Breaking Economic News: Santa Asks for Federal Bailout

Our Special Economics Correspondent, Gerard Magliocca, has just filed this exclusive for Enduring America:

Washington, DC, November 27, 2008: Santa Claus was greeted with deep skepticism on Capitol Hill this afternoon as he told members of Congress that he could not fund operations for the remainder of the year without federal assistance.

"Global warming created a real estate bubble in the North Pole that has burst," Santa explained. "Now my elves are under water and under water on their houses too." Aggressive cost-cutting steps, such as selling reindeer and reducing mall appearances, have failed to stem the tide of red ink.

In an emotional plea for support, Santa told lawmakers that his bankruptcy would lead to a devastating loss of jobs in the tree, stocking, and toy industries. In addition, "millions of crying children would deal a devastating blow to the nation's morale at a time when we need some cheer."

Senator Christopher Dodd, chair of the Senate Finance Committee, demanded more information on the Claus method for handing out gifts. "You say that you keep track of who is naughty and nice," Dodd asked, "but I think this committee has a right to know how you get that information and make those determinations."

Senator Richard Shelby, the ranking Republican on the committee, was critical of Santa's business plan and wondered, "How will taxpayers benefit from funding an operation that gives gifts away for free?" When Santa responded that he got "millions of cookies every year" that could act as collateral, the Senator did not seem impressed.

Other members were just as hostile. One asked why Santa had relocated all of his operations outside of the United States. "In exchange for any bailout," this Senator said, "I think you should pledge to hire American elves." Another complained that all she got when she was a kid was a lump of coal, and that it took guts for Santa to come begging for help now.

Similar sentiments greeted Santa in the House. When told that he had flown to the hearings in a private sleigh, Congressman Brad Sherman of California was livid. "Couldn't you have taken a dog sled? My constituents are having a hard time understanding that." Another called for a federal investigation of Santa's repeated break-ins at American homes over the years, which she described as "an outrageous invasion of our privacy."

The atmosphere of the hearings was best summed up by Congressman Barney Frank, who informed Santa that he'd need to develop a better plan and return to Congress in a week. "What the American people see here is a fat and bloated operation that needs to be trimmed," Frank said, "and I'm not just talking about you."

Breaking News: Beyond Hillary Clinton

Today's media are likely to be dominated by the celebrity and dramatic value of the appointment of Hillary Clinton as Secretary of State. All well and good for headlines and viewers, but with respect to foreign policy, almost all of this will be tangential or speculative. Two other appointments, one of which will get little coverage, deserve attention today.

The announcement with most immediate significance is Timothy Geithner, currently New York Federal Reserve Bank Chairman, as Secretary of the Treasury. Although the formula "little-known outside Wall Street" is being used to describe him, Geithner was being touted as a possible choice within days of Obama's election. He is well-respected within financial circles and won praise for his role in the bailout response to the October crisis. He is also an acolyte of Lawrence Summers, Treasury Secretary under Bill Clinton, further cementing the links between the Democratic Administration of the 1990s and that of 2009.

While Geithner will get attention, given the immediacy of the economic crisis and the overload of business coverage on US television, the naming of retired Marine General James Jones as National Security Advisor is likely to come in under the radar. That's an oversight, because Jones' selection is likely to be a significant as that of Clinton.

A former Supreme Allied Commander in Europe, Jones was a prime candidate in the first term of the Bush Administration to become Chairman of the Joint Chiefs of Staff. He was not selected, in part, because of clear differences with Secretary of Defense Donald Rumsfeld on how to wage the war in Iraq and on broader development of US forces.

Jones' choice, therefore, could be seen as a reaching-out to the military officers and strategists who were close to being ostracised by Rumsfeld and his civilian masterminds. The General should work well with the current Secretary of Defense, Robert Gates, whom I think will stay on with Obama for at least the first months of 2009, and he is of course familiar with General David Petraeus, who is now heading US Central Command with oversight of the battles in Iraq and Afghanistan.

That, however, raises an interesting question. I think Jones is the only military officer to serve as National Security Advisor, apart from Colin Powell in the last months of the Reagan Administration. Given Obama's red-meat talk on fighting the fight in Afghanistan, can we expect a hard power emphasis coming out of the National Security Council?

Certainly, there are signals that Jones --- despite the lack of public attention to his selection --- will be more of a policy player in the Obama White House than Condi Rice was in the Bush Administration from 2001 to 2005. As sources told the Washington Post, "Obama is considering expanding the scope of the job to give the adviser the kind of authority once wielded by powerful figures such as Henry A. Kissinger."

Fact x Importance = News: The Non-Story We're Watching (16 Nov)

Developing Non-Story of the Day: The Global Economic Summit

Really. I was expecting major headlines on the G20 Summit this morning if not to reflect reality, to at least keep up the impression of decisive action to shore up the economies of the world.

The Washington Post tried hard to deliver on the headline --- "World Leaders Agree to Seek Major Reform" --- but failed miserably in its attempt to keep up the appearance when it gave the "highlights" of the conference statement:

Global accounting bodies should work toward enhancing guidance for the valuation of securities and toward the creation of a single, high-quality global standard for accounting.

Regulators should ensure strong oversight of credit rating agencies.

Supervisors and regulators should speed efforts to reduce the systemic risks of credit-default swaps

National and regional authorities should work together to enhance regulatory cooperation on a regional and international level.

Global standard for accounting? Oversight? Regulatory cooperation? All very good if you're talking about sound day-to-day practice, i.e., practice that should have been pursued these past years of supposed global boom, but in the current situation, more like closing a very tiny door after a very large horse has bolted.

Nothing in the statement makes even a cursory approach to the issue of the already-existing toxic debt mountain and the already-emerging global recesssion that will accompany this. No recognition of the immediate crisis, and no recognition of the coordinated stimulus that some are advocating to try and off-set it.

