Honesty and Integrity

Policy shift will avert $9 trillion deficit-Orszag:

WASHINGTON, Feb 26 (Reuters) - President Barack Obama's budget director said on Thursday that without a shift in policies the U.S. deficit would reach $9 trillion over the next decade.

White House budget chief Peter Orszag said the Obama administration's budget outline reflects costs for the war in Iraq and other items that were previously not included in the budget.

"All told we are showing $2.7 trillion in costs in this budget that were excluded from previous budgets and I think that is a mark of the honesty and responsibility contained in this document," he said.

Its worth observing that honesty and responsibility is easy when it is self-serving. In this case, it is clearly in Obama's interest to portray the deficit he inherited to be as large as possible so that he can claim to be a deficit reducing fiscal conservative in 2012.

Babies with Candy III

Commenting on Krugman's latest offering:

Comrade Greenspan wants us to seize the economy’s commanding heights.

O.K., not exactly. What Alan Greenspan, the former Federal Reserve chairman — and a staunch defender of free markets — actually said was, “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.” I agree.

I don't. The idea is, on the surface, appealing. As was Paulson's asset buyout plan, and for the same reason. The promise of a single (more or less) bold, swift, unapologetic government action, which will stop the bleeding and right the ship. But, as I'll describe below, upon anything close to rigorous reflection, its hard to conclude that it stands much chance of working as advertised.

The case for nationalization rests on three observations.

First, some major banks are dangerously close to the edge — in fact, they would have failed already if investors didn’t expect the government to rescue them if necessary.

Second, banks must be rescued. The collapse of Lehman Brothers almost destroyed the world financial system, and we can’t risk letting much bigger institutions like Citigroup or Bank of America implode.

Third, while banks must be rescued, the U.S. government can’t afford, fiscally or politically, to bestow huge gifts on bank shareholders...

Let’s be concrete here. There’s a reasonable chance — not a certainty — that Citi and BofA, together, will lose hundreds of billions over the next few years. And their capital, the excess of their assets over their liabilities, isn’t remotely large enough to cover those potential losses.

Arguably, the only reason they haven’t already failed is that the government is acting as a backstop, implicitly guaranteeing their obligations. But they’re zombie banks, unable to supply the credit the economy needs.


While Krugman's observations are entirely correct, the conclusion he draws will not directly follow. He -- and this appears a tendency amongst liberal commentators -- conflates the two objectives of supplying banks with public capital.

As he noted, without the public backstop, these banks would likely implode. From the Lehman experience, we understand that the public has an strong interest in avoiding said imposion.

The second objective is that the banks need more capital "to supply the credit the economy needs."

The amount of capital required for the second is far in excess of the amount required for the first. Zombie banks may not juice the economy, but they don't threaten to destroy the global financial system the way a disorganized bankruptcy would.

Additionally, as I argued previously on this blog, claiming that credit is what the economy needs is akin claiming that alcohol is what Mickey Mantle needed. We are in economic pain due to systematic over-reliance on credit. For our long-term economic health, we need credit-withdrawal, not another fix.

To end their zombiehood the banks need more capital. But they can’t raise more capital from private investors. So the government has to supply the necessary funds.

But here’s the thing: the funds needed to bring these banks fully back to life would greatly exceed what they’re currently worth. Citi and BofA have a combined market value of less than $30 billion, and even that value is mainly if not entirely based on the hope that stockholders will get a piece of a government handout. And if it’s basically putting up all the money, the government should get ownership in return.

As discussed, Krugman pulled a logical fast one. He substituted the factual observation that we can't let Citibank go the way of Lehman, with the less solid assertion that we need to restore Citi fully back to life.

He is correct in noting that these banks cannot be recapitalized privately. He does not explain why this is the case. The reasons include: regulations that limit who can invest capital in banks and, more importantly, private capital is scared off by the spectre of nationalization.

Put differently: if the government formalized its role as backstop, which is required in any event, guaranteed that it would not punish new private capital, and reduced restrictions on where that capital could come from at least some banks would likely be able to recapitalize privately.

Tangentially, it seems like much of Obama's policy has reflected this pattern: He pursues some policy which restrains, or crowds out, private activity, and then uses that private inaction to justify dramatically increased government intervention. I am unsure if this is innocent or intentional, but its hard to imagine that Obama suddenly lost the rigor and discipline that characterized his campaign.

In any case, the "should" in "should get ownership in return" is, then, perhaps political necessity, but its not simply in the public's economic interest.

Still, isn’t nationalization un-American? No, it’s as American as apple pie.

Lately the Federal Deposit Insurance Corporation has been seizing banks it deems insolvent at the rate of about two a week. When the F.D.I.C. seizes a bank, it takes over the bank’s bad assets, pays off some of its debt, and resells the cleaned-up institution to private investors. And that’s exactly what advocates of temporary nationalization want to see happen, not just to the small banks the F.D.I.C. has been seizing, but to major banks that are similarly insolvent.

The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.

As Krugman notes later, the phrase "nationalization" is inapt if what is being advocated in a government ordered liquidation akin to what the FDIC does. Nationalization implies something different.

The idea that the government can, with the insolvent big banks do what the FDIC does with small banks -- in effect government-ordered bankruptcies-- bears little srutiny.

For one, if I understand correctly, the FDIC seizing is generally less akin to chapter 11 then chapter 7, which is to say, it more generally liquidates bank assets and pays back debt-holders in an orderly fashion, then restructures failed banks into viable ones. The former, obviously, requires far less business savvy -- and therefore is far more safely entrusted to the government -- then the latter. The nationalization Krugman appears to have in mind is very much the latter, and therefore the FDIC analogue-justification inapt.

Furthermore, consider that there are some 8000 FDIC insured banks in the US. Two banks seized a week adds up to a little over 1% a year. Even with the increase in bank failures the FDIC has a robust private market into which the it sells the institution or its assets.

Imagine, by way of comparison, of what would happen if the FDIC was seizing 50 banks a week. There would be at least two easy to foresee effects:

One, it would have far less ability to move seized institutions back into private hands. More likely it would be "forced" to operate those institutions for an indefinite amount of time.

Secondly, seizures are more likely to snowball. So long as seizures number 1% per year, they serve -- by avoiding fire-sales -- to strengthen healthy banks. Seizing 20% a year may well -- by undermining the sector -- serve to weaken healthy banks.

The same is true of Citibank and BofA. Any nationalization is unlikely to be particularly temporary and nationalizing Citibank and BofA may predictably weaken Goldman, Morgan and JPM to the point where they too "require" nationalization.

