John Cassidy's Blog, page 108

Newt's Big Apple Xmas Comes Early

On a December day so mild it was tempting to look for swallows, a migratory bird of another sort, Newt Gingrich, brought his travelling Presidential show to midtown for a few hours. The first stop was Trump Tower, on Fifth Avenue, where the Republican candidate met the Republican proprietor of the building.

"If I do become the nominee, we are going to compete in all fifty states," Gingrich declared at an impromptu press conference in the building's lobby. "I don't believe in a red-versus-blue model. I believe that we are all one hundred per cent Americans. And I think if the issue is food stamps versus paychecks, I think every state in the country will be in play. And I intend to be the paycheck candidate."

With Trump standing silently behind his right shoulder, his combover as wondrous as ever to behold, Gingrich had already achieved something many thought impossible: he had beaten Trump to the microphone, and on his own turf. "I'm a great fan of his," Newt said of his host. "He was in our last movie, 'City Upon a Hill,' and he did a great job."

(You didn't know Newt made films? Where have you been? He and his wife Callista are practically threatening to take Ken Burns's franchise out from under him. Gingrich Productions, the company they run together, has produced seven full-length documentaries, with subjects ranging from energy independence to Pope John Paul II.)

When Trump finally got to the mic, he said it was a great honor to have Newt in his building, adding, "It's amazing how well he's doing and how it really resonates with people." That didn't exactly sound like a ringing endorsement, but Trump had reason to be coy. He is due to host a Republican debate later this month, and he said he would delay any formal endorsement until after that momentous occasion.

Backtracking on what one of his flunkies said a couple of weeks ago, Trump added that he no intention of entering the Presidential race himself unless the Republicans choose "the wrong person"—read "Ron Paul"—as their candidate. And he added, "I don't think the wrong person will get in."

That was clearly what Newt wanted to hear. "The Donald has had the No. 1 show in the country," he said in reply to an impertinent question about why he had come seeking an audience with the great man. "He is a genuine American icon in his own right. Why wouldn't you want to hang out with him? And I would say the same thing across the board. I like the process of learning about all of America."

That much was clear. His next stop was the Union League Club, an exclusive men's club on East Thirty-seventh Street, where "denim, sneakers, athletic apparel of any description, or immodest attire are never permitted." That ruled out the small but noisy Occupy Wall Street contingent, which was standing across the street holding up signs that said things like "NEWT NEEDS A BATH. HE'S ROLLING IN DIRTY MONEY" and "NEWT = FASCIST ASSHOLE."

Once he got inside, Newt held another press conference, this one more formal. It took place in the second floor library, which was packed with historical mementoes that would have appealed to his professorial side. On one side of where I was sitting, there was a lock of John Brown's hair, which, the inscription said, had been "obtained at his funeral in North Elba, New York." On the other side of the room, next to a display of toy soldiers from the West Point Military Academy, there was a "British Humor" section, which included the collected works of Jonathan Swift and Alexander Pope.

As Newt strode in beaming broadly, and made his way to the lectern, I wondered what the author of "Gulliver's Travels" and "A Modest Proposal" would have made of him. On first impressions, at least, he would probably have been modestly impressed. Whatever Gingrich's merits or demerits as a leader, administrator, and Presidential candidate may be, he is a gifted speaker, a quick wit, and a battle-hardened political brawler. While Mitt Romney is running a Greta Garbo campaign, shying away from interviews, Newt wades right in and fires away.

Rather than backing off from his controversial comments last week about changing the child-labor laws and encouraging poor kids to do part-time paid work in their schools, he started out by asking the reporters how many of them had done anything to earn money before the age of ten. A few hands went up. Successful people learn early on about work and enterprise, Gingrich said: "We're looking for methods to help the poor."

A questioner asked whether he'd actually been to a housing project. Gingrich said he had done so many times, including during the nineteen-eighties, when he launched a program called "earning by learning." Another questioner asked whether he was seriously suggesting that high-school students, mainly blacks and Latinos, who were already behind on their studies and in danger of dropping out, should be encouraged to take part-time jobs. Newt said he was. Not hard manual labor, but work all the same. "What if they were assistant in the front office?" he said. "What if they did light work in the kitchen? You'd say to them, you'll get this job, you won't drop out, and you'll earn some money. This is called America. It is how people rise in America. They learn to work."

That didn't sound entirely plausible. But it sounded like something that many Republican voters would agree with. (A little earlier, Gingrich had persuaded Trump to agree to take on ten apprentices, or, as he put it, "apprenti," from schools in poor areas.)

Not content with reigniting one controversy, Newt started another, accusing Speaker Pelosi of breaking congressional rules and calling her "capriciously political." He was responding to a question about Pelosi's comments that she was looking forward to dredging up some of the material from the extensive House of Representatives ethics inquiry into Gingrich, which took place in the nineteen-nineties. "I want to thank Speaker Pelosi for what I regard as an early Christmas present," Gingrich said. Once the American people realized what she was up to, he went on, they would realize "what a tainted political operation that Nancy Pelosi was involved in."

After a few sideswipes at Romney and another direct shot at President Obama—"More people have gone on food stamps under this President than under any other President"—Gingrich called it quits and went along the corridor for a private meeting with some potential donors.

Then it was outside to brave the taunts of the O.W.S. demonstrators, who, by this stage, had worked themselves up into a fine lather. But Newt didn't even seem to hear them. To the consternation of his burly bodyguards, he stopped for a moment on the pavement before climbing into his black Escalade, and looked up and down Thirty-seventh Street. He was still smiling. "I like being in New York at Christmas," he had said earlier. "The city at Christmas is just magnificent."

Photograph by Spencer Platt/Getty Images.

Occupy the Met!

