Grasping Reality on TypePad, by Brad DeLong

Talent Seems Thin in the McCain Campaign...

McCain's own personal handlers parachute into Palin's operation. Monica Langley reports:

Game Plan for Palin Is Retooled Ahead of Debate: Top McCain Aides Oversee Preparation After Recent Flubs: The McCain campaign moved its top officials inside Gov. Sarah Palin's operation Sunday.... Additionally... Gov. Palin will leave late Monday for his Arizona ranch to prepare for the high-stakes debate.... McCain campaign manager Rick Davis and senior adviser Steve Schmidt are planning to coach the candidate.... [T]hese top officials plan to fly with her on Monday to Sen. McCain's ranch in Sedona, Ariz., which they hope she will find a comforting place to prep....

Mr. Palin has worried about the frequent separation of his wife from her family, friends and Alaska staff, an adviser said. Accordingly, her family will be with her in Sedona during this week. Also, a key Alaska staffer joined the Palin operation Sunday.... [T]he more experienced advisers assigned to her by the McCain campaign are accustomed to working with seasoned candidates, not someone "completely green on the national stage," one strategist said.

Several Republican backers have griped that the campaign has put the candidate in difficult situations... high-profile television interviews... meetings with foreign leaders... [who] made sexist remarks.... [Plus] Gov. Palin isn't getting media attention for her contributions. For example, with foreign leaders last week, she had detailed conversations about the national-security and global implications of the energy crisis, one adviser said....

Gov. Palin flubbed quasi-mock debates in New York City and Philadelphia, some operatives said. Finger-pointing began, and then intensified after her faltering interview with CBS anchorwoman Katie Couric.... Until the weekend, the highest levels of the McCain campaign were focused on Sen. McCain's response to the financial crisis and his own debate against Sen. Barack Obama.... The campaign is sending in Sen. McCain's debate coach, Brett O'Donnell, to help with her preparation, advisers said. Though he always was expected to help out after Sen. McCain's debate Friday in Oxford, Miss., Mr. O'Donnell now needs to "undo" much of her previous debate prep, which has resulted in occasional "rote" responses, one adviser said.

"We've got four days," another adviser said Sunday...

So does the McCain campaign really believe that it only has three competent people in it--Rick Davis, Steve Schmidt, and Brett O'Donnell?

The senior campaign staff are setting her up to be Dan Quayled: anything that goes wrong Thursday night is her fault; anything that goes right is to their credit.

If I were McCain, I'd fire all three for disloyalty right now...

KALW 11:00 AM Tuesday

Memo to self: Track down the audiotape...

My name is Malihe [Razazan]. I am a producer with Your Call on Kalw, Public Radio Station in San Francisco. I would like to invite you to be on the show tomorrow from 11:00 to noon to have a conversation about the current economic crisis. The ohter guest is professor Brenner from UCLA.

91.7 FM: Your Call: Global capitalism and its discontents.

Yesterday's Collapse...

Calling Will Wilkinson...

Tim Sullivan of Basic Books and I are sitting here at Brewed Awakening, wishing that either of us had read the sequel to What's the Matter with Kansas, and thinking that Will Wilkinson is the person to write to us from Iowa, telling us what is really going on in the Heartland right now...

Time to Shut the Republican Party Down

Mark Kleiman:

Magnitudes: Total value of the bailout bill: $700 billion. Net cost to the taxpayer: unknown, but much less than that [$100 billion]. Drop in the value of U.S. stocks today when the bill failed to pass: $1.3 trillion.

That's not quite the right comparison. There is also a loss of $2.0 trillion or so in lost wages corresponding to the lost expected profits that are reflected in the stock market declines.

The House Republicans thus have a benefit-cost ratio of -30-to-1.

New York Times Death Spiral Watch (David Brooks Edition)

Every time the New York Times publishes a David Brooks column, an angel has its wings ripped form its shoulders leaving a bloody, gory mess: "What we need... is authority. Not heavy-handed government regulation, but the steady and powerful hand of some public institutions..."

Revolt of the Nihilists: House leaders of both parties got wrapped up in their own negotiations, but did it occur to any of them that it might be hard to pass a bill fairly described as a bailout to Wall Street? Was the media darling Barney Frank too busy to notice the 95 Democrats who opposed his bill? Pelosi’s fiery speech at the crucial moment didn’t actually kill this bill, but did she have to act like a Democratic fund-raiser at the most important moment of her career?....

We’re living in an age when a vast excess of capital sloshes around the world fueling cycles of bubble and bust. When the capital floods into a sector or economy, it washes away sober business practices, and habits of discipline and self-denial. Then the money managers panic and it sloshes out, punishing the just and unjust alike.

What we need in this situation is authority. Not heavy-handed government regulation, but the steady and powerful hand of some public institutions that can guard against the corrupting influences of sloppy money and then prevent destructive contagions when the credit dries up.

The Congressional plan was nobody’s darling, but it was an effort to assert some authority. It was an effort to alter the psychology of the markets. People don’t trust the banks; the bankers don’t trust each other. It was an effort to address the crisis of authority in Washington. At least it might have stabilized the situation so fundamental reforms of the world’s financial architecture could be undertaken later.

Why oh why can't we have a better press corps?

Obama Takes the Gloves Off

These are the hard-hitting ads that Democrats need in this election:

Obama Runs Constructive Criticism Ad Against McCain

Why the House Republicans Voted Against the Paulson Plan

Let us turn the microphone over to Tim Echols, Treasurer for Paul Broun, R-GA:

FYI, all the Georgia Republicans voted against the bail-out.

As FRC said today, the current proposal fell short of upholding conservative ideals. The Congressional conservatives played an important role in keeping out the already-borderline socialistic White House proposal and some Hugo Chavezesque suggestions from the Democrats, such as allowing judges to set mortgage rates and creating a slush fund for liberal groups like ACORN. However, the final plan did not reform what has created the problem nor did it adequately explain how the taxpayers get their money back. Moreover, the bailout seemed to create a new entitlement in a federal insurance system for every home loan in America.

Speaker Nancy Pelosi (D-Calif.) also highlighted changing the proposal's original scope to include a federal bailout of failed city governments, making all U.S. taxpayers responsible for disastrous city councils. Responsibility is a lost word for many nowadays. Maybe the House vote signals more effort to restore that responsibility.

Tim Echols

As I said, raze the Republican Party to the ground. Plough it under. Scatter salt in the furrows so it can never grow back.

We need another, very different opposition party to face the Democrats. We need it now.

House to Wall Street: Drop Dead

A very good line from Rex Nutting:

House to Wall Street: Drop Dead: WASHINGTON (MarketWatch) - With a firm rejection of Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke, the House Republicans have told the financial markets that they'll have to solve their problems on their own, without $700 billion of taxpayer money. In a stunning vote on Monday, the House rejected the financial rescue package on a vote of 205 to 228. Republicans voted against the bill by a two-to-one ratio, and in the process rejected their own leadership.... Politicians who had cut their teeth on free-market principles couldn't accept the idea that the federal government should back up the banks who had foolishly bet everything on the housing bubble. Or they didn't want to face the voters in six weeks and explain why a Republican would vote for the biggest government bailout ever.

Now we shall see if Paulson and Bernanke were right when they said the credit crisis could worsen and inflict dire consequences on the global economy.... Rejection of the plan means there's no political solution to this financial crisis on the horizon. As it now stands, the markets are on their own. The next six weeks will tell whether the coup d'etat in the House on Monday has created a political crisis to match the financial one.

Palin's Staff Says that She Knows Nothing About Any Supreme Court Decision--Except Roe

Palin aide leaks: Palin can't name any Supreme Court case other than Roe v. Wade.

When this is what your own staff is leaking:

Jonathan Martin: In reintroduction, Palin to do more interviews and "tell her story": Of concern to McCain's campaign, however, is a remaining and still-undisclosed clip from Palin's interview with Couric last week that has the political world buzzing.

The Palin aide, after first noting how "infuriating" it was for CBS to purportedly leak word about the gaffe, revealed that it came in response to a question about Supreme Court decisions.

After noting Roe vs. Wade, Palin was apparently unable to discuss any major court cases.

There was no verbal fumbling with this particular question as there was with some others, the aide said, but rather silence.

John McCain: dishonorable and dishonest for choosing an unvetted running mate he did not know.

John McCain: Clown

Thomas Edsall:

Bailout Package Fails As Dow Plunges: [T]he outcome this afternoon was a major setback to John McCain, who had backed the proposal and portrayed himself as a party leader who would help win approval for the bailout. Chief McCain strategist Steve Schmidt said yesterday on Meet the Press, "What Senator McCain was able to do was to help bring all of the parties to the table, including the House Republicans, whose votes were needed to pass this." And this morning, McCain backer Mitt Romney told NBC that "this bill would not have been agreed to had it not been for John McCain....this is a bipartisan accomplishment, a bipartisan success. And if people want to get something done in Washington, they just watch John McCain." Instead, members of McCain's own party voted 133 to 65 against the measure. Democrats, on the other hand, voted 140 to 95 for the bill.

In an attempt to shift blame for the defeat, House Republican Leader John Boehner of Ohio and Republican Whip Roy Blunt of Missouri charged that House Speaker Nancy Pelosi provoked the 'no' votes by angering Republican members with an excessively partisan floor speech. "We could have gotten there today had it not been for the partisan speech that the speaker gave on the floor of the House," Boehner said. House Financial Services Committee chair Barney Frank of Massachusetts... [ssid] the claim amounted to an extraordinary level of personal and parochial motivation: "Because somebody hurt their feelings, they decided to punish the country."...

Shortly after Boehner spoke to reporters, the McCain camp issued a statement by economic adviser Doug Holtz-Eakin similarly seeking to shift the blame to Democrats:

From the minute John McCain suspended his campaign and arrived in Washington to address this crisis, he was attacked by the Democratic leadership: Senators Obama and Reid, Speaker Pelosi and others. Their partisan attacks were an effort to gain political advantage during a national economic crisis. By doing so, they put at risk the homes, livelihoods and savings of millions of American families. Barack Obama failed to lead, phoned it in, attacked John McCain, and refused to even say if he supported the final bill. Just before the vote, when the outcome was still in doubt, Speaker Pelosi gave a strongly worded partisan speech and poisoned the outcome. This bill failed because Barack Obama and the Democrats put politics ahead of country."

Obama campaign spokesman Bill Burton countered:

This is a moment of national crisis, and today's inaction in Congress as well as the angry and hyper-partisan statement released by the McCain campaign are exactly why the American people are disgusted with Washington...

Today in Financial History

The TED Spread:

Housing Prices:

Stock Market:

Unemployment:

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From Calculated Risk:

Calculated Risk: MONDAY, SEPTEMBER 29, 2008

Cliff Diving by Calculated Risk

Dow off 6%.

S&P 500 off 7%.

NASDAQ off 7%.

With the failure of the bailout in the House, the question is now what? There is the possibility of some arm twisting and another vote tomorrow. Another possibility is that the bill will be revised in some way to garner a few more votes....