For example, the administration initially floated the idea of offering banks guarantees against losses on troubled assets. This would have been a great deal for bank stockholders, not so much for the rest of us: heads they win, tails taxpayers lose.

Now the administration is talking about a “public-private partnership” to buy troubled assets from the banks, with the government lending money to private investors for that purpose. This would offer investors a one-way bet: if the assets rise in price, investors win; if they fall substantially, investors walk away and leave the government holding the bag. Again, heads they win, tails we lose.

Krugman's arguments here are blatantly dishonest. Earlier he observed the motivation for government involvement as avoiding a Lehman style implosion and Japanese style zombie banks. As that is the case, taxpayers wins and losses are measured by whether implosion is avoided and credit starts flowing again.

Also the public-private partnerships being discussed are not the simplistic heads they win, tails we lose scenario Krugman dishonestly describes.

To take a concrete example, lets say there is an asset that right now a bank will sell for $100, but outside investors would only buy for a far lower price, say $25. Which leads to it being stuck on the bank balance sheet inhibited lending.

The government is offering to finance ~90% of the purchase price of such assets which dramatically raises the price outside investors are willing to pay (the cost to the investor is now 10% * $100 + interest on $90). If an investor is now willing to buy the asset, the bank has cash instead of a toxic asset on its books and the amount of money it can lend out is increased (which is, for Krugman, a win).

The investor has put down $10 of their own money and borrowed $90. So long as the asset retains most of its value the investor will repay the loan and the government profits. If the asset value drops more substantially, the investor may walk away from the loan and leave the government holding the asset, which it, in effect bought for 9/10ths the asking price. The asset may well, at that point be worthless, but it also may have the capacity to recover with the government now owning the upside.

Contrast this with the nationalization Krugman desperately prefers. If the government seizes the bank, it now owns this asset. To restore the bank to health -- Krugman's avowed goal -- entails either writing the value of the asset down to near zero or selling the asset into the market. (Either action is likely to create further downward pressure on still-surviving banks.) The market is only willing to buy the asset at $25. (In the case of the nationalized Swedish banks, the government actually offered guarantees and subsidies to the buyers of some assets.) To keep the bank well capitalized (its assets safely greater then its liabilities) the government would then have to make up for the $75 loss with public money, only some of which it would get back if it sold the bank back into market. If it writes the asset value down to near zero, and the perceived riskiness of the asset drops substantively while the bank is nationalized, the government does stand to make some return. Still, it will likely be a long time before the perceived riskiness of most of these asset drops substantively.

In sum, there is no strong reason to believe that nationalization stands to be a better deal for the taxpayer then alternatives that promise roughly the same outcome.

Why not just go ahead and nationalize? Remember, the longer we live with zombie banks, the harder it will be to end the economic crisis.

I am not sure what he wants us to remember. He never explained why this is the case, and I rather suspect it is not the case.

The longer we live with zombie banks, the more we learn to live in a world of constricted credit. The economy that will emerge from that world will be far more sustainable then the product of free-flowing credit.

How would nationalization take place? All the administration has to do is take its own planned “stress test” for major banks seriously, and not hide the results when a bank fails the test, making a takeover necessary. Yes, the whole thing would have a Claude Rains feel to it, as a government that has been propping up banks for months declares itself shocked, shocked at the miserable state of their balance sheets. But that’s O.K.

The stress test is, likely, more about politics then economics. In practice, the outcome of a stress test is controlled by embedded assumptions. It will be easier politically to seize a bank that fails the stress test.

And once again, long-term government ownership isn’t the goal: like the small banks seized by the F.D.I.C. every week, major banks would be returned to private control as soon as possible. The finance blog Calculated Risk suggests that instead of calling the process nationalization, we should call it “preprivatization.”

And once again, this is either foolish or dishonest. If the government seizes Citibank and BofA it will likely be "forced" in short order to seize the rest. And if the government seizes the sector its hard to imagine that long term government ownership isn't the most likely outcome.

To put my money where my mouth is, I'll offer Paul Krugman the following $1000 bet straight-up. If the government seizes Citibank and BofA, five years later, Morgan Stanley will be bankrupt or in government hands.

The Obama administration, says Robert Gibbs, the White House spokesman, believes “that a privately held banking system is the correct way to go.” So do we all.

Gibbs finished that phrase by calling for government regulation. The difference between regulation and ownership is a fuzzy one. Its not clear to me what control the government would have as owner that it does not have as regulator.

I suspect Obama understands this, which is why he isn't eager to nationalize the banks. He can control the banks entirely without bearing the political cost of nationalizing them.

But what we have now isn’t private enterprise, it’s lemon socialism: banks get the upside but taxpayers bear the risks. And it’s perpetuating zombie banks, blocking economic recovery.

What we want is a system in which banks own the downs as well as the ups. And the road to that system runs through nationalization.

We own the downs because we are overly dependent on the overflow of credit the banks provide. If the banks suffer, they tighten the credit we can't live without. The road to that system, then, leads to an economy that is less dependent on credit. Alternatively, perhaps, the road to that system leads to an economy in which the flow of credit is less dependent on the health of a few large banks. The reasons it does in our economy are less market or structural and more legislative/regulatory in nature.

Its hard to see how the road to either place runs through nationalization. It is hard to see any sensible argument explaining nationalization gets us to a place where banks own the downs.

Finally, to krugman, zombie banks block economic recovery because they don't extend the credit the economy needs. It is illuminating to review precisely how that works. Crudely: the large banks take cash from lenders and investors, they, generally, "lend" by creating securities backed by loans (which they either originate themselves or support a market for originators), which they mostly sell of to investors in exchange for cash, which they can put right back to work. Part of what is going on now is that there is a dramatically reduced market for these securities. There are a number of reasons for this including: the opacity of some of the most complex derivatives, dramatically increased sale of government-debt securities crowding out the market for private-debt securities, and, perhaps, above all, the market questioning the credit worthiness of borrowers.

This is, in other words, another question and egg problem. The return of credit requires the return of debt securities markets. It is unclear that it is zombie banks causing frozen debt security markets as opposed to frozen debt security markets causing zombie banks.

Mickey-Mantle-nomics

I hated the speech.

It seems evident to me that the current economic crisis is largely the almost inevitable consequence of an over-levered economy. By historical standards, our economy is *still* massively over-leveraged.

