Category: Business

President Obama is on the prowl for new targets for (1) raising more tax revenue and/or (2) demonizing “the rich” for campaign purposes. Among Obama’s proposals, besides raising taxes on high-income individuals generally, is to more than double the tax rate paid by many private equity and venture capital investors from 15% to 35%, by reclassifying sales of their businesses (or shares in their businesses) as ordinary income rather than capital gains (more detail here and, drawn from prior versions of the proposal here and here). A common trope being retailed in some form or another by Obama and his allies is that taxing the wealthy and private equity and venture capital has no impact on job creation. As is common to liberal arguments, rather than argue that they are proposing a worthwhile tradeoff, liberals deny even the possibility that their policies involve any tradeoffs whatsoever. As well they might: the voters are hardly going to accept anything right now that impedes the growth of private sector businesses and jobs.
Now, there are a lot of economic angles to this argument, which have been ventilated in more detail elsewhere. But a concrete example may be useful in illustrating how wealthy individuals, private equity and venture capital contribute to the growth of businesses and jobs: the story of Facebook.
Facebook, as you may recall, was largely the brainchild of 20-year-old Harvard student Mark Zuckerberg, and – to simplify a story that has involved a lot of acrimony and litigation – was founded by Zuckerberg and his roommate Dustin Moskovitz in February 2004 to provide a way for Harvard students to interact online. The company was not created in response to any consumer demand to spend money on such a product (seven years later, it still doesn’t cost you anything to have a Facebook account, and the company’s revenue comes mainly from advertising and similar streams). It was created because the founders thought it was a good product and that creating it would generate its own demand (the antithesis of demand-is-everything Keynesian economic theory). They were right – they got 1,200 subscribers within 24 hours, and the user base of Facebook has grown like wildfire for years since, to over 800 million today.
But while they were not exactly paupers – each invested about $1,000 at the start, and later $10,000 – there were limits to how far Zuckerberg and Moskovitz could spread their business idea without investment. Enter the money. First came Eduardo Saverin, also a Harvard student, the son of a wealthy Brazilian businessman; Saverin had reportedly made some $300,000 investing in oil futures, and put a stake in Facebook to become one-third owner and the company’s first CFO. That got the venture off the ground, born from the start in commodity trading profits. (Saverin was later bought out to resolve litigation)
Just four months after the company’s founding, in June 2004, it got a major investment: $500,000 from Peter Thiel. Thiel had been running his own multibillion-dollar hedge fund since 1996, and had made $1.5 billion in 2002 from taking PayPal (which he founded) public and selling it to eBay. Once again, an investor flush with cash from hedge fund profits and the sale of a new business provided the rocket fuel that allowed Facebook to take off from dorm-room startup to major online network. (Thiel reportedly received a 7% stake in the company, now worth well over a billion dollars).
As a startup, Facebook needed constant inflows of cash. The company moved its headquarters to Palo Alto around the time Thiel invested, and spent $200,000 in mid-2005 to buy facebook.com (its prior domain name was thefacebook.com). It cost money from the very beginning to defend against lawsuits. And the company seems to have lost millions in its first two years of operations.
Yet the product itself grew and grew, expanding overseas by the fall of 2005, and the constant inflow of capital kept it able to sustain that growth. Venture capital firm Accel Partners put $12.7 million into Facebook in April 2005, followed by Greylock Venture Capital, which invested $27.5 million that same year. By 2007, Microsoft invested $240 million in exchange for just a 1.6% stake in the company, implying that the whole enterprise was now worth $15 billion. Today, Facebook has over 2,000 employees, and expects to grow that to 9,400 employees by 2017.
Anecdote is not the singular of data, and like most stories of individual companies you can overdraw the policy implications from Facebook’s growth. Yes, Facebook is an extreme example. Yes, Facebook grew in the shadow of the Bush tax cuts of 2001 and 2003, but it also grew up in high-tax states like Massachusetts and California, and of course I couldn’t tell you the particular tax rates paid by the various wealthy investors in the company. But Facebook’s story, and thousands of others like it (if less dramatic) illustrate three timeless truths:
(1) Growing businesses need capital;
(2) Capital for risky startup ventures – especially ones with as steep an upward growth trend as Facebook – tends to come primarily from wealthy individual investors and from the venture capital and private equity vehicles they fund (the business career of Mitt Romney is full of examples of this); and
(3) The more of that capital you have, and the better the after-tax returns it can earn, the more seed corn there is to grow still more of those businesses.
You would think that President Obama – who at least in 2008 drew a lot of support from Zuckerberg and his Silicon Valley ilk – would appreciate this concept. But Obama remains the same man who in the primary debate in 2008 in Philadelphia told Charlie Gibson that he wanted to raise the capital gains tax “for purposes of fairness” regardless of whether it brought in more revenue. Even as the economy has stagnated and dragged down his own political fortunes with it, Obama seems unwilling to even consider the importance of private capital in any recovery. Investors in new businesses, consider yourselves unfriended.

