Right in San Francisco

Obama's Economy

    Every discussion about the economy by President Obama or Treasury Secretary Geithner begins with the phrase "the mess that we inherited", and includes a vague commitment to eventual prudence.  Their hope is that the public won't figure out the game until they have been able to get their agenda through Congress - particularly crushingly expensive  public healthcare and  "cap and trade" energy programs.  The game is best understood in three parts:

    1. Inherited. The deep recession, which they really did inherit. A great politician, Obama has avoided debate about who caused the severity of the recession, and there are plenty of culprits on both sides of the aisle. The closest to an assessment has been implicit in the proposal for regulatory reform - which includes the politically popular component of an agency to protect consumers (voters), but does not deal with the rating agencies who called the toxic assets AAA, Barney Frank's Fannie Mae /Freddie Mac who financed it (and whose standards he is again seeking to undermine), the need to again separate the commercial and investment banks which were allowed to be combined in 1999, or the intertwined global financial industry which makes a singular US regulatory system impossible.

    2.  Shared. The stimulus plans that have come from his administration - $787 billion dollars of bailouts and incentives (which are largely not yet spent); the billions for the auto industry.  This will be a two or three year program, and despite the oft-mentioned "green shoots", most financial data is still only showing a slower rate of decline, and we haven't yet seen the impact of state insolvencies (such as California) or resurgent oil prices. Consumers have apparently received the message that they have to save, and most will for awhile.

    3.  Obama's. Obama's long term projected trillion dollar deficits - which should be the focus of discussion as the Congress debates a healthcare plan which will cover 50 million "uninsured" (including at least 10 million "non-citizens") and result in taxing employer-paid insurance for 160 million people. The political calculus is to focus on the extra benefits to be given to millions by the benificent administration, with a later discussion of the cost and who is to pay it.  But, this is what the Chinese/Russian/Indian/Brazilian call for a new global currency is about - the Baby Boomer generation has always felt that it deserved a second home at the lake, an SUV, and comfortable early retirement, and Obama is telling us that nobody has to pay the bill - except for those few elusive rich folks. There are a few billion folks on the planet who understand that isn't the way that economics works. Hopefully, there will be a few hundred in Congress who understand the disasterous effects of his healthcare and energy proposals - and will have the courage to act accordingly. 

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   This week's You Tube is an interview with the fiance of Neda Agha Soltan, who was killed by Iranian security forces at a protest in Tehran this week. The more graphic images which have been widely distributed require a You Tube sign in.  While many have been killed and arrested, she will be the face of Iran for the world. Our government's reaction? - our embassy in Tehran cancelled some invitations to the July 4 celebration party.

Bill Bowen - 6/27/09

Bernanke's Character Test

  Some time ago a friend gave me a framed quote from Rev. Martin Luther King, Jr:

        The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge  and controversy.

    I couldn't get this reflection out of my mind as I listened to Bank of America CEO Ken Lewis' Congressional testimony about his late 2008 conversations with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson. In summary, with only a little reading between the lines:

        -  Capping a long successful stretch of building Bank of America, Lewis used the financial crisis to acquire Countrywide (the country's preeminent mortgage lender) and Merrill Lynch (the country's preeminent retail broker.)  When he realized the risk of bad real estate securities at Merrill, he planned to exercise a contract clause allowing B of A to opt out in the event of a "material adverse change" at Merrill.  

        - In discussions led by Paulson and agreed to by Bernanke, it was made clear that a failure of B of A to follow through on the Merrill deal would be very detrimental to the financial system which had just seen the calamitous failure of Lehman Brothers, that Treasury would engineer the removal of Lewis and his board if they reneged on their Merrill deal, and (here is the legally murky piece) that Lewis should not tell his stockholders how bad Merrill's exposure was before they voted to approve the acquisition. At MLK's moment of crisis they did what they had to do, the banking system was being stabilized, and B of A was one of the banks given multi-billion dollar TARP loans as the essence of that $700 billion program changed from buying toxic assets to supporting banks. None of this had anything to do with the Treasury and the Fed's legal authority, Congress's intent in passing the TARP, or the rights of B of A stockholders. MLK might have approved.