To look at the data, from 1952 until 1980 Total Credit Market Debt as a % of GDP hovered around 150%. By 1997 it stood at 250% with about half that increase during RR's second term. From 1998 till 2008 it grew at a remarkably consistent ~.9%/quarter clip. When 2008 started it stood at 355%, more then double the more sustainable 1979 total. The Q4 2008 number is not posted, but through Q3 2008, it was up negligibly on the year.

When you look at those numbers what you see is, in effect, a fixed income ponzi scheme, where credit is over-extended and so ever-loosing credit is perpetually required to prevent the bubble from bursting.

There is certainly some argument that with the new fangled computerized and quantified economy that we have, can sustainably handle more debt/gdp then the 150% they had in 1952-1979. As we were reasonably stable around 250% through the HW Bush's presidency and Clinton's first term, I can believe that the number is in that ballpark.

In other words, what is called for is not "getting credit flowing again." On the contrary. Arguing that loosening credit is the way out of our problems is akin to prescribing binge drinking to a person suffering from liver disease. Obama's ode to flowing credit last night was then, to my mind, distateful and irresponsible.

In contrast to the President, the First Lady shined. She was wonderful. Her expression when hugging the "we aren't quitters" high school student was so warm and proud and empathetic. It, she, was beautiful.

Weakness

Jindal's GOP response to Obama speech strongly reflected the spirit of bi-partisanship that everyone swears the American people now want:

Tonight, we witnessed a great moment in the history of our Republic. In the very chamber where Congress once voted to abolish slavery, our first African-American president stepped forward to address the state of our union. With his speech tonight, the president completed a redemptive journey that took our nation from Independence Hall to Gettysburg to the lunch counter and now, finally, the Oval Office.

Regardless of party, all Americans are moved by the president's personal story -- the son of an American mother and a Kenyan father, who grew up to become leader of the free world...

Republicans are ready to work with the new president...

Strategically, it is worth noting after two hours of watching Pelosi orgasm, how she got there: hyperpartisanship. The public's desire for bi-partisanship is not new, and it did not lead to the failure of the Democrats hyperpartisan strategy of the past few years.

It used to be that Republicans understood that the game of politics was about focusing on a very few issues to draw sharp distinctions between you and your opponents.

One low hanging fruit for the GOP is Obama's insistence on labeling "tax credits" as "tax cuts". It is inarguably, if not an outright lie, very misleading. Bringing it to the american people's attention would go far towards undermining the Presidents claims to bringing more honesty and openness to government and his self-identification with middle-class values.

To solve our current problems, Washington must lead. But the way to lead is not to raise taxes and not to just put more money and power in hands of Washington politicians. The way to lead is by empowering you, the American people...

I am not sure this argument -- a relic from bush v gore -- will be really effective in the face of Obama's argument -- "I am taking money from the richest 2% to pay for health care and education for the rest."

Uncle David

David Brooks, who spent the last 8 years as an apologist for the Bush administration, has found a new calling fawning over the new administration. Brooks appears, above all, beholden to, or at least, unseemingly enamored with, power.

In his latest column he writes:

Our moral and economic system is based on individual responsibility. It’s based on the idea that people have to live with the consequences of their decisions. This makes them more careful deciders. This means that society tends toward justice — people get what they deserve as much as possible

Over the last few months, we’ve made a hash of all that. The Bush and Obama administrations have compensated foolishness and irresponsibility...

The stimulus ... will almost certainly force people who were honest on their loan forms to subsidize people who were dishonest on theirs.

These injustices are stoking anger across the country...

Let me put it this way: Psychologists have a saying that when a couple comes in for marriage therapy, there are three patients in the room — the husband, the wife and the marriage itself...

In the same way, ... a common economic landscape emerges, which frames and influences the decisions everybody makes.

A few years ago, the global economic culture began swaying. The government enabled people to buy homes they couldn’t afford. The Fed provided easy money. The Chinese sloshed in oceans of capital. The giddy upward sway produced a crushing ride down.

These oscillations are the real moral hazard. Individual responsibility doesn’t mean much in an economy like this one. We all know people who have been laid off through no fault of their own. The responsible have been punished along with the profligate.

It makes sense for the government to intervene to try to reduce the oscillation. It makes sense for government to try to restore some communal order. And the sad reality is that in these circumstances government has to spend money on precisely those sectors that have been swinging most wildly — housing, finance, etc. It has to help stabilize people who have been idiots.

The way I remember it, "Moral Hazard" refers to policy that rewards, and therefore encourages, bad behavior. "These oscillations", Brook's mindless assertion aside, are of course, the opposite of a moral hazard, they are the natural consequence of our collective economic behavior.

Brook's seems to feel "moral hazard" is something akin to theodicy. To him, these oscillations present moral hazard apparently because the righteous are suffering. Were that the case, capitalism itself is a moral hazard -- doing the "right thing" improves ones chances, but does not guarantee, success. Even within his frame, his analysis is poor. In as much as we, as a society, tolerated -- and all, in the short term benefited from -- bad economic policies that led us naturally to where none among us is without sin.

In as much as these oscillations are the products of the invisible hand trying to return sick markets to health, its does not make sense at all for government to intervene to protect the disease.

Government can, of course, act to reduce the pain. The happy reality is that it can do so without showering money on Brook's "idiots". It can change tax policy to help good companies squeezed by unnaturally tight credit. Arguably, if it can be done in a reasonably fair and corruption-free manner, government ought to be lending directly. It certainly should be helping people who have lost their homes incomes and health care. Even some level of deficit spending on infrastructure projects.

In other words, we can all agree with Brooks, that government should help people -- including those who were irresponsible -- suffering in this economic downturn. But its hard to agree with Brooks that the government should be trying to preserve those economic structures that led us here. Concretely: Its hard to defend the proposition that propping up failed banks, and then demanding that they engage behavior they would otherwise themselves deem too risky and pouring 200 million more into Fannie Mae and Freddie Mac and increasing the riskiness of their portfolios are parts of the sensible way forward.

Actually executing this is a near-impossible task. Looking at the auto, housing and banking bailouts, we’re getting a sense of how the propeller heads around Obama operate... they seem to be driven by a spirit of moderation and restraint. They seem to be trying to keep as many market structures in place as possible so things can return to normal relatively smoothly.

What is apparent to Brooks, may not be apparent to all. Whatever drives policy like mortgage cramdowns it is neither the spirit of moderation and restraint nor a fundamental respect for market structures.

