Minggu, 06 Februari 2011

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Jumat, 06 Agustus 2010

You have been warned

 The underlying assumption that the current world monetary system is built upon is that America will always over-consume and the world will always accept our debt at face value. It's a warped and unhealthy relationship, but its worked (sort of) for several decades. That's why it was notable when a Chinese central banker  spoke up last week.

    "The United States cannot force foreign governments to increase their holdings of Treasuries," Zhu said, according to an audio recording of his remarks. "Double the holdings? It is definitely impossible."

Impossible? That's absurd. For decades foreigners have been more than willing to exchange their excess dollars from trade surpluses for our debt in order to keep their currencies at artificially low levels.
It turns out that the problem isn't foreigner's willingness to lend to us.

    "The US current account deficit is falling as residents' savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world," he added. "The world does not have so much money to buy more US Treasuries."

The problem is that the American middle class is broke and unable to continue to over-consume.

The current global monetary system is known as  Bretton Woods II. The idea is that the world uses dollars it receives from trade surpluses with America for its purchases from third-party countries of commodities that are priced in dollars, such as oil.
Once global trade is satisfied, these dollars are reinvested in America in the form of bond purchases. This allows America to finance its enormous debts at artificially low interest rates. Also, by purchasing American debt, it artificially inflates the dollar, thus allowing the American consumer to purchase goods at artificially low prices.
With their artificially suppressed currencies, Asian nations were able to put millions of people to work in factories producing goods for export to America.

Through the years some people questioned whether foreigners would continue to purchase debts that America obviously will never be able to repay. Yet year after year the foreigners continued to play their part in this prisoner's dilemma.
However, while no one was watching, the other side of the equation was breaking.

The artificially low interest rates in America led directly to asset bubbles. These asset bubbles were used to mask the fact that wages weren't keeping up with living standards. Our manufacturing base was being put out of business by the artificially high dollar.
The American consumer borrowed against these inflated assets, primarily houses, to live a lifestyle that their wages couldn't support. When multiple asset bubbles popped in 2008, the American consumer no longer had an asset to leverage against, and banks, in order to survive, had to cut back on consumer credit lines.

 Suddenly one side of the Bretton Woods II monetary standard - America's ability to over-consume - was busted.
"Foreign Central banks aren't going to finance much of the 2009 US fiscal deficit; Their reserves aren't growing anymore."
- Brad Setser, Council on Foreign Relations

At this point the American government stepped in. Instead of trying to address the source of the problems with the economy and put Americans to work, the government tried to re-inflate the consumption bubble with programs like Cash4Klunkers and HAMP. Except for some extremely short-term results, these expensive programs have completely failed because they have only addressed the symptoms rather than the disease.
Real Unemployment

All this government borrowing adds up.

As the world watched America go on a borrowing binge unprecedented in the post WWII era, their first response was to  roll their long-term dollar assets into short-term assets as they expired. This reduces risk for the lender, plus reduces rates for the borrower.
However, it causes a potential problem for the borrower - America - because it requires an increasingly large amount of debt that must be rolled over every few months. If, for whatever reason, there is an unexpected, short-term financial crunch, then it can quickly become a crisis.

The more fundamental problem with this "solution" of government borrowing replacing consumer borrowing was largely unmentioned until Mr. Zhu brought it up last week. It's relatively easy to finance a $400 Billion budget deficit when the trade deficit is also $400 Billion. The trade deficit dollars get recycled as is normal.

But how do you finance a $1.4 Trillion budget deficit when the trade deficit is only $300 Billion?

You have to get the money from somewhere else. For a couple of months we can issue our debt in short-term bills to match our foreign creditor's desire to reduce their risk. This will only mask the problem, and in fact, its already run out.

"It would appear, quietly and with deference and politeness, that China has canceled America's credit card," Kirk told the Committee of 100, a Chinese-American group.

Instead of buying American debt, China has gone on a worldwide shopping spree for natural resources, and spent another $586 Billion on themselves to stimulate their economy. China is also making currency swap agreements with other nations, so it no longer has to use dollars in its foreign trade.
Or as Bank of America put it:

    The financial crisis delivered a clear verdict, in our view, on the limits to the Asian growth model. It no longer makes sense to pursue double-digit growth by lending cheaply to the US consumer.

“Confidence in the U.S. dollar is ‘fraying’ and a shift away from the greenback after the financial crisis is inevitable."
- Nobel Prize-winning economist Joseph Stiglitz

 It begs the question - where will the money come from?

Sometimes people ask that question, which is a very good question, but stop there.
An even better question to ask is - is there enough money?
The IMF, which has repeatedly underestimated the economic crisis, has produced some numbers which are scary in and of themselves.

 Fortunately,  Carmen M. Reinhart and Kenneth S. Rogoff have studied dozens of historical examples since 1800 and tried to answer that question by basing it what that history teaches us.

If you are like me, $33 Trillion are so far above my ability to imagine that they may as well be using another language. That's why it is important to put things into perspective by comparing this number to other asset classes.

If you understand the significance of these numbers you have arrived at the "Oh, shit" moment. The amount of money required to bail the world out of the current economic crisis, if this crisis plays out at a historical average, is nearly equal to all the private wealth currently in the world.

To repeat the obvious, this doesn't add up. What about the capital needed to fund the businesses of the world? What about the capital needed for private consumption?
There is no "what if". The odds of all this deficit spending getting financed at an affordable rate is zero. It's simply not going to happen. You can close your eyes and cross your fingers. You can pray to your Gawds. You can chant "I believe" all you want, but at the end of the day the laws of supply and demand will win.

Once you wrap your mind around this horrible fact, you realize that we are in for a world of hurt.
There are only three possible outcomes: 1) interest rates skyrocket to crushing levels, or 2) the central banks print money on a massive scale, or 3) some combination of the first two choices.

  ZeroHedge does the math.

    Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion....
    Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck.

The Federal Reserve, the lender of last resort, h
as also become the buyer of last resort.

 The Fed stepped into the mortgage market is a  very big way.

    In other words, the Federal Reserve alone bought $722 billion of mortgages and agency debt when only $686 billion in new mortgages were issued. So, through August, the Fed bought more than 100% of the entire supply of new (purchase) mortgages in 2009.

The reason for this is three-fold: 1) foreigners began dumping Fannie Mae and Freddie Mac bonds the moment the Treasury had to nationalize these agencies, 2) no one trusts our mortgage-backed securities anymore, and 3) the desire of Washington to bail out Wall Street via re-inflation of the housing bubble.