The Soros-funded “Think Progress” (two lies for the price of one!) pays a number of writers to obsess about finding the Koch brothers under their bed. Powerline’s John Hinderaker administers a spectacular beat-down to one of those writers, Lee Fang, on the subject of a particularly loopy conspiracy theory about oil futures. It’s quite clear that Fang does not know even the first thing about the commodity futures markets or the oil business, and makes one glaring error after another on the subject – not minor errors, mind you, but errors like not having the first clue how markets work, how oil companies make money, or how oil prices were affected by the global economic slowdown in late 2008.
It can often be frustrating dealing with left-wing blogs, because they have so much more paid manpower and free time compared to the largely volunteer corps of conservative blogs, which are disproportionately staffed by people with day jobs and families. But in cases like this one, what matters more is the competitive advantage of the conservative blogosphere in having more people who have actual experience in the business world.

Claire Berlinski on the pathetic British history with nationalized car companies:

British Leyland was born. It held 40 percent of the UK car market and within five years lost nearly a quarter of it.
Why? The early seventies saw ever more intense competition from continental auto manufacturers, as well as the rise of the Asian car tigers. Leyland’s management was inflexible and slow to adapt. The group had too many companies under its control, and they made similar, competing, outdated cars. The oil-price shock didn’t help. Neither did Leyland’s militant union. Led by Derek Robinson, an unapologetic Communist known as “Red Robbo,” the union embarked on a series of ruinous disputes with management, regularly bringing production to a standstill.
Leyland’s factories were overmanned, its equipment old, its cars ugly. Antique collectors with a keen sense of irony now cherish the dumpy Austin Allegro, known at the time as the Flying Pig. Available in beige, brown, and wilted-lettuce green, it leaked, and its rear windows spontaneously popped out. Its proudest design innovation was its squarish steering wheel. While Leyland was busy inventing the world’s first square wheel, the Germans were building the Volkswagen Golf, a stylish, family-friendly, fuel-efficient hatchback that quickly became one of the best-selling cars in history.

The rest of the piece is less humorous and more dire in its parallels to the present day, as the British spent 13 years pouring taxpayer money down this rathole. Margaret Thatcher was right to oppose the whole project – as Berlinski summarizes the Iron Lady’s thinking, “[i]f the economy was in crisis, she held, the government should waste less of the taxpayers’ money, not more” – but even Lady Thatcher lacked the political strength to stop subsidizing the misbegotten venture until almost the end of her tenure in office, thanks to the voting power of the auto workers whose jobs continued to exist solely as a matter of public charity.
Perhaps we can still learn a thing or two from real-world history before we spend the next decade going down the same dead-end road.

Francis Cianfrocca at the New Ledger makes a startling point writing on an issue I have addressed at some length before: the excessive government involvement in America’s farm policy. He argues that if you look at the numbers, the Agriculture Department’s budget is larger than the profits of the entire U.S. agriculture sector.
I don’t agree with his provocative conclusion that the industry would vanish without subsidies, but it would surely be compelled to adapt.

Intimidation, home invasion and the not-too-subtle threat of physical violence – by community organizers closely allied with governmental power and receiving taxpayer money. It’s not a pretty combination:

Bruce Marks doesn’t bother being diplomatic. A campaigner on behalf of homeowners facing foreclosure, he was on the phone one day in March to a loan executive at Bank of America Corp.
“I’m tired of borrowers being screwed!” Mr. Marks yelled into the phone. “You’re incompetent!” Before hanging up, he threatened to call bank CEO Kenneth Lewis at home to complain about the loan executive.
Mr. Marks’s nonprofit organization, Neighborhood Assistance Corp. of America, has emerged as one of the loudest scourges of the banking industry in the post-bubble economy. It salts its Web site with photos of executives it accuses of standing in the way of helping homeowners — emblazoning “Predator” across their photos, picturing their homes and sometimes including home phone numbers. In February, NACA, as it’s called, protested at the home of a mortgage investor by scattering furniture on his lawn, to give him a taste of what it feels like to be evicted.
In the 1990s, Mr. Marks leaked details of a banker’s divorce to the press and organized a protest at the school of another banker’s child. He says he would use such tactics again. “We have to terrorize these bankers,” Mr. Marks says.
Though some bankers privately deplore his tactics, Mr. Marks is a growing influence in the lending industry and the effort to curb foreclosures. NACA has signed agreements with the four largest U.S. mortgage lenders …in which they agree to work with his counselors on a regular basis to try to arrange lower payments for struggling borrowers. NACA has made powerful political friends, such as House majority whip James Clyburn of South Carolina, and it receives federal money to counsel homeowners.