An old friend of mine went to the Met on Saturday night to see Des McAnuff's updated version of "Faust," which turns the leading man into an aging nuclear physicist who worked on the atomic bomb. Apparently, the show was even more contemporary than intended. Here's my friend's report:

"Met Opera got Occupied tonight. A guy started shouting "Occupy Wall Street!" at top of his voice just before start of act 3. To my amazement, loads and I mean loads of the audience started applauding enthusiastically. Then he was chucked out. But still if Met crowd clapping that then something is happening here."

As it happened, I was also at Lincoln Center on Saturday, with my brother and daughters, for New York City Ballet's seasonal (and splendid) staging of Balanchine's "The Nutcracker." No sign of O.W.S. demonstrators, I can report. But there were lots of snow fairies, giant mice, and dancing candy canes.

Ode to Herman*

So farewell then, Herman Cain

You came and went like summer rain

"9-9-9" man and pizza C.E.O.

We hardly had time to say hello

From out of nowhere, you blazed a trail

For we, the geographically frail

Who can't tell Libya from Pakistan

And, frankly, don't give a damn

You stood up there and gave us hope

That here, finally, was the straight dope

Income tax: a dime on the dollar

It was time to hoot and holler

What we didn't know, of course

Soon to cause buyer's remorse

A little something in your past

That would make us all aghast

A zipper issue so truly appalling

That when accusers came a-calling

There was really nothing left to do

Except deny it and say, "Nuts to you!"

That you did with a wink and a smirk

For a while, it even seemed to work

Until one day, confirming all our worse fears

Came forth your alleged mistress of thirteen years

And that, dear Herman, was pretty much that

Your campaign hit the sidewalk with a splat

Even the rescuer of Godfather

Could on no account go farther

So bid adieu to campaign planes

Nice tour buses and special trains

It's time to go back and work it

On the rubber-chicken circuit

(*With apologies to Calvin Trillin and E.J. Thribb, two masters of political doggerel.)

The Jobs Report and the Election

How big a deal was today's jobs report for November (pdf), which showed hiring picking up and unemployment falling to 8.6 per cent, its lowest level since March 2009? At 9:15, forty-five minutes after the Bureau of Labor Statistics released the figures, I still couldn't get onto its Web site to download the full report.

It's a sure thing that most of the folks clogging up the Labor Department's server were investors and traders trying to get a peek before the stock market opened at 9:30. But I'd be surprised if some of them weren't anxious Republican political strategists. For while the headline figures need to be qualified in various ways, one thing is undeniable: this is the best piece of economic news that President Obama has received in many a moon.

On CNBC's Squawk Box, a former chairman of the White House Council of Economic Advisers said, "The trend I am seeing … is that things have turned around." And he went on: "People don't feel good about the economy until the labor market turns around. And the labor market has been lousy for a long time. I am pretty hopeful."

No, those weren't the words of Austan Goolsbee, Obama's former chief economic advisor. (He was on the show too, and, as you might expect, he was pretty chipper.) The upbeat comments came from Ed Lazear, the Stanford professor who headed the Council of Economic Advisors from 2006 to 2009 under President George W. Bush.

In my experience, both Lazear and Goolsbee are straight shooters. They were each at pains to point out that it is a mistake to read too much into one month's figures, or one individual survey. That is most certainly true. Before making any definitive judgments about where the economy is heading, I would want to see the December and January employment figures. But the November report confirms what other economic statistics have been saying for a couple of months: the American economy is doing a bit better than many pundits, myself included, had expected.

Retail sales, business investment, and exports have all come in higher than predicted. Just yesterday (Thursday), the auto manufacturers announced that car sales rose sharply in November, which is usually a weak month. Ford's sales were up twenty per cent compared to a year ago. GM and Toyota both posted seven per cent jumps. On the back of strong demand for Jeeps, Chrysler's sales rose a hefty forty-five per cent.

Until now, the brighter sales figures haven't translated into a substantial fall in the unemployment rate, which is the economic indicator that political strategists watch most closely. In November, that changed. What is going on?

The employment report consists of two surveys, one of employers and one of households. The payroll figures come from the survey of employers; the unemployment rate comes from the household survey. As far as the payroll survey goes, there weren't any big surprises. Employers created an additional 120,000 jobs in November, which was actually a bit less than the average figure for the previous twelve months (131,000). The upside shock came in the household survey. For most of this year, the unemployment rate has been stuck between 9.0 per cent and 9.2 per cent. In November it dropped by four tenths of a percentage point. For a single month, that is big move.

Looking at the entire jobs report—I was eventually able to see it—I can think of at least three theories to explain the fall in unemployment, two skeptical and one positive. I reckon that the last one is probably right.

1. Sampling error: Since the government can't question every firm and individual every month, it relies on random samples, which creates the possibility of error if the sample is not representative of the population as whole. To deal with this issue, the government uses large samples, which reduce the possibility of mistakes, and it also provides some guidance on how likely these are. According to its calculations, which rely on standard statistical techniques, there is a ninety per cent chance that the true value of the unemployment rate is within 0.2 percentage points of the reported figure. A drop of 0.4 percentage points is well outside this range. Therefore, it is very unlikely (but not impossible) that it was merely the product of statistical noise.

2. Fewer workers: One of the most surprising (and potentially depressing) aspects of the report was that the number of people in the labor force fell by 315,000 last month, from 154,198,000 in October to 153,883,000. Since the unemployment rate is calculated on the basis of people who are actively looking for work, the fall in November could be partly a result of people getting so tired of searching that they have given up completely. With forty-three per cent of the unemployed having been out of work for more than six months, this wouldn't be very surprising.