Of course, the nominally conservative Brooks apparently shares with Obama the belief that only the government can (best) address our current problems. The liberal Krugman disagrees with them. Of course, Krugman is, in his heart, an economist while they are both products of politics.

And they seem to understand the big thing. The nation’s economy is not just the sum of its individuals. It is an interwoven context that we all share. To stabilize that communal landscape, sometimes you have to shower money upon those who have been foolish or self-indulgent. The greedy idiots may be greedy idiots, but they are our countrymen. And at some level, we’re all in this together. If their lives don’t stabilize, then our lives don’t stabilize.

That is a rather perverse spin on it.

In the end, these people -- "our countrymen" -- run a protection racket. They hold our economic well being hostage to their over-sized profits. If we don't pay them off, we risk our store being burnt down.

Brooks, enamored with power, would make an odd virtue out of paying protection money or negotiating with terrorists.

In all these examples, the short term interest is contra the long term interest. It used to be that liberals, following Keynes, more privileged the short term against the long term and nominal conservatives were more willing to bear short term pain in the service of long term gain.

Babies With Candy II

As much as I have been hoping to hate on him, in Friday's column, Paul Krugman (mostly) sensibly extends and refines arguments from his previous column. That said, its still easy to see Krugman-the-partisan-columnist censoring Krugman-the-nobel-winning-economist.

...people at the Fed are troubled by the same question I’ve been obsessing on lately: What’s supposed to end this slump? No doubt this, too, shall pass — but how, and when?

To appreciate the problem, you need to know that this isn’t your father’s recession. It’s your grandfather’s, or maybe even (as I’ll explain) your great-great-grandfather’s.

Your father’s recession was something like the severe downturn of 1981-1982. That recession was, in effect, a deliberate creation of the Federal Reserve, which raised interest rates to as much as 17 percent in an effort to control runaway inflation. Once the Fed decided that we had suffered enough, it relented, and the economy quickly bounced back.

Your grandfather’s recession, on the other hand, was something like the Great Depression, which happened in spite of the Fed’s efforts, not because of them. When a stock market bubble and a credit boom collapsed, bringing down much of the banking system with them, the Fed tried to revive the economy with low interest rates — but even rates barely above zero weren’t low enough to end a prolonged era of high unemployment.

Its obviously not quite accurate to summarily characterize that the post-war recessions as because of the Fed's efforts. I rather believe that a meaningful understanding of the structural problems that brought us, almost inevitably, into the current mess requires a detailed understanding of progression (which is not quite the right term) of our economy from the late sixties on. Be that as it may, Krugman is, I suppose, entitled to a bit of creative license.

More interestingly, I seem to remember that during the Great Depression, in addition to the rough zero-interest-rate-policy Krugman mentions, the Government tried to revive the economy with some other set of programs that weren't enough to end that prolonged era of high unemployment. What was it called?

Oh yes: The "New Deal". Odd Krugman neglecting to mention it.

Now we’re in the midst of a crisis that bears an eerie, troubling resemblance to the onset of the Depression; interest rates are already near zero, and still the economy plunges. How and when will it all end?

To be sure, the Obama administration is taking action to help the economy, but it’s trying to mitigate the slump, not end it. The stimulus bill, on the administration’s own estimates, will limit the rise in unemployment but fall far short of restoring full employment. The housing plan announced this week looks good in the sense that it will help many homeowners, but it won’t spur a new housing boom.

Its not clear to me that Obama's rhetoric in selling the stimulus bill well-matches Krugman's lowered expectations. It is, in any case, not difficult to see in the above paragraph the conflict between Krugman-the-economist, who understands the stimulus bill to be minimally effective, and Krugman-the-partisan-columnist who is obliged to cheer his party's policy.

What, then, will actually end the slump?

Well, the Great Depression did eventually come to an end, but that was thanks to an enormous war, something we’d rather not emulate...

This is an improvement from his last column when he seemed to imply we should be considering policy to parallel WWII.

So will our slump go on forever? No. In fact, the seeds of eventual recovery are already being planted.

Consider housing starts, which have fallen to their lowest level in 50 years. That’s bad news for the near term. It means that spending on construction will fall even more. But it also means that the supply of houses is lagging behind population growth, which will eventually prompt a housing revival...

The same story can be told for durable goods and assets throughout the economy: given time, the current slump will end itself, the way slumps did in the 19th century. As I said, this may be your great-great-grandfather’s recession. But recovery may be a long time coming.

The closest 19th-century parallel I can find to the current slump is the recession that followed the Panic of 1873. That recession did eventually end without any government intervention, but it lasted more than five years, and another prolonged recession followed just three years later...

Its almost as if Krugman read my post on his last column!

Its worth noting that five years is a long time, but that the Great Depression did last longer. Its obviously not an apples to apples comparison, but superficially it would appear that the more active Government policies of the 1930s did not serve to shorten, or substantially mitigate, that downturn.

Krugman-the-economist, more or less, directly disagrees with the President who argued that "the federal government is the only entity left with the resources to jolt our economy back into life." But Krugman-the-partisan-columnist is always at the ready:

Let’s be clear: the Obama administration’s policy initiatives will help in this difficult period — especially if the administration bites the bullet and takes over weak banks. But still I wonder: Who’ll stop the pain?

,

Financial Illiteracy

Another measure of how poorly educated Americans are about finance. On tonight's jeopardy, one clue "Stock Lingo" for $1200

THIS GREEK LETTER
MEASURES HOW MUCH A STOCK HAS RISEN OR FALLEN
OVER A ONE YEAR PERIOD

One contestant, Matt, guessed "Delta", he was judged wrong. Another one guessed "Beta", she was certainly wrong. Alex announced the answer as "Alpha".

Alpha is, to my knowledge, no such thing. It is a measurement of how much of a stock, or portfolio's, return, is attributable to characteristics unique to the stock, or portfolio, as opposed to Beta which is a measurement of how much of a stock, or portfolio's, return is attributable to broader market factors.

Delta is the closest to accurate answer. In option parlance, Delta is the measure of how much the price of the option changes in response to a change in underlier price. Generally, however Delta often refers to the difference between two numbers.

Babies With Candy

Heretofore my posts have been sort of whatever-grabbed-my-attention. I think the blog would be better was posting more systematic. To that end, I introduce, what I hope will be the first of many recurring topics: Babies With Candy.

The theme of this topic is to comment, hyper-critically, on Paul Krugman's NY Times columns, to argue generally that he is more then a bit of a hyper-political fraud of an economist. The title of the topic stems from my sense that the task isn't particularly difficult.