Bailout Plan Fails in House by Calculated Risk

Yes 205 No 228 ... Dow off 500 points. The vote failed....

House Vote Nears on Bailout Plan by Calculated Risk

Here is the debate on C-SPAN. Voting now ... will take about 15 minutes (so about 1:45 PM ET)....

Fed to significantly expand "the capacity to provide U.S. dollar liquidity" by Calculated Risk

From the Fed:

In response to continued strains in short-term funding markets, central banks today are announcing further coordinated actions to expand significantly the capacity to provide U.S. dollar liquidity. Central banks will continue to work together closely and are prepared to take appropriate steps as needed to address funding pressures.

Meanwhile the TED Spread from Bloomberg is at a record 3.48! Ouch....

---

Conventional open-market operations work on the liquidity premium--they either relax a cash-in-advance constraint keeping aggregate demand low, or relax a relatively-safe-investments-look-unprofitable animal spirits constraint keeing investment and thus aggregate demand low. For the past year the problem has not been that safe interest rates have been low--far from it. The problem has been that risky asset values have been low (partly because a lot of risky assets are backed by investments that weren't fundamentally very profitable, and partly because risk premia are high because the supply of risky assets is great and the mobilized risk-bearing capacity of the private market is not that large).

So the natural answer appears to be open-market operations working not on the liquidity premium but on the risk premium--Operation Twist on a Pan-Galactic scale.

Paul Krugman has thoughts:

The humbling of the Fed: Not a day has gone by since this crisis began that I haven’t been thankful that Ben Bernanke is the chairman of the Fed; had events gone a bit differently (thank you Harriet Meiers!) the post might well have gone to some unqualified Bush loyalist.

That said, the Fed’s experience in this crisis has been humbling; getting traction has proved harder than BB himself suggested in his pre-crisis writings. Here are my thoughts on why....

[T]he Fed... is a very big player, but not that big compared with the market as a whole — the Fed has roughly $800 billion each of assets and liabilities in a $50 trillion credit market. And conventional monetary policy consists, basically, of enlarging or contracting the Fed’s balance sheet. Why does the size of a financial player constituting less than 2 percent of the credit market matter? The answer is that the Fed’s liabilities are special: nobody else has the right to create monetary base, which can in turn be used either as currency or as bank reserves. When the Fed expands the money supply, the key thing isn’t that it’s buying Treasury bills, it’s the fact that it’s doing so by expanding the monetary base.... But in March, and again this week, interest rates on T-bills fell close to zero — liquidity trap territory. What does that do to the Fed’s role?... [O]nce T-bills have a near-zero interest rate... the two sides of the Fed’s balance sheet become perfect substitutes.... [T]he liquidity trap makes conventional monetary policy impotent.

But why not purchase stuff other than T-bills? This can be thought of as changing the composition of the Fed’s balance sheet, rather than enlarging it; and Ben Bernanke, in happier days, thought that might be an effective policy in a liquidity trap. There are, however, three reasons to be doubtful about this stuff:

1. The Fed is now trying to move a much bigger rock: it is, in effect, trying to raise the price of financial assets other than T-bills by selling T-bills and buying other stuff. There’s only (yes, “only”) $800 billion of monetary base....

2. T-bills and other assets, such as long-term bonds, are probably much better substitutes for each other than T-bills are for monetary base — money is unique as a medium of exchange....

3. The reason T-bills are an imperfect substitute for, say, corporate bonds — to the extent they are — is risk. Therefore, the reason changing the composition of the Fed’s balance sheet can move prices, to the extent it can, is because the Fed is taking on risk. This isn’t a role the central bank is meant to play; you’re sliding over into fiscal policy.

Nonetheless, I guess the Fed had to try the “Bernanke twist.” And it did — the old Fed balance sheet, in which T-bills were the vast bulk of assets, is no more. But the effects have been disappointing, especially weighed against the risk, which I know is making Fed officials very nervous.... So Ben Bernanke came into his current position believing that central banks have the power, all on their own, to fight Japan-type problems. It seems that he was wrong.

Krugman's (2) seems to be wrong, for the reason he gives in his (3): T-Bills are not close substitutes for mortgage-backed securities. If they were close substitutes, we wouldn't have a problem. It's the huge risk premium that makes them fail to be close substitutes--if the risk premium fell, things would be very different.

But I am not sure that (3) is right: taking on risk doesn't seem to me to be well-described as fiscal policy any more than as conventional open-market operation monetary policy. It is something else. I'm calling it open-market operations on the risk premium, but that is not a very good name.

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As I have said before, I find it helpful to group all the things the Fed and Treasury have done, are doing, and might do into three baskets, each corresponding to a different stage of the seriousness of the financial crisis and the soundness of the financial system.

Stage I policies: dealing with a liquidity panic These are the "Bagehot rule" policies: the central bank acts to keep the economy at the "good equilibrium" in a panic when multiple equilibria--a good "confidence" equilibrium and a bad "panic" equilibrium--are possible. It does so lending freely to solvent but illiquid institutions at a penalty rate on collateral that would be good in normal timrs. Emergency discount window operations are of this kind. The conventions that the discount rate should be higher than the bank-to-bank federal funds market rate and that borrowing from the discount window should create a stigma and a presumption of a higher degree of future regulatory and counterpary scrutiny are part of the "penalty rate" charged for asking for such help from the central bank. The idea is that institutions that have gotten themselves short of reserves and need emergency liquidity should feel some pain as a result of the systemic risk they caused.

Stage II policies: These the are conventional consensus monetary policies--the central bank as central planner making the price in the short-term money market an administered price in the interest of maintaining full employment and price stability. It raises and lowers the market rate of interest to keep it near the Wicksellian natural rate of interest. It uses open-market operations to buy Treasury securities for cash to flood or drain the market with liquidity, and so push down or up real borrowing costs (thus encouraging or discouraging investment) and push up or down the cash values of all kinds of debt. In the case of a financial crisis, if there was worry about the liquidity or solvency of the system before, the hope is that stage II policy open-market purchases will drive such worry away by boosting the asset values and reducing the debt carrying costs of "banks"--that is, any financial intermediary that lends long and promises liquidity by borrowing short. The idea behind these policies is to keep the good equilibrium at the right place as far as employment and price stabilization is concerned--and, in an emergency, to do what it can to make sure that the good near full-employment equilibrium exists.

Stage III policies: These come after stage I policies aimed at curing a temporary inability to turn assets into cash at any but fire-sale prices have failed to repair matters have been exhausted. These come after the stage II policies of using normal tools of monetary stabilization to lower interest rates across the entire spectrum--flooding the system with liquidity--have failed to ease worries that one's counterparties are still insolvent or still at risk of becoming illiquid at an awkward moment.

The purpose of stage III policies is to boost demand relative to supply for risky assets, and thus to operate on the margin that is the spread in prices and yields between safe assets like Treasury securities and the risky assets whose falling prices are threatening the stability of the financial system and the macroeconomic flow of investment. It is not enough for the central bank to turn the short-term safe interest rate into an administered price, and set it at a low value (stage II). It is not enough to provide unlimited liquidity at a penalty rate (stage I). Instead, the Fed or the Treasury or both must make the price of risk or the quantity of risky assets or both an administered price. Just as for more than half a century there has been a consensus that the level of the short-term interest rate is too important a price to be left to a market full of easily spooked and not very rational financiers, so stage III leads us to the conclusion that the price of risk is also too important a price to be left to the market.

How are we to model these three stages?

Start with a version of Bernanke-Gertler: financial intermediaries can operate in one of two modes: well-capitalized or poorly-capitalized. When financial intermediaries are well-capitalized, they themselves have little problem borrowing on a large scale and serving as conduits for the flow of funds between savers and investors. Thus market demand for risky financial assets is relatively high:

And, given the (fixed in the short run) supply of risky financial assets like mortgages and private-sector bonds, the prices of such financial assets are relatively high as well--which gives businesses an incentive to expand their capital stocks and thus put people to work in the investment-goods industries:

But there is another mode of operation: if financial intermediaries are poorly-capitalized they themselves will have great problems borrowing--savers will fear the moral hazard problems that arise when those who manage their money don't themselves have a large stake in the game, and a financial intermediary without a large equity cushion leads savers to ask the American question "if you're so smart, why aren't you rich?" and shy away. So if financial intermediaries are poorly-capitalized, supply and demand looks very different:

with low demand for financial assets, a low equilibrium price of financial assets--and no incentive for businesses to expand their capital stocks, and mass unemployment, and depression.

The kicker is that large declines in the prices of financial assets--a panic--can switch financial markets from one mode to the other, because their is a large range over which declining prices do sufficient damage to financial intermediaries' capital and reputation to cause the demand curve to slope the wrong way--in what I was taught to call the "Krugman Backwards-S" demand curve:

which produces two stable equilibrium--a good, high-price, high-investment, full-employment one, and a bad, low-price, low investment depression one. The task of central banking is to keep the financial markets and the economy at the good equilibrium, and keep it from jumping to the bad one. These are crisis stage I policies--the good equilibrium is where it should be; monetary policy is appropriate; the problem is that some shock has destroyed confidence and the economy is threatening to jump to the bad, low-value, high-unemployment equilibrium. The correct response is "Bagehot rule" policies: lend freely to financial institutions that are caught short of cash so they don't have to liquidate good assets at fire-sale prices, but lend at a penalty rate so they do feel the pain appropriate to the amount of systemic risk that we have had.

Now let's jump back in time to 2001-2002. It is the aftermath of the collapse of the tech boom and of 911. The Federal Reserve has lowered interest rates to try to forestall deflation and keep the economy near full employment. By lowering interest rates it made safe assets less attractive, and thus pushed demand for risky assets outward--raising the prices of (which is the same thing as lowering the interest rates of) risky financial assets:

The outward push became larger because of two additional factors: Asia's policy of low-currency valuation and thus of providing interest-rate subsidies to America's borrowers, and relaxed lending standards coupled with real estate exuberance. In an environment in which any newly-created financial asset could be sold for a high price, construction companies undertook to build lots more houses--and thus pushed the supply of financial assets out to the right between 2002 and 2006 as all of these new houses--5 million more than trend construction--needed mortgages:

Now comes 2007: an end to irrational exuberance and a little bit of bad macroeconomic news pushes demand for financial assets back to the left. At first--last summer--the Federal Reserve thinks that its job is simply to maintain confidence, to keep the economy at the good equilibrium by making everybody understand that the Fed was not going to let the economy get to the bad, depression equilibrium. But over the fall it became clear that such "Panic Stage I" policy wasn't going to be enough:

Providing liquidity to the market in order to maintain confidence--following Bagehot's rule of lending freely at a penalty rate to organizations that could offer collateral that would be acceptable in normal times--wasn't going to be enough to avoid a depression because it was no longer a matter of maintaining confidence that banks and other financial intermediaries were and would remain well-capitalized. Why wasn't it enough? Because they weren't well capitalized. The good equilibrium was in the wrong place--had too low a price of financial assets and thus too low a level of economic activity and too high a level of unemployment. And perhaps the good equilibrium did not exist at all.

