John Cassidy's Blog, page 114

Wrong-Way Corrigans in Charge at White House

In case you doubted it, Sunday's Times provides confirmation that politics is driving economic policy in the Obama administration—and driving it in the wrong direction.

In a page-one story, the Times says the White House economics team, led by Gene Sperling, the head of the National Economic Council, is pushing President Obama to champion a big new jobs program, featuring subsidies for firms that hire new workers, even though such a program would struggle to pass the Republican-controlled House of Representatives. But David Plouffe, the president's top political adviser, and Bill Daley, the White House chief of staff, are resisting such a move. Plouffe and Daley want Obama "to maintain a pragmatic strategy of appealing to independent voters by advocating ideas that can pass Congress, even if they may not have much immediate impact."

Back in June, when Austan Goolsbee quit as head of the Council of Economic Advisers, I wrote a post saying that the White House badly needed an economist of stature to "take on the Andrew Mellon crowd, which thinks deficit-reduction is the answer to every economic ill." The Times report suggests the situation in the White House is even more worrisome than I had thought. With the 2012 election dominating everything, the politicos have set economic policy to autopilot, and even the possible onset of a double-dip recession hasn't done anything to change their thinking.

The story quotes Christina Romer, the former head of the Council of Economic Advisers, stating what is rapidly emerging as the consensus view among centrist economists, as well as left-leaning ones: the economy badly needs some more short-term stimulus as well as long-term deficit reduction. Interestingly, Romer also couches the economic argument in political terms. "Playing it safe is not going to cut it," she says. "Not proposing anything bold and not trying to do something to definitively deal with our problems would mean that we're going to have another year and a half like the last year and a half—and then it's awfully hard to get re-elected."

Then comes the most depressing paragraph:

But there is little support for such an approach inside the administration. A series of departures have left few economists among Mr. Obama's senior advisers. Several of his political advisers are skeptical about the merits of stimulus spending, and they are certain about the politics: voters don't like it.

There you have it. Even after the recent sell-off on Wall Street, the political geniuses at the White House don't want the President to push for something that might actually give the economy a boost before next year's election, because it would involve taking on the Republicans, and voters don't like political strife.

So how's this strategy working out politically? The chart above, which is from Real Clear Politics, shows that, following the debt-ceiling debacle, the President's job disapproval rating is now more than fifty percent. Back when I used to cover politics on a regular basis, a disapproval rating of more than forty per cent was generally considered terminal. For campaign managers it served as the primary goal. If you could somehow get your opponent's negative ratings to forty percent, you knew that your guy had a very good chance of winning.

But perhaps things have changed. Perhaps the President's strategy of staying above the fray and leading from behind is really working out well, and it is just ivory tower economists and other out-of-touch critics who can't see the logic of it all.

Why S. & P. Got the U.S. Government Downgrade Right

Many people are criticizing Standard & Poor's for moving too hastily in stripping the U.S. government of its AAA rating. I disagree. In focusing attention on the dysfunction in Washington and making the participants pay a price, S. & P. was performing a valuable public service. The U.S. Congress needs some adult supervision. If America's political system can no longer function in a minimally effective manner, losing its AAA rating is but one of many indignities that the country will suffer over the coming decades.

I don't consider myself a fiscal hawk. My Comment for the issue that comes out on Monday is devoted to arguing the case for a serious jobs program. Whenever the economy goes into a downturn, as it has in the past six months, it makes eminent sense for the government to try and prevent a downward spiral, even though that costs money. Nothing brings down the deficit more quickly than getting the unemployed back to work.

In discussing a country's solvency, we are talking about long-term debt projections rather than short-term stimulus programs. Despite red ink that stretches out as far as the eye can see, the United States is far from bust. With taxes (federal, state, and local) totaling just twenty five per cent of G.D.P., there is plenty of room to raise revenues. The U.S. government could also curb its long-term spending plans. But the political system appears to be incapable of doing either of these things. Since 2000, the United States has started two wars and introduced two big entitlement programs—a prescription-drug plan for Medicare (George W. Bush) and subsidies for purchasing private health insurance (Barack Obama)—while slashing the overall federal tax burden to its lowest level in sixty years. That is not the behavior of a responsible nation. As and an anonymous columnist at China's state-run Xinhua News Agency have both pointed out in recent days, it is the behavior of a country that is exploiting its role as issuer of the world's reserve currency, which enables it to issue debt cheaply—at least for now.