Unfortunately for me, I am mostly in agreement with his latest column Decade at Bernie’s. Anyways, without further ado:

By now everyone knows the sad tale of Bernard Madoff’s duped investors. They looked at their statements and thought they were rich. But then, one day, they discovered to their horror that their supposed wealth was a figment of someone else’s imagination.

Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.

At one level this should come as no surprise. For most of the last decade America was a nation of borrowers and spenders, not savers...

Yet until very recently Americans believed they were getting richer, because they received statements saying that their houses and stock portfolios were appreciating in value faster than their debts were increasing. And if the belief of many Americans that they could count on capital gains forever sounds naïve, it’s worth remembering just how many influential voices — notably in right-leaning publications like The Wall Street Journal, Forbes and National Review — promoted that belief, and ridiculed those who worried about low savings and high levels of debt.

Krugman is certainly correct in arguing that we should have borrowed less and saved more. He is also certainly right that its worth remembering who encouraged such irresponsible behavior. In as much as American personal indebtedness begins with student and home loans, it silly to suggest that the chorus was strictly on the right. More productive then looking back, of course, is looking forward. For example, which congressman were demanding of Bank CEOs that they lend more.

Then reality struck, and it turned out that the worriers had been right all along. The surge in asset values had been an illusion — but the surge in debt had been all too real.

More accurately: The surge in asset values was a partial function of the surge in debt. (It was also, in part, a function of the Fed's easy monetary policy.)

So now we’re in trouble — deeper trouble, I think, than most people realize even now. And I’m not just talking about the dwindling band of forecasters who still insist that the economy will snap back any day now.

For this is a broad-based mess. Everyone talks about the problems of the banks, which are indeed in even worse shape than the rest of the system. But the banks aren’t the only players with too much debt and too few assets; the same description applies to the private sector as a whole.

And as the great American economist Irving Fisher pointed out in the 1930s, the things people and companies do when they realize they have too much debt tend to be self-defeating when everyone tries to do them at the same time. Attempts to sell assets and pay off debt deepen the plunge in asset prices, further reducing net worth. Attempts to save more translate into a collapse of consumer demand, deepening the economic slump.

With this, I am in perfect agreement and have posted similarly here.

Its worth, in this vein, noting the effect of easy credit + leveraged buy outs on the economy. The banks did not only lend recklessly to consumers, they lent recklessly to private equity. These shops used the easy money available to buy healthy businesses, raid them of their cash, and saddle them with debt, that they are now, increasingly, unable to repay.

Are policy makers ready to do what it takes to break this vicious circle? In principle, yes. Government officials understand the issue: we need to “contain what is a very damaging and potentially deflationary spiral,” says Lawrence Summers, a top Obama economic adviser.

In practice, however, the policies currently on offer don’t look adequate to the challenge. The fiscal stimulus plan, while it will certainly help, probably won’t do more than mitigate the economic side effects of debt deflation. And the much-awaited announcement of the bank rescue plan left everyone confused rather than reassured.

If the situation is as dire as Krugman describes, why-does-he-believe-that/in-what-way-will an inadequate (and somewhat unfocused) stimulus plan will help at all?

Its also not clear to me that some deflation is not a good, or at least necessary, thing. Can prices be sustainably maintained at levels that were artificially inflated by unsustainable lending practices (and monetary policy). A little deflation might bring us closer to more sustainable price levels. Put differently: Would the economic shock and awe that the administration has planned and Krugman deems inadequate be more effective were it aimed at preserving more sustainable price levels.

There’s hope that the bank rescue will eventually turn into something stronger. It has been interesting to watch the idea of temporary bank nationalization move from the fringe to mainstream acceptance, with even Republicans like Senator Lindsey Graham conceding that it may be necessary. But even if we eventually do what’s needed on the bank front, that will solve only part of the problem.

On some level, it does, generally, seem like a government run sorting out, in which some banks a scrubbed and blessed as healthy and others are forced out of business may be the least bad option available. However politicized, corrupt and wasteful the process is bound to be, there are worse outcomes if you are left, at the end, with at least some reasonably healthy banks.

On the other hand, I think there is good reason to fear that the scrubbed, newly healthy banks, will as quickly as they can -- and with the encouragement of government -- get back into the business of making reckless loans they haven't the skill to manage. That, especially as they will be survivors of a government scrubbing, the will be far more attentive to regulator- and legislator- than risk- management.

If you want to see what it really takes to boot the economy out of a debt trap, look at the large public works program, otherwise known as World War II, that ended the Great Depression. The war didn’t just lead to full employment. It also led to rapidly rising incomes and substantial inflation, all with virtually no borrowing by the private sector. By 1945 the government’s debt had soared, but the ratio of private-sector debt to G.D.P. was only half what it had been in 1940. And this low level of private debt helped set the stage for the great postwar boom.

Since nothing like that is on the table, or seems likely to get on the table any time soon, it will take years for families and firms to work off the debt they ran up so blithely. The odds are that the legacy of our time of illusion — our decade at Bernie’s — will be a long, painful slump.

One interesting thing about Krugman -- captured above -- is the way as an economist he seems to feel some professional obligation to write accurately even while, as a partisan columnist, covering over the truth in a politicized attempt to mislead his readers.

To recognize that it was WWII that pulled the US out of the Great Depression is to acknowledge that the New Deal was fundamentally ineffective (although he no doubt believes it "certainly" helped). Branding WWII as a "large public works program" rhetorically covers over the failure of the New Deal.

Identifying WWII as a "large public works program" is, of course, more spin then reality. During WWII the economy was effectively nationalized and many people -- draftees -- were coerced into working. The implication that he would prefer to see some parrelel option on the table is a bit perverse.

More fundamentally, if it is true -- as Krugman claims -- that given time, even without coercing labor, families and firms can work off their debt and that will lift us out of our slump, its why was WWII required to lift us out of the Great Depression? It started more then a decade after the stock market crash. Shouldn't we have been able to lift ourselves out of the depression without it?

The depression of the 1930s was, of course, neither the first, and apparently not the last, depression we have experienced. Nor was it the shortest historical depression. The simple truth, covered over in Krugman's column, is that we got out previously without "large public works programs" and we can do so again.