The Fed has already purchased over $1 Trillion in mortgage-backed securities and it is approaching its self-imposed limit.
On the other side of the scale was the Fed's completed purchase of $300 Billion worth of Treasuries. Yet despite the Fed's monetization being over, interest rates remain low and the auction bid on Treasuries remain high.
It brings up the question of who is buying all these Treasuries?

    the United States increased the public debt by $1.885 trillion dollars in fiscal 2009... According to the same report, there were three distinct groups that bought more than they did in 2008. The first was “Foreign and International Buyers”, who purchased $697.5 billion worth of Treasury securities in fiscal 2009 – representing about 23% more than their respective purchases in fiscal 2008. The second group was the Federal Reserve itself. According to its published balance sheet, it increased its treasury holdings by $286 billion in 2009, representing a 60% increase year-over-year.

So who is the third group that is buying all these Treasuries? It's you and me.

    US households purchased $529 billion of US Treasuries in the first nine months of 2009, accounting for 45% of total new Treasury issuance.

Wait a second. Something is wrong with this picture. The balance sheet of the American household is in terrible shape.
Unemployment is at post-Great Depression highs. Even people still employed are working fewer hours. The bursting of the housing and stock bubbles has devastated the investment portfolio of the American family. What's more, the "Household Sector" is outside of mutual funds, money market funds, pension and retirement funds, and life insurance companies.
So how does the "Houseshold Sector" go from purchasing $15 Billion in Treasuries in 2008 to purchasing $528 Billion in 2009?

    we discovered that the Household Sector is actually just a catch-all category. It represents the buyers left over who can’t be slotted into the other group headings. For most categories of financial assets and liabilities, the values for the Household Sector are calculated as residuals. That is, amounts held or owed by the other sectors are subtracted from known totals, and the remainders are assumed to be the amounts held or owed by the Household Sector. To quote directly from the Flow of Funds Guide, “For example, the amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government and the balance is assigned to the household sector.”(Emphasis ours)10
    So to answer the question - who is the Household Sector? They are a PHANTOM.
    They don’t exist.
They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.
    Our concern now is that this is all starting to resemble one giant Ponzi scheme.

The fact that the Treasury can't actually identify the one of the largest buyer of its debt can't help but raise a few eyebrows.
Can you imagine a private company that couldn't identify its largest customer? Can you imagine a government who couldn't identify its largest creditor? Oh wait...It's beyond suspicious.
Are these phantom creditors hedge funds? Probably not.

It makes a person wonder if the Fed and/or Treasury hasn't been involved in either some shady accounting tricks, or hidden monetization of debt. Even if the these are legitimate investors, is it realistic to expect a savings-poor America will increasingly buy these Treasury bonds that yield almost no interest?

The math is clear - there isn't enough money in the world to fund these massive deficits, at least not with the current monetary system. So it would not surprise too many people to find out that the government is taking extreme measures to balance its budgets.
Remember, you can't spell "confidence" without "con".

Surveys for Democracy Corps and NPR put America's Politics at a Critical Moment

With President Obama delivering his State of the Union Address tonight, we wanted to make sure you had our interpretation of this key moment based on a Democracy Corps and Center for American Progress national survey conducted right before the Massachusetts Senate election and a National Public Radio bipartisan poll conducted with Glen Bolger of Public Opinion Strategies right afterwards. We take these developments very seriously, but we also want to offer perspective and set out major steps that can produce a very different future.

The upset in Massachusetts was the culmination of yearlong trends that reached their boiling point even before these voters gave Ted Kennedy’s Senate seat to a Republican.  Voters are increasingly consumed by unemployment and want their leaders to address that priority, yet leaders in Washington seem polarized and gridlocked, pushing a health care bill now defined by special deals rather than its benefits and the reforms that voters want.  They are worried about spending and angry about the bailout of Wall Street that has no shame.  Both the Democracy Corps and NPR polls show near 60 percent of voters believing the country is off on the wrong track. That is normally a measure of the lack of confidence in the economy, congressional progress and national leadership.[1]

As you will see, this is reflected in disillusionment with incumbents, Democrats, and the Democratic Congress, even as Republicans remain unreconstructed.  There is a populist and conservative revolt against Wall Street and financial elites, Congress and government, and it is centered among independents.  Democrats and President Obama are seen as more interested in bailing out Wall Street than helping Main Street.  Stir in demoralized Democrats and energized Republicans and you reach a boiling point.  Democracy Corps showed the named-congressional ballot slipping to minus one point (45 to 46 percent), half way between the average of the public polls, which have the Democrats ahead by 2, and the NPR poll showing Republicans moving ahead by 5 points.[2]

The big question is whether this mood, all too reminiscent of 1994, will be controlling in November.  Or will voters see a different kind of politics, priorities and progress over the next nine months?  Will tempers cool?  Will voters begin to consider whether they really want to go back to Republican rule and the Bush policies that favored Wall Street, big business and the wealthiest while hurting the middle class and America?  Will they consider whether they want to turn to Republicans who opposed all help for the unemployed at a time of economic crisis of their own creation?

Before Massachusetts, there was some evidence that key indicators and sentiment had stabilized since November and that, perhaps, the environment is at a low point for Democrats – bad timing for a special election.  While the congressional generic vote in the NPR survey suggests some Massachusetts effect, there is also evidence for stabilization and an election being fought right now at close to parity and at the low point.  Despite the bleak mood, there is some evidence in both polls of an uptick in optimism about the economy.

Our analysis of these surveys suggests a number of things that Democrats can do to move America to a different place:

    1. Pass health care and explain it anew. While the route to passing health care is difficult, passage would signal a break of the gridlock in Washington.  Health care reform has become a metaphor for ineffective government and gridlocked Washington politics, while passage provides an opportunity to explain its economic benefits.
    2. Get the spotlight off of Congress.  Shift the focus away from Congress, the sausage-making of legislating and the polarization of Washington.
    3. Turn to jobs and focus relentlessly on bringing the economy and small business back. Long-term unemployment and its effects require a Democratic president and Congress who understand this public priority.    
    4. Act on reforming Wall Street.  Pass Wall Street reforms, including CEO bonuses and bank fees, to reclaim the cost of the bailout. The NPR poll shows Democrats much more in touch with the country here.
    5. Take visible action to cut spending and reduce the deficit.
    6. Get the economic narrative right. As the economy recovers painfully slowly, get the narrative right to move voters from their current protest vote to a place where voters don’t want to put the recovery at risk by voting Republicans into office who want to go back to the same policies that got us into this mess.
    7. Sharply define the Republicans and the real choice in the election.