What impact will the downgrade have? In a worst-case scenario, it could trigger another financial crisis. Many other assets, such as municipal bonds, are priced off Treasuries, and we saw in September 2008 how adverse developments in one market can spill over into others. Because S. & P. had been telegraphing the downgrade for months, I think such a reaction is unlikely, but we will see. In the best-case scenario, the financial markets would shrug off Friday's news as an overdue recognition of reality, while politicians from both parties, but particularly the Republicans, would take it as a wake-up call. Fat chance of that happening. Rather than vowing to put the country's finances on a more sustainable path, Republicans, Democrats, and Obama Administration officials spent the weekend shooting the messenger.

It's important not to get bogged down in the details surrounding the announcement of the downgrade. (Did S. & P. get its math wrong? Why didn't it wait for the bipartisan "super committee" to issue its report in November, and see if Congress implements its recommendations? Why downgrade the U.S. but not the U.K.? ) S. & P. isn't basing its judgment on any single debt projection or any particular international comparison. In the wake of the debt ceiling "debacle"—S. & P.'s word—it is questioning Washington's capacity to tackle the long-term fiscal challenges that the country faces, which have been clear to anybody with half a brain since the nineteen eighties. In a statement, S. & P. said:

The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

For years, the attitude in the markets has been that the two parties in Washington will eventually make the necessary policy changes, even if it takes a big selloff in the bond market to make them do it. I shared this cynical but ultimately optimistic view, and so did S. & P. and other ratings agencies. But the rise of the Tea Party and a further lurch to the right in Congress has changed the political calculus. With the country facing an imminent threat of default, the Republican Party showed itself unwilling to countenance any tax increases whatsoever, even ones that wouldn't have gone into effect until 2013 at the earliest. Many Democrats, meanwhile, balked at the very idea of discussing changes to entitlement programs. The President, while calling for a "balanced approach," seemed virtually powerless.

What ground is there for assuming that sanity will eventually prevail? Some, certainly. But enough to support an AAA rating? The fiscal arithmetic is pretty clear. According to estimates from the Congressional Budget Office and other authorities, perhaps half of the current budget deficit is due to the recession, which caused tax payments to fall and unemployment benefits and other expenses to rise. But that leaves a structural deficit of perhaps four or five percent of G.D.P., which will remain even after the economy returns to full employment. To prevent the country's debts from exploding over the next twenty or thirty years, this structural deficit needs to be brought down to two or three percent, at which point the long-term debt-to-G.D.P. ratio would stabilize.

So, over the long term, we need a permanent fiscal adjustment of about two or three percent of G.D.P. (In current dollars, that means somewhere between $300 billion and $450 billion a year.) On paper, it is relatively easy to come up with such a policy program. We could curb military expenditures (Do we really need eight hundred and twenty military bases around the world? Fifty thousand troops in Germany?) and reform entitlement spending, by, for example, indexing the retirement age to life expectancy. To raise more revenue, we could simply let the Bush tax cuts expire once the economy gets back on its feet—and for everybody, not just the rich.

Can you see Congress agreeing to any of these things? Neither could S. & P.'s analysts. Many people will ask why the firm is downgrading Treasuries now when it didn't downgrade any subprime mortgage securities before it was too late. The critics make a sound debating point: during the credit bubble, the ratings agencies acted as whores to Wall Street. But this downgrade should be treated on its own merits. If it leads to another global financial cataclysm, or if Congress magically gets its act together between now and the end of November, when the bipartisan "super committee" on fiscal reform is due to report, I might change my view. For now, though, I think that S. & P. has done the right thing.