The conservative claim, with which Krugman-the-economist apparently agrees, is that free markets are intrinsically self-correcting and regenerative. That, given the time and opportunity, free people making free choices will rebuild vibrant economies out of the carcasses of dead ones. It follows that that ham handed intrusive Government economic meddling can crowd out private initiative and dampen the regenerative process. It is easy to see that happening now. Conservatives, though not Krugman, attribute the failure of the economy to recover in the 1930s to this.

Topped Chef

Can I say? I'm sort of annoyed this season that it seems like the elimination decisions appear consistently made more on the basis of what makes for better TV, and less on the basis of the cooking competition.

Also, while I am at it. Its time for Colicchio to go. I may be wrong on this, but in earlier seasons I feel he was more respectful of the opinions of other judges. This season he appears to only with the greatest of grudgingness allow anyone else to express an opinion and, for the most part, can't talk-down-to/dismiss it quick enough (and not in the insightful/entertaining way Jefferey Steingarten does it on Iron Chef America). The other judges seem to walk on eggshells around him.

Something is On The Way

CNN "reports" Obama's foreclosure fix on the way ("reports" in scare-quotes because Obama's plan is on the way, whether or not it will prove to be a fix is, for the moment, a matter of conjecture).

NEW YORK (CNNMoney.com) -- Obama administration officials are hammering out the details of a $50 billion foreclosure prevention program that the president is set to unveil Wednesday in Arizona, sources said...

The multipart plan will for the first time commit government money to spur loan modifications. One likely component will be interest-rate subsidies for at-risk borrowers, with the government matching the servicer's rate reduction. Borrowers would have to take an affordability test to see whether they could handle the monthly payment on the reworked loan...

On deck is controversial legislation to allow bankruptcy judges to modify loans on primary residences. The financial industry is staunchly opposed to this measure, but administration officials told them last week to expect it to happen this year.

As commented here before, the reworking of debt is one of the things that the free market, ordinarily, does rather well. Incentives are, generally, aligned. Lenders want to be in the business of collecting predictable payments, not seizing and selling homes and borrowers want to live in their homes with payments they can safely afford. When economic circumstances change, markets are, ordinarily, pretty good at renegotiating debt to reflect those changes. Credit Card debt -- which is frequently renegotiated -- is a particularly good example of markets at work. There are three primary reasons why that is not happening as much in the mortgage markets as it otherwise might:

1. Mortgage securities are generally pooled and tranched. Even when renegotiation would favor the pool as a whole (i.e.: maximize the Pool's net income), it is contra the interest of the lowest tiers. Pool Managers/Servicers who do renegotiate face the threat of lawsuit by the lower tranche-holders.
2. Pool Managers/Servicers are often themselves owners of lowers tranches and so face a conflict of interest.
3. Given the -- now proven reasonable -- expectation that the Government will in the future subsidize this debt, it is generally irrational to renegotiate without subsidy.

Again, as noted here, these clogs can all be addressed reasonably without expense to the taxpayer.

1. Pass laws to protect Pool Manager/Servicers who renegotiate from lawsuit.
2. Pass conflict-of-interest laws, to ensure that Pool Manager/Servicers are not beholden to the interests of a particular tranche.
3. Make explicitly clear that no subsidies will be forthcoming.

One has to take a pretty dim view about the efficacy of markets to believe that this can't be sorted out without political or judicial intervention. If markets can't do this, what can they do?

Judicial modification is a particularly hard to understand policy. Without Judicial modification, modification is by negotiation. Lenders, generally, will agree to modifications that they believe maximize their expected revenue, which is to say, turn a more expensive loan which the borrower is less likely to be able to repay into a less expensive loan which the borrower is more likely to repay. With Judicial modification, Judges can force modifications that lenders do not feel will maximize their expected revenue. In as much as we face a national crisis of under-capitalized banks -- we are told that our financial system would have collapsed without TARP providing public capital to banks; "Swedish" style plans where the Government acknowledges the general under-capitalization, seizes bank assets and sorts out winners and losers are increasingly considered -- it is hard to understand how the public interest lies in policy like this that will, above all, serve to reduce bank capital. In as much as we are being told only the government can get credit flowing again, its odd to see the same government pursuing policy which makes lending less attractive.

The $787 billion stimulus package set to be signed into law Tuesday increases the loan limits for mortgages insured under the Federal Housing Administration, as well as those that can be bought by Fannie Mae and Freddie Mac, to as much as $729,500, up from $625,500. The higher limit, which was in effect last year, is designed to help those with larger mortgages refinance into more affordable loans and to make it easier for people to purchase homes in high-cost areas.

To spur home sales, first-time buyers will get a tax credit worth up to $8,000 on their 2008 or 2009 taxes, under the stimulus package. The credit starts to phase out for buyers who make more than $75,000 for singles or $150,000 for couples. This measure, which builds on a tax credit enacted last year, is intended to help soak up the inventory on the market, which is also depressing home values.

There is, perhaps, some sensible argument along the lines of "We have all this bad debt in the system that needs to work its way out quickly, Government can facilitate that happening quicker." It is hard for me to understand arguments for shoveling new soon-to-be-bad debt -- encouraging people with less money to buy more expensive homes -- in the system.

Nothing To See Here

From Treasury Boss Taking Fire in Europe Over Stimulus:

Last week Giulio Tremonti, Italy’s finance minister and Mr. Geithner’s host for the weekend, gave a tart review of the Obama administration’s stimulus in a local newspaper here.

“If the problem is an excess of debt, the cure is not adding more debt, whether that debt is public or private,” he wrote in the Corriere della Sera. Italy is one of the most indebted countries in Europe. Its debt surpasses its annual gross domestic product.

More from the Times, In Japan’s Stagnant Decade, Cautionary Tales for America

The Obama administration is committing huge sums of money to rescuing banks, but the veterans of Japan’s banking crisis have three words for the Americans: more money, faster.

The Japanese have been here before. They endured a “lost decade” of economic stagnation in the 1990s as their banks labored under crippling debt, and successive governments wasted trillions of yen on half-measures.

Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail.

By then, Tokyo’s main Nikkei stock index had lost almost three-quarters of its value. The country’s public debt had grown to exceed its gross domestic product, and deflation stalked the land. In the end, real estate prices fell for 15 consecutive years.

More alarming? Some students of the Japanese debacle say they see a similar train wreck heading for the United States.

“I thought America had studied Japan’s failures,” said Hirofumi Gomi, a top official at Japan’s Financial Services Agency during the crisis. “Why is it making the same mistakes?”

Many American critics of the plan unveiled Tuesday by Treasury Secretary Timothy F. Geithner said the plan lacked details. Experts on Japan found it timid — especially given the size of the banking crisis the administration faces.