Anti-Washington Mood Turning Into Anti-Democratic Sentiment

The pervasive anti-incumbent mood evident since the summer has turned against the Democrats who are in charge of Washington.  Everything Democratic has trended down, though this trend is moderating in the Democracy Corps survey.  The ‘Democratic Congress’ thermometer rating has fallen to a mean of 41.3 degrees, 2 degrees below the ‘Republicans in Congress’ – only the third time that has happened in Democracy Corps polling.

There has been no parallel story of a recovering Republican brand.  Its scores remain unchanged and stuck at a low point.  That, more than anything, suggests that this is not 1994 and there is opportunity to create a choice for the fall.

While Democrats continue to hold a small favorability advantage over the Republicans, the same is not true among independents.  Independent voters hold more negative views of both parties, but their views of Democrats have turned especially sour: a mean thermometer rating of just 37.0 degrees for the Democrats, compared to the 41.8 for Republicans.

The anti-incumbent mood has also turned populist for two reasons. First, there is a belief that President Obama and the Democrats are more concerned with bailing out Wall Street than helping ordinary people (49 to 41 percent). But second, this is because of the conservative surge and conservative revolt against government.  About 45 percent of voters now self-identify as conservative, roughly 4 points above where it has stood in previous years.  This is accompanied by a rise in support for the NRA – a kind of proxy for anti-government sentiment.  (There has been no rise in the thermometer rating for pro-life groups, suggesting the character of this ideological shift.)

The independent pull back from the Democrats also has an ideological character.  According to a combined dataset of Democracy Corps polling conducted throughout 2009, the proportion of independents self-identifying as conservative has increased significantly since 2008. In our 2008 polling, 32 percent of independents self-identified as conservative (a proportion that has been mostly stable since 2003), in 2009 that figure jumped a full 10 points with 42 percent of independents identifying as conservative.[3]  The result is Democrats losing independents by 14 points in the Democracy Corps survey and 11 points in the NPR survey. 

Obama a Step Apart and Stable, Not Falling Support

Just as exit polls in New Jersey, Virginia and Massachusetts showed that most voters were not trying to send a message to Obama, these two national polls show the President a step outside the boiling pot.  His approval rating has been stable at 48 or 49 percent since November, though his enthusiastic approval has fallen from 33 to 28 percent and below his level of strong disapproval, which has not changed.

A majority of independents now disapprove (55 percent), with only 39 percent approving. Strong disapproval has reached 40 percent among this group – double the number who strongly approve. This pattern has been evident since the fall.

Nonetheless, in a recent round of Democracy Corps focus groups with independent and swing voters, we saw that voters are willing to give Obama some space, want to see the President succeed and realize that it will take time to change things.  As one woman in Columbus, Ohio said, “I do think that he is breathing some fresh air in, but it is going to take time….I think people need to be patient with him because I do think it (change) is going to happen…” Another woman said, “I think that we have to give him (President Obama) a chance to see if we can change things.”

Just as the President’s approval rating has stabilized after dropping some, so too has his personal favorability rating, landing at a mean rating of 53.1 degrees.

For all of the difficulties, the NPR survey shows that 50 percent of the country believes President Obama is trying to bring the “right kind of changes for the country,” with 46 percent saying he is pursuing the wrong ones.

The country has not yet reached a judgment on whether the President’s economic policies will succeed: 45 percent believe they have helped avert an even worse economic crisis, while 49 percent thinks they’ve done little more than raise the deficit while failing to end the recession. With the NPR survey showing nearly identical results, it is clear the jury is still out on the President and the economy.

Fallen to Parity on Most Issues and Congressional Ballot

There is no doubt that Democrats have lost ground in the congressional vote.  This is not just about turnout.  The electorate has shifted, including among independents.  The Democrats in the Democracy Corps poll only had a 2-point edge among the 2008 presidential voters who gave congressional Democrats an 8-point win in November 2008. 

While the Democracy Corps poll shows Democrats down by a point among likely voters, it also shows Republicans very enthusiastic about November with 46 percent saying they are a ‘10’ on our zero to 10 scale.  By contrast, only one-third of Democrats and 35 percent of independents respond similarly. In this survey, among “core voters” (those who voted in 2006 and 2008 and are almost certain to vote in 2010), Republicans hold a 4-point advantage (48 to 44 percent).  When the electorate is reduced somewhat to only those scoring 8-10 on our enthusiasm scale, Republicans have a 10 point lead (51 to 41 percent).  Obviously, Republicans have a reason to turn out and whether Democrats find one will greatly impact the congressional elections.

At least part of this enthusiasm gap is driven by strong opposition to health care reform among Republicans.  The debate in the Senate brought support for reform down to its lowest point.  Strong opposition is at 46 percent, far outnumbering strong supporters.

However, on the key issues and values of the day, voters’ views have also stabilized since November and have emerged almost evenly divided on which party does a better job handling the economy, jobs and employment, making the right choices as elected officials and being on your side.  Voters are split 40 to 39 percent (Democrats to Republicans) on being on your side – the strongest vote predictor in our regression modeling.

    There is no doubt about the Democrats’ lost altitude over the year, nor that they find themselves in a heated moment after Massachusetts, but it is also true that on most measures the political situation has stabilized since November and that the parties are at near parity on most issues.  Does a new narrative in the New Year bring a different trajectory and temperature?

The Economy and the Populist Revolt

At this boiling point, the economy has contributed to the populist revolt.  A majority of 51 percent says they want to vote for a Republican to protest the direction of the economy while 44 percent say they want to vote for a Democrat so that we do not jeopardize the chance of an economic recovery. That is a 7-point advantage for protest voting, which we will monitor over the year.

But there is also the first evidence that voters are seeing some economic changes. In both the NPR and Democracy Corps polls we see, for the first time, more than two thirds of voters saying that the worst of the economic crisis is behind us. Moreover, the proportion of voters saying that things have already started to improve is up and now stands at roughly four-in-ten in both polls.  And when asked if things are better or worse than they were one year ago the proportion saying worse has dropped since July from a slim majority to only 41 percent in the NPR poll.