Going against this theory are two things. According to the household survey, the number of unemployed fell by 594,000 last month, to 13.3 million. This drop is almost twice the size of the fall in the labor force. Even if some workers are giving up completely, this isn't enough to explain the drop in unemployment. Second, the government tracks a category called "discouraged workers," which is people who say they consider themselves to be part of the labor force but who are too discouraged to actively seek employment. If workers were giving up en masse, you would expect the number of "discouraged workers" to be rising. It isn't. In November, the Labor Department counted 1.1 million discouraged workers. This time last year, there were almost 1.3 million of them.

3. Rising demand: After many months of modest but pretty steady growth in spending and output, employers are finally coming to the conclusion that they need to hire more workers. One of the encouraging things in the payroll survey was that job gains for previous months were revised up: from 158,000 to 210,000 for September, and from 80,000 to 100,000 for October. The household survey, which perhaps does a better job of tracking hires at small companies, has been showing stronger job growth for some months, and this continued in November, with the number of people employed rising by 278,000.

If budget cuts weren't still forcing state and local governments to lay people off across the country, the employment situation would look brighter still. Last month, according to the payroll survey, private sector employers created 140,000 jobs, but 20,000 jobs were lost in the public sector.

Of course, just because the unemployment rate is catching up with other economic indicators, such as retails sales and business investment, that doesn't necessarily mean it will fall much further in the months ahead. One thing we have learned in the past few years is that employers, once they downsize their work forces, are chronically reluctant to rehire. Even now, after more than two years of rising output, the economy has only created about 2.5 million jobs, which compares to more than eight million jobs that were lost during the recession.

There is no prospect of the economy making up this gap between now and next November. On the other hand, the November job figures could be the start of a trend, which would see the unemployment rate declining modestly in 2012. Lots of Americans are still suffering out there, and many things could still go wrong. Congress could give the economy another blow it doesn't need by refusing to extend payroll-tax cuts and unemployment benefits. (Thankfully, that possibility now looks less likely.) Europe could blow up, with who knows what ramifications. For today, at least, though, the U.S. economy appears to be heading in the right direction.

Which for President Obama and his Republican rivals is potentially very big news.

Photograph by Justin Sullivan/Getty Images.

Mitt vs. Newt: Now It's a Real Race

If you want to know when the Republican primary race started in earnest, it was on Monday, when Mitt Romney attacked Newt Gingrich in an interview with Brett Baier, of Fox News. To be sure, Romney's critique of Gingrich wasn't exactly devastating— "He's a lifelong politician…. He spent his last thirty or forty years in Washington"—but the fact that he made it all spoke volumes, something Gingrich picked up on immediately. "You're talking to a guy who was dead in June," he quipped. "I'm now being attacked by the former frontrunner."

As usual, Gingrich was using hyperbole. Although he leads in some national polls (and in the Real Clear Politics poll-of-polls), Romney remains the clear favorite. He has much more money than Gingrich, a far better organization (in some states, Iowa included, Newt doesn't really have a ground campaign), more endorsements, and a clearer policy platform. But Romney's coronation is by no means assured. On Intrade, the online betting platform where people can buy shares in each candidate, his stock has fallen twenty per cent in a week, while Gingrich's stock has soared. Intrade now puts the probability of Romney winning at fifty-three per cent and the probability of Gingrich winning at thirty-five per cent. Ron Paul, the third-placed candidate, is trailing badly at five per cent.

Of course, political betting markets, like all financial markets, are far from infallible. A few weeks ago, Herman Cain's stock was rising fast: today, it is a penny stock. Gingrich could suffer the same fate as Cain, but I wouldn't wager on it. His baggage, which would fill the cargo hold of a 747, almost certainly makes him unelectable as President. But that doesn't mean he can't cause Romney a lot of grief. He can. As I noted a few days ago, his biggest challenge will be in persuading conservative Republicans, many of them devout Christians, that he is still one of them. Given his ties to Freddie Mac and his checkered personal history, this won't necessarily be easy. But he also has some things working in his favor.

First, unlike the three previous "Not-Romneys"—Bachmann, Perry, and Cain—he is a known quantity, with familiar stains on his record. Second, he is peaking at the right time. The Iowa caucus is less than five weeks away. Third, the subsequent electoral calendar works in his favor. If he does well in Iowa and reasonably in New Hampshire, where Romney should win easily, he will have some momentum going into the first two big states, South Carolina and Florida, which vote at the end of January.

In both of these states, Gingrich could well win big. In South Carolina, he has been leading the polls for some time. Two new polls published yesterday showed him surging in Florida. In one of them, he was leading Romney by forty-one per cent to seventeen per cent. The other poll showed him with an even bigger lead—forty-seven per cent to seventeen per cent. These figures represent a big turnaround in Florida since the start of November, when a Rasmussen poll showed Gingrich trailing Romney and Cain, with just nineteen per cent of the vote.

If Gingrich comes surging out of South Carolina and Florida, the specter of George Wallace will start to haunt Romney and his backers in the Republican hierarchy. George Wallace wasn't considered electable in 1972, when he entered the Democratic primaries, but that didn't prevent the populist and pro-segregationist governor of Alabama from winning the Florida primary and chasing the establishment favorites Ed Muskie and Hubert Humphrey out of the race before a bullet from an attempted assassin left him paralyzed.

Already, Romney appears a little rattled. For months, he sought to remain above the fray, appearing onstage for scripted speeches and television debates, occasionally gracing the friendly environs of Sean Hannity's show to take potshots at President Obama, and otherwise avoiding the campaign press like the plague. In sitting down with Baier, who is a real reporter, and criticizing Gingrich, Romney was indicating that his rules of engagement have changed. Politico is reporting today that his campaign is "preparing a robust, sustained attack that tags the former House speaker as a Washington insider and serial flip-flopper who can't be trusted with the nation's economy. And they're gearing up to have Romney bring the challenge directly—and proactively."

So settle down folks, and pay attention. With one of the comic warm-up acts—Cain—reportedly preparing to leave the stage, the real show is about to begin.