    Fast forward to the new administration and the massive efforts to stimulate the economy and institute Obama's broad and expensive agenda.  The confab of Brazil, Russia, India, and China getting together to discuss the demise of the dollar as the global reserve currency, comes amid much discussion from the Fed about being prepared to remove the massive liquidity that has been injected into the US financial system, and which will inevitably lead to high inflation and the decline of the dollar.  The challenge for the theoretically non-political Fed will be to raise interest rates and stop supporting government debt in the elusive moment once the economy has healed, but before inflation takes over. (That positioning assumes that inflation would be due to the various stimulus efforts, rather than ongoing trillion dollar deficits.)  There will be no supporters in the White House, the Congress, or the liberal press.

    So, how to incent Mr. Bernanke to properly balance the Fed's two charter imperatives - (politically popular) full employment and a (politically painful) stable dollar.  For a carrot, the administration and Congress will expand the role and authority of the Fed in regulating the financial industry- what bureaucrat doesn't want more power. (In the mix, Congress will probably reduce the Fed's consumer protection role, and may grab greater control over the appointment of regional governors.) For the stick, it is noted that Bernanke's term expires in February and his reappointment depends on Obama and the Democratic Congress. Let's hope that Ben Bernanke is more like Reverend King, and less like Ken Lewis, as the need to protect the dollar runs into Obama's free-spending agenda.  

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    This week's You Tube wouldn't be appropriate unless it were from a classy late night stand up comedian, making his final host appearance on the Tonight Show. Unfortunately, the other jerk got all of the week's publicity.

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   And here is an unusually clear article about China by Graham Summers on Seeking Alpha.

    bill bowen - 6/19/09

North Korea: Part 2

    I have had enough feedback and afterthoughts from last week's posting on the North Korean confrontation to call for a follow-up. The thoughts fall into three general subjects:

    1. The ball is in China's court.  The logic goes like this - China has been North Korea's patron since at least the Korean War; they are the predominant trading partner and financial supporter; they have a major interest in eliminating a motivation for Japan to develop their own nuclear capability; their behavior at Tienanmen Square and in Tibet demonstrates that they are not as constrained by public opinion as we are; significant voices in Beijing note that Kim Jung-il has "crossed the bottom line"; they provide the medical care for the ailing dictator; and they can / should hasten the Great Leader on his way.

   This all makes sense, but it opens an even larger subject - the transition from Pax Americana to a duopoly of global power. Since WWII we have been the only country willing and able to exert military power to keep the world's order. (An exception is our client Israel, which has occasionally needed to clean up its neighborhood.)  When we have chosen to act, we have had the wars in Korea, Vietnam, Iraq, and Afghanistan, and the NATO mission in Yugoslavia. When we have chosen not to act, nobody has stepped in to the void - Rwanda, Sudan, Somalia, Cambodia, Iran's nuclear program. We are now hoping that China will step up. 

    But the scope of the emerging duopoly is broader. China has started talking of a replacement for the dollar as the global reserve currency, and when their students spontaneously laugh at Treasury Secretary Geithner's claim of financial prudence, they acknowledge the reality. As our recession began, there was hopeful talk of a "decoupling" - the premise that other countries would be able to carry on as US demand for gadgets declined. Lo and behold, while our economy has been contracting at a 6% rate in recent quarters, theirs has continued to growin high single digits, Nancy Pelosi's harangues about human rights and carbon emissions notwithstanding.

    It will be very difficult for us to accept, but power follows economics, and we are no longer preeminent. Life will be easier in terms of economics and security if we have a good partner, and North Korea offers China an opportunity to demonstrate that they are ready for prime time.

 2. Reality, as well as domestic politics requires that Obama do something, and there are some meaningful things that can be done. The first is a quarantine on military-related exports, enforced by a naval interdiction force. South Korea has agreed to join the 90 nation Proliferation Security Initiative, despite North Korea's calling it a "declaration of war." How far this gets pushed depends on China, Obama, and the North Korean generals, but we have enough forces on hand to manage a blockade, if not the potential North Korean land response.  Russia and China apparently are finally ready to join a meaningful UN resolution in this direction.

    The second response is longer term, technological, and expensive.  While short of Reagan's "Star Wars" vision, we have a missile defense technology that should be upgraded and deployed. We cannot defend against a Cold War onslaught from the Russians, but we should be able to provide protection against Korean or Iranian missiles, working with our allies - including Russia and China. More problematic - equally necessary and less expensive, but probably less effective - is the deployment of bomb-detection equipment for use at world ports and at sea.

   The third is a broader expansion of non-proliferation efforts. Mohamed ElBaradei's term as Director General of the International Atomic Energy Agency ends in November, and it is important that he be replaced with another well respected international figure. Obama has talked of downsizing US and Russian nuclear arsenals - strengthened international constraints against the backdrop fo US/Russian cooperation would certainly be a good thing.