“I think they know how big it is, but they don’t want to say how big it is. It’s so big they can’t acknowledge it,” said John H. Makin, an economist at the American Enterprise Institute, referring to administration officials. “The lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks.”

Instead, the Japanese first tried many of the same remedies that the Bush administration tried and the Obama administration is trying — ultra-low interest rates, fiscal stimulus and ineffective cash infusions, among other things. The Japanese even tried to tap private capital to buy some of the bad assets from banks, as Mr. Geithner proposed.

One reason Japan’s leaders were so ineffectual for so long was their fear of stoking public outrage. With each act of the bailout, anger grew, making politicians more reluctant to force real reform, which only delayed the day of reckoning and increased the ultimate price tag. Japanese taxpayers are estimated to have recouped less than half what it cost the government to bail out the banks.
...
Economists say these blunders meant Japan’s financial system did not start to recover until late 2002, six years after the crisis broke. That year, the government of the reformist leader Junichiro Koizumi ordered a tough audit of the country’s top banks.

Called the Takenaka Plan after Heizo Takenaka, who headed the government’s financial reform efforts, the move finally brought the full extent of bad loans to light. Initially, banks lashed out at Mr. Takenaka. “The government can’t order bank management to do this and that,” Yoshifumi Nishikawa, president of the Sumitomo Mitsui Financial Group, complained to the press in October 2002. “It’s absolutely absurd.”

But Mr. Takenaka stood firm. His rallying cry, he said in an interview on Wednesday, was, “Don’t cover up. Don’t distort principles. Follow the rules.”

“I told the banks clearly, ‘I am in a position to supervise you,’ ” Mr. Takenaka said. “I told them I am not open to negotiation.”
...
“The way things are going right now,” said Mr. Hoshi, “the U.S. taxpayers’ burden will keep going up and up.”

According to the Times, then, one key lesson of Japan's lost decade is that faced with this sort of crisis, fiscal stimulus is mostly ineffective. No too long ago, the President drew the opposite lesson:

OBAMA: No, no, no, no -- I think that what I've said is what other economists have said across the political spectrum, which is that if you delay acting on an economy of this severity, then you potentially create a negative spiral that becomes much more difficult for us to get out of. We saw this happen in Japan in the 1990s, where they did not act boldly and swiftly enough, and as a consequence they suffered what was called the "lost decade" where essentially for the entire '90s they did not see any significant economic growth.

So what I'm trying to underscore is what the people in Elkhart already understand: that this is not your ordinary run-of-the-mill recession. We are going through the worst economic crisis since the Great Depression. We've lost now 3.6 million jobs, but what's perhaps even more disturbing is that almost half of that job loss has taken place over the last three months, which means that the problems are accelerating instead of getting better.

Now, what I said in Elkhart today is what I repeat this evening, which is, I'm absolutely confident that we can solve this problem, but it's going to require us to take some significant, important steps.

Step number one: We have to pass an economic recovery and reinvestment plan...

Accountability

Many representatives in questioning the Bank CEOs yesterday used the "we are now your shareholders" trope. In my mind, it only strengthened how little these CEOs have been accountable to their actual shareholders.

I think its fair to observe that there is -- and has been for years -- a systematic accountability problem in our public equity markets.

The usual sort of reform proposal in response to this is to create penalties for Board of Directors that some arbiter judges negligent. This is, to my mind, the sort of ill thought out mess that creates more problems then it solves.

A more thoughtful -- and free enterprise -- solution would recognize that it is the sole responsibility of shareholders to hold directors and management in line, seek to identify and understand the systematic reasons why shareholders have not and pursue policies that address them.

Term Limits

Watching the House Financial Services Committee Bank CEO hearing, one can't but feel like term limits are a good idea. There appears to be inverse proportionality between the thoughtfulness of the question and the length of member's tenure.

Obamanomics

I meant to comment on Obama's news conference Monday night. Drudge linked to a very good article that touches on some of the misgivings I had, but also, the reason I still feel more comfortable with Obama in charge then McCain.

...On being presented the Nobel Prize in economics in 1974, Friedrich von Hayek devoted his Stockholm lecture to acknowledging the severe limitations of his profession. “It seems to me,” he said, “that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences—an attempt which in our field may lead to outright error.”

Tangentially, a few years ago, I attending a financial risk management conference where, I think it was Emanuel Derman made a similar point about the financial models that have since proven inadequate.

Government simply cannot know enough to direct an economy successfully, and when the President claims that his fiscal stimulus plan will create (or save) at least three million jobs, he is taking a wild, and dangerous, leap.

One of the things that has reduced my confidence in the President is the manner in which he has held up this "create (or save) at least three million jobs" formulation. He has to know that there is no real way to measure that, which leads to the conclusion that it has more to do with politics then economics.

Said Hayek:

If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.

I think there is an essential, common sense, wisdom in Von Hayek's argument that the Government ought be more a gardener and less a sculptor. Strauss, I think, makes somewhat of a similar argument in On Tyranny.

Government-as-gardening is obviously more difficult then government-as-sculpting in that it requires greater understanding and patience, which is to say: wisdom.

What is that environment? ...Third, it recognizes that Americans have undergone a financial calamity and that we need time to adjust; we cannot, like a car battery, be shocked back to life, and we aren’t in the mood to have someone blow in our ear.

I don't really agree with the author's prescription, which is why I snipped out First and Second, but there is some truth to Third. Obama, Monday night, described the vicious cycle which he argued can only, or best, be broken by Government. <metaphor-alert>But there is a timing game. If government shoots its wad and fails, there is no second chance. The author may well be correct at least to the extent that the public now might not be as responsive to a stimulus package as required, and it may make sense to save bullets in the gun.</metaphor-alert>

In fact, stimulus may be precisely the wrong metaphor. Rather than getting jazzed up, we need to be calmed down and to take the time to learn from the Great Depression, a time when government did too much, not too little. Amity Shlaes makes the argument in The Forgotten Man, her book about the Great Depression, that the constant experimenting and meddling of the New Deal froze investors and business operators in fear: “Businesses decided to wait Roosevelt out, hold on to their cash, and invest in future years.”

One doesn't have to dig too deeply to see plenty of instances of that dynamic -- private sector activity frozen awaiting Government decisions/intervention -- at play in out current crisis.

I think, perhaps, the most promising thing in the Presidential transition, was Obama's stated desire to avoid insular groupthink. For that reason, the most disappointing part of his initial press conference was when he derided those who question the efficacy of the New Deal.