Our focus groups reinforced these findings as for the first time since the financial crisis occurred over one year ago we witnessed some sense of optimism about the economy. This should not be overstated as participants still discussed their own serious economic difficulties, but for the first time people openly stated that they are cautiously optimistic about the economic future. As one senior in Orlando, Florida said, “I think that it [the economy] is getting better and I really don’t see what other directions there is [for it to go].” A man in Orlando expressed his belief that things will improve because America has been through rough patches before saying, “I am optimistic simply because I do feel that the American people have the ability to pull through without a doubt.  If there’s a country that can come out of this recession or even a depression it would be ours.”

This flicker of optimism is the first we have seen since the financial crisis and could impact voters’ moods as we move toward the 2010 elections.

Meanwhile, voters continue to blame the current economic crisis on former President Bush, with no signs of that blame shifting to President Obama.  Underscoring that may effect how Democrats frame the choice in November.

Framing the Election

The Democrats have been so busy trying to govern through a crisis that there has been little time to develop a narrative, define the Republican opponents or pose a choice for the upcoming election.  These devices will not get traction until there is more movement on the economy and governance, but it does not mean it is too early to begin creating a framework.

People are living through economic difficulties and one of the strongest choices focuses on what the Democrats did to help people, while Republicans voted against all new help for the unemployed at a time of economic crisis. In our focus groups many volunteered how vital the extension of COBRA was to their survival.  Over half of the voters in the poll said they were more likely to support a Democrat when focused on that choice.

A similar number are more likely to support the Democrat when they present the choice: Democrats are fighting to make the economy work for the middle class, while Republicans fight for more breaks for wealthiest Americans, big corporations and special interests.  This was very believable in the focus groups, where participants viewed Republicans as out out-of-touch and defenders of the status quo and Wall Street.

Voters overall, but especially Democrats respond to a motivating choice between continuing to move forward with the changes Democrats have implemented or going back to the policies of George Bush and continuing the status quo. An attack on Republicans for wanting to go back to the policies of George Bush and Dick Cheney – policies that hurt the middle class while protecting tax cuts for the wealthiest, bonuses for CEOs and the profit of the insurance companies – also tested very well, particularly among Democrats.

A straight out attack on Republicans for efforts to privatize Medicare was the strongest tested attack: Republicans developed and voted for a plan that would have put an end to Medicare and forced seniors to buy insurance directly from insurance companies. After hearing this a striking 57 percent said they were less likely to vote for the Republican candidate, with 41 percent much less likely.

Republican messages tested about 5 points stronger in this survey, but campaigns are dynamic.  We presume this is the worst possible moment to be testing these choices, which will gain traction as Democrats move on the steps described below.

Changing the Dynamic of 2010

The NPR survey asked voters what issues the president should prioritize and what coming out of the State of the Union address should be his focus.  They are pretty clear: 63 percent want him to prioritize the economy and jobs.  Health care is next, but a distant second.  When we ask in which bills to advance after the State of the Union, 70 percent choose a jobs bill and 49 percent a deficit reduction plan.

Any plan to change the dynamic must see different priorities in the coming months – and show evidence of progress on all three of those policy areas.

Also contributing the boiling point are the extraordinary Wall Street bonuses in the same year as the taxpayer bailout.  That too is part of a new way forward.  While voters have been cautious about Democrats potential favoring of Wall Street over Main Street, there is no such caution on a proposal to impose fees on the largest banks.  By 57 to 39 percent, voters agree with the Democrats that this will discourage big bonus payouts and ensure that the big banks that caused the crisis pay for the bailout.  These initiatives have the chance to change the current dynamic.

This takes us to the steps Democrats can take to change this dynamic in this election year.

    1. Pass health care and explain it anew. While the route to passing health care is difficult, passage would signal a break of the gridlock in Washington.  Health care reform has become a metaphor for ineffective government and gridlocked Washington politics, while passage provides an opportunity to explain its economic benefits.
    2. Get the spotlight off of Congress.  Shift the focus away from Congress, the sausage-making of legislating and the polarization of Washington.
    3. Turn to jobs and focus relentlessly on bringing the economy and small business back. Long-term unemployment and its effects require a Democratic president and Congress who understand this public priority.   
    4. Act on reforming Wall Street.  Pass Wall Street reforms, including CEO bonuses and bank fees, to reclaim the cost of the bailout. The NPR poll shows Democrats much more in touch with the country here.
    5. Take visible action to cut spending and reduce the deficit.
    6. Get the economic narrative right. As the economy recovers painfully slowly, get the narrative right to move voters from their current protest vote to a place where voters don’t want to put the recovery at risk by voting Republicans into office who want to go back to the same policies that got us into this mess.
    7. Sharply define the Republicans and the real choice in the election.

Huckabee's Populist Image Belies Bizarre Economic Plan

Mike Huckabee’s first-place finish in the Iowa Republican caucus was a victory for the Religious Right, after the combined efforts of a number of lesser-known right-wing figures eager to nominate one of their own. But while James Dobson and Richard Land issued cautious statements endorsing the victory if not the candidate, other national religious-right activists remained aloof, maintaining that Huckabee jeopardizes the vaunted right-wing coalition by alienating some of its partners, especially allies on the economic Right.

“I'm still skeptical that Mike Huckabee is the right man to speak for them because of his views on economics and foreign policy,” said Gary Bauer. Tony Perkins of the Family Research Council said Huckabee supporters “overlooked the fact he was not attractive to other members of the conservative coalition, and they said they don't care about us, and we don't care about them."

Indeed, these prominent religious-right activists are echoing people like Patrick Toomey of the Club for Growth, who called Huckabee the “John Edwards of the Republican Party,” FreedomWorks' Dick Armey ("Huckabee undermines the GOP's longstanding unity between its traditional and economic wings"), or American Enterprise Institute Vice President Harry Olsen. Toomey’s Club has done the most to convince Republicans of Huckabee’s alleged tax-hiking heresy, running anti-Huckabee ads heavily in Iowa since the summer.

Huckabee himself has played up this reputation as a populist, deriding the “Club for Greed” and talking about “the growing angst in the middle class.”

While many pundits seem to have accepted this presentation, it’s important to separate style from substance: When it comes to economic policy, Huckabee has arguably been running to the right of any of his major opponents.

