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Obama's Real Opposition
Excerpt from The Wall Street Journal - 2008-11-06; Page A18Now that Barack Obama has vanquished John McCain, he faces a much greater foe: Democrats on Capitol Hill. They've humbled the last two Democratic Presidents -- and with their enhanced majorities next year, they'll be out to do it again.
Mr. Obama may appreciate the threat, because yesterday he offered Clinton White House veteran Rahm Emanuel a job as his chief of staff. But even that savvy, relatively sane liberal will have difficulties grappling with the fearsome committee chairmen and liberal interest groups that did so much to sabotage Bill Clinton and Jimmy Carter. Meet the President-elect's real opposition:
David Obey. The Appropriations Chairman wants to slash defense spending as a money grab for more social programs and entitlements. Fellow spender Barney Frank recently added that a military budget cut of 25% was about right. A military crash diet wouldn't leave the funds for the surge in Afghanistan that Mr. Obama advocates, and it's a sure way to hand the national security issue back to the GOP.
Chuck Schumer. The Senate Democrat and his friends are already threatening banks if they don't lend more money instantly under the Troubled Asset Relief Program. Other political masters want to use Tarp to nationalize large swaths of U.S. industry such as the Detroit auto makers or to bail out states like New York that are in debt. If Mr. Obama doesn't want to have to pass a Tarp II, he'll have to say no.
George Miller. Some Democrats are starting to target the tax subsidies for 401(k)s and other private retirement options. Mr. Miller, who heads the House Education and Labor Committee, calls them "a big failure" and recently held a hearing to ponder alternatives, including nationalizing pensions and replacing them with special bonds administered by Social Security. The proposal has also caught the eye of Jim McDermott, who chairs the relevant Ways and Means subcommittee. Mr. Obama won big with his promise of tax cuts for the middle class, which doesn't square with attacks on middle-class nest eggs.
John Conyers. The man running House Judiciary is cheerleading the Europeans who want to indict Bush officials for war crimes. Other Democrats are thinking about hearings and other show trials. This is far from the postpartisan reconciliation that Mr. Obama preaches.
Henry Waxman. With President Bush soon to be out of office, the Californian's team of Inspector Clouseaus at House Oversight won't have any "scandals" left to pursue. The word in Washington is that Mr. Waxman is looking to unseat John Dingell as Chairman of Energy and Commerce, in order to shove aside a global warming moderate. That could pave the way for huge new energy taxes. Voters will punish Mr. Obama if they get hammered every time they fill up the gas tank or buy groceries.
Pete Stark. The Chairman of a crucial House subcommittee dealing with health care doesn't think Mr. Obama's proposal to significantly federalize the insurance market goes far enough. He wants a single-payer system like Canada's. Mr. Obama may want to strike a deal with Senate Republicans on health care, but Mr. Stark will be pulling him left at every turn.
All of these feudal lords -- and many others -- also come with their own private armies: the interest groups that compose the money and manpower of today's Democratic Party. The American Civil Liberties Union, Human Rights Watch and others on the anti-antiterror left want Mr. Obama to limit the surveillance and other tools that have prevented another terrorist attack on U.S. soil. The Natural Resources Defense Council and Environmental Defense will insist on onerous caps -- that is, taxes -- on coal and other carbon energy. Those won't help Mr. Obama carry Ohio and Indiana again in four years.
The trial bar wants an end to arbitration in disputes in return on its Senate investment, while the National Education Association will try to gut No Child Left Behind accountability standards. And organized labor will insist on a major push to pass "card check," which would end secret-ballot elections for unions. If Mr. Obama wants to mobilize the business community against him while squeezing moderate Democrats, he'll go along with that right from the start.
While many voters may think they've voted for "change" in Mr. Obama, they also handed power to the oldest forces in the Old Democratic Party. Jimmy Carter campaigned as a moderate and outsider, but Congressional liberals quickly ran his budget director, the economic centrist Bert Lance, out of town. Then they overrode Mr. Carter's veto of a pork-barrel water bill. Mr. Carter referred to the tax committees as "ravenous wolves" after they transformed his tax reform into a special-interest bouquet. Next came Reagan.
Bill Clinton also campaigned as a moderate, but in his first two years he was unable to govern as Congress pursued liberal priorities, including a big boost in taxes and spending. Recall Roberta Achtenberg as the scourge of the Boy Scouts and Joycelyn Elders calling for the legalization of drugs? Mr. Clinton chose -- or was forced -- to take up gun control and HillaryCare before welfare reform. Next came Newt Gingrich.
Maybe Mr. Obama has absorbed these lessons, but even if he has he'll have to be tough. The Great Society liberals who dominate Congress are old men in a hurry, and they'll run over the 47-year-old neophyte if he lets them.
Not Everyone Should Own a Home
Excerpt from The Wall Street Journal - 2008-10-06; Page A19Maybe only a friendly foreigner could say this. But America needs to realize that not everyone can own a home. The American Dream of home ownership for all is a fraud. Politicians who pimped this dream created an unsustainable mortgage industry whose collapse is only surprising because it didn't happen earlier. America's mortgage industry will not recover, nor deserve to recover, unless it is prepared to challenge this politically unpalatable reality.