So over the winter the Federal Reserve moved on to "Panic Stage II" policy: fight the possibility of deflation and depression by doing what they did in 2002, and lowering safe interest rates in order to boost private-sector demand for risky assets. Banks borrow short and lend long. Reduce interest rates and you boost the value of their long-term assets by more than the value of their short-term liabilities. With more of a net worth cushion and with a lower cost of borrowing, their demand for risky assets will expand--the good equilibrium will move to the right place for the macroeconomy, or the good equilibrium will reappear (we hope).

That gets us to last spring, when the Federal Reserve had done almost all that it could do in the way of reducing interest rates on safe assets, of trying to recreate the good equilibrium. Yet as we see now financial markets were still not calmed, were still not confident that the good equilibrium exists.

So the Fed moved on to Stage III policies. We do two things. First, we have the Federal government reduce the supply of risky financial assets by having the government buy or guarantee (thus making the assets no longer risky, you see). Second, we have the Federal government "encourage" the financial sector to recapitalize itself, thus pushing the demand up and to the right, like so:

And so pushing up the prices and reducing the interest rates charged on financial assets, making the good equilibrium reappear, and keeping us out of depression, like so:

That, in a nutshell with simple graphs, is what we are doing.

Five more notes:

First, last spring Larry Summers had good arguments that we had then set in motion enough policy moves to resolve the crisis and save the world economy from depression. We had implicitly guaranteed the unsecured debt of every large investment bank in the United States. And we had greatly strengthened the implicit guarantee of Fannie and Freddie. That should have been enough. But clearly it wasn't.

Second, I don't believe that after this the price of risk will ever again become a free-market price, just as after the Great Depression the short-term price of liquidity--the short term interest rate--ever became a free-market price. The federal government, in one form or another, is going to be in the business of insuring debt securities against steep declines in value. Securities that are not so insured will simply not be traded. What Fannie Mae did for "conforming" home loans, the Treasury or some other government agency will do for derivative securities. It will offer insurance, charge for that insurance, and supervise and oversee financiers much more strictly.

Third, the market fundamentalists in other sectors will need to be quiet for quite a while. We have just seen financial markets rife with moral hazard, agency, and adverse selection problems crash spectacularly. Is this a situation in which we should move health care--also rife with moral hazard, agency, and adverse selection problems--toward a free market configuration? No. Market regulation needs to be smart. But first market regulation needs to be.

Fourth, there is now no time for tolerance of the three objections to this analysis and this plan of action, roughly: (1) it's immoral, (2) it's unfair, and (3) it can't work in the long run. To expand a bit:

1. It's immoral because people have a right to be treated like adults--which means that they have a right not to be rescued by the government from the consequences of their bad judgment, and we are violating that right.

2. It's unfair because feckless greedy financiers who caused the problem ought to lose money and aren't--or aren't losing enough money--and because feckless greedy imprudent thriftless borrowers who caused the problem ought to lose money and aren't--or aren't losing enough money.

3. It won't work--at least not in the long run.

I dismiss objection (1). It is made, mostly, by those who speak for the Princes of Wall Street. Note that the Princes of Wall Street themselves are not opposed to what the Federal Reserve and the Treasury and the congress doing--anything, anything at all that promises to raise asset prices is something that each of the Princes of Wall Street would trade at least one of their organs of generation for. But those who speak for the Princes of Wall Street--well, they really believed that the Princes earned their fortunes by virtue of their virtue--their intelligence, their nerve, their skill, and their willingness to run great risks for great rewards. The idea that there is a public safety net to catch the Princes when they all fall off the tightrope at once--that they are not actually rugged Randite individualists running great risks--that they are people in the right place at the right time with enough low animal cunning to cover themselves with glue and then step outside at 57th and Park or on Canary Wharf as the money blows by so that a bunch of the money sticks to them--well, this strikes those who speak for the Princes of Wall Street on the editorial page of the Wall Street Journal or in Investors' Business Daily as a betrayal of the moral order.

The response to objection (1) is that the people who make it need to grow up. There is no more a John Galt or a Jane Galt than there is a Santa Clause. There are no Randites in a financial crisis--or no even quarter-sane Randites. The fact that there is a safety net in a financial crisis is something that has been obvious to everything with a spinal column for at least a century and a half--that's what central banks are for, for Jeebus's sake! The Princes of Wall Street did not earn their fortunes by virtue of their virtue, their intelligence, their nerve, their skill, and their willingness to run great risks, et cetera, et cetera, low animal cunning, glue, money sticks as it blows by.

The response to objection (2) is "tough." Yes, it is important to design the elements of the rescue package in such a way as to give as few windfalls as possible to the undeserving feckless, greedy, imprudent, thriftless, et cetera. We will do what we can within the law to make sure as few gains ill-gotten survive going forward. But as Federal Reserve vice chair Don Kohn says, it is bad public policy to hold the jobs of tens of millions hostage in an attempt to teach a few feckless financiers (or even somewhat more thriftless borrowers) even a much-deserved lesson.

The response to objection (3) is that it was first made by Karl Marx at the end of the 1840s: that the problem is not overspeculation but rather overproduction, and cannot for long be solved by paliatives that address overspeculation only:

Karl Marx and Friedrich Engels: Neue Rheinische Zeitung Revue (1850): Speculation regularly occurs in periods when overproduction is already in full swing. It provides overproduction with temporary market outlets... but then precipitating the outbreak of the crisis and increasing its force.... What appears to the superficial observer to be the cause of the crisis is not overproduction but excess speculation, but this is itself only a symptom of overproduction. The subsequent disruption of production does not appear as a consequence of its own previous exuberance but merely as a setback caused by the collapse of speculation...

Marx was wrong then--the business cycles of the 1850s were not the harbingers of a world-wide communist revolution and not the expression of the dialectical contradictions of capitalism. "Overproduction" does not necessitate a crash. "Overproduction" simply means that the economy has built a lot of capital, and that a bunch of that capital is not going to be worth what the rich people who invested in it had hoped, and in the aftermath the economy's real interest rate will be low. Big whoop--a low long-term real interest rate. All historical evidence suggests that stage III policies can work. And that avoiding them definitely for reasons of ideological purity does not work.

Fifth, later on we should talk more about the corollary to the refutation of objection (1)--the fact that there has always been a safety net for the rich makes it an obvious matter of simple justice that there be a safety net for the poor and the middle class as well. But for the present the important thing is to make sure that people who argue for tax cuts for the rich or for welfare-state program cutbacks for the poor should not be allowed to disrupt the formulation of public policy when there is serious public busienss to be done.

Melodrama

Miss Prism:

Cecily, you will read your Political Economy in my absence. The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational. Even these metallic problems have their melodramatic side...

Bring Congress Back into Session After the Election...

...and go for the Swedish plan: nationalize the insolvent large financial institutions: dare Bush to veto that after the election.

Vote Count:

Democrats: 141 Yea, 94 Nay
Republican: 66 Yea, 132 Nay.

This Republican Party needs to be burned, razed to the ground, and the furrows sown with salt...

KRON 4: 5 PM: Sunday September 29, 2008: Paulson-Dodd-Frank

Washington Post Death Spiral Watch (Jonathan Weisman Edition)

Hoisted from Comments: Jameson:

Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong: The interesting thing about the Weisman story is where it stops, with Pelosi telling Paulson she didn't know he was a Catholic. As reported in the New York Times, the exchange went on, with Pelosi saying: “It’s not me blowing this up, it’s the Republicans.”

Mr. Paulson sighed. “I know. I know.”

(Talks Implode During a Day of Chaos; Fate of Bailout Plan Remains Unresolved, NY Times, 09/25/08 )

Now why would Weisman fail to include that little tidbit?

Two possibilities: because his Republican sources would get mad, or because his editors would get mad. I suspect both.

How Much Will This Cost? How Does This Constrain the Policy of an Obama-Biden Administration?

Larry Summers's answers are "not much" and "not at all." I agree:

Lawrence Summers - Taxpayers can still benefit from a bail-out: The American experience with financial support programmes is somewhat encouraging. The Chrysler bail-out, President Bill Clinton’s emergency loans to Mexico, and the Depression-era support programmes for housing and financial sectors all ultimately made profits for taxpayers. While the savings and loan bail-out through the Resolution Trust Corporation was costly, this reflected enormous losses in excess of the capacity of federal deposit insurance programmes. The head of the FDIC has offered assurances that nothing similar will be necessary this time. It is impossible to predict the ultimate cost to the Treasury of the bail-out programme and of the other guarantee commitments that financial authorities have – this will depend primarily on the economy as well as the quality of execution and oversight. But it is very unlikely to approach $700bn and will be spread over a number of years....

[T]he usual concern about government budget deficits is that the need for government bonds to be held by investors will crowd out other, more productive, investments.... To the extent that the government purchases assets such as mortgage-backed securities with increased issuance of government debt, there is no such effect.

Third, since Keynes we have recognised that it is appropriate to allow government deficits to rise as the economy turns down if there is also a commitment to reduce deficits in good times.... [T]he US made a serious error in allowing deficits to rise over the last eight years. But it would be compounding this error to override what economists call “automatic stabilisers” by seeking to reduce deficits in the near term. Indeed, in the current circumstances the case for fiscal stimulus – policy actions that increase short-term deficits – is stronger than at any time in my professional lifetime. Unemployment is now almost certain to increase... to the highest levels observed in a generation. Monetary policy has very little scope.... [E]xperience around the world with economic downturns caused by financial distress suggests that while they are of uncertain depth, they are almost always of long duration.... The more people who are unemployed the more desirable it is that government takes steps to put them back to work by investing in infrastructure, energy or simply through tax cuts that allow families to avoid cutting back on their spending....

We still must address issues of entitlements and fiscal sustainability.... [T]he worst possible actions... would be steps that have relatively modest budget impacts in the short run but that cut taxes or increase spending by growing amounts over time.... The best measures would be those that represent short-run investments that will pay back to the government over time or those that are packaged with longer-term actions to improve the budget. Examples would include investments in healthcare restructuring or steps to enable states and localities to accelerate, or at least not slow down, their investments...

I Picked the Wrong Week to Give Up Sniffing Glue...

From Duncan Black:

Eschaton: Great Moments In Cable Television : Republican MSNBC strategist talking about Biden "the human gaffe machine:"

Here's a guy who thought FDR was president during the Great Depression.

Washington Post Death Spiral Watch (Yet Another David Broder Edition)

Primatologist Frans de Waal on David Broder:

Frans de Waal: Nervous Old Male: David Broder in the Washington Post of September 28, 2008, writes an opinion piece entitled "McCain as the Alpha Male." Since the term "alpha male" comes out of primatology, and I have known many males who qualify, I feel like commenting on Broder's observation

... an imbalance in the deference quotient between the younger man and the veteran senator -- an impression reinforced by Obama's frequent glances in McCain's direction and McCain's studied indifference to his rival....