Key to jumpstarting Huckabee’s surge in Iowa, along with conservative homeschoolers, was his early embrace of a little-known right-wing group called FairTax.org, which proposes replacing all income taxes with a 23 percent national sales tax. FairTax sent at least 20 buses full of people to the Ames straw poll in August, where Huckabee finished a surprising second-place, and the group almost went broke in the fall working the campaign.

Huckabee sells the plan with a populist flair, promising to abolish the IRS and put in place a “progressive” system that would be less for everybody while rewarding “hard work and thrift.” However, the substance doesn't quite match the rhetoric.

Economists and observers on the right and left have mocked the FairTax plan as “politically unrealistic and mathematically impossible.” The 23 percent number, for example, seems to be an obvious ruse to disguise what is in fact a 30 percent tax. (Here’s how that works: adding a $30 tax to a $100 purchase is what anyone would call a 30 percent tax – but the “FairTax” folks say that $30 is only 23 percent of the new total cost of $130.)

Even that number is not sufficient to meet current government spending, which would also be taxed under the plan: Supporters include the tax government agencies would themselves pay when computing revenue but not when calculating spending. Other estimates put the required sales tax rate to meet current spending at above 50 percent.

But beyond the legerdemain and “fantasy” numbers put out by FairTax, the plan for a national sales tax—which would ignore corporate income and capital gains as well as wages—is most vulnerable to criticism that it hits the poor and middle class hardest. Bruce Bartlett, a conservative economist who worked in the Reagan administration, wrote that under the FairTax plan, “there would be an enormous shift in the tax burden from the wealthy to those with lower and middle incomes.” As Money magazine explained:

    Let's say a hedge fund manager has a good year and earns $1 billion. If he can somehow manage to scrape by spending, say, $100 million, the other $900 million is tax free. He'll have paid about 2% of his income in taxes that year.

Such a scheme is far more regressive than the current income tax, and no other candidate has proposed anything so radical. Nevertheless, Huckabee continues to employ the FairTax plan as part of his “populist” image, which pundits and his right-wing opponents alike—not to mention religious-right leaders—have bought into.

Mr. Obama’s Junk Economics: Democrats Relinquish the Populist Option to the Republicans

In a dress rehearsal for this November’s mid-term election, Democrats and Republicans vied last week for who could denounce the banks and blame the other party the most for the giveaways to Wall Street that have swollen the public debt since September 2008, pushing the federal budget into deficit and the economy into a slump.
The Republicans are winning the populist war. On the weekend before his State of the Union address on Wednesday, Mr. Obama strong-armed Democratic senators to re-appoint Ben Bernanke as Federal Reserve Chairman. His Wednesday speech did not mention this act (happily applauded by Wall Street). The President sought to defuse voter opposition by acknowledging that nobody likes the banks. But he claimed that unemployment would be much higher if they hadn’t been bailed out. So the giveaway of public funds was all for the workers. The $13 trillion that has created a new power elite was just an incidental byproduct. Unpleasant, perhaps, as American democracy slips into oligarchy. But all for the people. The least bad option. It had to be done. People might not like it, but Main Street simply cannot prosper without creating hundreds of Wall Street billionaires – without enabling them to increase their bonuses and capital gains as bank stock prices quadruple. It’s all to get credit flowing again (at 30% for credit card users, to be sure).

So the rest of us must wait for wealth to trickle down. The cover story is that this is how the world works, like it or not. At least this is the argument of the lobbyists who are drafting and censoring laws and signing off on just who is acceptable to run the Federal Reserve, Treasury and other public-subsidy agencies. The working assumption is that the economy cannot recover without enriching Wall Street.

This is the Administration’s tragic flaw. What the economy needs is to recover from the Bush-Obama supposed cure, i.e., from the mushrooming debt overhead. It needs to recover from the enrichment of Wall Street. It doesn’t need more credit, but a write-down for the unpayably high debts that the banks have imposed on American families, businesses, states and localities, real estate, and the federal government itself.

Instead of helping debtors, Mr. Obama has moved to heal the creditors, making them whole at public expense. If debtors cannot pay, the Treasury and Fed will take their IOUs and bad casino gambles onto the public sector’s balance sheet. The financial winners must come first – and it seems second and third, too. The rationale is that unless the government gives the large financial institutions what they want and saves them from taking a loss, their “incentive” to protect the economy from devastation will be gone.

Knuckling under to this protection racket is not the change that most people voted for in November 2008. So on Thursday afternoon, most Republican senators opposed a second four-year term for Bernanke. By leading the effort to re-confirm him, the Corporate Democrats (but not most of their colleagues who had to face voters this autumn) removed this albatross from the Republican neck and put it around their own.

For starters, Chairman Bernanke has convinced the President that the Fed should be the single regulator of Wall Street – ideologically kindred, and drawn from its ranks, or with its assent. Mr. Obama’s address made no reference to the Consumer Financial Products Agency he promised a year ago to be the centerpiece of financial reform. Its main sponsor, Elizabeth Warren, has been warning that hopes for reform are being overwhelmed by financial lobbyists arguing that truth-in-lending laws and anti-usury regulations threaten to reduce bank profits, forcing lenders to raise costs to consumers. In Mr. Bernanke’s world, regulations to protect consumers simply will oblige the banks to pass on the cost increase caused by this “government interference.” The more regulation there is, the more consumers will have to pay.

This is the inside-out picture drawn by bank lobbyists and purveyed by Mr. Obama’s economic team. Could George Bush have gotten away with it? Democrats have a friendlier and more compassionate face, but the substance remains the same.

Most economists believe that Mr. Obama is whistling in the dark when he says the economy will recover this year under Chairman Bernanke’s guidance. The financial screws are being tightened, yet the Fed refuses to abide by its charter and regulate credit card rates going through the roof. Instead of countercyclical federal spending to rescue the economy from debt deflation, Mr. Obama says that since we have given so much to Wall Street in the past year and a half, little is left to spend on the “real” economy. Sounding like a Republican in Democratic clothing not unlike his Senate mentor Joe Lieberman, his State of the Union speech urged creation of a bipartisan (that is, Republican-friendly) working group to agree on how to lower the deficit. The President proposes that starting next year Congress should freeze spending not already committed under entitlement programs.

