in desperate need of paying our bills," Cullerton said. "Just think about how we're going to be after we pass this. We would have all our bills, all those people that are owed money, $8 billion would go back into the economy. People will be paid on time. Our credit rating will be dramatically improved."

They aren't raising revenue to pay bills. They're raising revenue to borrow money to pay bills.

2011-01-09T09:57:00.001-05:00

Congresswoman Giffords.

Local reaction to the attempted assassination of Congresswoman Giffords can be found here. New York Times columnist Paul Krugman correctly notes that this is not a "tragedy," as seemingly everyone keeps insisting. It's an atrocity.

2011-01-08T15:43:00.002-05:00

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.

2011-01-07T19:30:00.000-05:00

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.

2011-01-07T18:12:00.037-05:00

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.

Transcript:

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.

2011-01-07T15:20:00.000-05:00

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.

2011-01-07T07:17:00.000-05:00

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.

2011-01-07T07:02:00.001-05:00

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.

2011-01-06T12:26:00.004-05:00

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).

Excerpt:

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.

2011-01-06T08:27:00.000-05:00

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?

2011-01-05T16:02:00.000-05:00

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.

2011-01-05T15:46:00.001-05:00

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.)

2011-01-05T11:46:00.001-05:00

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.

2011-01-04T19:04:00.000-05:00

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.

2011-01-04T12:37:00.001-05:00

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.

2011-01-03T11:27:00.002-05:00

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.

2011-01-01T21:20:00.000-05:00

The I-Pad

If you don't have one, buy one. It is an astonishing piece of technology; brilliantly imagined and amazingly capable. And it's really fun.

Thanks to the men and women who created it, and to Steve Jobs, whose leadership made the idea a reality.

2011-01-01T13:20:00.000-05:00

Happy New Year.

It should be a great year. Next year, 2012, maybe not so much.

2010-12-31T12:08:00.000-05:00

The Savior.

His mechanics may not be the best and there may be a bit too much air underneath his longer throws, and he may be annoyingly hard-working and coach-pleasing, but is there any doubt that Tim Tebow can lead a franchise back from the depths? I don't think so.

2010-12-31T11:54:00.000-05:00

Rising Interest Rates and CRE.

The always excellent Gillian Tett has an important column today on what happens when the music stops in the Commercial Real Estate sector. She writes:

To understand this, look at some numbers compiled by the Institute of International Finance, the Washington-based banking lobby group. The IIF calculates that in March 2008, there was about $25bn worth of pre-crisis investment grade commercial real estate in distress. By March this year, however, that number had exploded to $375bn (and has probably swelled since).

Thus far, the banks have “dealt with potential delinquency problems in part by extending loans until 2011-13”, the IIF notes. Or, in layman’s terms, they have swept it under the carpet. But while this avoided defaults, the IIF reckons that about $1,400bn of CRE loans must be refinanced before 2014. Alarmingly, “nearly half of these are at present ‘underwater’, ie have mortgages in excess of the current value of the property”, it adds.

Read the whole thing.

2010-12-31T08:25:00.000-05:00

Digital Story.

The digital story of the nativity, to be exact. Clever, mindless and fun. (via Dan Burstein)

2010-12-24T18:51:00.001-05:00

Merry Christmas.

Silent Night. Holy Night. May your heart be light.

2010-12-23T12:12:00.000-05:00

Houston, Texas.

Within three years, according to an actuarial study commissioned by the city, the pension for firefighters will require the city to contribute 45 percent of its payroll costs for that retirement plan, a burden Mayor Annise Parker says is unsustainable.

The other two plans are in even worse shape. The police and municipal employee pensions are underfunded by $2.1 billion, roughly the equivalent of what the city spends annually for public safety and general operations.

"The bottom line is the whole system is completely unsustainable with current benefit levels and the city's financial position," said John Diamond, a Rice University public finance fellow and governmental tax consultant.

-- From the Houston Chronicle.

2010-12-23T09:38:00.000-05:00

"Pritchard Is The Future."