The goal of this sort of thing, of course, is to thoroughly politicize business decisions from top to bottom of the economy, squeezing out as far as possible the role of independent business judgment and for the benefit of favored constituencies and politicians (see here for one of the more egregious examples by one of the nation’s most notorious practitioners of political extortion, and here for a similar example of the use of strong-arm street tactics). And the results will be predictable: together with the move to limit credit card fees, the Democrats and their activist allies will put businesses to the choice of (1) extending bad credit in exchange for insufficient returns to cover the risks, for the purpose of currying political favor and keeping the brownshirts away from their homes and families, or (2) getting out of the business altogether. (Allahpundit notes the third choice of shifting costs onto good credit risks, but there’s only so much blood to squeeze from that stone directly, except insofar as it’s done indirectly by using taxpayer money to bribe the banks).
It’s not a good thing for liberty, not a good thing for the economy, and ultimately not a good thing for the integrity of a government that gets too comfortable pulling the strings.

Megan McArdle on fair pay. Some of her best work.

So, Ezra Klein wants Eliot Spitzer back in public life, and argues that New Yorkers should take him back just like his wife did, and presumably for the same reasons. This is part of Spitzer’s rehab tour (more here and here). But Klein has picked the wrong man, and for the wrong reasons.
First of all, Spitzer should never be entrusted with any sort of executive authority ever again. The reasons for this are too numerous to recount here, but let’s start with the obvious: the man held the State’s top two law enforcement positions (Attorney General and Governor) while pursuing a lengthy and illegal prostitution habit, which he surrendered (so far as we know) only when exposed by a federal investigation. Yes, some politicians have survived hookers and other sex-and-crime scandals before: Barney Frank is still in Congress two decades after paying for an affair with a prostitute who operated a brothel out of Frank’s apartment; David Vitter is running for re-election in the Senate after being exposed as a former client of the DC Madam; Gerry Studds kept a commitee chairmanship in the House after an affair with an underage Congressional page; Ted Kennedy is still in the Senate four decades after leaving a woman to drown in his car, an event that in a just world would have resulted in a charge of second-degree murder. But bad as our tolerance for such scandals in legislators may be, they are another thing entirely when you are talking about a man who was charged not only with casting votes and writing laws but with taking care that the laws be faithfully, fairly and uniformly enforced while he was creeping around choking hookers.
It should also not be forgotten that fair and reasonable law enforcement was never Spitzer’s thing. Before the hooker scandal broke, he was already mired in investigations over improper use of state troopers to dig up dirt on political foes. He pursued a thuggish investigation designed to intimidate crisis pregnancy centers while giving a pass to abortion clinics. He forced out the successful management of AIG over charges that seem terribly penny-ante compared to what happened afterwards, and pursued a petty and ultimately unsuccessful vendetta against former NYSE chairman Dick Grasso. He tried to issue drivers’ licenses to illegal aliens, and while he was going after New York’s leading industries, his parole board dramatically increased the number of violent felons it let back on the streets; Spitzer never had much interest in violent crime. His signature move was applying vague laws to conduct they’d never been extended to; over and over again, he prosecuted things people had done that they’d never thought illegal. His targets, when they fought him in court, often won, a reflection of the weakness of his cases on the merits; Spitzer’s MO depended on suing businesses who couldn’t afford the consequences of an ongoing government campaign against them and had to settle rather than fight. Oh, and let’s also not forget, as we watch New York suffer under the bumbling regime of David Paterson (who even Klein admits is a “disaster”), that Spitzer was the guy who picked Paterson (already known for such lunacy as his ‘shoot to wound’ bill) to take over in case Spitzer had to resign, at the same time that Spitzer was engaging in the pattern of criminal activity that forced him to do just that.
All that aside, let’s look at the Spitzer article from 2004 that has Klein swooning about “pretty prescient stuff”:

Unfortunately, our belief in the importance of equal opportunity and nondiscrimination is too often forgotten when it comes to the debate over whether and how to police the market for home mortgages. In poor and working-class communities across the nation, predatory mortgage lending has become a new scourge. Predatory lending is the practice of imposing inflated interest rates, fees, charges, and other onerous terms on home mortgage loans — not because the imperatives of the market require them, but because the lender has found a way to get away with them. These loans (which are often sold as refinance or home improvement mechanisms) are foisted on borrowers who have no realistic ability to repay them and who face the loss of their hard-won home equity when the all-but-inevitable default and foreclosure occurs. When lenders systematically target certain low-income communities for loans of this sort, as they often do, the result is more insidious. Costs are imposed and burdens inflicted in a manner and to a degree that is discriminatory by race.
On the surface, predatory lenders are doing nothing more than seizing a “market opportunity” for refinancing or home-improvement loans in lower-income communities. To be sure, such communities desperately need credit. And it stands to reason that the prices and terms will be less favorable to borrowers whose financial circumstances are troubled or limited. In this sense, predatory loans are the natural outcome of a competitive market.[…]
[But] it is difficult to imagine a less rational, less efficient economic practice than lending of this sort. At the micro-level, it results in a gross misallocation of costs– imposing higher costs than the market requires on those least able to bear them. At the macro-level, it denies lower-cost capital to whole classes of persons who would otherwise qualify for it and to neighborhoods whose economic vitality depends on it.
In these circumstances, government must step in to curb predatory lending and encourage the flow of fairly priced capital to sectors where it is needed and will be well-used.

Leave aside Spitzer saying that the problem with the market is that it charges more than the market requires, which is nonsense by definition in the absence of a cartel (nobody claims that the chaotic mortgage market was a cartel at the retail level; the only place where the market narrowed to a few players was at the GSE level). The critical point here is that Spitzer never argued that the borrowers he discussed should not be given loans at all; to the contrary, his reference to “lower-cost capital” makes clear that he felt that the problem was that lenders were pricing loans too high. But if lenders had made the same loans at lower rates, they’d have been in even worse shape than they are now, with less return on their investments to cover the same default rates. Spitzer’s simplistic thinking seems to be that the only reason why subprime borrowers would end up defaulting was because they were paying too much in fees – it never occurred to him that the problem was underpriced credit for overpriced real estate investments by people with insufficient credit, whether they be people who should never have been given a mortgage to higher-end borrowers who were given one too big for their means. In short, Spitzer got the problem precisely backward – and worse yet, Ezra Klein, writing with the benefit of hindsight, still thinks this is profound.
No thanks.
UPDATE: I see Mickey Kaus beat me to making some of the same points about Klein and that Spitzer quote.

My RedState and New Ledger colleague Francis Cianfrocca, working off the same Matt Yglesias piece I noted below, gets to the core of the issue of executive compensation:

Continue reading Bigger and Closer to Power

As anyone who followed the Kyoto Protocols back in the 1990s can tell you, even if you believe that government action to stem carbon emissions would be desirable, Kyoto wasn’t a genuine effort to get a worldwide agreement on limiting emissions: it exempted seven of the world’s eight most populous nations (the U.S. being the lone exception) from its provisions, including rapidly growing economies like China (now the world’s number one carbon emitter) and India. And neither of those countries, with more than a billion inhabitants each, has any intention of being subject to the kinds of restrictions that President Obama’s carbon emissions “cap-and-trade” plan would impose on U.S. industries, much less during a global recession. Including industries that employ lots of the blue-collar union workers the Democrats purport to represent.
Those industries’ and unions’ solution, naturally, is even more government taxes and regulations: use trade barriers to try to inflict the same harm on foreign manufacturers as on American ones. Hey, why not start a trade war? Just remember, one thing, though: Senator Smoot and Congressman Hawley both lost their bids for re-election in 1932.

Continue reading Cap and Don’t Trade

A followup here to the post linked here:

If I have profits in Estonia and I re-invest the profits there, the ECTR is 0%.
If I repatriate the profits to the U.S., because there was no corporate tax paid to Estonia to qualify for the “foreign tax credit” I get hit for the full 35% U.S. rate – period.
If the “loophole” of leaving those profits in Estonia (rather than repatriating them) is “closed,” I’m getting hit with a 35% “fee” just for being a U.S.-based corporation.
If the “loophole” is closed, the only way to get away from that fee for the “privilege” of being a U.S.-based corporation is simply to take the enterprise itself out of the country – to Bermuda, or the Cayman Islands, or…. Estonia.

I know I link to a lot of pieces by my colleagues at RedState, but this from Skanderbeg (who knows his stuff because he does a lot of business abroad) is really a concise masterpiece explaining the lunacy of Obama’s latest plan to jack up taxes on already-battered American businesses. A sample of his explanation of the existing anti-business rules that Obama wants to make worse:

Suppose you are CEO of XYZ Widgets, Inc., an international widget supplier based in the U.S. You have a competitor, ABC Widgets Oy, based in Finland. Both of you sell widgets in the U.S., earn profits, and pay U.S. corporate tax on those profits. Both of you sell widgets in Finland, earn profits, and pay Finnish corporate tax on those profits. So far, so good. However, here things diverge. ABC Widgets Oy can take its remaining after-tax profits from the U.S. and bring them back to home base in Finland to invest in things like increasing widget production – and not face another hit of Finnish corporate tax on that money. In contrast, if you (XYZ Widgets, Inc.) want to repatriate your after-tax profits from Finland back to the U.S. – to invest in things like increasing YOUR production of widgets…well, you have to pay the full (and also too-high) U.S. corporate tax of 35% on those already-taxed-in-Finland profits. You’d probably choose to leave that money outside the U.S. – and, oh, use if for something like investing in increasing your widget production by building a new plant in someplace like Romania.
In the above, replace “Finland” with the name of any other country in the world, and the story is the same. The U.S. is the only country that has this “double-taxation” rule.