Testifying Wednesday morning as a run-up to Pres. Obama’s evening speech, Messrs. Geithner and Paulson at least avoided the Washington ploy of emulating Alzheimer’s patients and saying that they couldn’t recall anything about their giveaways. Sophisticated enough to outplay their questioners in verbal tennis, the past and present Treasury Secretaries brazened it out. Using the Plausible Deniability defense, they claimed that they weren’t even in the loop when it came to paying AIG enough to turn around and pay Goldman Sachs and other arbitrageurs 100 cents on the dollar for securities worth about a fifth as much. It was all done by their subordinates. Their underlings did it. “This was a Federal Reserve loan,” Mr. Paulson explained. “They had the authority. They had the technical expertise … and I was working on many other things which were in my bailiwick.” And in any case an AIG bankruptcy “would have buckled our financial system and wrought economic havoc.” Unemployment, he warned, “could have risen to 25%.” The Fed had to protect people.

When there was no way to dodge, they frankly admitted what had happened, providing helpful pieties to the effect that it is the job of Congress to change the law to make sure nothing like this happens again. Yes, there was a big giveaway, but we saved the economy. Wall Street’s loss would have been the peoples’ loss. Certainly we need new rules to protect the taxpayer, blah, blah, blah. We’re all in the same boat. If the banks took a loss, they would have to raise the price of financial services and we would all have had to pay more. Thank heavens that everything is getting back to normal now.

“A lot of people think the president of the New York Fed works for the government,” Democrat Marcy Kaptur of Ohio concluded, “but in fact he works for the banks on the board that elected you.” Not so, testified New York Federal Reserve general counsel Thomas Baxter. “A.I.G. wanted to keep the information confidential, for fear that it would lose business if customers were named.” And if it lost business, “This would have had the effect of harming the taxpayers’ investment in A.I.G.” So it was all to save the taxpayers money that the Fed spent $185 billion of their money.

But was it really necessary not to let A.I.G. go bankrupt in September of 2008? The Wall Street Journal’s editorial page blew the whistle on how the government’s wheeler-dealer insiders have been changing their story again and again – not usually a sign of truthfulness. “Secretary of the Treasury Timothy Geithner and predecessor Hank Paulson said they didn’t bail out AIG to save its derivatives counterparties” from bad credit default swap contracts because if it would have asked these counterparties to “take a haircut,” credit-ratings agencies would have downgraded AIG. A lower rating would have obliged it to post even more collateral on its other swap contracts, presumably because of the higher risk.

There are a number of problems with this story, the editorial explained. First of all, Goldman Sachs and other counterparties unilaterally said the prices had declined for securities that had no market price at all, only subjective valuations. A.I.G. would have been reasonable in disputing this. In any event, as the firm’s new 80% stockholder, the U.S. Government said it would stand behind AIG. This should have removed fears of non-payment. But most important of all was the claim by Messrs. Paulson and Geithner that failure to “honor” AIG’s swaps would have threatened its far-flung insurance businesses on which so many American consumers depended. New York Insurance Superintendent Eric Dinallo, who was AIG’s principal insurance regulator at the time, testified before the Senate last year that these operations were not threatened at all! “‘The main reason why the federal government decided to rescue AIG was not because of its insurance companies.’ He was so confident in the health of the AIG subsidiaries that, before the federal bailout, he was working on a plan to transfer $20 billion of their excess reserves to the parent company.”

This directly contradicts Mr. Geithner’s claim “that the ‘people responsible’ for overseeing the insurance subsidiaries ‘had no idea’ about the risks facing AIG policyholders. He’s talking about Mr. Dinallo here. Instead of being safely segregated, Mr. Geithner said the insurance businesses were ‘tightly connected’ to the parent company. Mr. Paulson added that the healthy parts of AIG had been ‘infected’ by the ‘toxic assets.’ He added, ‘One part of the company would have contaminated the other.’” Does this mean that New York’s “heavy state insurance regulation was a sham,” the newspaper asked? It would seem that “When push came to shove, policyholders were not protected from a default by the parent company.” It urges that Mr. Dinallo be brought back to straighten the matter out.

Mr. Geithner closed his own comments by saying, “if you are outraged by what happened with A.I.G., then you should be deeply committed to financial reform.” This is rhetorical judo. The financial system in question is not the economy at large. It was A.I.G.’s carefully segregated bookies’ account for wealthy hedge fund gambles and Wall Street speculations that should have had little to do with the “real” economy at all.

Wall Street – and most business schools – promote the myth that the “real” economy of production and consumption cannot function without making Wall Street’s insiders immensely rich. Emulating Louis XIV, Wall Street’s spokesmen explain, “L’economie, c’est nous.” There seems nothing to be done about banks impoverishing people by extortionate credit card rates, junk securities and a debt burden so heavy that it will require one bailout after another over the next few years. Present policy is based on the assumption that the U.S. economy will crash if we don’t keep the debt overhead growing at past exponential rates. It is credit – that is, debt – that is supposed to pull real estate out of its present negative equity. Credit – that is, debt leveraging – that is supposed to raise stock market prices to enable pension funds to meet their scheduled payments. And it is credit – that is, debt –is supposed to be the key to employment growth.

Credit means giving Wall Street what it wants. Regulating it is supposed to interfere with prosperity. Truth-in-lending, for example, will increase the “cost of production” by “making” banks charge consumers even more for creating credit on their computer keyboards.

This Stockholm syndrome when it comes to Wall Street’s power-grab is junk economics. Wall Street is not “the economy.” It is a superstructure of credit and money management privileges positioned to extract as much as it can, while threatening to close down the economy if it does not get its way. High finance holds the economy hostage not only economically but also intellectually at least to the extent of having captured Mr. Obama’s brain – and also the federal budget, as money paid to Wall Street has crowded out spending on economic recovery. It has re-defined “reform” to mean putting Wall Street even more in power by making the Fed the sole regulator of Wall Street. Under these conditions, saving “the system” means saving a mess. It means saving a debt dynamic that must grow exponentially at the economy’s expense, absorbing more and more federal bailout funds and hence crowding out the spending needed to revive the economy.

Mr. Paulson’s testimony echoed the idea that the rescue of A.I.G. was necessary to keep the economy from collapsing. “We would have seen a complete collapse of our financial system,” Mr. Paulson said, “and unemployment easily could have risen to the 25 percent level reached in the Great Depression.” So it was all for the working class, for employees and consumers. It was done to save the government – a.k.a. “taxpayers” – from losing money on its investment. It was to save the economy from breaking down – or perhaps to pay off protection-racket money to Wall Street not to wreck the economy. And as we all know, taxpayers today are mainly the lower-income individuals unable to take their revenue in the form of low-taxed “capital gains” like Wall Street traders, in today’s fiscal war between finance and labor.