Why listen to an Australian like me? For starters, as our central banker, Glenn Stevens, said a few weeks back, Australian banks are "light years away from what's happening in other banking systems around the world." Australia's four major banks sit amongst the 20 AA rated banks around the globe. And as the Sept. 23 International Monetary Fund Country Report on Australia concluded, Australia's banking sector "is sound with stable profit, high capitalization and few non-performing loans."
The reasons go directly to regulatory differences that should interest Americans. Take nonrecourse mortgage loans. When Australians borrow money to buy a house, they know that if they default and the mortgaged property doesn't cover the debt, they will be responsible for the shortfall. And the lender will chase them for it. It's a neat way of reminding Australians to borrow responsibly.
In America, where populist post-Depression laws in many states have mandated loans be nonrecourse, the opposite is true. Americans can take out a mortgage more or less as a one-way bet. If you can't afford the repayments and can't refinance, you just send the keys back to the bank. Borrowers wipe their hands of liability. So, naturally, an American in financial strife will pay off debts that carry personal liability -- such as credit cards -- before they pay off their mortgage.
Quite apart from ugly economic effects of such laws, they are objectionable in a moral sense. America is meant to be the land of sturdy individuality and personal responsibility. Instead, nonrecourse lending laws mean that mortgages, as an asset class, are of dubious value.
This is made worse by the fact that traditionally many American mortgages were typically set at a fixed rate for the 25- or 30-year life of the loan and the borrower often has the nifty ability to refinance without penalty. Most Australian mortgages are usually subject to a variable rate of interest. Fixed-rate loans are limited to around five years. So when Australian lenders offer a fixed-rate loan for five years, they fund it by borrowing five-year money. If borrowers want to repay a fixed-rate loan early, sensible economics require that they pay the lender a "break" fee, which compensates the lender for the lost interest the loan would have brought in had it been carried to term.
Prepayment penalties are either prohibited or severely restricted in the U.S. Thus, an American lender who makes a 30-year fixed rate loan that the borrower can prepay at any time without penalty is simply making a bet about the average life of a loan. And while it's true that there are good quality statistics about how long American loans usually last, these are necessarily averages. Averages don't reflect actual experience and are especially misleading when real outcomes are at the extreme. If market interest rates fall below the fixed interest rates, borrowers will simply refinance at lower rates. Another fine deal for borrowers. If market rates rise above the fixed interest rates, borrowers will stand pat. So loans are terminated by borrowers when they are profitable for lenders and loans last longer when they are unprofitable for the banks. Who would want to be an American lender?
America has a long and undistinguished history of populist politicians stacking the cards against lenders and in favor of risky homeownership. Proving that good intentions are no guarantee of good policy, President Jimmy Carter's 1977 Community Reinvestment Act, which required banks to make loans to low-income people, was just another legislative leg-up for high-risk borrowers. If socially laudable but economically reckless laws cause entirely predictable problems for lenders, don't be surprised if taxpayers have to bail them out.
The final proof that American social policies have made mortgage lending an unviable industry rests with Fannie Mae and Freddie Mac. If sensible business people don't get into the mortgage industry because it is fundamentally a bad business, the American way has been to send in a couple of quasi-government agencies to fill the gap.
Fannie and Freddie dominated the mortgage industry because ultimately government was prepared to fund activities that prudent lenders would not. When their implicit government guarantee became explicit, America's system of government-directed lending on socially desirable, but commercially imprudent, lending stood exposed.
Now, Australians -- and others -- place a high value on homeownership too. But they are aghast at the dumb things America has tolerated in pursuit of that goal. Even more dumbfounding is that nobody in Washington seems to be talking about fixing it.
Ms. Albrechtsen writes a weekly column for The Australian.
America and the New Financial World
Excerpt from The Wall Street Journal - 2008-10-06; Page A19Soon enough, America's financial crisis will wind down -- maybe in a month, maybe in a year. Yet regardless of when, this crisis marks the beginning of a new era for the U.S. For more than six decades, from the end of World War II in 1945 until now, the U.S. was the hub of global capital and capitalism. In the years to come, it will remain a vital center, but not the center.
In 1945, after an exhausting three decades of exertion against Germany, the United Kingdom emerged militarily victorious only to see itself economically exhausted. A year later, it was bankrupt, unable to find capital and on the verge of collapse. It had nowhere to turn but the U.S., which then dictated terms that amounted to a withdrawal of Great Britain from the world stage. The U.S. is not yet in the position of Great Britain, and our creditors in China are not yet as we were then. But absent a more humble and realistic attitude toward capital in Washington, that is the path we're headed down.