A confident alpha male chimpanzee would never show studied indifference. I have seen such behavior only in males who were terrified of their challenger.... A self-confident alpha male just approaches his challenger and sets him straight, either by attacking him or performing a spectacular display of his own. No avoidance of eye contact: he takes the bull by the horns. It rather is the hesitant or fearful alpha male who avoids looking straight at the other.... I read the body language between McCain and Obama as that between a senior male being challenged by a remarkably confident junior one. The senior didn't know exactly what to do. He avoided eye contact and body orientation, probably realizing that a direct confrontation might not go his way. If McCain was an alpha male, it was an incredibly insecure one...

David Broder:

McCain as the Alpha Male: There were no knockout blows in the first presidential debate of the fall, but John McCain outpointed Barack Obama often enough to encourage his followers that he can somehow overcome the odds and deny the Democrats the victory that has seemed to be in store for them. It was a small thing, but I counted six times that Obama said that McCain was "absolutely right" about a point he had made. No McCain sentences began with a similar acknowledgment of his opponent's wisdom, even though the two agreed on Iran, Russia and the U.S. financial crisis far more than they disagreed. That suggests an imbalance in the deference quotient between the younger man and the veteran senator -- an impression reinforced by Obama's frequent glances in McCain's direction and McCain's studied indifference to his rival.

Whether viewers caught the verbal and body-language signs that Obama seemed to accept McCain as the alpha male on the stage in Mississippi, I do not know. But it reinforced my impression that McCain was the more aggressive debater. He flung the adjectives that stick in a listener's mind, calling Obama "naive" and therefore "dangerous"...

Did Broder really remain in his cave, reading none of the polls reported on Saturday that showed that voters thought Obama had done a better job in the debate? Or is he just a big liar when he says "I do not know"?

I say liar.

Why oh why can't we have a better press corps?

TARP Draft

Paul Krugman:

Paul Krugman: Section 113, MINIMIZATION OF LONG-TERM COSTS AND MAXIMIZATION OF BENEFITS FOR TAXPAYERS, is where the rubber meets the road — it’s where the plan says something about how the deals will be done. As I read it, Treasury can (1) conduct reverse auctions and suchlike; (2) buy directly — but only if it gets equity warrants or, in companies that don’t issue stock, senior debt.

My view is that (1) will be ineffective but also not a bad deal for taxpayers — firms that can afford to will dump their toxic waste at low prices, the way some already have on the private market, and taxpayers may end up making money in the end. Firms in big trouble will probably stay away from the auctions. The plan’s real traction, if any, is in (2), which is a backdoor way to provide troubled firms with equity — and the bill seems to say that taxpayers have to own this equity, although I wish it was clearer how much equity will be judged sufficient.

Not a good plan. But sufficiently not-awful, I think, to be above the line; and hopefully the whole thing can be fixed next year.

Add: House staff tells me that there are significant changes from this draft. More info when I get it.

The Assistant Secretary of the Treasury for Financial Stability is going to have a really interesting time.

The TARP Plan

As of lunchtime:

To provide authority for the Federal Government to purchase certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, and for other purposes...

Hold Your Nose and Vote for Paulson-Dodd-Frank

The Swedish model is better, but doing nothing is like a poke in the eye from a Lawn Dart(TM).

On KRON 4 at 5 for two minutes (unless we get bumped by the announcement of Bristol Palin's wedding, that is).

John McCain: Dishonorable, Dishonest, and Butt-Ignorant

In Friday's debate, when the issue of direct diplomacy came up McCain said:

The point is that throughout history, whether it be Ronald Reagan, who wouldn't sit down with Brezhnev, Andropov or Chernenko until Gorbachev was ready with glasnost and perestroika. Or whether it be Nixon's trip to China.... Look, I'll sit down with anybody, but there's got to be pre-conditions...

What McCain said about Reagan and the Russians is not true at all. Reagan was not just willing to meet with Brezhnev, et. al -- he actually tried to arrange these meetings, but the Soviets kept putting off these requests (largely because their elderly ruling circle kept dying). And, of course, Nixon flew to China without knowing whether or not Mao was willing to meet with him.

Time magazine, April 26, 1982:

In an interview with Pravda, the Communist Party newspaper, Brezhnev rejected President Reagan's proposal, made earlier this month, that the two leaders meet informally in New York this June after the disarmament talks at the United Nations General Assembly...

Republicans of sanity deserve a better candidate to vote for.

John McCain Is Dishonest and Dishonorable

No American patriot would ever choose an unvetted running mate like Sarah Palin:

Steve Benen: PALIN DOESN'T SPEAK FOR CAMPAIGN.... Over the summer, there were a series of instances in which John McCain would say something, and McCain aides would walk it back by saying the candidate doesn't actually speak for the candidate's campaign. At one point, Douglas Holtz-Eakin, one of McCain's top advisors, said that just because McCain says something publicly about a policy, "that doesn't mean it's official." This morning, McCain took a similar tack with Sarah Palin.

Sen. John McCain retracted Sarah Palin's stance on Pakistan Sunday morning, after the Alaska governor appeared to back Sen. Barack Obama's support for unilateral strikes inside Pakistan against terrorists "She would not...she understands and has stated repeatedly that we're not going to do anything except in America's national security interest," McCain told ABC's George Stephanopoulos of Palin. "In all due respect, people going around and... sticking a microphone while conversations are being held, and then all of a sudden that's -- that's a person's position... This is a free country, but I don't think most Americans think that that's a definitive policy statement made by Governor Palin."

I see. So, just because Sarah Palin says something in public doesn't mean Palin actually believes what she's saying. And for goodness sakes, no one should think that Palin's comments are a reflection of the campaign's position on an issue. This is getting pretty silly.... [H]ow are voters to know the difference between the things Palin says that are "definitive policy statements," and the things she says that should be ignored? How is the public to know when Republican candidates mean what they're saying and when they don't?

A Very Large Invisible College Indeed: Analogies to teh Great Depression

So I surf to Mark Thoma's website physically located 400 miles north of my office in order to find the smart things being written eight feet to my north, on the other side of my office wall. Barry Eichengreen:

From Wall Street to Main Street: Lessons from the Great Depression: A couple of months ago at lunch with a respected Fed watcher, I asked, “What are the odds are that US unemployment will reach 10% before the crisis is over?” “Zero,” he responded, in an admirable display of confidence. Watchers tending to internalise the outlook of the watched, I took this as reflecting opinion within the US central bank.... The Fed and Treasury were on the case. US economic fundamentals were strong. Comparisons with the 1930s were overdrawn.

The events of the last week have shattered such complacency. The 3 month treasury yield has fallen to “virtual zero” for the first time since the flight to safety following the outbreak of World War II. The Ted Spread, the difference between borrowing for 3 months on the interbank market and holding three month treasuries, ballooned at one point to five full percentage points. Interbank lending is dead in its tracks. The entire US investment banking industry has been vaporised. And we are in for more turbulence. The Paulson Plan, whatever its final form, will not bring this upheaval to an early end.... So comparisons with the Great Depression.... Which ones have content, and which are mainly useful for headline writers? 

First, the Fed now, like the Fed in the 1930s, is very much groping in the dark. Every financial crisis is different, and this one is no exception. It is hard to avoid concluding that the Fed erred disastrously when deciding that Lehman Bros. could safely be allowed to fail. It did not adequately understand the repercussions for other institutions of allowing a primary dealer to go under. It failed to fully appreciate the implications for AIG’s credit default swaps. It failed to understand that its own actions were bringing us to the brink of financial Armageddon.

If there is a defence, it has been offered [by] Rick Mishkin, the former Fed governor, who has asserted that the current shock to the financial system is even more complex than that of the Great Depression. There is something to his point. In the 1930s the shock to the financial system came from the fall in the general price level by a third and the consequent collapse of economic activity. The solution was correspondingly straightforward. Stabilise the price level, as FDR did by pumping up the money supply, and it was possible to stabilise the economy, in turn righting the banking system.

Absorbing the shock is more difficult this time because it is internal to the financial system. Central to the problem are excessive leverage, opacity, and risk taking in the financial sector itself. There has been a housing-market collapse, but in contrast to the 1930s there has been no general collapse of prices and economic activity. Corporate defaults have remained relatively low, which has been a much-needed source of comfort to the financial system. But this also makes resolving the problem more difficult. Since there has been no collapse of prices and economic activity, we are not now going to be able to grow or inflate our way out of the crisis, as we did after 1933.

In addition, the progress of securitisation complicates the process of unravelling the current mess....

That said, we are not going to see 25% unemployment rates like those of the Great Depression. Then it took breathtaking negligence by the Fed, the Congress and the Hoover Administration to achieve them. This time the Fed will provide however much liquidity the economy needs. There will be no tax increases designed to balance the budget in the teeth of a downturn, like Hoover’s in 1930. Where last time it took the Congress three years to grasp the need to recapitalise the banking system and provide mortgage relief, this time it will take only perhaps half as long. Ben Bernanke, Hank Paulson and Barney Frank are all aware of that earlier history and anxious to avoid repeating it.  

And what the contraction of the financial services industry taketh, the expansion of exports can giveth back.... The ongoing decline of the dollar will be the mechanism bringing about this reallocation of resources. But the US economy, notwithstanding the admirable flexibility of its labour markets, is not going to be able to move unemployed investment bankers onto industrial assembly lines overnight. I suspect that I am now less likely to be regarded as a lunatic when I ask whether unemployment could reach 10%.

Three points. (1) We could inflate our way out of it--in the 1930s we had a 30% product price deflation, and now we have had a 30% housing price deflation. Balanced inflation would remove the debt overhang in both cases. We may well not want to resolve the problem via inflation--and I suspect that even by raising the theoretical possibility I have reduced my chances of attaining high office in the Eccles Building to something indistinguishable from zero--but we could.

(2) Barry is right. Particularly, it looks as though Barry is right about Lehman Brothers. In retrospect, the decision to let Lehman fail without rescue, control, or supervision looks to be the first significant misstep that Bernanke and Paulson have made in the past fifteen months. Clearly it looked to them to be a good idea at the time, and clearly they have more information than I do, and it is impossible to dance this dance and put every foot right. I'm sure that had I been at the Treasury or the Fed I would have made worse mistakes by now than they have made. But:

It looks like it is the failure to cushion the losses of the creditors of Lehman than has produced the need for emergency action. If the Fed and the Treasury had offered Sunday night to buy as much of Lehman debt as the market offered at 75% of the previous Friday's market price, I don't think we would be staring into this particular abyss right now.

(3) Nevertheless, I said a year ago that if the unemployment rate stays below ten percent then it is a win for monetary policy. And I still think we have an 80% chance of achieving that...