Despite the warnings of Keynes, the experience of the past half-century indicates that today’s low interest rates will start having a positive effect, though it still will take many months. Meanwhile, left alone, what Hayek called “spontaneous order” will find its way forward. Using a different metaphor, James Grant, in his history of credit, Money of the Mind, wrote, “The cycle of decay and renewal is as much a part of capitalism as it is of the forest floor.” But, in the 1930’s, “something in the normal regenerative process was missing. There was no decisive recovery from the business-cycle bottom. People had lost their speculative courage, and the more government legislated and taxed, the more that credit sulked.”

This is, I think, the key point here. It seems that the Bush and Obama economic teams have identified problems -- eg: "credit is not flowing" -- and pursued government-as-sculptor policies intended to directly fix the problem. The presidents description need for government action to break the vicious cycle is a perfect illustration of that approach. More often then not the scope of the problem and the consequences of the policy surpass the policymakers grasp and so the policy proves ineffective.

The wiser course of action, again, would be governing-as-gardening. In this case, the focus would not be on directly fixing direct problems, but on identifying and targeting the reasons why the natural regenerative processes are missing.

To give one concrete example, previously discussed on this blog:

In a functioning cycle, creditors work with borrowers to renegotiate terms such that creditors get a more certain cash flow and borrowers get to keep their homes. That is not happening as much as it should in this cycle, largely because mortgages are pooled and tranched, renegotiation is contra the interests of the lower tranches. Pool managers may themselves own lower tranches or face lawsuit from lower-tranche-owners if they renegotiate. As this failure to renegotiate results in far more uncertain cash flows, the securities derived from those pools are far harder to accurately price. The pricing difficulty is, of course, at the heart of why these securities are "toxic" and, therefore, why credit is crunched.

A government-as-gardener might, then, pursue policies that unblock loan-modification that would lead to greater cash flow certainty. It could create conflict of interest laws and protect managers who renegotiate from the threat of lawsuit. If need be, it could adjust tax laws to ensure the pool managers incentives are properly aligned. And so forth. With more certain cash-flows, the derived securities would have a more certain price and the process of sorting out winners and losers and starting a-new could begin in earnest.

Instead, the sculptor-policy-makers have pursued erratic ham-handed policy using borrowed money to subsidize market players whose main effect has been to create a line out the door and round the corner of private sector actors who now demand to be subsidized before they do what they would do anyways and raise market expectations of serious inflation, interest rate and tax hikes in the not too distant future. What attention has been paid towards encouraging renegotiation results in sculpting-policy-proposals involving government actively engaged in the actual renegotiation rather then gardening-policies along the lines outlined above.

There is no doubt in my mind that a President McCain would be pursuing government-as-sculptor policies as, if not more, aggressively then President Obama. President Obama prides himself on being thoughtful and non-ideological and so there is at least a chance that he will, better belatedly then never, come to understand the wiser course.

On the other hand, I am not quite sure that President is as non-ideological as he presents himself and there is a serious ideological point in play. It is a matter of liberal faith that FDR "saved capitalism from itself," which, can be understood as believing that markets, without the intervention of Government, do not naturally self-correct. From his press conference, it seems likely Obama adheres unquestioningly to this faith. And that it will be quite the stepping out of the bubble for him to consider the possibility of alternatives.

Netanyahu's Victory

To read the headlines, the result of the Israeli election is in doubt. For example, the Times has "Battle Is Close in Israeli Election which begins:

Israel’s centrist Kadima Party led by Foreign Minister Tzipi Livni and the more conservative Likud Party led by Benjamin Netanyahu were locked in a tight battle for leadership early Wednesday that left unclear the shape of the next Israeli government.

The close race all but guaranteed that the political jockeying to assemble a governing coalition would be intense and lengthy. And it left open the question of whether Ms. Livni, a supporter of a peace accord with the Palestinians, or the more hawkish Mr. Netanyahu would form the next government.

While it is true that there will be intense political jockeying, if the rule of law abides, it will not be lengthy and its outcome is not in doubt. The article itself actually reports the fact in the sixth paragraph down, if ambigously and with its import somewhat obscured.

Haaretz, no fan of Netanyahu's, is honest enough to report directly:

By law, the president must consult with all the parties as to who they prefer as prime minister, and whoever is recommended by more Knesset members is given the nod. Hence if the religious and rightist parties all recommend Netanyahu, he would get first crack at forming a government.

It takes some, lets call it "optimism", to believe that the religious and rightist parties will not all recommend Netanyahu and/or that he will not be able to form a coalition with them.

On a related note, I have to admit some unease about what a Netanyahu victory would mean for the American/Israeli relationship.

There are certainly many Obama supporters who would like to see the US pursue a "more balanced" policy. I think there is suspicion to be had of the goals of those who see the longstanding US policy of support for a Jewish state living side by side in peace with a Palestinian state as being, somehow, un-balanced. Other Obama supporters -- who go by the not quite accurate label "realists" -- would like to see Obama trade away Israel's interests in the pursuit of Iranian and broader Islamic favor.

This anti-Israel pressure is, of course, counter-balanced by the affinity between Jews and the Democratic party. Should Livni win, Obama's ability to act strongly against Israel will also be limited by "Hillary" voters who would be sensitive to the impression of Obama bullying a female leader. On the other hand, Netanyahu is a bit of the anti-christ to liberal American Jews. Obama would have a much freer hand to act strongly against a Netanyahu led Israel without sacrificing domestic support.

Obama's Bible Study

At the national prayer breakfast, the president remarked:

...Jesus told us to
“love thy neighbor as thyself.” The Torah commands, “That
which is hateful to you, do not do to your fellow.”...

This is not entirely accurate. The Torah, in Leviticus 19:18, commands the teaching the President attributed to Jesus. The commandment the President attributes to the Torah is actually a teaching of the Sage Hillel to a potential Roman convert.

This mistake is mostly, but not entirely, harmless. The rub is this -- there is a strain within Christianity that likes to imagine that they discovered love and true human fellow-feeling. Such Christians find it important to emphasize how much more loving Christianity is in particular contrast to the Judaism of the Pharisees, which is to say, our Judaism. The distinction between the active "golden" formulation of Jesus and the passive "silver" formulation of Hillel is of crucial importance to such people, as is maintaining the fiction that the teaching of Hillel, and not the biblical verse, represents the authoritative view of Judaism.