Photograph by Paul J. Richards/AFP/Getty Images.

Austerity Britain: An Experiment That Failed

With the euro zone on the brink of breaking up, it is easy to overlook events across the English Channel, but what is happening to the U.K. arguably has more important lessons for the U.S. In continental Europe, we are witnessing the crisis of a poorly designed monetary system that is very different from our own. In the U.K., we are seeing the results of monumental policy blunders that could well be repeated here if Republican budget hawks seize power next November.

During the past eighteen months, a callow and arrogant Chancellor of the Exchequer, empowered by a hands-off Prime Minister and backed by the bulk of the country's financial and media establishment, has needlessly brought Britain to the brink of another recession by embracing draconian spending cuts that hark back to the early nineteen-thirties. Rather than changing course and taking measures to boost growth, the Conservative-Liberal coalition is doubling down on austerity. On Tuesday, it announced plans to extend its cuts for two more years, until 2016-2017. "Until now, we had been thinking of four years of cuts as unprecedented in modern times," Paul Johnson, the director of the non-partisan Institute for Fiscal Studies, said. "Six years looks even more extraordinary."

On Wednesday, two million public-sector workers left their jobs to protest against the cuts, which are wreaking havoc on employment, output, and living standards. The strikes came a day after George Osborne, the Conservative Chancellor, admitted that the fiscal strategy he introduced last year, which aimed to eliminate a gaping budget deficit in just four years while setting the stage for sustainable prosperity, is failing abysmally on both counts. Delivering his annual Autumn Statement to Parliament, Osborne conceded that the British economy will hardly grow at all in 2011 or 2012, and he further admitted that if the rest of Europe heads into recession, which is pretty much a foregone conclusion, "it may prove hard to avoid one here in the U.K."

The independent Office of Budget Responsibility, which Osborne set up on taking office last year, lowered its forecast for G.D.P. growth in 2012 from 2.5 per cent to just 0.7 per cent, dryly commenting that "the probability of a much worse outcome … is greater than the probability of a much better one." Some economists think the double-dip recession has already begun. Earlier this week, the Organisation for Economic Co-operation and Development said the British economy would shrink in the fourth quarter of this year and the first quarter of next year.

Just eighteen months ago, when the Conservative-Liberal coalition came to power, the British economy was growing at an annual rate of more than four per cent, and appeared to be recovering surprising strongly from a deep recession that followed the financial crisis of 2008. The budget deficit, which had ballooned to more than ten per cent of G.D.P. as tax receipts had plummeted, clearly needed tackling, but there was no immediate crisis. The previous Labour government had already committed to a gradual program of fiscal retrenchment, and the interest rates on British government bonds had remained low.

Britain, unlike continental countries like Spain and Italy, has its own currency and central bank, which gives it some policy flexibility. Rather than taking advantage of this enviable position and sticking with a gradualist approach, Osborne and his boss Cameron, for reasons that still haven't been fully explained, decided to adopt the most drastic fiscal adjustment that any major country has attempted in modern times—aiming to cut the deficit from 10.1 per cent of G.D.P. in 2010-11 to 2.1 per cent in 2014-15. To this end, the Conservatives, with the backing of their Liberal coalition partners, embarked on a four-year program of swinging spending cuts—twenty per cent, or more, for some government departments—and also raised taxes.

As some economists and commentators (myself included) pointed out at the time, the inevitable result of introducing big spending cuts is (guess what?) big reductions in spending, output, and income. That is precisely what we have seen. According to the Office of Budget Responsibility, real household disposable income will fall 2.3 per cent during 2011—the biggest drop since the Second World War. And the unemployment rate, which stood at 7.7 per cent when the government took over, will rise to 8.7 per cent by the end of next year.

And all this for what? With joblessness rising, spending on unemployment benefits is rising and tax receipts are coming in lower than expected. Consequently, the budget deficit is not falling nearly as rapidly as the government had hoped. To its great embarrassment, the government said it would have to borrow an additional 111 billion pounds over the next four years. Already, it is planning to issue more debt than Gordon Brown's supposedly profligate government was planning to issue. And if growth doesn't magically rebound in 2013 and 2014, it will have to borrow an even greater amount.

The lesson ought to be clear: advanced countries cannot simply slash their way to prosperity and fiscal balance regardless of the overall level of demand. The myth of expansionary fiscal retrenchment, which Osborne and Columbia's Jeffrey Sachs, who advised him before he came to office, cited in early 2010, is just that: a myth. Hundreds of thousands of ordinary Brits who were protesting from Aberdeen to Bristol don't need telling this, but, sadly, many members of the English financial and media and establishment do. Even now, they are standing behind Osborne. Only last week, the editorial page of the Financial Times said the government "should not deviate from its sensible strategy."

Sensible? The damage this strategy has already inflicted on the British economy is plain for all to see, and there's more to come. In fact, about the only positive thing that has come out of Osborne's reckless experiment in pre-Keynesian economics is that it provides ammunition for those of us warning against similar actions in the United States. So, George: thanks for that, at least.

Photograph by Oli Scarff/Getty Images.

Why Judge Rakoff Was Right to Block the Citigroup Settlement

On a day when Barney Frank, the feisty Democrat who co-authored the 2009 financial-reform bill, announced that he will be stepping down from Congress, it was fitting that the fallout from the financial crisis of 2007-2008 was back in the headlines. In refusing to accept the $285 million proposed settlement between the Securities and Exchange Commission and Citigroup over the sale of toxic mortgage securities, Judge Jed S. Rakoff, of the U.S. District Court, did the American public a great service.