The Observer of London comes closest to identifying an actual story, albeit with a focus on the British Prime Minister (and albeit on page 6):

Gordon Brown was struggling last night to prevent the G20 nations from watering down his ambitious plans for a global anti-recession package, the revival of stalled trade talks and radical reform of the international banking system.

Amid signs that several countries were not ready to sign up to his blueprint, the Prime Minister admitted that negotiations were 'difficult' and would go on until the very last minute in Washington.

Brown's proposal for stimulus is far from his own. Other Europeans leaders have pressed for this, as have some American observers (if often with a narrow focus on the US). The key question becomes: who is in opposition?

The Observer is on shaky, speculative ground, pointing to Canada and Germany. The latter is especially surprising, as the German economy has just recored a second straight quarter of negative growth.

My own perhaps-shaky speculation is what goes unnoted in The Observer or any newspaper I've read this AM. George Bush's free-market flutterings on the eve of the conference were in large part a signal that his Administration was not prepared to make any Government-led intervention, at least in co-ordination with other government. So it's a friend thousands of miles from any summit who makes the shrewdest observation with her "feeling that all is awaiting Obama".

Well, maybe. I don't think others will find it advisable or even possible to wait for the 44nd President and they certainly won't be hanging around until the next meeting of the G20 in April. My sense, bolstered by conversations with insiders from the City of London, is that European countries could soon make a co-ordinated move. Having taken criticism in the autumn for moving one-by-one and, conversely, having (at least in the case of Gordon Brown) received political kudos for finding a European approach to shore up the banks and financial sector, moves from the EU nations to avoid an even more serious recession seem likely.

That, of course, doesn't mean success. A financial insider, answering my questions on Friday, noted that the US system can find a 1st tranche of money to shore up its bailout of banks and insurance companies. The 2nd tranche of money to fund a stimulus package, let's say $650 billion? She can't see where it's coming from.

So, as China already takes a lead with its own stimulus package --- $500+ billion --- can Europe find the economic resources and the political will to make its own move? If so, it will bolster the other striking notion in the story in The Observer: this meeting is "signalling a shift away from America's traditional global economic dominance".

Newsflash: That Bush Speech for Economic Salvation

Non-Event of the Day

The President, who had to give a boiler-plate speech at the UN yesterday on religious belief and common values (which, forgive me, still doesn't square with Iraq 2003), then took on his important task. At the Manhattan Institute, he gave a keep-the-faith, flight-from-reality speech:

People say, are you confident about our future? And the answer is, absolutely. And it's easy to be confident when you're a city like New York City. After all, there's an unbelievable spirit in this city.

Bush's mission was to explain to the true believers --- not the religious one, the free-market ones --- that, after this weekend's global economic summit got through its first four tasks (like "understanding the causes of the global crisis"), it would get to the most important duty:

"reaffirming our conviction that free market principles offer the surest path to lasting prosperity"

That, of course, is not an action plan. It's a slogan, like the mantra from the Bush Administration's key global document --- the 2002 National Security Strategy --- of "freedom, free markets, and free trade".

Bush, however, had to cover his possibly-not-so-free market backside, having pushed for $700 billion of Government money to prop up the financial and banking sectors as well as the nationalisation of America's largest mortgage brokers. So he murmured, "I'm a market-oriented guy, but not when I'm faced with the prospect of a global meltdown," and then said...

Well, nothing of substance, really. Regulation of credit default swaps, financial co-operation, and other tinkering phrases. Filler to get to this, the opener for the second half of the speech:

While reforms in the financial sector are essential, the long-term solution to today's problems is sustained economic growth. And the surest path to that growth is free markets and free people.

Well, George, you can put the faith all you want but "sustained economic growth" isn't exactly the Number One Prospect right now. Recession is, and any speech of meaning --- rather than ideological flutterings --- would recognise the immediate dilemma for the US Government.

Paul Krugman, who doesn't hold elective office and thus doesn't owe that office to activists in places like the Manhattan Institute, grabbed hold of Dilemma Horns this morning:

We are already, however, well into the realm of what I call depression economics. By that I mean a state of affairs like that of the 1930s in which the usual tools of economic policy — above all, the Federal Reserve’s ability to pump up the economy by cutting interest rates — have lost all traction.

Krugman then gets to the heart of the matter and thus his recommendation:

All indications are that the new administration will offer a major stimulus package. My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion.

It's a suggestion that would have Bush's speech into a real event, especially if Krugman had put the down-side half of his proposal: how do you finance that $600 billion when the Federal Government is on the verge of a $1 trillion deficit in 2009?

Instead, here's your Presidential economic reassurance:

We saw [America's] resilience after September the 11th, 2001, when our nation recovered from a brutal attack.

Of course, only the worst-taste blogger would extrapolate from this: America's economic salvation lies in another Al Qa'eda spectacular.

Celebrating Bankers: The $140 Billion Tax Cut in the Bailout

A reader from New Zealand tips us off to today's front-page story in the Washington Post:

The financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.

But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.

The Treasury Department effectively removed a 1986 Congressional provision that limited tax shelters in corporate mergers. The move may be illegal, although the Treasury is trying to cover itself by saying that the notice is an "interpretation" of the law.

One immediate effect of the "interpretation", which came a day after the House of Representatives initially rejected the $700 bailout plan, was to make the rescue of troubled banks and financial companies more attractive. For example Wachovia, one of the largest banks in America, was going to be taken over by Citicorp but, after the ruling, Wells Fargo swooped in and made a successful bid.

President-elect Obama may want to consider, as he considers a tax reduction plan (still unclear how he's going to finance it...), that another $100 billion has just been slammed on the Federal Government's budget deficit.