Hold Your Nose and Vote for the Paulson Plan

Paul Krugman has smart things to say, as usual:

The good, the bad, and the ugly\: Brad DeLong says that Swedish-style temporary nationalization is the right answer to a financial crisis; he’s right. I haven’t been clear enough about this, it seems, but it’s where my basic diagnosis leads: the problem is insufficient capital, you want to inject capital, but you don’t want it to be a windfall to existing stockholders — hence, take over and recapitalize the failing firms. By the way, that’s what we did with AIG 10 years days ago.

So that’s the good solution. The Paulson plan, which is some combination of sheer giveaway and mystic faith that a slap in the market’s face will make everything OK, is a bad solution (and probably no solution at all.)

But nationalization doesn’t seem like a politically realistic answer now. This leaves the rough question of whether to hold out for a good solution, which won’t be possible until Jan. 21st, or accept the ugly compromise that the WH and the Congressional Dems, once again, say they’ve reached. It’s a tough call, but as I’ve written, I’ll probably hold my nose and say OK — as long as it has broad Republican support.

If not, go back to the good plan.

Atlantic Monthly Death Spiral Watch

Clive Crook works very hard not to tell his readers that one presidential candidate has supported the financial support package Treasury Secretary Henry Paulson is negotiating and one has tried to block it. He has to work very hard to do so:

This is no time for politics of the playground: The technocrats are in charge – Hank Paulson at the Treasury and Ben Bernanke at the Federal Reserve – and even they are making it up as they go along.... Mr Obama and Mr McCain are obliged to play politics rather than having anything helpful to say.

So much for the idea that Mr Obama’s experience resides in “being tested on the campaign trail”. A fat lot of use that was when the financial system approached meltdown last week. Mr McCain did no better....

For Mr Obama, what has happened is not so much a result of specific regulatory failures (of which there have been plenty) but a wholesale failure of the enemy ideology. Here is his recommendation on how to move forward, almost in full: “You can fire the whole trickle-down, on-your-own, look-the-other-way crowd.”

Mr McCain, likewise playing to stereotype, sounded loud populist notes about greed on Wall Street and (again) the need for change in Washington. Both men continue to accuse the other of lies, distortions and gratuitous insults...

I would not have thought it possible to write about this issue without contrasting Obama's "We've got to get something done..." with McCain's "I'm not going to sign on to a deal just to sign the deal..." Simply not possible.

This is journalistic malpractice of an extraordinary order.

Why oh why can't we have a better press corps?

---

UPDATE: And Matthew Yglesias writes, about Marc Ambinder:

Kissinger and Preconditions: Marc Ambinder tries to sum up the Kissinger issue:

The only difference appears to be that McCain would insist that Iran do certain things before diplomacy commences, while Kissinger and Obama would NOT insist on any concessions.

“Do certain things” means... preconditions. In short, Barack Obama favors negotiations without preconditions. I think this is the correct strategy. Henry Kissinger also thinks it’s the correct strategy. So when Obama says Kissinger agrees with him, Obama is correct. When McCain says Kissinger does not agree with Obama, McCain is incorrect. That McCain is incorrect is evident from the logic of Marc’s post, but he doesn’t quite seem to be able to bring himself to say it.

More journalistic malpractice.

John McCain Campaign Manager Rick Davis Corruption Blogging

Talking Points Memo reader UB leads Josh Marshall to this:

This is the website of 3eDC--a "web development company to which the McCain campaign has paid $1,000,000, a web development company part (mostly? fully?) owned by McCain campaign manager Rick Davis, a web development company whose address is the same building as Davis's firm Davis-Manafort.

If this is the quality of work 3eDC does for its own website, what are the chances that it is adding any value to the McCain campaign? If it weren't a fraud--if it were a real web development company--it would have a more impressive website, no?

People: I want probability estimates: what are the odds that 3eDC is nothing but a way for McCain campaign manager Rick Davis and his partners to steal $1,000,000 from the contributors to John McCain for president?

What Is to Be Done?

If the House Republicans won't vote for the Paulson-Dodd-Frank plan, then the Democrats should not either. They should write the best bill possible--which I think is the Swedish model--pass it, and send it to Bush to sign.

Josh Micah Marshall wants to know what Paul Krugman thinks of this plan:

Talking Points Memo | Is Nationalization The Answer?: Brad DeLong says it's a better option than the Paulson model bailout. (And it did seem to work out pretty well for the Swedes when they got into a somewhat similar situation.) I'm curious what Krugman thinks.

John McCain: Dishonest, Dishonorable, Underbriefed, and Butt-Ignorant

Jonathan Weisman of the Washington Post doesn't care whether he gets it right--remember his admission that it was part of his job to uncritically rewrite White House press releases?--but just whether he pleases his sources and his editors. So you trust this only if you trust that his sources are telling the truth. And he doesn't tell you who much about who his sources are.

Nevertheless, interesting--and possibly true:

How McCain Stirred a Simmering Pot: When Sen. John McCain made his way to the Capitol office of House Minority Leader John A. Boehner (R-Ohio) just past noon on Thursday, he intended to "just touch gloves" with House Republican leaders, according to one congressional aide, and get ready for the afternoon bailout summit at the White House. Instead, Rep. Paul D. Ryan (Wis.), the ranking Republican on the House Budget Committee, was waiting to give him an earful....

McCain listened, then... burst into the Senate Republican policy luncheon.... Robert F. Bennett (Utah) and Judd Gregg (N.H.) had been explaining the contours of a deal just reached.... Then McCain spoke. "I appreciate what you've done here, but I'm not going to sign on to a deal just to sign the deal," McCain told the gathering, according to Graham and confirmed by multiple Senate GOP aides. "Just like Iraq, I'm not afraid to go it alone if I need to." For a moment, as Graham described it, "you could hear a pin drop. It was just unbelievable." Then pandemonium. By the time the meeting broke up, the agreement touted just hours before -- one that Sen. Lamar Alexander (Tenn.), the No. 3 GOP leader, estimated would be supported by more than 40 Senate Republicans -- was in shambles....

McCain's dramatic announcement Wednesday that he would suspend his campaign and come to Washington for the bailout talks had wide repercussions.... The breakdown was serious enough that word reached Paulson. Just 25 minutes before the scheduled meeting at the White House, Paulson phoned House Speaker Nancy Pelosi (D-Calif.) to alert her to trouble....

Pelosi said Obama would speak for the Democrats. Though later he would pepper Paulson with questions, according to a Republican in the room, his initial point was brief: "We've got to get something done." Bush turned to McCain, who joked, "The longer I am around here, the more I respect seniority." McCain then turned to Boehner and Senate Minority Leader Mitch McConnell (R-Ky.) to speak first. Boehner was blunt. The plan Paulson laid out would not win the support of the vast majority of House Republicans.... Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, pressed Boehner hard, asking him if he really intended to scrap the deal and start again. No, Boehner replied, he just wanted his members to have a voice. Obama then jumped in to turn the question on his rival: "What do you think of the [insurance] plan, John?" he asked repeatedly. McCain did not answer....

McCain emerged alone, shook the hands of the Marines at the door and left. The aides were baffled. The plan had been for a bipartisan appearance before the media, featuring McCain, Obama and at least a firm statement in favor of intervention. Now, one of the leading men was gone.... Obama asked if they could duck into a room, and back they went to the ornate, windowless Roosevelt Room. It was then that Paulson gingerly walked in to beg, "Don't blow this up, please." The secretary feared that Democrats would throw their hands up and declare the deal dead. The crowd erupted in unison, all barking at Paulson that they were not the problem -- he needed to talk to his own party. Under the barrage, Paulson dropped to one knee, clasped his hands in front of his face as if he were praying and joked: "Please, please, don't blow this up. Give me some time." "Hank," Pelosi replied, "I didn't know you were Catholic"...

And then Friday John McCain pulls the rug out from under the House Republicans at the debate:

LEHRER: Are you going to vote for the [Paulson] plan, Senator McCain?

MCCAIN: I -- I hope so. And I...

LEHRER: As a United States senator...

MCCAIN: Sure.

LEHRER: ... you're going to vote for the plan?

MCCAIN: Sure. But -- but let me -- let me point out, I also warned about Fannie Mae and Freddie Mac and warned about corporate greed and excess, and CEO pay, and all that. A lot of us saw this train wreck coming...

And then Saturday--in spite of his declaration Wednesday that reaching an agreement was too important for him to continue campaigning--McCain does absolutely nothing to help reach an agreement but, instead, sits on his butt in one of his eight houses:

Matthew Yglesias: After last night’s debate, John McCain went to his condo in Northern Virginia (one of eight or so houses he owns) and he’s been around there ever since. Why not head to the Hill to help with bailout negotiations? Well:

Asked why Mr. McCain did not go to Capitol Hill after coming back to Washington to help with negotiations, Mr. Salter replied that “he can effectively do what he needs to do by phone.’’

Which of course raises the question of why he had to pretend to suspend his campaign in order to rush physically to Washington last week...

McCain had not read the Paulson plan as of Tuesday evening--indeed, did not even know that the Paulson plan was only three pages long as of Tuesday evening:

ANCHOR: As for the massive Wall Street bailout McCain insists it have...

JSM: Oversight that is effective and transparent. We need people like Warren Buffet and Mike Bloomberg and Mitt Romney to have an oversight of this. We can't put that responsibility in the hands of one person.

ANCHOR: The crunch question. Would you vote for it as it's presently constructed?

JSM: I have not had a chance to see it in writing so I have to examine that...

And as of Saturday evening still has absolutely no idea what the issues are:

Watch CBS Videos Online

I am assured that this is not because McCain is underbriefed. McCain's aides had briefed him carefully. It's an information-retention problem. McCain's aides were as surprised as anybody when he blew up the planned "we gotta pass this" Thursday evening post-White House meeting statement.

John McCain: Dishonest, Dishonorable, Underbriefed, and Butt-Ignorant

This is WROSE THAN SARAH PALIN!!:

Watch CBS Videos Online

John McCain has an ethical duty to resign from the Senate and from the Republican Party immediately. The citizens of Arizona deserve a senator who knows more about the issues. The activists of the Republican Party deserve a candidate who knows more about the issues.

Paul Krugman Holds His Nose

The Paulson plan is, he says, better than a poke in the eye with a Lawn Dart(TM), but not much better, because it does little or nothing to recapitalize the banking system:

Tricky bailout politics: The fundamental problem in the financial system is too little capital; bizarrely, the Treasury chose not to address that problem directly, by (say) purchasing preferred shares in financial institutions. Instead, the plan is premised on the belief that toxic mortgage-related waste is underpriced, and that the Treasury can recapitalize banks on the cheap by fixing the markets’ error.

The Dodd-Frank changes make the plan less awful, mainly by creating an equity stake. Essentially, this makes it possible for the plan to do the right thing through the back door: use toxic-waste purchases to acquire equity, and hence inject capital after all. Also, the oversight means that Treasury can be prevented from making the plan a pure gift to financial evildoers. But it’s still not a good plan.