In 2009, the town of Pritchard, Alabama could no longer pay its pension benefits. The money ran out, literally. The New York Times reports on the consequences.

2010-12-22T23:06:00.002-05:00

Not Backing Down.

Financial analyst Meredith Whitney created a stir this past weekend when she predicted that 2011 would bring hundreds of municipal defaults in the United States. Felix Salmon rounds up the rebut-niks. Ms. Whitney ain't backing down.

Ellisblog! sides with Whitney. Up to and including civil unrest and disorder.

2010-12-22T08:43:00.000-05:00

Maybe Facebook Can Save California.

Paul Kedrosky has an interesting post on how leveraged California's budget is to stock options and capital gains. Read the whole thing.

2010-12-22T08:22:00.001-05:00

Wealthy Suburbs

Q. How is the wealthiest county (Nassau County, on Long Island) in New York State doing?

A. It's broke and a State Oversight Board is moving to take control of its finances.

2010-12-21T10:44:00.001-05:00

What Me Worry

There are two ways to look at California. You can look at it, as the state's Treasurer does in this piece, strictly in terms of on-balance sheet revenues and expenditures. If you look at it that way, expenditures aren't really growing, revenue has collapsed, a revived economy will (some day) bring everything back into rough alignment, so relax and buy some more bonds.

Another way to look at California is in terms of its total obligations. Those would include unfunded pension and retiree health benefits, the financial collapse of its major cities, the financial collapse of hundreds of its smaller municipalities, the likely downturn in property tax receipts as people's homes are re-assessed to fit the new reality. Add these items to the balance sheet and things look a bit less relaxing. Maybe you want to buy Wyoming state bonds instead.

What's weird about The Reckoning at every level of American governance is that, in almost every case, we don't know what we owe. As Meredith Whitney pointed out in that "Sixty Minutes" interview, in many cases the states and municipalities only provide financial data thorugh June of 2008. Things have changed since then, to say the least.

It would be helpful to have a full accounting of what it's going to cost to bring California fiscal "situation" back into some kind of alignment. It would be helpful to have a full and accurate accounting of what it will cost to bring New York State back into some kind of alignment. Repeat for every state. Repeat for every major city. Repeat for all municipalities in trouble.

You can't have a reckoning without a full accounting. The problem with the accounting of people like California State Treasurer Bill Lockyer is that everyone knows it's not the whole story. It's not even close to the whole story. So no one is reassured. And the weight of authority (which comes from speaking the truth) is diminished.

Which in turn erodes confidence. Which in turn makes it more likely that, at some point, something will snap and all the micro-cracks will become an earthquake. And another financial panic will be upon us.

2010-12-20T14:12:00.000-05:00

The Reckoning: San Francisco.

The city of San Francisco needs $4.4 billion to cover the cost of its retiree health benefits. The city has set aside $9.7 million to meet this obligation. That leaves the city $4.39 billion short, by my calculation.

A problem like this would ordinarily fall into the lap of the state of California. But California is broke. It has a $28 billion budget deficit. It has staggering unfunded pension liabilities. And it has its own unfunded retiree health benefits as well. So there's no money there.

Option "B" would be some kind of Federal aid, but I very much doubt that the GOP-controlled House of Representatives will do anything to help Nancy Pelosi's hometown. So that's a non-starter.

Which leaves what options, exactly? Other than bankruptcy?

2010-12-20T12:38:00.000-05:00

"It's a downward spiral."

There are weak states and strong states. There are weak municipalities and stronger ones. Investors are starting to bear down on the weak ones.

2010-12-20T10:36:00.000-05:00

The Reckoning.

This "Sixty Minutes" report will not tell you anything new, but it's a fairly competent overview of the coming collapse of state and municipal finance. Three data points inside the story: (1) Meredith Whitney on the almost unbelievable opacity of state and municipal accounting, (2) Illinois State Troopers can't buy gas on credit because the State of Illinois doesn't pay its bills, and (3) the State of Illinois spends 2x what it takes in in taxes.

2010-12-20T08:25:00.001-05:00

An Epic Collapse.