At issue is not just the $700 million in losses that investors suffered as a result of purchasing a particularly unwholesome credit default obligation (C.D.O.) that Citi put together, marketed, and bet against just as the housing market was collapsing. What is at stake is the government's overall failure to bring to book Wall Street for its conduct during the credit bubble. More than three years after the collapse of Bear Stearns and Lehman Brothers, none of the other Wall Street firms involved in creating and selling subprime securities has received anything more than a slap on the wrists. And so far the Justice Department hasn't brought criminal charges against anybody.

The S.E.C.'s case against Citi was a civil one, and Judge Rakoff, in his ruling (pdf), summarized it admirably:

After Citigroup realized in 2007 that the market for mortgage-backed securities was beginning to weaken, Citigroup created a billion-dollar Fund (known as "Class v Funding IIIU") that allowed it to dump some dubious assets on misinformed investors. This was accomplished by Citigroup's misrepresenting that the Fund's assets were attractive investments rigorously selected by an independent investment adviser, whereas in fact Citigroup had arranged to include in the portfolio a substantial percentage of negative projected assets and had then taken a short position in those very assets it had helped select. Having structured the fund as a vehicle for unloading these assets, dubious assets on unwitting investors, Citigroup realized net profits of around $160 million, whereas the investors, the S.E.C. later revealed, lost more than $700 million.

In a stinging fifteen pages, Judge Rakoff called the settlement between the S.E.C. and Citigroup, which was agreed to in October, a sop to the troubled megabank, noting that it was charged only with negligence rather than fraudulent intent; it didn't admit any wrongdoing; and it received a fine that was "pocket change" to such a huge institution. "If the allegations of the complaint are true, this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and modest cost of doing business," Rakoff wrote.

If this were a one-off it would be worrying enough. But this is the third such settlement that the S.E.C. has reached with Wall Street banks. In July of last year, Goldman Sachs paid $550 million to settle a case relating to the notorious Abacus deal, in which the investment bank secretly allowed the billionaire hedge-fund manager John Paulson to select some of the mortgage securities underpinning a C.D.O. even though he was planning to short it once the deal closed. In July of this year, JPMorgan Chase settled a C.D.O. case involving a different hedge fund, Magnetar, for $153.6 million. As in the Citi case, the government allowed both Goldman and Morgan to settle without admitting any wrongdoing.

In seeking to settle cases of this nature, banks have three primary aims: to avoid admitting any wrongdoing (such an admission could be used against them in subsequent lawsuits); to avoid going court, where emails and other embarrassing internal documents would be made public; and to persuade the government not to investigate similar deals the firm was responsible for, thus capping its overall liability. In the Citi case, and in the two previous ones, the banks achieved all of their objectives. While the S.E.C. hasn't said publicly that it has agreed not to pursue further investigations of Citi, Goldman, and Morgan, the banks' lawyers have said as much, and the government hasn't contested their statements.

If Judge Rakoff smelt a rat, he wasn't the only one. Ordinary criminals rarely get the chance to settle charges against them without admitting they have done wrong and violated the law. Why does the S.E.C. treat Wall Street firms any differently? Judge Rakoff pointed out that in a civil complaint filed against an individual who worked at Citi, Brian Stoker, the S.E.C. did accuse Citi of knowingly misleading investors, which, in Rakoff's words, "would appear to be tantamount to an allegation of knowing and fraudulent intent." But in settling with the bank as a whole, the S.E.C. invoked the much lesser charge of negligence.

The head of enforcement at the S.E.C., Robert Khuzami, released a lengthy statement saying Judge Rakoff's judgement "ignores decades of established practice throughout federal agencies and decisions of the federal courts." That may well be true, but that only raises larger questions about the cozy relationship between Wall Street and its primary regulator. Khuzami is, by all accounts, a tough and able lawyer, who earlier in his career worked for more than a decade in the office of the U.S. Attorney for the Southern District of New York. But he subsequently spent seven years in a highly remunerated position at Deutsche Bank, one of the firms that the S.E.C. is now investigating. After that experience, Khuzami would hardly be human if he hadn't come to view the world at least partly through the lens of Wall Street.

I say all this as someone who argued in my 2009 book, "How Markets Fail: The Logic of Economic Calamities," that misaligned incentives and over-optimism rather than outright crookery were at the heart of the subprime meltdown. Back then, I wrote,

My perhaps controversial suggestion is that Chuck Prince, Stan O'Neal, John Thain, and the rest of the Wall Street executives whose financial blundering and multi-million dollar pay packages have featured on the front pages during the past two years are neither sociopaths, nor idiots, nor felons…. Some of these men, perhaps many of them, harbored doubts about what was happening, but the competitive environment they operated in provided them with no incentive to pull back.

I stick by those words. But in 2009 I wasn't aware that, as the subprime market was crumbling, Citi, Goldman, and other firms were cooking up deals with hedge funds that made a killing from shorting the securities that other, less informed, clients of the firms ended up holding. Was Prince, Citi's C.E.O. at the time, aware of what his employees were doing? If not, why not? Did Lloyd Blankfein know that Goldman was doing roughly the same thing? How much did Jamie Dimon, who has largely escaped criticism, know about the Magnetar deal and similar ventures that JPMorgan was involved in?

Since none of the S.E.C.'s cases has gone to court, and the government has published only a minimal amount of factual evidence to support its case, it is impossible to tell how widespread the misconduct was, or how high up it went. Above all else, it was the S.E.C.'s failure to pursue its investigation to the point where it could shed light on these sorts of matters that prompted Judge Rakoff to take the action he did. "In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth," the judge wrote.

To which I can only add: Amen.

The Conservative Dilemma

Donald Trump for President! In case you missed the news over the holiday, The Comb-Over is once again threatening to enter the 2012 race, this time as the candidate of a third party—his own party: "He's prepared to finance an independent run for president if he's not satisfied with the Republican nominee," Michael Cohen, one of Trump's sidekicks, told the Wall Street Journal.