What is happening to finance today is similar to what happened to manufacturing beginning in the 1970s. Until then, U.S. manufacturing accounted for as much as half of all global output. By the 1970s, Germany and Japan began to exert themselves as manufacturing titans. So did Taiwan, Singapore, Korea and others that had benefited from American aid. The globalization of manufacturing continued, and was accelerated by the information technology revolution of the 1990s. While the U.S. today continues to produce a decent share of global manufactured goods, it is one among many and employs only 13 million people (10% of the workforce) in a sector that in the middle of the 20th century accounted for a third of all jobs. The same thing is now happening with finance.
In the past five years, there has been a transfer of wealth from the U.S. and Europe to Asia, the Middle East and Russia of trillions of dollars for oil and raw materials as well as inexpensive manufactured goods. Whether or not that transfer has been positive or negative for the U.S. economy writ large -- and there is considerable debate on that subject -- the outflow of wealth is a fact.
You can argue that the transfer of dollars to goods-producing countries, China above all, has provided American consumers with products that might otherwise be unaffordable but has had a negative effect on the U.S. labor force. The transfer of wealth to oil-producing states and countries rich in base metals has been an economic drain, especially as the price has spiked and the cost has risen.
That wealth transfer occurred just as the U.S. financial system began to expand its exposure to the housing market. The movement of capital away from the U.S. was one reason hungry banks turned to more absurd forms of leverage. That disguised the erosion of real capital.
Even as that was happening, however, American financial institutions still wore the mantle of global leadership. As China, the Gulf region, India, Brazil and other parts of the world have increased in affluence, they relied on the expertise, acumen and advice of Wall Street. Go to any region of the world and you will find central banks and investment banks staffed by people educated at U.S. business schools and graced with resumes that include time at the formerly premier institutions of Wall Street. Few major deals were brokered without involvement from a U.S. bank or access to Wall Street financing. That is now at an end.
It is at an end for two reasons. One is structural. There are now vibrant economies that don't depend on the U.S., are not heavily levered, and have a burgeoning, confident and ambitious middle class. But it is also at an end because those newly affluent regions of the world do not find the U.S. a welcoming home for capital.
There is no small irony in the fact that state-driven capitalism, which is the norm in the Persian Gulf and China, finds the U.S. too restrictive. Sovereign wealth funds, with enough cash on hand to bail out Wall Street and the U.S. housing market many times over, invested billions a year ago but are now saying no.
Uncertain growth for the United States is one reason. But the nature of the American regulatory regime is also to blame. Sarbanes-Oxley and the Patriot Act -- whose anti-money-laundering provisions had the unintended consequence of repelling legitimate investors -- combined with a tax code that places a heavy burden on corporations doing business in the U.S. has meant that, as the wealth transfer has happened, there is less and less inclination for global institutions to place that capital in the U.S.
This is a fact regardless of whether you believe that a high corporate tax rate is morally and fiscally correct. In truth, because of the differentials between high U.S. corporate taxes and the rates in Europe (lower) and Asia (in places nonexistent), even U.S.-listed companies that operate globally keep their profits outside the U.S., and thereby avoid those high taxes altogether.
In addition, the regulatory requirements of listing a company in the U.S. have led many companies to look to other markets and other exchanges for financing, hence the boom of financial centers such as Hong Kong, Dubai and even London.
This should not be a partisan argument. It is perfectly fair to argue that wealthy corporations should pay a greater share of the tax base than struggling middle-class Americans. Fair, but not realistic. The U.S. government can no longer dictate to global capital. Once, when the U.S. was the engine of global growth, when the world needed Wall Street for funding, capital could be taxed and controlled by the fiat of the U.S. government. No longer. The U.S. may have the will; it does not have the power.
The current debate in Washington gives no indication that this reality is understood. Both sides of the aisle are susceptible to a false sense of American economic sovereignty. Companies and countries flush with cash increasingly view U.S. laws, regulations and attitudes as undue burdens. As consumer activity accelerates outside the U.S. and Europe, and as financial centers spring up elsewhere, there is increasingly less inclination and less need for the world to go either to Wall Street or to Main Street.
For now, even with the breakdown of Wall Street, the U.S. remains vital to the global economy. It is the largest market, with a dynamic consumer culture, innovative companies, and is deeply enmeshed in the international system. But it is not the alpha and the omega; it is not the center; and the crisis hitting Wall Street is leading the rest of the world to form bonds that bypass the U.S.
Not all of this need be an absolute negative. In a truly interconnected world, more affluence and activity globally can be a universal benefit. U.S. companies operating outside the United States and Europe have already been reaping the rewards. But failure to accept the new reality will lead to the worst of all worlds.
As the U.S. government plunges into the markets, we must understand that this is the end of an era, and that attempts to unilaterally force capital to stay here will only lead to its continued flight. We are now one market among many, a huge and affluent one to be sure, but a wise nation recognizes both its strengths and its limitations. A more secure domestic capital base depends on the U.S. being seen as a desirable place for investment, and not as King Lear raging against the storm, alone, deluded and abandoned.
Mr. Karabell is president of River Twice Research. His latest book, "Chimerica: How the United States and China Became One," will be published next year by Simon & Schuster.