When I turned off the radio yesterday afternoon, the New York Giants had just scored to go up 31-10 with roughly 10 minutes left in the game. They lost 38-31. It was a collapse for the ages.

2010-12-16T10:05:00.001-05:00

"Electability."

Is Sarah Palin "electable"? Is there any way she could be elected President of the United States?
Not at the moment. In the new Wall Street Journal poll, she trails President Obama in a hypothetical match-up by a wide margin (55%-33%).

Former Governor Mitt Romney also trails President Obama at this point in the pre-primary season, but by a much narrower margin (47%-40%). The fact that President Obama's "number" (against Romney) is 47% (and not, say, 53% or 55%) is indicative of his precarious political standing. Less than a majority of the nation's electorate would choose him over someone they don't know very well at all. Never a good sign.

Presidential trial heats are fun (and often informative), but they're also irrelevant. In order to qualify for the real trial heat, one has to win the GOP Presidential nomination first. And amongst caucus-attending and primary voting Republicans, especially in the early states, Palin is seen by most to be the de facto front-runner for the nomination.

So the question is this: over the course of the next 12 months, will her perceived "electability" problem hurt her in the early states? Will it cause caucus-attending and primary voter Republicans in those states to say: "we love you Sarah but you can't win, so we're going with someone who can?" Or will the constant pronouncement of Palin's "un-electability" from the "Lame Stream Media" have the opposite effect? Will it cause activists and true believers to say, essentially, "we'll see about that?"

The answer to this question will determine the outcome of the GOP presidential nomination battle and the general election campaign. If GOP primary voters and caucus attenders decide that electability is an essential qualification, then Palin is done. If they decide that anyone can beat President Obama in 2012, so they can take a chance, then Palin is going to be a very formidable contender for the GOP presidential nomination indeed.

President Obama is hoping and praying that Republican caucus-attenders and primary voters dismiss the "electability" argument out of hand. As the poll shows, Ms. Palin makes Mr. Obama a whole lot more electable.

2010-12-15T18:48:00.000-05:00

A Cure for AIDs.

The news that German researchers "cured" a man with the AIDs virus generated a lot of news coverage this week. And it produced a few laughs.

2010-12-15T16:58:00.000-05:00

83% Disapprove.

These Congressional approval ratings are a new low. Can they go lower? Can they go to zero?

2010-12-15T13:22:00.000-05:00

The Gracious Time.

Some say that ever 'gainst that season comes
Wherein our Saviour's birth is celebrated,
The bird of dawning singeth all night long:
And then, they say, no spirit date stir abroad;
The nights are wholesome; then no planets strike,
No fairy takes, nor witch hath power to charm,
So hallow'd and so gracious is the time.

--William Shakespeare

2010-12-15T13:18:00.000-05:00

The Reckoning.

From a Los Angeles Times story on Governor-elect Jerry Brown's budget plans for 2011:

In the past, state leaders relied on one-time gimmicks, some of which made the state's deficit worse, and one-time cash infusions to patch over flawed spending plans. Those days are over, Brown said.

"The day of reckoning is upon us and I'm determined to bite the bullet, get it done in whatever way the consensus of California can be built," he said. "Fair, transparent and enduring — that's my goal."

Educators responded by calling for an end to cuts, asking for greater discretion at the local level as to how dwindling dollars are spent, urging the state to seek more federal funding and requesting legislation that would allow them to increase local property taxes with 55% of the vote rather than the current requirement of two-thirds.

"We can't take any more cuts. You really need to look elsewhere," said Bernie Rhinerson, the chief district relations officer at the San Diego Unified School District. "We are at the cliff."

State Treasurer Bill Lockyer grew visibly frustrated by some of the comments about increasing funding of programs, such as online education.

"Anyone who thinks we get by that without everyone getting hit probably should live in Mendocino County," he said, referring to the region known for marijuana growing. "There are going to be cuts."