Of course, it may not be entirely coincidental that Trump has a new book to promote, "Time to Get Tough," which is largely devoted to criticizing Barack Obama's handling of the economy, while also accusing him of flying around too much and cozying up to China. "This is a very political book," Cohen averred. Well, it would be, wouldn't it? Having published numerous volumes on how to succeed in business and get stupendously rich, it was only a matter of time before Trump delivered one aimed at putting his adoring public straight on how to organize the country.

As you might have guessed, I like poking fun at Trump as much as anybody. In this instance, though, and much as I hate to admit it, his timing might well be spot-on. Just weeks from the first Republican primaries, there is still a mighty vacuum on the right, where the conservative rival to Mitt Romney should be standing. Trump is most certainly not right man to fill this void. But he is perfectly placed to receive another round of publicity, and sell lots of books, as he goes through the motions of pretending to be the savior.

With the rise and fall of Michele Bachmann, Rick Perry, and Herman Cain, conservative Republicans are now left with the prospect of Mitt Romney or Newt Gingrich as their candidate. Despite the best efforts of the Republican establishment to make this a palatable choice, many conservative activists are gagging on it, and why wouldn't they be? From their perspective, the choice appears to be between a Johnny-come-lately convert to conservative ideas who is quite likely to betray them once he has been elected, and a fixture of the corrupt Washington establishment who has already sold out his principles and his supporters.

Romney's problems with conservatives are well known. Of late, some Republican organs, such as the Weekly Standard and the editorial pages of the Wall Street Journal have published pieces arguing that the party should unite behind him as the candidate mostly likely to defeat Obama. Opining in the Journal last week, the writer and radio host Michael Medved, said,

It is easy to imagine Mitt Romney appealing to many citizens who would never consider Rick Perry or Herman Cain. It is much harder (if not impossible) to describe the sort of voter who would refuse to support Mr. Romney (over Barack Obama!) but would somehow eagerly back Messrs. Perry, Cain or Gingrich, let alone Michele Bachmann, Rick Santorum or Ron Paul.

To an outsider, Medved's argument seems so obvious as to be almost trite. But on conservative web sites, such as Redstate.com, it is generating a lot of pushback. Over the weekend, a contributor called "Streiff" put up two posts devoted to knocking down the pragmatic argument for Mitt. The first one, "The Unelectable Mitt Romney," said this:

Romney can't win in a general election because very few people, outside the 20% who like his hair and a handful of devoted fluffers, will vote for the man.

He will lose a lot of conservatives because we fear that he will energetically return to his past persona as a liberal New England governor if he is elected…

He will lose a lot of GOP, as opposed to conservative, support because he is a supremely smarmy and untrustworthy character whose core value is defined by a strong belief that he should be president and nothing more.

The second post, "The Unelectable Mitt Romney II," claimed Mitt would be an easy target for the Democrats. It featured the now-famous photograph of a young Romney and his colleagues from Bain Capital with dollar bills bulging from their suit pockets. "Get used to seeing it," Streiff wrote,

It will be on busses and billboards across the nation if Romney wins the nomination. And it will be the image people take into the voting booth on Election Day.

Try as he might, Romney doesn't seem to be able to win over more than a quarter of Republican voters. In some polls, his support has actually slipped a bit in recent weeks. A month ago, his share of the vote in the Real Clear Politics poll-of-polls, which averages a number of different surveys, briefly topped twenty-five per cent. Today, it is back to twenty-one per cent.

The main beneficiary of Romney's slide has been Gingrich, who is now leading the R.C.P. poll-of-polls with just over twenty-three per cent of the vote, and who, over the weekend, received the coveted if somewhat tepid endorsement of the New Hampshire Union Leader. "Newt Gingrich is by no means the perfect candidate," the paper's editorial page said. "But Republican primary voters too often make the mistake of preferring an unattainable ideal to the best candidate who is actually running."

While the endorsement will give Gingrich a boost in New Hampshire, it won't resolve his problems with conservatives nationally, which were brewing even before the most recent debate, when he took a relatively moderate stance on illegal immigration, At the start of last week, he told an interviewer from USA Today that he would play the role of "Braveheart" to the Tea Party. Not so fast, interjected many Tea Party supporters. At Redstate.com, Steve Foley, who founded the Minority Report blog, commented,

Gingrich is NO "Braveheart" or a William Wallace but rather is a calculated political tactician, who should be ashamed for this reckless self promotion and appeal to those of us in the Tea Party. Candidly, as Christmas approaches, Gingrich should not embrace the role of Braveheart to compare himself to, but I would suggest Mr. Potter, the corrupt banker from It's a Wonderful Life whose only interest is lining his pockets no matter how deceitful his behavior is or who it hurts. I encourage all of my fellow Tea Partiers to not be yet another opportunistic species for Newt to try to prey upon on.

Even setting aside the ethical problems Gingrich encountered as Speaker of the House and his more recent lucrative sideline as a professional lobbyist for Freddie Mac—sorry, I meant to say professional historian and "strategist"— the conservative/Tea Party rap sheet on him is long and detailed. He once supported an individual mandate to purchase health insurance (closet Obama supporter); he supported NAFTA and is a member of the Council on Foreign Relations (closet globalist); he supported George W. Bush's costly prescription-drug benefit (closet big government supporter); he supported the TARP bailouts (closet Wall Street lackey); he has long defended generous subsidies for growers of ethanol (closet Big Agriculture and Big Oil lackey); and his first two marriages collapsed amid allegations of adultery (closet liberal fornicator).

