James Pethokoukis

Politics and policy from inside Washington

How global capitalism (and the U.S. military) is defeating Al Qaeda

Aug 6, 2009 21:29 UTC

A lengthy post from Thomas PM Barnett always makes it a great day. Here he talks about the video truce offer from Zawahiri, and why it is another sign of Al Qaeda strategic weakness and failure:

Radical Islam has overplayed its hand again, creating popular resentment escalating to political backlash. … Why? Because the penetrating embrace of globalization is doing the truly profound damage to Al Qaeda, and we are globalization’s bodyguard. The flow of proliferating networks that offer ideas and conversations and products and expressions of individualistic ambition — especially with regard to women — offer radical Islamic groups no hope of gaining permanent political control. … The Middle East currently suffers from a destabilizing youth bulge around people between the ages of 15 and 30. In two decades time, the region’s demographic center of gravity will have shifted upward commensurately, meaning the Middle East will hit “middle age.” What do we know from this shift in other parts of the world? That criminal behavior wanes, meaning bin Laden and Al Qaeda do not have time on their side. … Globalization is not some elite conspiracy hatched in Manhattan or Davos; it’s now largely fueled by the ravenous demand for a decent lifestyle by an emerging — and huge — global middle class located overwhelmingly beyond our shores. That world-spanning force demands the Islamic world’s progressive integration into globalization’s vast universe.

Me: Another reason why American needs to stay open to the world, especially in terms of trade. But all the cross-border flows count: goods, services, ideas, capital, people.


Capitalism has always been the answer. That’s what the Reagan-wing of the party kept trying to say: you can’t spread liberty with guns.

Welcome to reality.

Tax the rich. Good luck with that

Aug 6, 2009 18:17 UTC

Government revenue estimates of future tax hikes on the wealthy always overestimate how much dough they will bring in.  This is certainly the case with the 1993 Clinton tax hikes. Now why is that? First up is my Reuters compadre, the so-smart-he’s-scary Christopher Swann:

It has been many years since the rich had a powerful incentive to test the limits of the tax code. The top rate of income tax has fallen with only minor interruptions since its vertiginous peak of 92 percent in 1953. But a foretaste of what might be expected was offered by Maryland’s ill-fated creation of a millionaires-tax bracket in 2008.

A year later 1,000 millionaires had disappeared — a third of the total — and revenues from this group had fallen by $100 million. Some may have left the state while others may have found ingenious ways to reduce their reported income.

And now Richard Rahn in the WaTimes:

Quite simply, upper-income people have options. History shows that when tax rates are raised, many will choose to work less (leisure is nontaxable), retire earlier than they had planned and save and invest less in taxable, productive activities. Those making more than $160,000 per year would need to have their taxes roughly tripled to take care of just this year’s deficit. (One merely has to look at the tax evasion practiced by the chairman of the congressional tax writing committee, the secretary of the Treasury and the former majority leader, et al. at today’s tax rates to know that they and their colleagues, as well as most everyone else, will find either legal or illegal ways to avoid paying the tax.

America’s Most Dangerous Man? An Accountant

Aug 6, 2009 17:54 UTC

Well, that didn’t take long. Just four months ago, the Financial Accounting Standards Board wisely knuckled under to Ccongressional cajoling and decided to ease its market-to-market valuation rules. But now FASB Chairman Robert Herz and his obscure accountacrats in Norwalk, Conn. are enthusiastically re-embracing “fair value.” They want to expand their application as never before, to include all financial assets, even loans.

All that, despite evidence that the change made back in April enabled banks to claim billions in additional first-quarter earnings (more than $3 billion at 45 large firms) and helped instill a needed dose of confidence into wobbly markets. Thus this new effort by Herz & Co. represents a triumph of ideology — that transparency trumps all — over practicality and experience. What if an upgraded mark-to-market standard forced slowly healing banks to set aside huge sums to cover paper losses and further crimp lending? Not FASB’s problem.

Now in a Greenspanian dream world of perpetual economic moderation, a mark-to-market may well be the ideal one-decision regulatory approach. Just set it and forget it. Whereat’s the risk in a pro-cyclical policy, after all, when the business cycle seems stuck firmly on “gentle”?

But stormy economic times can turn fair value into foul policy. Great Depression-era regulators, according to a 2008 Securities and Exchange Commission report, abandoned mark-to-market in 1938 because of “serious concerns” over how it was affecting systemic financial stability. And had money center banks in the 1980s been forced to mark those loans to market prices, argues former FDIC chairman William Isaac, “virtually every one of our money center banks would have been insolvent.”

Now let’s be clear. Fair value didn’t spark America’s financial crisis. Rather, as Warren Buffett aptly put it, mark-to-market was “gasoline on the fire.” (Though, as a purely historical matter, it should be pointed out that mark-to-market coincided nicely with two major U.S financial panics.) As such, a mid-crisis reevaluation of the standard should have been an easy call for FASB. It clearly wasn’t.

Not true for others, though. Earlier this year, the Group of 30 – an international body of banking and academic biggies – recommended that “fair value accounting principles and standards should be reevaluated [when] dealing with less liquid instruments and distressed markets.” Paul Volcker, himself a member, questioned the suitability of “across-the-board application of mark-to-market accounting,” which sounds exactly like what FASB is proposing. Even the International Standards Accounting Board seems hesitant to go as far as its American cousin.