There are three possibilities. One, Obama really is this economically ignorant. Two, Obama knows the consequences of his actions and genuinely desires to reduce the presence of large corporations in the U.S. and replace them with government employment. Three, Obama is cynically pandering to his economically ignorant base and, perhaps, hoping that somehow his plan will end up getting scuttled.

A hilarious column from Michael Lewis that’s too good to excerpt. Lewis has the rare gift of two-sided satire, by which he can simultamneously needle both Wall Street’s traditional mindset and the fools on Capitol Hill who want to change it. The serious question underlying his Swiftian proposal is whether the big financial firms can regain their health if they have to willingly submit to political micromanagement of all their decisions.

I’ve explained here, here, here, here, here, and here, among others, why I grudgingly supported the original Paulson Plan that formed the foundation of TARP and why I have been opposed to its expansion and to all the subsequent bailouts. This post gives a pretty good anecdotal glimpse into why the situation in mid-September 2008 was so uniquely dire compared to the more usual workings of even a fairly severe recession.

I’ve been waiting for Michael Lewis to write the definitive account of the credit crisis. This is an excellent start.
Here’s a few of his vignettes on the housing market madness at the foundation of the crisis, although he has much more on how it worked its way through the financial system:

Continue reading BUSINESS: Liar’s Poker Folds

Megan McArdle advises Matt Taibbi to stop. And has some good advice for people who only tuned in to the financial world during the credit crisis:

No one who did not know what a CDO was before the crisis should be opining as to the causes or the possible solutions. And anyone who tells you that they understand exactly why this happened, why we got this crisis instead of the dollar crisis we were expecting, and what kind of regulations will unquestionably fix it, is definitionally too ignorant to be opening their mouth.

The funny thing is Taibbi ranting about the institutional market for securities backed by bad loans…while at the same time refusing to address the bad loans themselves except to deny they had any role. That failure of basic logic alone is hilarious.
The overextension of housing credit, which formed the collateral for the various instruments whose loss of value set off so many other dominos falling, was, by definition, at the root of the crisis. Now, was the root of the crisis the only cause, or the only thing we ought to avoid repeating? Are there other, second-order aspects of the system that made it more vulnerable to the contagion from loans to un-credit-worthy borrowers based on overvalued real estate? Of course not, and as McArdle says, the fact that we can piece together some significant contributors to the crisis does not equate to understanding fully why it happened.
Then again, while I understand McArdle’s call for a cool, academic assessment of the multiple factors involved after we get more data, that approach is entirely impractical in the middle of a contested election, in which both sides are naturally going to have to answer voter questions about what happened and why. It would be political malpractice for Republicans not to make the (accurate) point that the roots in the lending/housing market are the part of all this in which bad public policy played the most direct role in distorting the market away from its natural equilibrium. And it’s likewise a slam dunk to point out that had Republican-led legislative efforts to rein in the GSEs not been stymied in the 2001-2005 period, the situation would have been, at a minimum, much more tractable to deal with, and that Democratic opponents of such efforts had longstanding financial and ideological reasons to oppose them.
I kept meaning to do a longer post on the inevitable (even if McCain wins) mania for more regulation, although I could just as easily refer you to McArdle’s entire blog for that. Here, for example, she points out the obvious fact that regulators are human and not generally wiser than the businesses they regulate:

Continue reading Opening Your Mouth And Removing All Doubt

Well, the last couple of days could have gone better, couldn’t they?
The Wall Street Journal has probably the best overview of Congress’ failure. Lest anyone get the wrong idea from yesterday’s post, which I will freely admit I wrote in a heat when emotions were very raw as the vote slipped away and the stock market collapsed (the credit markets are worse – LIBOR more than doubled overnight, which should frighten the bejabbers out of anyone who pays attention to this stuff), I do think there’s plenty of blame to go around in both parties here (naturally, CNN and other media sources are blaming only the Republicans, ignoring who has a majority of votes in the House):
Congress
Let’s start with the obvious: the credit crisis demands action (I’d love to take the purist free market position of letting lots of businesses fail, but while that makes sense in the case of any one enterprise, the credit/debt markets are like the atmosphere of the economy; if there’s no atmosphere, things get uglier by multiples for lots of bystanders who didn’t make any mistakes related in any way to the crisis. Here’s one canary in the coal mine: the New York Sun, quite possibly New York’s best newspaper. If you don’t believe me, listen to Tom Coburn, the Oklahoma populist who is such a good friend to taxpayers that all four candidates in the presidential race have fallen over themselves seeking a share of credit for battles Coburn led). And more to the point, if any action is going to take place it has to be large, rapid, decisive, complex, unpopular, and unpleasant for principled people on both sides of the aisle.
Congress, of course, was basically designed specifically to not work this way, and by nature it attracts people who don’t work that way. On some level you can’t fault the House of Representatives for falling back, when pushed hastily to act on something that was clearly beyond most Members’ understanding, on just representing popular anger against the bailout plan that was pouring in to their offices. (This is also why we generally don’t put Congressmen or Senators on national tickets – we may have low expectations for legislators, but couldn’t abide this sort of behavior in a President).
An aside: an awful lot of basic economics is just common sense expressed in equations, charts and terms of art, and is therefore easy enough for adults to understand if they think about it a little. As a result, there are a lot of people in Congress, at least on the GOP side and among moderate Democrats, who I would trust to understand the essentials of how the economy works.
Modern global finance, when you cut all the way to the gray matter of how the system operates, is another story. It’s clearly not something a lot of conservative Republicans in Congress undertood, or that most Congressional liberals would even bother to try to understand. And we’re stuck with one Presidential candidate who spent his whole life in public service and seems to think that profit motives are somehow a lesser calling, and another who has proudly boasted of turning away from the private sector and is obsessed with income inequality rather than how income and wealth gets created in the first place. Even the Harvard MBA in the White House is an oilman, not a finance guy. Quite simply, our political class is not equipped to handle this crisis. Now, the traditional conservative answer to that is to say, well, that’s why we let the market sort this stuff out rather than entrusting politicians with things that, if they understood them, they wouldn’t be politicians. But at this juncture, I’d rather trust the Goldman Sachs guy, Paulson, to come up with the answer (and as another aside, thank heavens Bush got a qualified Treasury Secretary on the third try after the two prior efforts to give the job to industrial CEOs).
House Republicans and John McCain
Whether House Republicans voted “no” out of ideological principle, responsiveness to angry constituents, fear of losing re-election, ambition to rise within the caucus, pique at Nancy Pelosi, or some combination thereof, they win no awards for courage or wisdom in a crisis. The GOP House leadership bit the bullet and came back on their shields; they can’t be faulted for lack of courage but they were ultimately ineffective in whipping their own caucus.
I have noted a few times that I agreed on policy grounds with John McCain’s decision to involve himself in the negotiations, and the record bears out that his involvement helped House Republicans improve the deal enough to get 60+ votes. Patrick Ruffini continues to argue that it was bad political strategy, and he’s probably right that McCain neglected my rule that you never fight legislative battles you can’t afford to lose. Either way, McCain did not, in the end, come up with enough House GOP votes to ensure passage. He bought into the process, and didn’t deliver the final product.
As a matter of pure political theater, if I was running the campaign, the ideal resolution this week would be to have McCain, or better yet Gov. Palin, get the whip count from Roy Blunt of the most-wavering Republicans, and burn the phone lines to round up 12 House conservatives who voted against the bailout but could be persuaded to switch. Given suddenly softening public opposition to the deal after yesterday’s market crash, this may yet be possible, and given that the holdouts include a lot of rural/small town Republicans, Gov. Palin may be just the person to speak their language (and promise to campaign in their districts and defend their decision). Then, hold a joint press conference hailing them as heroes for biting the bullet to switch their votes and save the economy and, while she’s at it, explain to the media that she has learned as a Governor that being a doer matters more than being a talker. “Nancy Pelosi, here are the votes you couldn’t deliver in your own caucus. Now, let’s get beyond finger-pointing and do the people’s business.”
That would be a political masterstroke, which could be accomplished entirely by conservative Republicans without the assistance of a single Democrat or wobbly moderate; it would stand the entire blame debate on its head and totally and instantly remake her reputation going into Thursday’s debate. Of course, dramatic gestures of that nature rarely seem to work in politics, but I can’t see why it would not be worth a try.
UPDATE: I see Tom Maguire has suggested nearly exactly the same thing.
House Democrats and Barack Obama
Leaving aside policy, Karl Rove pretty perfectly captures here the political and emotional dynamic on the House floor as the vote came down:

H/T. The question of the day is whether the failure of the bailout package was proof of Pelosi’s and Barack Obama’s incompetence or their deliberate choice.
On the incompetence front, well, most of you will remember how the whip operation worked when Tom DeLay was House GOP Whip and later Majority Leader: Republicans running the chamber basically never lost a floor vote because DeLay would twist arms until they snapped like twigs to get those last few votes, and would not bring a bill to the floor until he damn well knew he had those votes. The House is not the Senate; the minority has no formidable powers of obstruction. The majority gets what it wants, period. If you assume Pelosi wanted this to pass, you would think she could have used every procedural device and lever of influence in the book to make it happen.
But increasingly, it looks like this was deliberate and done to place the interests of blaming Republicans over the nation. Soren Dayton rounds up the damning evidence, including the fact that Pelosi never even had her Whip, John Clyburn, do his job and round up support. Then we get this, which even the New York Times couldn’t find an excuse not to print:

Mr. Holtz-Eakin said Mr. McCain had made “dozens of calls” on the bill, some to House Republicans who opposed it.
Aides to Mr. Obama said he had not directly reached out to try to sway any House Democrats who opposed the measure.

H/T. Go back and listen to that list reeled off by Rove, and notice the presence of a lot of Obama allies, including Congressman Jesse Jackson jr, national co-chair of the Obama campaign and a frequent spokesman on Obama’s behalf (Jackson’s statement is here). (Obama’s own Congressman, Bobby Rush, also voted No). Do we really think Obama could not have swayed Jackson’s vote on this? Are there really not twelve House Democrats, not even in the Congressional Black Caucus – which voted heavily against the deal – who care what Barack Obama thinks? (If not, that bodes ill indeed for an Obama presidency).
In other words, neither Pelosi nor Obama raised a finger to make this happen, and their defenders must at best argue that they are so ineffective they could not have made a difference if they tried (I mean, if you can’t buy William Jefferson’s vote…). Barney Frank was bragging that he could persuade a dozen more Republicans if they’d give him the names, but three Massachusetts Democrats, Stephen Lynch, John Tierney and William Delahunt, all voted No as well, and Frank doesn’t seem to have made any headway with them. Pelosi’s speech laying into Republicans on the eve of the vote just seems the icing on the cake here.
Needless to say, deliberately contributing to the defeat of legislation they professed to support, solely for political gain, would not reflect well on Pelosi or Obama. But as little respect as I have for their competence, I can’t look at their inaction and think they are really fools enough that they could have been trying to pass it and acted as they did.
That said, I do not think four years of this would be at all healthy for the conservative movement. (H/T Ace). I mean, it was fun to read and several of the individual factual pieces are worth repeating, but the overall theme and especially the flow chart just reeks of “truther”-style conspiracy theory.
President Bush
I don’t especially blame Bush for the vote failure – it’s not like he has any political chits left to call in (how totally obvious is it that Bush would have been happy to head back to his ranch about three months ago?). Then again, if one of the lessons of Bush I was that you need to spend your political capital while it lasts, one of the enduring lessons of Bush II is that maybe you shouldn’t spend it all and have nothing left for a rainy day.

The question of the day is whether House Republicans are going to support some form of bipartisan bailout deal. The Paulson plan is pretty much the only plan that is on the table with any conceivable chance of passing a Democrat-controlled House and Senate, period. There will undoubtedly be battles over what to add on to the basic bones of the Paulson plan, or whether to tinker around the edges of its structure, but while people debate the academic merits of plans laid out by Newt Gingrich, the Republican Study Committee, and others, we need to bear in mind that none of those plans has any chance of passing this Congress.
Nobody is threatening a filibuster of the Paulson plan in the Senate, and indeed I have not seen any sign of major organized opposition among Senate Republicans. As we all know from elementary school Civics, if Nancy Pelosi can get her caucus to line up behind the bill, not a single House Republican’s vote is needed to pass it. The bailout remains massively unpopular and sets many bad policy precedents, and under ordinary conditions Republican intransigence would be the right and honorable thing to do: make the majority take responsibility for doing something unpopular, present a coherent alternative, capitalize at the polls, and replace as much of the unpopular plan as possible with the alternative after the elections.
These are not normal times. House Republicans need badly to come to grips with four very unpleasant realities, and to do so ASAP – and if ever there is a time for John McCain to lead them, this is it:

Continue reading Some Straight Talk For House Republicans: Time To Lead From The Rear