On the Web, you will find many articles written by conservatives detailing these and other charges against Newt. They have headlines such as these: "Newt Gingrich: the 'Anti Romney' or the 'Other Romney'?"; "Newt Gingrich: the Establishment Conservative"; and "The Grinch Who Stole Conservatism." Some of the attacks are coming from supporters of Ron Paul and Rick Perry—but not all of them. Perhaps the most effective demolition of the former Speaker came from George Will, who, speaking on ABC's "This Week," described him a "rental politician," adding that he "embodies everything disagreeable about modern Washington."

Not that Will is any fan of Romney either. Just a few weeks back, Will described him in a column as "a recidivist reviser of his principles who is not only becoming less electable; he might damage GOP chances of capturing the Senate." In signing off, a disgusted Will wrote, "Has conservatism come so far, surmounting so many obstacles, to settle, at a moment of economic crisis, for this?"

But therein lies the rub for conservatives. Unless something unexpected happens in the next few weeks, it has indeed come to this. If they don't like Mitt and don't trust Newt, what can they do? Some, undoubtedly, will vote for Ron Paul, or Cain, or Perry, or Bachmann. However, Karl Rove, Reince Priebus (the head of the Republican National Committee), and other establishment figures in the G.O.P. are betting that most of the party's foot soldiers will eventually fall into line in the interest of defeating Obama.

Maybe this will happen. But even if the Republican Party does unite behind Romney or Gingrich, the grass-roots activists won't bring the enthusiasm they brought to the "Tea Party election" of 2010, which sent Marco Rubio and Rand Paul to Washington. And the possibility of a third party candidacy, on the part of Paul, Bachmann, or somebody else, cannot be wholly discounted.

Which brings us back to Trump, who even now is doubtless making plans to fire up his 757 and head back to New Hampshire.

Republican Debate: Newt Goes Moderate As Neocons Look On

For what felt like the hundredth time but was actually the eleventh, the Republican candidates debated each other on television Tuesday night. The subject of this gabfest was supposed to be national security. I think the previous one, in South Carolina, was also about foreign policy, but don't hold me to that. After watching too many of these things, they are beginning to mush together in my mind like splotches of paint on a Jackson Pollock canvas.

The big question going in was whether Newt Gingrich would be able to sustain his recent surge, and, in particular, whether he and Mitt Romney would engage in direct combat. In the event, little blood was spilt—or not much that I saw. The biggest news story of the evening was that on a major issue Romney and Gingrich swapped their usual roles, with Mitt playing the conservative and Newt playing the moderate. (Note: I use "moderate" in the Republican sense of the word, not the dictionary sense.)

The issue was illegal immigration. Under attack from Michelle Bachmann, who accused him of supporting an amnesty program, Newt said he couldn't countenance deporting people who have lived in the United States for many years, raising families and paying taxes. Romney argued that providing rewards for illegal immigrants only encouraged more of them to come here, averring that it was time to "turn off the magnet." Gingrich refused to back down, saying, "I am prepared to take the heat for saying let's be humane."

In today's Republican party, appearing humane in any dimension is a risky strategy, and Gingrich had hardly uttered the word before the Twittersphere was full of people saying he might have dropped a clanger. We shall see about that, but the exchange about immigration wasn't the only time Newt found himself being outflanked on the right. On the question of whether to take military action against Iran and Syria, he also emerged as something of lily-livered centrist.

The hawks in these instances were Rick Perry and Herman Cain, two men who used to play the "Not Romney" role that Gingrich now occupies, but who are now reduced to bit parts, their prior gaffes marking them out like the black spots that once afflicted the victims of bubonic plague. When Perry advocated a no-fly zone over Syria, I wondered for a moment whether he meant to say Iran but couldn't remember its name. And when Cain said he would provide military assistance to Israel in bombing Iran so long as it had a credible plan of attack, I couldn't suppress the mischievous thought that he was actually referring to Syria, or Yemen, or possibly Belgium.

O.K.—that was gratuitous. At this stage, the Republican candidates, for all their flaws, are too familiar to be truly horrifying. When Romney cited China as a big threat to the United States, you could almost hear the audience saying: "Come on Mitt, we've heard that one. Haven't you got any new lines?" And when Bachmann accused Barack Obama of following "a doctrine of appeasement" in his dealings with Iran, my thoughts drifted to why she hadn't shifted to heavy dark eyeliner weeks ago. Going all cougar probably wouldn't have saved her campaign, but it might have attracted some much-needed financial contributions from cosmetics companies.

For once, the questioners rather than the candidates provided the evening's most scary viewing. Perhaps in an effort to poach some Fox News viewers, CNN had teamed up with the Heritage Foundation and the American Enterprise Institute, two think tanks that offer various services for the conservative movement, one of which is providing congenial retirement homes for its warriors. On this occasion, some of these right-wing luminaries had kindly agreed to help out Wolf Blitzer.

First up was seventy-nine-year-old Edwin Meese, who served four years as attorney general under Ronald Reagan, and who was last spotted slinking out of office in 1988, having escaped being indicted for attempting to cover up the Iran-Contra affair. A hero to conservative jurists since the mid-eighties, when he championed the doctrine of original intent, Meese asked the candidates whether they thought it would be a good idea to make the Patriot Act permanent rather than submitting it to Congress every few years. (Not surprisingly, several of them thought it would be a very good idea.)

A bit later, Frederick Kagan, a military historian who, together with his brother Robert, vigorously supported the Iraq war, took the floor to ask the candidates whether they endorsed an expanded drone campaign in Pakistan. (Is the Pope a Catholic?) I thought that might be it for unrepentant neocons, but I was wrong. Who should appear on the screen but Paul Wolfowitz, now a visiting scholar at the A.E.I. Sadly for supporters of the Project for the New American Century, this was the Wolfman in his World Bank suit rather than his D.O.D. fatigues. Instead of engaging the candidates on the threat of radical Islam, he asked them whether they supported foreign aid.