But neither historical precedent nor present-day analysis seems to much matter to the Gnomes of Norwalk. The changes to mark-to-market didn’t further destabilize shaky credit markets. And those toxic asset-laden “zombie” banks are slowly earning their way to health, needing neither nationalization nor more government money.

Yet none of this has prompted even a tacit admission by FASB that every few generations rules may need to be massaged just a wee bit. Fair value is neither good nor evil; it’s just another tool in the toolbox, appropriate for some economic times perhaps and not for others. And with fragile credit markets still in recovery mode, now is not the time for FASB to try and bring it back with a vengeance.


@ Danny –

Most states do require ethics education for those who wish to sit for the CPA. The real problem is that ethics is not something that can be taught in a few credit hours of classes. Especially not ‘business ethics’, which in my experience is taught as compliance with regulations and laws, and not real ethical reasoning.

White House reform plan to make Fannie and Freddie … Fannier and Freddier!

Aug 6, 2009 14:53 UTC

So Team Obama is considering a truly horrible plan: to re-imagine Freddie and Freddie as new entities that are just like the current failed ones, but with government taking over all the toxic stuff . Tell it to me WaPo:

The Obama administration is considering an overhaul of Fannie Mae and Freddie Mac  that would strip the mortgage finance giants of hundreds of billions of dollars in troubled loans and create a new structure to support the home-loan market, government officials said. The bad debts the firms own would be placed in new government-backed financial institutions — so-called bad banks — that would take responsibility for collecting as much of the outstanding balance as possible. What would be left would be two healthy financial companies with a clean slate.

Me: Well, that is one approach.  Or perhaps  …. we could just break up and replace them with a larger number of smaller private companies — ones with no implied government guarantees. They would be left to thrive or fail or get taken over or whatever.  Then again, as this posts says, no one is going to be buying houses anyways.

Will healthcare reform create trillion-dollar budget deficits?

Aug 6, 2009 14:34 UTC

That is the contention of former White House budget official James Capretta who does the math:

CBO expects the spending in the bill would grow at a rate of least 8 percent annually into the indefinite future, while the revenue to pay for it will only grow at about 5 per cent per year. Hence the “substantial increases” in federal budget deficits beyond 2019.

Although CBO declined to specify any actual deficit numbers beyond 2019, they can be easily calculated, in rough terms, from the information provided in Elmendorf’s letter.

By 2030, if the spending associated with the coverage provisions rises 8 percent per year after 2019 and the revenue rises by 5 percent, the bill would add more than $200 billion per year to currently projected budget deficits. By 2048, the annual deficit increase would top $1 trillion — and only go up from there.


As a practical matter, this country lacks the ability to address healthcare (and for that matter ANY problem), in a focused, direct, and coordinated fashion. It is also incapable of really planning much of anything of real value, at least not at this point in time. That type of activity does not fit within our governance model.

What you see here is an example of what happens when ANY entity is run by committee. We’ve known that as a society for a long time.

Our governance model is a “herding cats” governance model, where we let people and the entities they form have the freedom to do most of what they consider to be in their best interests, and we hope that it will also be in society’s best interests.

Sometimes that works for us, and other times it doesn’t. It will never yield consistency in approach, effort, and results. For us to think so is delusional in nature.

We (as a nation) lack the ability to rally around anything, unless it is perceived as An imminent threat to virtually all of us, and that’s not going to happen often. And so we become self-absorbed in thinking about our own personal, close to home minutiae.

There are some positive and negative ramifications associated with ANY alternate approach we might pursue, and the yelling and screaming will always loud and raucous.

As George Will often says, there is the “inertia” which is Washington. There is also the “inertia” which is the U.S. and its constituent parts.

Although this approach has served us well for most of the last 110 years, from a theoretical perspective, one has to wonder how long we can govern ourselves using the “herding cats” governance model, in light of our increase in size and complexity of our citizens.

If the US were run like a business, then every single day, its management team would assess whether its goals are being attained, bust their butts to achieve those goals, ensure that it was getting the maximum value and productivity out of those working for it, and make on the dime changes to most effectively and efficiently reach those goals. In other words, be nimble.

This country is not nimble, and can not be.

I’m not advocating a particular change, either left or right; just the recognition that EVERY governance model has its limitations, and this one is no different. However, for us to think that we can continue to use it and not have negative periods and poor, inappropriate responses to problems, is not reasonable. A country needs to know its limitations.

Study: Housing market will be in a recession for decades

Aug 6, 2009 14:26 UTC

A University of Utah study predicts that the percentage of U.S. households that own homes — a number which peaked at 70.4 percent in 2004 and 2005 and is now at 67.4 percent — will drop to about 63.5 percent by 2020. That would be the lowest level since 1985. The reasons are a) smaller households, b) tighter credit, c) green desires thatare  pro-renting.

David Rosenberg of Gluskin Sheff give his two cents on what it all means:

At a time when there are still some 800,000 units in excess that are vacant AND for sale, this secular decline in demand spells one thing and one thing only — a secular deflation in residential real estate. The periodic months of “green shoot” stability will very likely prove to be little more than noise along a fundamental downtrend in pricing.


Your link to the study is not working, please post the study link…have you read the study or just Breakfast with Dave?

Posted by Jon | Report as abusive