"So far, I've heard good ideas about how to spend more money. Great. It ain't there. It's time to make cuts, I believe deep cuts," Lockyer said. "I'd do the 25% across the board and just say those who wanted less government, you're going to get your wish. In other communities that are willing to put something on the ballot to make up that difference, they're going to have a higher service level."

2010-12-15T10:40:00.000-05:00

The Circle Game.

It's completely legal. And it never ends.

2010-12-15T05:43:00.000-05:00

Ghost Cities

China's most famous ghost city is Ordos. It and other cities like it are the subject of this remarkable set of satellite photographs. (via Business Insider).

2010-12-13T12:58:00.001-05:00

What Happens Next.

The city of Detroit has been bankrupt for a long time. It just hasn't faced reality. All the clever "fixes" and accounting tricks to keep the city operating have now run their course. Mayor David Bing, the man with the unenviable task of trying to somehow save the city, has apparently settled on a strategy of "consolidation." Seven of the city's nine "wards" (if you will) will continue to receive city services. The other two will be abandoned to drug gangs and crazy people.

Think about that: 20 percent of the city of Detroit (by acreage) will have no police protection, no fire protection, no schools, no road repair, no services of any kind, at all. Thirty years ago it was one of the richest cities in America.

2010-12-09T22:11:00.001-05:00

Why Interest Rates Will Rise.

Short answer: demand for capital from emerging economies will rise (fast). McKinsey's Global Institute has a persuasive report that provides the longer answer. (via Martin Wolf's column on keeping interest rates low now)

2010-12-09T21:19:00.000-05:00

Property Tax Revenue.

Zillow estimates that $9 trillion worth of equity has vanished due to the housing crisis. Assuming that that number is at least close to accurate, it follows that people will be lining up to have their property taxes lowered, since their homes are inarguably less valuable than they were, say, four years ago.

Well guess what? That's exactly what they're doing.

Since it is inarguable that their homes really are less valuable than they were, say, four years ago, it follows that they should pay less tax. At exactly the moment that municipalities need that revenue most.

2010-12-09T07:18:00.000-05:00

Contortions

When is an earmark an earmark? What happens if you sanctimoniously promise to ban earmarks, but then decide that such a stance is politically untenable? "Conservative" Republican Congressmen (and Congresswomen) ponder these questions inside a Politico piece.

You literally cannot make this stuff up.

2010-12-08T06:24:00.001-05:00

The Story of Our Time.

This is from the Empire Center of New York, but it could easily be from any think tank in any number of states:

Over the next five years, tax-funded annual contributions to the New York State Teachers’ Retirement System (NYSTRS) will more than quadruple, while contributions to the New York State and Local Retirement System (NYSLRS) will more than double, according to estimates presented in this report. New York City’s budgeted pension costs, which already have increased tenfold in the past decade, will rise by at least 20 percent more in the next three years, according to the city’s financial plan projections.

NYSTRS and NYSLRS are “fully funded” by government actuarial standards, but we estimate they have combined funding shortfalls of $120 billion when their liabilities are measured using private-sector accounting rules. Based on a similar alternative standard, New York City’s pension funds had unfunded liabilities of $76 billion as of mid-2008—before their net asset values plunged in the wake of the financial crisis.

The question is: what happens when you take these liabilities and insist that they be part of any state (and/or municipal) bond financing? And what happens when House Republicans decide to not renew the Build America Bonds program? Is there an orderly bankruptcy process that forces readjustment? Or is their a Eurozone-like contagion that eventually unravels the cohesion of the United States?

No one really knows the answer.

2010-12-06T13:15:00.000-05:00

Google E-Books.

This is a truly stunning achievement by the people at Google. You can visit the site by clicking here.

2010-12-06T12:40:00.001-05:00

How Broke Are the States?

Three GOP Congressmen have introduced legislation designed to compel a more accurate answer to that question. Specifically, they want to know to what degree state (and municipal) state pensions (and retirement health plans) are underfunded.

Bonus Links:

1. Sunday, The New York Times had a lengthy and useful overview of the state and municipal debt issue, which you can read by clicking here.

2. Walter Mead on why the state and local debt crisis may quickly become a catastrophe.