On the other hand, there’s no prospect of enacting an actually good plan any time soon.... If it was the original Paulson plan, no plan is better. Dodd-Frank-Paulson may just cross the line — let’s see what details we have if and when agreement is reached. If the plan looks not-awful enough, I’ll be pro. But I won’t be cheering — I’ll be holding my nose.

Why Oh Why Can't We Have a Better Press Corps? (AP Edition)

In a good world, Julie Davis and David Espo would be provided with an awful lot of employment counseling, and maybe a free box or two of Lawn Darts(TM). Outsourced to Robert Waldmann:

Robert's Stochastic Thoughts: Briefly the extreme bias of the facts overwhelmed the Associated Press's quest for Ballance. Now JULIE HIRSCHFELD DAVIS and DAVID ESPO write:

In one small sign of progress, House Republicans dispatched their second-ranking leader, Rep. Roy Blunt of Missouri, to join the talks after their objections to an emerging compromise had brought negotiations to a standstill the day before. They also demanded "serious consideration" for a plan of their own, involving less government intrusion and lower cost to the taxpayers than the $700 billion that Treasury Secretary Henry Paulson has been seeking.

So how do they know that the House Republicans' plan will cost taxpayers less ? Whjy the House Republicans said so, so it must be true. I think it is obvious that it will cost much more than the Dodd-Frank plan and create new risks for the financial system. The AP has gone back to stating completely unsupported partisan assertions as facts, so long as the partisans are Republicans who don't know anything about the issues (Matt Yglesias has the goods but the thinkprogress hamster is tired)

Alarmingly and unsurprisingly the Democrats are caving and proposing a totally crazy dog's lunch compromise "Democrats and Bush officials said the insurance proposal was acceptable as an option but not as a replacement for the administration's more sweeping approach."

One small thing that Robert misses is that the "insurance option" was already in the mix for the long term. Let's turn the mike over to Henry Paulson three weeks ago:

hp-1129: Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers: At the end of next year, the Treasury temporary authorities will expire, the GSE portfolios will begin to gradually run off, and the GSEs will begin to pay the government a fee to compensate taxpayers for the on-going support provided.... Because the GSEs are Congressionally-chartered, only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission. The new Congress and the next Administration must decide what role government in general, and these entities in particular, should play in the housing market. There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form. Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk...

The fee that Fannie Mae and Freddie Mac must pay starting in 2010 is what the House Republicans are calling their "insurance proposal": it's money to compensate the Treasury for the guarantee the government offers to Fannie and Freddie. The idea is that not just Fannie and Freddie but other participants in the mortgage market could--or maybe, if they are too big to fail, must--pay the same fee and get the same guarantee.

This was set up last September 7.

The "insurance program" that Treasury and the congressional Democrats are agreeing to add to the Paulson plan is something that was already there--and everybody is pretending that this is a concession to the House Republicans in order to keep them (and McCain) from throwing another hissy-fit.

Another Good Op-Ed from Bruce Bartlett

I forgot to link to Bruce yesterday, who has a good post on how to treat our current Lawn Dart(TM) injuries, but Andrew Samwick remembered:

Another Good Op-Ed from Bruce Bartlett | Capital Gains and Games: In The New York Post today, Bruce Bartlett makes the case for why trouble in the financial sector merits federal intervention, relying on the particular nature of financial institutions:

The basic problem is that the financial sector faces systemic risk in a way that no other industry does: By its nature, it is a house of cards that can collapse at a moment's notice.

[...]

What prevents this house of cards from falling is confidence: People don't feel compelled to hold all their money in cash under their mattress and the system functions smoothly.

But, should confidence be shaken, the risks are very great indeed.

This is a good article to e-mail your less financially savvy friends to help explain the mess to them.

John McCain Is Dishonest and Dishonorable (More Pointless Lies from Sarah Palin Department)

No true patriot would choose an unvetted running mate. Gabriel Winant tries and fails to find a single trade mission to Russia that she went on:

Palin's mysterious trade missions: [W]hen pressed by Katie Couric... the Republicans' vice-presidential nominee couldn't come up with a lot of specifics:

COURIC: Explain to me why that enhances your foreign policy credentials.

PALIN: Well, it certainly does because our -- our next door neighbors are foreign countries. They're in the state that I am the executive of. And there in Russia --

COURIC: Have you ever been involved with any negotiations, for example, with the Russians?

PALIN: We have trade missions back and forth.... They are right next to -- to our state.

As you might notice, Palin only cites one discernible foreign interaction under her purview: Trade missions.

I spent some time on the Governor's Web site seeking more details about her trade negotiations with Russia. There's a press release about Gov. Palin's meeting with a trade mission from the Yukon, but nothing about Russia anywhere in the archives. Tony Knowles, a Democrat who was governor from 1994-2002, led a trade mission -- back in 1997, while Palin was running Wasilla -- to the remote island of Sakhalin, off the coast of Siberia. That seems to be about it for Russia-Alaska trade missions lately.

When asked for examples of trade missions with Russia that have taken place under Palin's watch, gubernatorial spokeswoman Kate Morgan refused to answer the question. Morgan said she could not legally discuss any trade missions with me because she's a state employee and I had first heard this claim through the Couric interview, which was part of Palin's campaign for the vice-presidency. When I pointed out that any trade missions that occurred would have been official state business, Morgan again noted that I had learned about them in the context of the campaign. "The law is very stringent," she said, and recommended that I contact the McCain-Palin campaign. Two spokespeople did not respond to requests for comment.

An article published two weeks ago in the Seattle Times notes that a politician from Russia's Far East did in fact meet with Palin in Anchorage, and urged her to come to Russia. One of Palin's trade specialists is also quoted saying that no trade missions with Russia are currently on the agenda: "I am not aware of any plans but that doesn't mean she wouldn't [arrange any]."

The article noted that Anchorage is host to an organization called the Northern Forum, a council of regional governments from all the northernmost countries of the world. But the Palin administration cut the Forum's budget from $75,000 to $15,000, and stopped the practice of sending representatives to its meetings.

Ta-Nehisi Coates Says That He Is Not that Different from Sarah Palin

Ta-Nehisi:

Ta-Nehisi Coates: Sarah, we are not that different, you and I: I've been... rewatching the videos of Palin's interview.... [I]t's all made me tremendously sad. There are lot of us lefties who are guffawing.... I may have been one of them. But I'm out of that group now.

The Palin pick was the most crassest, most bigoted decision that I've seen in national electoral politics.... [T]hey picked Palin strictly as a stick to drum up the victimhood narrative--small town, hunters, big families and most importantly, women.... To the McCain camp, Palin isn't important as a politician, or even as a person... [but as] a symbol of some vague, possibly endangered American thing.... Lineup all your instances of national politicians using white victimhood to get into offices--Willie Horton, White Hands, Sista Souljah, Reagan in Philadelphia etc.--they were all awful no doubt. But I have never seen a politician subject an alleged ally to something like this....

I have watched this whole Palin thing with some twinge of personal recognition. I come from a family of seven kids by four women.... I've got brothers born in the same year, and brothers born to best friends. My father was a high-school drop-out. I am a college drop-out. I was a father by 24.... I come to books and learned things in a hard, organic way. I was watching Palin explain to Couric how it could be that she just got a passport last year, and I was thinking, "Shit, I don't have a passport now."...

Sarah Palin never struck me as stupid. When she talked about not backpacking across Europe and working her whole life, beneath the dumb anti-intellectual dig, I saw a gem of truth. I wish she had have mined it, instead of trying to score a cheap point....

In election season, there is a price for being turned into a symbol. When actual journalists, with a rep to protect, show up, they are going to do their job. Which brings me to the sexism of John McCain. He knew full well what Sarah Palin was going to face if he nominated her. He knew that reporters would go through her past, that they'd quizz her on the present, that she would need to be ready, and he shunted concern aside, and tossed her to the wolves.... For one last run at the White House, he risked a future star of the party he claims to call home. How do you do that? I don't meant to rob Palin of agency, certainly she is also a victim of her own calculations and ambitions. But where I am from the elders protect you, and pull you back when you've gone too far, when your head has gotten too big.

Of course the irony of all this is how conservatives have, for years, lampooned the liberal pursuit of multiculturalism/identity politics. But here's the thing, even when done haphazardly, awkwardly, and imprudently, the fight against bigotry and ignorance has rewards.... [T]here is a price--bigger than the black vote--to be paid for disengagement. You become ignorant.... So these guys go to the well one more time, and ressurect the old spectres of "Us against Them." But the fools haven't been paying attention--the"Us" has changed. This isn't Alabama, and it ain't 1968. There is a whole class of educated, working women, themselves, the children of educated working women. And this is what McCain has to say to them, "I don't care if you know a thing about foreign policy. I don't care if you know a damn thing about the economy. Here is what you are to me--breasts, hair and a lovely smile."

Turns out it helps to actually care about the fate of women, to know something about them, beyond your own lust, when going for their votes. Who'da thunk it?

The President of Paraguay Draws the Line...

First, McCain won't meet with the President of Iran.

Next, McCain won't meet with the President of Spain.

Now Fernando Lugo, the President of Paraguay, has had enough:

Steve Clemons: Paraguay President Fernando Lugo... the room went silent and then broke into subdued laughter when he confided that he was approached about meeting with GOP Vice Presidential candidate and Alaska Governor Sarah Palin. President Lugo turned the meeting down...

Now the claim is that John McCain misheard and has added Uruguay to the list of countries whose president he will refuse to meet.

Marc Ambinder Calls John McCain a Liar

Ambinder writes:

Marc Ambinder: A debater's trick: answering a charge that was not leveled.

But I do not believe that we can make conditions for the opening of negotiations. We ought, however, to be very clear about the content of negotiations and work it out with other countries and with our own government.

That was Dr. Henry Kissinger, interviewed by CNN special correspondent Frank Sesno on the 20th of September. Dr. Kissinger was referring to negotiations with Iran....

Kissinger responded last night to an assertion that Obama had not made:

Senator McCain is right. I would not recommend the next President of the United States engage in talks with Iran at the Presidential level. My views on this issue are entirely compatible with the views of my friend Senator John McCain. We do not agree on everything, but we do agree that any negotiations with Iran must be geared to reality.

If Kissinger's views on Iran are "entirely compatible" with John McCain's -- an indirect invocation of the transitive principle -- and if Kissinger's September 20th interview with Frank Senso accurately renders his views, then it seems as if there is very little daylight between Barack Obama and John McCain on how and when to negotiate with Iran.

The Fifteen-Year-Old Needs to Learn to Use Her Powers for Good and Not for Evil

The Fifteen-Year-Old says:

OK. I understand that the McCain campaign doesn't dare let Sarah Palin talk to the reporters after the debate. But they could have taped a bunch of YouTube videos during the debate--Sarah Palin watching the debate with average Americans and saying "John really won that exchange"; "John was right"--and then released them to YouTube as the debate ended...

I'm glad the McCain campaign has nobody as competent as the Fifteen-Year-Old in its employ.