    3. It is a unique irony that Al Gore's TV reporters apparently wandered into North Korea at a most unpropitious time.  While the Huffington Post would like to blame their incarceration on George Bush, they should plan on a long stay.   

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        Instead of a You Tube, this week I have attached a video about the Memorial at Harbor ViewPark, in Bayonne, New Jersey - a gift from the Russian people to commemorate the 911 victims. The media has apparently been too busy writing about Paris Hilton and our politics to cover this excellent statement of Russia's attitude in the 21st Century.

bill bowen - 6/12/09

Chamberlain v Kim

    When Joe Biden "guaranteed" in October that there would be a foreign crisis to test the mettle of a President Obama, he provided no specifics, and John McCain predicted that he would have the wrong response.  For the moment we seem to have evaded the collapse of the financial system, swine flu, and the retreat of the Pakistani government, leaving global warming for another day.  Enter Kim Jong-il, the Asian pillar of the Axis of Evil, with his erratic behavior seeking who knows what, and leaving little room for Obama to "meet with any world leader without preconditions" in search of "Peace in Our Time".   

    What we do know:

        -  Since Kim's father withdrew from the Nuclear Nonproliferation treaty in 1993, Presidents Clinton and Bush have tried everything- Six Party talks; Chinese leadership; US engagement; food and energy aid; a promise of nuclear energy assistance; non-aggression commitments; offers of a peace treaty ending the 1950's Korean war; olive branches from the South. It is not a question of finding better adjectives and adverbs.

        - North Korea, a country of 24 million,  has an Army of 1.2 million to go with its significant missile program, and the nuclear program which has achieved Hiroshima-sized explosions.  Although there is no evidence that they can deliver the bombs any distance at this point, that is not far away - at least relative to South Korea and Japan, two countries which have relied on the United States for defense, much to the relief of the remainder of Asia. Between the two allies, we have about 60,000 US troops to supplement the South Korean regular forces of some 520,000 army and 70,000 navy troops, and 600 aircraft.  This is not like the Wizard of Oz where the facade crumbles when confronted.

        -  The military has firm control, having displayed little concern during the famine of the 90's which killed between one and two million people. This satellite photo of the Korean Peninsula at night shows the state of affairs.

        -  Yongbyon, the center of the nuclear program, is too far from Tel Aviv to count on the Israeli's to clean up the mess. But the Iranians are watching the American response closely.

        -  The South Korean stock market is up 22% through May. What me worry?

   What we can assume:

        -  Smart people in diplomatic and military positions throughout East Asia are considering all alternatives. The North's nuclear and missile facilities could be destroyed with conventional weapons, but that leaves the million-man army concentrated along the DMZ, which is within 25 miles of Seoul, the South's thoroughly modern capital with over 10 million people. There is no good answer. 

        -  The hope has been that over time the next generation of leaders of the North would migrate toward the prosperity of the south, a la East Germany.  But Kim Jong-il replaced his father in 1994, and his 26-year old son, Kim Jong-un, is apparently being groomed to replace him with no change to the marriage between the military leadership and the Kim family business.  Neville Chamberlain would still bank on this path.

      -  My guess - the Obama administration will migrate from saying that a nuclear-armed North Korea is unacceptable, to saying that they cannot be allowed to export nukes. (They have been exporting missiles to Iran for decades, and were apparently involved in a nuclear site in Syria which the Israeli's took out in 2008.)  The issue will become the ability to inspect outbound cargoes, a prospect that the South Koreans have recently endorsed, but which the North Koreans consider an act of war. To paraphrase Teddy Roosevelt, we will "walk stickly and carry a big soft."  The press may even give more coverage to the two naive reporters from Al Gore's "Current TV", who were captured doing an investigation of refugees going to China - real people are always more important than a few theoretical nukes.

        - Plan B would involve some elements of further economic embargo, incentives for cooperation, more UN resolutions, and a Chinese pledge to shelter the North Korean leadership in the event of a collapse.  Then, serious interdiction of shipping, large-scale civil defense planning in the South, and a collective holding of our breath.  In a year or two, even this will not be possible.

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    To put the implications of North Korea's nuclear program in context, this week's You Tube is an investigative report by John Oliver of the Daily Show on this Fall's experiment to test the results of high energy collision of nuclear particles.  

Bill Bowen - 6/5/09