It seems to be merely an incidental by-product of saving taxpayers and labor that Wall Street ended up with the hundreds of billions of dollars of gains (and losses avoided) – at a $13 trillion expense of government and of about four million jobs in the overall economy whose employment is shrinking, and about four million home foreclosures in 2009-10. The cover story is that matters would have been worse otherwise. This was the price for “saving the system.” But “the system” turns out to be the Bubble Economy, in which the Obama administration has put as much faith as Bush did. This is why the same managers have been kept in place. This policy has enabled Republicans to strike a posture of denouncing the banks in preparation for this November’s mid-term election.

“Saving the economy” has become a euphemism for the policy of keeping bad debts on the books and saving high finance from writing them down to reflect the realistic ability to pay. Wall Street has used its bailout money to lobby Washington, back its political nominees to hold Congress hostage, and blame the downturn on any regulator or president who does not yield to its demands.

The resulting program is not saving the economy; it is sacrificing it. What has been saved is the debt overhead – the wrong side of the balance sheet.

The reactionary political outlook

A bipartisan compact between Corporate Democrats and Republicans is not the change voters expected in November 2008. Confronted with the “Obama surprise” – an absence of change – the only option that many voters believe they have is to change the existing party. Republicans are setting their eyes on Pres. Obama’s former Senate seat in Illinois, Vice Pres. Biden’s seat in Baltimore, and Majority Leader Reid’s seat in Nevada. Losing these and other seats would create a political standoff giving Mr. Obama further excuse for not changing course.

This kind of standoff normally would enable a popular president to ask voters to elect a majority large enough to legislate the program he outlines. But instead of a program, Mr. Obama has simply appointed the leading Bush-era administrators and brought back the Clinton “Rubinomics” team from Wall Street. His spending freeze in a shrinking economy is a Republican program, his modest “stimulus package” is over, and he has dropped the Consumer Financial Products Agency under Wall Street pressure. So if we are to look at what the administration actually is doing, its program is simply a blank check to the Fed and Treasury (under Bush-era management) to revive Wall Street fortunes – in a nutshell, more Rubinomics.

Convergence between the two parties reflects the privatization of politics by political lobbying and campaign contributions. Getting paid back with fiscal favors, sell-offs and bailouts promises to increase in the wake of the recent Supreme Court “Frankenstein” decision that corporations are virtual people when it comes to freedom of speech and the purchase of media time.

The only countervailing power is that within the Republican Party a fringe of tea partiers threatens to run against more established candidates safely sold to special interests. The Democratic Party always has been a looser coalition, which may not hold together if the Rubinomics team continues to lock out non-Corporate Democrats. So a political realignment may be in the making. Financial and fiscal restructuring issues span left and right, progressive Democrats and populist Republicans. So far, their sentiments are reactive rather than being spelled out in a policy program. But there is a widening realization that the economy has painted itself into a financial corner.

What is needed is to explain to voters how financial and tax policies are symbiotic. The tax shift off finance, insurance and real estate (FIRE) onto labor and industry since 1980 has polarized the economy between a creditor class at the top of and an indebted “real” economy below. Unless this tax favoritism is reversed, more and more revenue will be diverted away from spending on consumption and investment to pay debt service and “financialize” the economy even more.

It is natural that the world’s most debt-ridden economies – Latvia and its Baltic and post-Soviet neighbors, and Iceland – are the first to perceive the problem. They may be viewed as an object lesson for a dystopian future of debt peonage. New Europe’s debt strains are threatening to break up the core euro-currency area (aggravated from within by the Greek, Spanish and Irish public debt problems). The British economy is likewise financialized, weakening sterling. And Europe lacks the U.S. financial safeguard that enables mortgage debtors here to walk away from properties that have fallen into negative equity. Insolvent homeowners in Europe face a lifetime of literal debt peonage to make the banks (even foreign banks, which dominate Central Europe’s post-Soviet economies) whole on their bad debts as the continent’s real estate prices are plunging even more steeply than those in the United States – some 70 percent in Iceland and Latvia.

The only silver lining I can see is that perception will spread that the financial sector is an intrusive dynamic subjecting the economy to debt deflation. But at present, lawmakers are acting as if the economy is an albatross around Wall Street’s neck. (“How are we wealthy people to bear the cost of healing the sick and employing the masses?” the financial sector complains. “The cost is eating into our ability to create wealth.”) Libertarians have warned that our economy is going down the Road to Serfdom. What they do not realize is that by fighting against government power to check financial hubris, they are paving the road for centralized financial planning by Wall Street. They have been tricked into leading the parade on behalf of the financial, insurance and real estate sector – down the road to debt peonage in a monopolized and polarized economy.

For Populism, a Return to Economic Roots

Yana Paskova for The New York Times
“I’ve not seen anything like this,” 
Ed Rollins said of today’s populist uproar.

In selecting villains, politicians reflect the anxieties of their era. Today’s populist uproar reaches far beyond the American International Group — and may mark a turning point.

As baby boomers came of age, targets for populist scorn typically tracked fears of social breakdown. At various points, they included the 1960s counterculture, welfare cheats, violent criminals, illegal immigrants and gay men and lesbians.

Now A.I.G. executives and their bonuses have set off revulsion among lawmakers, and the House last week voted overwhelmingly for tax rates at a level — 90 percent — unseen in decades. Amid recession and the troubles on Wall Street, economic populism has displaced social populism as the emotional flash point in American politics.

In selecting villains, politicians reflect the anxieties of their era. Today’s populist uproar reaches far beyond the American International Group — and may mark a turning point.

As baby boomers came of age, targets for populist scorn typically tracked fears of social breakdown. At various points, they included the 1960s counterculture, welfare cheats, violent criminals, illegal immigrants and gay men and lesbians.

Now A.I.G. executives and their bonuses have set off revulsion among lawmakers, and the House last week voted overwhelmingly for tax rates at a level — 90 percent — unseen in decades. Amid recession and the troubles on Wall Street, economic populism has displaced social populism as the emotional flash point in American politics.

And as baby boomers approach retirement with depleted savings, it may last a while.