In Which We Recall Douglas Holtz-Eakin to Headquarters...

We sent Brother Douglas Holtz-Eakin out on a mission to teach John McCain about the financial crisis. He has failed. Brother Felix Salmon has the after-action report:

Market Movers: The number of undecided voters who understand the difference between financial and fiscal is minuscule, and the number of those who think that the difference actually matters is probably zero. But from a technocratic standpoint, the fact that McCain twice referred to the financial crisis as a "fiscal crisis" is telling. It means (a) that he doesn't really understand it, and (b) that insofar as he does, he thinks that government is at least as much part of the problem as it is part of the solution...

This is your recall to Trantor, Brother Holtz-Eakin.

How Can You Work Across the Aisle If You Can't Even Look Across the Aisle?

Hilzoy:

The Washington Monthly: [T]he McCain campaign seems to think that pointing out the occasions when Obama said that McCain was right is a winning strategy. I think this is wrong, not only for the reasons I mentioned, but because it undercuts one of McCain's main lines of argument: that he is willing to reach across the aisle and work for bipartisan solutions, whereas Obama is not.

Think about it: McCain couldn't even bring himself to look at Obama. He was consistently contemptuous and dismissive. And now he has released an ad that takes Obama's willingness to acknowledge that his opponents are right to be the sort of thing that's worth attacking him for.

McCain claims that he can truly reach out to his opponents and work with them, while Obama cannot. It's hard for me to think that his performance in this debate didn't seriously undermine that claim.

Low-Information Voters Watch the Debate

And they say:

Atta J.Turk: Some younger guy said he should be President, but some cranky older guy said that yet another guy named Petraeus should be President. Maybe the old guy was like Petraeus's butler or something?

Why Oh Why Can't We Have a Better Press Corps?

Is CNN's Bill Schneider too lazy to do his homework, or in the tank for McCain? We report, you decide:

Media Matters: CNN senior political analyst Bill Schneider wrote of a statement Sen. Barack Obama made during that evening's presidential debate: "[Sen. John] McCain almost certainly misspoke when he said he wouldn't speak with Spain. ... I am not sure that's a fair thing for Obama to call him on." Schneider was referring to Obama's assertion that McCain "said the other day that he would not meet potentially with the prime minister of Spain, because he -- you know, he wasn't sure whether they were aligned with us."...

From a September 18 post on the washingtonpost.com blog The Trail:

In comments that have caused a kerfuffle in Spain, McCain seemed to lump Spanish Prime Minister Jose Luis Zapatero in the same category as the anti-American leaders of Venezuela, Bolivia and Cuba.... [W]as McCain purposely trying to diss the Spanish leader? Questions about whether McCain forgot which country Zapatero leads, got confused about Spain's geographic relationship to Latin America, or confused Zapatero with the Zapatista rebels from Mexico have exploded on blogs since reports of the interview first surfaced.

McCain foreign policy adviser Randy Sheunemann [sic] said McCain's answer was intentional.

The questioner asked several times about Senator McCain's willingness to meet Zapatero (and id'd him in the question so there is no doubt Senator McCain knew exactly to whom the question referred). Senator McCain refused to commit to a White House meeting with President Zapatero in this interview," he said in an e-mail.

It's All Fun in Games Until...

Sterling Newberry says something smart:

As a charter member of "the men in black," what do you think we've been talking about lo these many years now? This is what a currency crisis looks like. It's all fun and games until they stop taking your paper. That's what has happened, the bankers of this world have ceased to believe that the dollar-regulated global financial order works...

Makes me think that a routine could be developed:

Q: What's the difference between the game of Investment Banking

and the game of Lawn Darts?

A: In Lawn Darts, it's all fun and games until someone loses an eye. In Investment Banking...

---

UPDATE: And the winner is Ken Houghton, who successfully completes the answer:

A: In Lawn Darts, it's all fun and games until someone loses an eye. In Investment Banking, it's all fun and games until someone eyes a loss.

He can collect his prize--a Presidential Commission as Assistant Secretary of the Treasury for the Troubled Asset Relief Program--on January 21, 2009, at the side entrance of 1500 Pennsylvania Avenue.

Another Event: Thursday Noon: Berkeley Law School: Global Financial Turmoil

What happens when one's calendar gets full?

Advice John McCain Really Needs to Hear (Man Bites Dog Edition)

Robert Waldmann directs us to:

Matthew Yglesias: The press likes the unusual. The man bites dog story. The maverick senators who do weird stuff. But just because men who bite dogs make for good copy doesn’t make biting a dog a good idea...

John McCain Is Dishonest and Dishonorable

The most bizarre moment of the debate was when John McCain--after flying to Washington to rally the House Republican caucus to oppose the Paulson plan at the 4:00 PM Thursday White House keeting--announced that he was going to vote for the Paulson plan:

---

LEHRER: Are you going to vote for the [Paulson] plan, Senator McCain?

MCCAIN: I -- I hope so. And I...

LEHRER: As a United States senator...

MCCAIN: Sure.

LEHRER: ... you're going to vote for the plan?

MCCAIN: Sure. But -- but let me -- let me point out, I also warned about Fannie Mae and Freddie Mac and warned about corporate greed and excess, and CEO pay, and all that. A lot of us saw this train wreck coming....

---

I don't know why he rallied the House Republicans to oppose Paulson in the first place. I don't know why he betrayed them in the second.

But this is not a man we want as president.

McCain Misremembered the Eisenhower Story

A correspondent informed me that McCain misremembered his Eisenhower story. Eisenhower's letter accepted responsibility. He did not offer his resignation. What proportion of McCain's base is madeup of WWII military fanatics?

Debate Highlights

Wow. McCain sure told a lot of lies. Dishonest and dishonorable:

Transcript of presidential debate - CNN.com:

OBAMA: Well, thank you very much, Jim, and thanks to the commission and the University of Mississippi, "Ole Miss," for hosting us tonight. I can't think of a more important time for us to talk about the future of the country. You know, we are at a defining moment in our history. Our nation is involved in two wars, and we are going through the worst financial crisis since the Great Depression. And although we've heard a lot about Wall Street, those of you on Main Street I think have been struggling for a while, and you recognize that this could have an impact on all sectors of the economy. And you're wondering, how's it going to affect me? How's it going to affect my job? How's it going to affect my house? How's it going to affect my retirement savings or my ability to send my children to college? So we have to move swiftly, and we have to move wisely. And I've put forward a series of proposals that make sure that we protect taxpayers as we engage in this important rescue effort.

No. 1, we've got to make sure that we've got oversight over this whole process; $700 billion, potentially, is a lot of money. No. 2, we've got to make sure that taxpayers, when they are putting their money at risk, have the possibility of getting that money back and gains, if the market -- and when the market returns. No. 3, we've got to make sure that none of that money is going to pad CEO bank accounts or to promote golden parachutes. And, No. 4, we've got to make sure that we're helping homeowners, because the root problem here has to do with the foreclosures that are taking place all across the country. Read more about the expectations

Now, we also have to recognize that this is a final verdict on eight years of failed economic policies promoted by George Bush, supported by Senator McCain, a theory that basically says that we can shred regulations and consumer protections and give more and more to the most, and somehow prosperity will trickle down. It hasn't worked. And I think that the fundamentals of the economy have to be measured by whether or not the middle class is getting a fair shake. That's why I'm running for president, and that's what I hope we're going to be talking about tonight....

LEHRER: Are you going to vote for the [Paulson] plan, Senator McCain?

MCCAIN: I -- I hope so. And I...

LEHRER: As a United States senator...

MCCAIN: Sure.

LEHRER: ... you're going to vote for the plan?

MCCAIN: Sure. But -- but let me -- let me point out, I also warned about Fannie Mae and Freddie Mac and warned about corporate greed and excess, and CEO pay, and all that. A lot of us saw this train wreck coming....

LEHRER: All right, let's go to the next lead question, which is essentially following up on this same subject. And you get two minutes to begin with, Senator McCain. And using your word "fundamental," are there fundamental differences between your approach and Senator Obama's approach to what you would do as president to lead this country out of the financial crisis?

MCCAIN: Well, the first thing we have to do is get spending under control in Washington. It's completely out of control. It's gone -- we have now presided over the largest increase in the size of government since the Great Society. We Republicans came to power to change government, and government changed us. And the -- the worst symptom on this disease is what my friend, Tom Coburn, calls earmarking as a gateway drug, because it's a gateway. It's a gateway to out-of-control spending and corruption. And we have former members of Congress now residing in federal prison because of the evils of this earmarking and pork-barrel spending. You know, we spent $3 million to study the DNA of bears in Montana. I don't know if that was a criminal issue or a paternal issue, but the fact is that it was $3 million of our taxpayers' money. And it has got to be brought under control. As president of the United States, I want to assure you, I've got a pen. This one's kind of old. I've got a pen, and I'm going to veto every single spending bill that comes across my desk. I will make them famous. You will know their names....

OBAMA: Let's be clear: Earmarks account for $18 billion in last year's budget. Senator McCain is proposing -- and this is a fundamental difference between us -- $300 billion in tax cuts to some of the wealthiest corporations and individuals in the country, $300 billion. Now, $18 billion is important; $300 billion is really important. And in his tax plan, you would have CEOs of Fortune 500 companies getting an average of $700,000 in reduced taxes, while leaving 100 million Americans out. So my attitude is, we've got to grow the economy from the bottom up. What I've called for is a tax cut for 95 percent of working families, 95 percent. And that means that the ordinary American out there who's collecting a paycheck every day, they've got a little extra money to be able to buy a computer for their kid, to fill up on this gas that is killing them. And over time, that, I think, is going to be a better recipe for economic growth than the -- the policies of President Bush that John McCain wants to -- wants to follow....

LEHRER: What I'm trying to get at this is this. Excuse me if I may, senator. Trying to get at that you all -- one of you is going to be the president of the United States come January. At the -- in the middle of a huge financial crisis that is yet to be resolved. And what I'm trying to get at is how this is going to affect you not in very specific -- small ways but in major ways and the approach to take as to the presidency.

MCCAIN: How about a spending freeze on everything but defense, veteran affairs and entitlement programs.

LEHRER: Spending freeze?

MCCAIN: I think we ought to seriously consider with the exceptions the caring of veterans national defense and several other vital issues....

OBAMA: I just want to make this point, Jim. John, it's been your president who you said you agreed with 90 percent of the time who presided over this increase in spending. This orgy of spending and enormous deficits you voted for almost all of his budgets. So to stand here and after eight years and say that you're going to lead on controlling spending and, you know, balancing our tax cuts so that they help middle class families when over the last eight years that hasn't happened I think just is, you know, kind of hard to swallow.