Daffyd ab Hugh at Big Lizards has an insanely long but comprehensive and comprehensible post on the nature of the current financial crisis and the Paulson bailout plan. (H/T Ace) As somebody who was familiar with a good deal of this stuff before it hit the front pages, I can vouch for the fact that this is a smart, clear, insightful summary. My main question about it is that Daffyd seems to assume that Treasury will be buying MBS at the low, distressed market prices now available, and I’m not sure we have assurances that is the case.
By the way, I was listening to the horrible Mets game rather than watching President Bush’s speech tonight, but on paper at least the speech was a fairly clear layman’s explanation of how the crisis developed. I know some conservatives wanted a more partisan finger-pointing speech, but Bush isn’t running for office, he’s trying to hold together fragile bipartisan support for a bill nobody likes. And he does seem to give credence to Daffyd’s reading of how the bailout will operate:

[A]s markets have lost confidence in mortgage-backed securities, their prices have dropped sharply. Yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages. The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal. And when that happens, money will flow back to the Treasury as these assets are sold. And we expect that much, if not all, of the tax dollars we invest will be paid back.

I tried over the weekend to do a more serious post with my analysis of the credit crisis and the bailouts, but basically there’s just no way for me to get into this further without running afoul of my day job. At this juncture, given the limits on what I can write, the best I can offer my readers on the whole Wall Street/bailout issue is a roundup of links and what I can see and hear going around the political side of things:

Continue reading BUSINESS/ Monday Bailout Roundup

I know I tend to link a lot to my colleagues at RedState, where I am currently one of the site’s Directors; we have a tremendous and varied group of writers and thinkers on the site, and while I don’t necessarily agree with any of them all the time, we have quite a number of people who are always worth reading.
But if there’s one of my co-Contributors to the site who you really need to be reading regularly, it’s Francis Cianfrocca, who writes under the pseudonym of “blackhedd.” He’s scary-smart about Wall Street issues he knows from personal experience, he’s utterly unsentimental and willing to think outside the box, and unlike most people in the blogosphere, nearly everything he writes is 100% original content you can’t get anywhere else. And he’s been warning the rest of us about the falling sky in the credit markets pretty consistently since about June 2007. And unlike me, he’s not hemmed in at all turns from writing about these issues (I have to avoid writing in any but the most general terms about my firm’s clients, which includes almost everybody).
Here’s his stuff just from the last week:
*Explaining the root causes of the crisis.
*Henry Paulson and the First National Bad Bank of the United States.
*The AIG bailout here and here.
*The Fannie/Freddie bailout here.
*The non-bailout of Lehman Brothers here.
*Other roundups of the week’s events here, here, here and here,

Beldar notes that ExxonMobil in the second quarter of 2008 paid three times as much in taxes as its after-tax profits.
You know, if there is one thing – one thing – that will encourage the development of alternative fuels, it’s the same thing that led to the mad scramble of capital into internet and telecom in the 1990s: the belief by investors that whoever got ahead in the race to market would reap fabulous profits.
The best possible way to blunt that belief is to slap additional taxes on today’s energy producers for being too profitable. Especially when they aren’t even all that profitable on a returns-on-investment basis; those humongous profit figures are just due to massive market share:

Exxon’s profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).
If that’s what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery — both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau’s industry rankings.

(That WSJ editorial also notes that Google had a 25.3% profit margin).
Anyway, I’ll probably get into this further when I have time for a longer post on energy, but I laid out the case in 2006 for some ideas on how government can do more to strengthen the confidence of investors that the winners of any alternate-fuel gold rush actually get to enjoy the spoils of their investment and labor.

Is the U.S. economy in a recession? The Democrats and the media have been saying so for a while, but the funny thing is, “recession” is a word and it has a meaning, and the fact that the economy is throwing off a lot of scary indicators and people in particular businesses or jurisdictions are losing jobs may mean the economy has problems, but it doesn’t mean we’re in a recession – at least not yet – any more than clouds in the sky mean that it’s raining. A recession requires multiple quarters in which the GDP declines – that’s what it means, no more and no less. It’s true that you have to already be in a recession before the data comes in to prove it…so how many consecutive quarters of negative growth in the economy are we working on right now?
Well, the data is in this morning, and in the most recently concluded quarter – the 2d quarter of this year – the economy grew, at a 1.9% annualized rate, the best since the 3d quarter of 2007.
Great news? No. 1.9% isn’t the kind of robust growth we’d been used to since 2003, and the underlying structural worries are still there, and some reports are crediting short-term stimulus checks and weak-dollar-driven drops in imports, neither of which is cause for long-term celebration. But as usual, the bad news has been overstated by efforts to paint this as 1933 or 1979 all over again. If we elect a president who wants to jack up taxes, close off trade and hold the line against domestic energy production, though, it might be.
PS – If you want a gander at how much worse things could be, check out the Detroit housing market (Democratic mayor, City Council, Governor and state legislature for years now).

Megan McArdle has an excellent list of points, all of which I basically agree with.