“I’ve not seen anything like this,” said a Republican consultant, Ed Rollins, who was a strategist for presidential bids by Ronald Reagan, Ross Perot and Mike Huckabee. “They think it’s all occurring because of greedy bastards on Wall Street and inept government officials.”

“If I wanted to run a populist presidential campaign,” Mr. Rollins added, “I’d have a lot more tools than I had with Ross Perot.”

Anger over economic change spawned the Populist Party after the Gilded Age in the late 19th century. Championing rural America, the party accused East Coast elites of dividing the country into “tramps and millionaires.”

Franklin D. Roosevelt attacked “economic royalists” during the Great Depression. “They are unanimous in their hate for me,” Roosevelt said, “and I welcome their hatred.”

Focus on Social Issues

That conflict, however, lost its spark with the economic boom after World War II and the advent of the civil rights movement, the sexual revolution and the Vietnam War. “In the 1960s, the center of gravity of populism shifted to social issues,” said Jeffrey Bell, a Republican who is the author of “Populism and Elitism: Politics in the Age of Equality.”

George Wallace attacked “pointy-headed intellectuals who couldn’t park their bicycle straight.” Richard M. Nixon contrasted the “silent majority” of Middle America with unruly protesters, whom his vice president Spiro T. Agnew condemned as “an effete corps of impudent snobs.”

Crusading against government excess, Reagan, as a candidate, lampooned a “Chicago welfare queen” who received benefits under multiple identities. George Bush used the rapist Willie Horton to cast Democrats as soft on crime.

In the early 1990s, as worldwide economic integration showcased gaps between rich and poor, economic populism gained force from the voices of Mr. Perot and Bill Clinton. But the free trade policies that Mr. Clinton followed as president frustrated those seeking to place corporate elites in the cross hairs.

In 2000, Al Gore’s charge that “powerful interests” blunted working-class aspirations could not win him the White House. George W. Bush prevailed in two elections while courting “values voters,” and in 2004 backed a constitutional amendment to ban same-sex marriage.

“The distribution of income and opportunity is likely to dominate the next stage of American politics,” Jeff Faux predicted in “The Global Class War” in 2006. But opposition to the Iraq war proved more powerful that November, even as Democrats regained control of Congress.

Anger’s Course

As the 2008 campaign began, Iraq and illegal immigration loomed as the most volatile issues. Then last fall, the financial crisis shoved other concerns aside and began to vindicate Mr. Faux’s prediction.

How long economic anger will persist remains unclear. “So far we don’t have the big political movement that helped stir up class issues in the 1930s,” said Alan Brinkley, a historian at Columbia, referring to the populist firebrands Huey P. Long and Father Charles Coughlin who put pressure on Roosevelt.

Public ire could help President Obama reverse Republican policies on taxes, domestic spending and regulation — shifts that he argues will curb the inequalities behind the current sense of outrage.

But it also could threaten Mr. Obama’s plan to stabilize the financial system. His temperament and public demeanor run toward cooling that anger rather than stoking it.

Once the Wall Street crisis eases and economic growth resumes, Mr. Bell predicts, social populism will regain pre-eminence. Others, though, see a continuing search for scapegoats as Washington uses more taxpayer money to cover bad bets by financial executives.

“You’re just seeing the beginning of this with A.I.G.,” said Robert Borosage, an adviser to the Rev. Jesse Jackson when he ran for president. “The people making off with all the rewards led the whole economy off a cliff.

“Working Americans are now asked to bail them out. This anger is going to get much worse.”

Baby boomers nearing retirement have long fretted that government cannot afford their promised Social Security and Medicare benefits. Now fallen housing and stock values have shrunk their savings. Their effort to pin blame could color the political agenda for years.

“You’re going to see a lot of elderly people coming up short,” said Mr. Rollins, the Republican strategist. “It’s not a normal cycle like we’ve been in. That’s the scary part.”

McCain is suddenly an economic populist

Talk about your battlefield conversions. With financial bombs going off all over the landscape, John McCain -- with rare exceptions a lifelong foe of government regulation -- has seen the light.

Where just last March he was telling The Wall Street Journal, "I am always for less regulation," now he is promising, though without saying just how, to end the "reckless conduct, corruption and unbridled greed" of Wall Street.

Coincidentally, it was in March, too, that Barack Obama, in his key economics speech at the Cooper Union in New York, pointed out the worsening consequences of the rash and reckless deregulations of recent years.

After the wreck of the mortgage markets, the Bear Stearns buyout and the collapse of the Fannies Mae and Mac into federal receivership, the swoon of insurance/investment megalith AIG, whose necessary federal rescue has put us all on the hook for $85 billion, finally got McCain's attention.

Where his closest economic adviser, former Sen. Phil Gramm, just weeks earlier had dismissed as a "nation of whiners" a public anxious about losing homes and jobs by the millions and seeing their 401(k) plans blitzed, the GOP candidate now rides as the champion of consumers and workers.

Getting all fiery, as he can do, McCain told a Tampa crowd, "Government has a clear responsibility to act in defense of the public interest."

It is a welcome turn to be sure but, goodness, an abrupt one.

In the 1990s, McCain supported, as luckily most senators did not, a proposed broad moratorium on any new government regulation. In '96, with only four other senators, he voted against a comprehensive reform of telecommunications on the grounds that it didn't deregulate the field enough. In '99, he supported legislation that removed regulations, dating to the Great Depression of the 1930s, that had kept banks and investment and insurance companies from poaching in one another's fields. The consequent muddling is a source of much of the current trouble.

Even where McCain has lapsed, he has tended to recant. After Enron and other accounting scandals, he supported strengthening the regulatory Sarbanes-Oxley Act -- then deplored the vote last year.

Although he is suddenly talking the language of economic populism -- for McCain, as unexpected as speaking in tongues -- it is not clear he yet quite gets what has happened. He focuses much of the blame on personal misbehaviors in business and government, rather than on a policy of indulgence that by making such behavior possible pretty much assured it would occur.

The president McCain most admires, Theodore Roosevelt, inveighed a century ago against "malefactors of great wealth" but, as well, acted against them with anti-monopoly legislation which broke up the trusts that were the target of his indignation.

McCain's new populism would be more credible if he showed that he understands it's not just errant business executives and indifferent or distracted regulators who are at fault. The turmoil today is far more the work of an ideologically rigid political philosophy -- more nearly radical than conservative -- which holds that even obviously prudent public oversight is an unacceptable affront to free-market purity, and the consequences be damned.