OBAMA: Well, this is an area where Senator McCain and I have a fundamental difference because I think the first question is whether we should have gone into the war in the first place. Now six years ago, I stood up and opposed this war at a time when it was politically risky to do so because I said that not only did we not know how much it was going to cost, what our exit strategy might be, how it would affect our relationships around the world, and whether our intelligence was sound, but also because we hadn't finished the job in Afghanistan. We hadn't caught bin Laden. We hadn't put al Qaeda to rest, and as a consequence, I thought that it was going to be a distraction. Now Senator McCain and President Bush had a very different judgment.

And I wish I had been wrong for the sake of the country and they had been right, but that's not the case. We've spent over $600 billion so far, soon to be $1 trillion. We have lost over 4,000 lives. We have seen 30,000 wounded, and most importantly, from a strategic national security perspective, al Qaeda is resurgent, stronger now than at any time since 2001. We took our eye off the ball...

LEHRER: Well, let's go at some of these things.

MCCAIN: Senator Obama is the chairperson of a committee that oversights NATO that's in Afghanistan. To this day, he has never had a hearing.

LEHRER: What about that point?

MCCAIN: I mean, it's remarkable.

LEHRER: All right. What about that point?

OBAMA: Which point? He raised a whole bunch of them.

LEHRER: I know, OK, let's go to the latter point and we'll back up. The point about your not having been.

OBAMA: Look... Joe Biden... is the chairman of the Senate Foreign Relations Committee, and as he explains, and as John well knows, the issues of Afghanistan, the issues of Iraq, critical issues like that, don't go through my subcommittee because they're done as a committee as a whole. But that's Senate inside baseball.... John, you like to pretend like the war started in 2007. You talk about the surge. The war started in 2003, and at the time when the war started, you said it was going to be quick and easy. You said we knew where the weapons of mass destruction were. You were wrong. You said that we were going to be greeted as liberators. You were wrong. You said that there was no history of violence between Shiite and Sunni. And you were wrong. And so my question is...

OBAMA: Nobody talked about attacking Pakistan. Here's what I said. And if John wants to disagree with this, he can let me know, that, if the United States has al Qaeda, bin Laden, top-level lieutenants in our sights, and Pakistan is unable or unwilling to act, then we should take them out. Now, I think that's the right strategy; I think that's the right policy. And, John, I -- you're absolutely right that presidents have to be prudent in what they say. But, you know, coming from you, who, you know, in the past has threatened extinction for North Korea and, you know, sung songs about bombing Iran, I don't know, you know, how credible that is....

OBAMA: Well, let me just correct something very quickly. I believe the Republican Guard of Iran is a terrorist organization. I've consistently said so. What Senator McCain refers to is a measure in the Senate that would try to broaden the mandate inside of Iraq. To deal with Iran. And ironically, the single thing that has strengthened Iran over the last several years has been the war in Iraq. Iraq was Iran's mortal enemy. That was cleared away. And what we've seen over the last several years is Iran's influence grow. They have funded Hezbollah, they have funded Hamas, they have gone from zero centrifuges to 4,000 centrifuges to develop a nuclear weapon....

MCCAIN: Senator Obama twice said in debates he would sit down with Ahmadinejad, Chavez and Raul Castro without precondition. Without precondition. Here is Ahmadinenene [mispronunciation], Ahmadinejad, who is, Ahmadinejad, who is now in New York, talking about the extermination of the State of Israel, of wiping Israel off the map, and we're going to sit down, without precondition, across the table, to legitimize and give a propaganda platform to a person that is espousing the extermination of the state of Israel, and therefore then giving them more credence in the world arena and therefore saying, they've probably been doing the right thing, because you will sit down across the table from them and that will legitimize their illegal behavior. The point is that throughout history, whether it be Ronald Reagan, who wouldn't sit down with Brezhnev, Andropov or Chernenko until Gorbachev was ready with glasnost and perestroika. Or whether it be Nixon's trip to China, which was preceded by Henry Kissinger, many times before he went. Look, I'll sit down with anybody, but there's got to be pre-conditions. Those pre-conditions would apply that we wouldn't legitimize with a face to face meeting, a person like Ahmadinejad. Now, Senator Obama said, without preconditions.

OBAMA: So let's talk about this. First of all, Ahmadinejad is not the most powerful person in Iran. So he may not be the right person to talk to. But I reserve the right, as president of the United States to meet with anybody at a time and place of my choosing if I think it's going to keep America safe. And I'm glad that Senator McCain brought up the history, the bipartisan history of us engaging in direct diplomacy. Senator McCain mentioned Henry Kissinger, who's one of his advisers, who, along with five recent secretaries of state, just said that we should meet with Iran -- guess what -- without precondition. This is one of your own advisers.

Now, understand what this means "without preconditions." It doesn't mean that you invite them over for tea one day. What it means is that we don't do what we've been doing, which is to say, "Until you agree to do exactly what we say, we won't have direct contacts with you." There's a difference between preconditions and preparation. Of course we've got to do preparations, starting with low-level diplomatic talks, and it may not work, because Iran is a rogue regime. But I will point out that I was called naive when I suggested that we need to look at exploring contacts with Iran. And you know what? President Bush recently sent a senior ambassador, Bill Burns, to participate in talks with the Europeans around the issue of nuclear weapons. Again, it may not work, but if it doesn't work, then we have strengthened our ability to form alliances to impose the tough sanctions that Senator McCain just mentioned.

And when we haven't done it, as in North Korea -- let me just take one more example -- in North Korea, we cut off talks. They're a member of the axis of evil. We can't deal with them. And you know what happened? They went -- they quadrupled their nuclear capacity. They tested a nuke. They tested missiles. They pulled out of the nonproliferation agreement. And they sent nuclear secrets, potentially, to countries like Syria. When we re-engaged -- because, again, the Bush administration reversed course on this -- then we have at least made some progress, although right now, because of the problems in North Korea, we are seeing it on shaky ground. And -- and I just -- so I just have to make this general point that the Bush administration, some of Senator McCain's own advisers all think this is important, and Senator McCain appears resistant. He even said the other day that he would not meet potentially with the prime minister of Spain, because he -- you know, he wasn't sure whether they were aligned with us. I mean, Spain? Spain is a NATO ally.

MCCAIN: Of course.

OBAMA: If we can't meet with our friends, I don't know how we're going to lead the world in terms of dealing with critical issues like terrorism.

MCCAIN: I'm not going to set the White House visitors schedule before I'm president of the United States. I don't even have a seal yet. Look, Dr. Kissinger did not say that he would approve of face-to- face meetings between the president of the United States and the president -- and Ahmadinejad. He did not say that...

OBAMA: Look, I mean, Senator McCain keeps on using this example that suddenly the president would just meet with somebody without doing any preparation, without having low-level talks. Nobody's been talking about that, and Senator McCain knows it. This is a mischaracterization of my position. When we talk about preconditions -- and Henry Kissinger did say we should have contacts without preconditions -- the idea is that we do not expect to solve every problem before we initiate talks. And, you know, the Bush administration has come to recognize that it hasn't worked, this notion that we are simply silent when it comes to our enemies. And the notion that we would sit with Ahmadinejad and not say anything while he's spewing his nonsense and his vile comments is ridiculous. Nobody is even talking about that...

MCCAIN: By the way, my friend, Dr. Kissinger, who's been my friend for 35 years, would be interested to hear this conversation and Senator Obama's depiction of his -- of his positions on the issue. I've known him for 35 years....

OBAMA: The biggest threat that we face right now is not a nuclear missile coming over the skies. It's in a suitcase. This is why the issue of nuclear proliferation is so important. It is the -- the biggest threat to the United States is a terrorist getting their hands on nuclear weapons.

And we -- we are spending billions of dollars on missile defense. And I actually believe that we need missile defense, because of Iran and North Korea and the potential for them to obtain or to launch nuclear weapons, but I also believe that, when we are only spending a few hundred million dollars on nuclear proliferation, then we're making a mistake. The other thing that we have to focus on, though, is al Qaeda. They are now operating in 60 countries. We can't simply be focused on Iraq. We have to go to the root cause, and that is in Afghanistan and Pakistan. That's going to be critical. We are going to need more cooperation with our allies.

And one last point I want to make. It is important for us to understand that the way we are perceived in the world is going to make a difference, in terms of our capacity to get cooperation and root out terrorism. And one of the things that I intend to do as president is to restore America's standing in the world. We are less respected now than we were eight years ago or even four years ago. And this is the greatest country on Earth. But because of some of the mistakes that have been made -- and I give Senator McCain great credit on the torture issue, for having identified that as something that undermines our long-term security -- because of those things, we, I think, are going to have a lot of work to do in the next administration to restore that sense that America is that shining beacon on a hill...

OBAMA: Oh, there's no doubt. Look, over the last eight years, this administration, along with Senator McCain, have been solely focused on Iraq. That has been their priority. That has been where all our resources have gone. In the meantime, bin Laden is still out there. He is not captured. He is not killed. Al Qaeda is resurgent.

In the meantime, we've got challenges, for example, with China, where we are borrowing billions of dollars. They now hold a trillion dollars' worth of our debt. And they are active in countries like -- in regions like Latin America, and Asia, and Africa. They are -- the conspicuousness of their presence is only matched by our absence, because we've been focused on Iraq. We have weakened our capacity to project power around the world because we have viewed everything through this single lens, not to mention, look at our economy. We are now spending $10 billion or more every month. And that means we can't provide health care to people who need it. We can't invest in science and technology, which will determine whether or not we are going to be competitive in the long term. There has never been a country on Earth that saw its economy decline and yet maintained its military superiority. So this is a national security issue.

We haven't adequately funded veterans' care. I sit on the Veterans Affairs Committee, and we've got -- I meet veterans all across the country who are trying to figure out, "How can I get disability payments? I've got post-traumatic stress disorder, and yet I can't get treatment." So we have put all chips in, right there, and nobody is talking about losing this war. What we are talking about is recognizing that the next president has to have a broader strategic vision about all the challenges that we face. That's been missing over the last eight years. That sense is something that I want to restore....

OBAMA: Well, let me just make a closing point. You know, my father came from Kenya. That's where I get my name. And in the '60s, he wrote letter after letter to come to college here in the United States because the notion was that there was no other country on Earth where you could make it if you tried. The ideals and the values of the United States inspired the entire world.

I don't think any of us can say that our standing in the world now, the way children around the world look at the United States, is the same. And part of what we need to do, what the next president has to do -- and this is part of our judgment, this is part of how we're going to keep America safe -- is to -- to send a message to the world that we are going to invest in issues like education, we are going to invest in issues that -- that relate to how ordinary people are able to live out their dreams. And that is something that I'm going to be committed to as president of the United States.

East African Plains Ape Pack Leadership Dynamics

In the Inbox: McCain is submissive:

Looking at replays in the post-debate chatter, the moment when Obama listed McCain's errors on Iraq is powerful not just because of the prepared attack, but because Obama is looking right at McCain and McCain won't look back at him. It makes McCain look intimidated, afraid of Obama...

Being able to say "John is right" shows Obama is the bigger man, which is how I think he came across to those independent voters...

Note that McCain refused to look Obama in the eye... a sign of weakness, dishonesty, and fear...