Setting aside Gingrich's admirable refusal to endorse dispatching Texan grandmothers back to Guadalajara, the only real departures from Republican orthodoxy came from Ron Paul, who was in fine fettle. Time and again as the debate went on, I found myself writing down his statements in my notebook. Here are some of them:

On the Patriot Act: "I think the Patriot Act is unpatriotic because it undermines our liberties."

On the war against terrorism: "We are using loose language. I don't remember voting on a declaration of war."

On the Middle East: "Israel has two hundred to three hundred nuclear weapons. They can take care of themselves. Why do we have this automatic commitment to send our money and kids to Israel?"

On the failure of the super committee: "We are in big trouble, and nobody wants to cut anything. The biggest threat to our national security is our financial position. This is just aggravating it."

On the war on drugs: "I think that's another war we should cancel…. The federal war on drugs is a total failure."

On Perry's proposal to establish a no-fly zone over Syria: "Why don't we mind our own business.

Hitherto, I admit, I haven't taken Paul very seriously. On domestic issues such as social welfare, commercial regulation, and central banking, his free market nihilism leaves me cold. But on some non-economic issues, he has a knack of identifying and querying the assumptions on which members of his own party, but also many Democrats, base their policy recommendations.

Paul says things that haven't been focus-grouped or adopted to curry favor with particular interests. Partly for this reason, he won't win the nomination. Still, he has the capacity to make you stop and think. Heading into debate twelve, which is scheduled for December 12th in Iowa, there aren't many other candidates of which that much can be said.

Photograph by Ricky Carioti/The Washington Post via Getty Images.

After the Super Committee: Obama's Big Challenge

Say what you like about politicians, they don't dwell in the past. Even before the bipartisan super committee officially announced it had failed to reach an agreement on deficit reduction, the pols and their minders in both parties had already moved on to the only question they really care about: What impact will it have on next year's election?

Out on the stump, the Republican candidates are busy portraying the collapse of the budget talks as another failure of Presidential leadership. Mitt Romney in New Hampshire: "I would have anticipated that the President of the United States would have spent every day and many nights working with members of the super committee trying to find a way to bridge the gap, but instead he's been out doing other things—campaigning and blaming and travelling. This is, in my view, inexcusable."

It isn't just Republicans who are criticizing Obama for not getting more involved in the failed talks. Alice Rivlin, who headed the Office of Management and Budget during the Clinton Administration, said on Monday, "The president and the leadership of Congress could have cut a deal that the committee would have approved," and she described the failure of the committee as "a huge missed opportunity." Mayor Bloomberg, who has serially flirted with a third-party candidacy, described the end of the budget talks as "a disaster for this country and an embarrassment if ever there was one."

If the Republicans can make the super committee's failure stick to Obama, it will further depress his approval ratings and strengthen the rap against him that Romney is already starting to lay out in campaign commercials: decent guy; good husband and father; totally ineffectual and out of his depth. Clearly, Obama needs a counter-narrative. Fortunately for him, one is emerging, which portrays him as a master political strategist who has lured the Republicans into a trap.

"When is the last time some of you Obama voters stood up and cheered for the President?" Lawrence O'Donnell, the MSNBC host said on his show on Monday. "Well, tonight is your night. President Obama has mastered the politics, the policy, and the strategy of budget legislation better than any president in history. That's right—any president in history."

In allowing the super committee to fail, and putting the onus on Republicans to come with a way of avoiding $500 billion in automatic spending cuts to the Pentagon, the President had forced the G.O.P. into "the absurdist corner of standing for nothing but low taxes for the rich," O'Donnell went on. "He will go into his re-election with the image of a president who has worked harder than any other, only to be stymied by an intransigent Republican Congress that pledged its soul to a Republican anti-tax lobbyist even before they took their oaths of office."

To be sure, Obama didn't seem too miffed about the super committee's demise. Within an hour of it being announced, he was at the podium in the White House press room pledging to veto any efforts to derail the automatic spending cuts unless it was part of a "balanced" approach to deficit reduction. "There will be no easy off ramps on this one," he said.

Compared to where he was in July and August, during the debt-ceiling crisis, Obama is undoubtedly in a much better position. At a cost of just $21 billion in domestic spending cuts for 2012, he has extricated himself from the threat of being the first President to see the U.S. government to default on its loans. He has avoided agreeing to significant cuts in Social Security and Medicare, which would have enraged his base. And he has given himself the opportunity to pivot the economic debate away from deficits and back to jobs, where he has an eminently sensible (and moderate) proposal, the American Jobs Act, awaiting congressional approval.

For now, at least, Obama has congressional Republicans on the defensive. If they don't cooperate with him next month, hundreds of millions of Americans will see their payroll taxes rise on January 1st, and many people who have been out of work for more than six months will see their unemployment benefits lapse. Surely Obama should be able to win that battle and cheer up his supporters.

When it comes to the election campaign, the task he faces is much tougher. The emerging White House strategy is to run against Congress and the Republicans, portraying them as a bunch of right-wing ideologues and patsies of the super-rich, which is largely true. Speaking in New Hampshire on Tuesday afternoon, Obama said: "When push comes to shove, are you willing to fight as hard for working families as you are for the wealthiest Americans? What's it going to be? That's the choice."

This approach is fine as far as it goes. But history strongly suggests that Presidential elections are ultimately a referendum on the incumbent and the state of the economy. (The election of 1948 is sometimes cited as a counter-example—hence references to Obama running a "Harry Truman strategy.")

If Obama is going to emerge victorious, he won't be able to rely simply on attacking Republicans. He will need to say something positive about his own achievements and where he intends to lead the country. For now, with unemployment at nine per cent, the President is understandably keen to talk about other things, such as Republican obstructionism. But that is a tactic, not a strategy.

Finding something positive to say is the real challenge facing Obama.