Smoke, Mirrors, and Obama's Humbling

Lo and behold, they did a last-minute deal! No surprise there, except it came a bit earlier than I had expected. Due to the arcane rules of the Senate and the House, it takes about forty-eight hours to get legislation passed. To meet a debt-ceiling deadline of midnight, August 2nd, the two sides had to reach an agreement by midnight, July 31st, which is exactly what they did.

So Washington works after all? Not exactly.

In removing the immediate threat of a debt default, the agreement, details of which can be found here, signals that the U.S. government still satisfies the minimum standard of financial functionality: it pays its bills on time. That should be enough to head off an immediate downgrade in the nation's credit rating, and it explains why Wall Street bounced at Monday's opening bell.

Beyond that it is hard to see anything very positive about a deal in which President Obama finally persuaded the Republicans to accept a Republican plan. Putting on my ethicist cap, I agree with Bernie Sanders that the deal is wrongheaded and immoral. To be sure, America has a long-term fiscal challenge that needs to be confronted. But at a time when fourteen million Americans are unemployed, and many millions more have been forced to work just part-time, the government should be focussing on job growth rather than cutting the budget.

Rather than rehashing the arguments of my colleague Rick Hertzberg and of Paul Krugman, who both have strong pieces expressing the dismay of liberal Democrats, let's look a little closer at the details of the agreement. The best thing I can say about it is that it won't do much immediate damage to the economy because it's largely smoke and mirrors. In practical terms, what the two sides have done is to agree on some miniscule spending cuts in the 2012 budget and postpone the bigger debate about taxes, spending, and the size of government.

As I've said before, headlines such as "Democrats and Republicans agree on $2.4 trillion in spending cuts over 10 years" are virtually meaningless. The United States, like every other country, budgets on an annual basis. What really matters for the economy, and for the unemployed, is how much cash the federal government will spend in the remaining months of the 2011 fiscal year and in fiscal 2012, which begins October 1st. A pledge to cut spending in 2016, say, is just that: a pledge. Between now and then, we will have another bipartisan spending review (that's also part of the deal), a Presidential election, and who knows how many budget battles. The actual 2016 spending outcome will almost certainly bear little relation to the figures in this agreement.

So let's look at reality. The deal has no impact on this year's budget. I searched in vain the White House fact sheet and John Boehner's slide show to see how it will impact 2012. Fortunately, Josh Barro, at the National Review, appears to have the inside track. He says, "There will be $22 billion in spending cuts compared to the baseline for 2012."

Twenty-two billion dollars. That might sound like a lot of moolah, but the most recent Congressional Budget Office's estimate (pdf) of the baseline budget for 2012—total federal spending that would result without any policy changes—is $3,639 billion. If Barro's figures are right, the proposed spending cut amounts to less than two-thirds of one percent—0.605 per cent is the figure.

But wait, even that is an overestimate of the actual spending cut relative to this year. The C.B.O.'s baseline figure for federal outlays in 2012 is $10 billion higher than its figure for 2011. Subtract that ten billion, and the actual cut in outlays relative to this year is not $22 billion but $12 billion, or less than one third of one per cent (0.330 per cent). What are the implications for a $15 trillion economy? To a first approximation, there aren't any.

That's another way of saying what I said earlier: this agreement merely kicks things down the road. A bipartisan committee in Congress is tasked with coming up with another $1.5 trillion in spending cuts over ten years, and it has to be report back by November 23rd, with Congress to vote on its proposals by Christmas. If the Committee fails, or if Congress can't agree on its recommendations, automatic spending cuts would follow, beginning in fiscal 2013—half of them falling on the Pentagon.

Thus, the best-case outcome is another budget showdown at the end of this year. The more likely outcome is an ongoing dispute that carries on throughout the 2012 Presidential campaign. The lasting significance of the deal is that it greatly weakens the White House's position and emboldens the Republican crazies for this lengthy battle ahead. A few months ago, I expressed confidence that Obama; his budget director, Jacob Lew; and the head of the National Economic Council, Gene Sperling would be able to outwit the Republicans on budget matters. I was right about the immediate issue—Paul Ryan's controversial budget—but wrong about the bigger picture. The President has just had his behind handed to him.

And all this at a time when the economy is showing alarming signs of relapsing into another recession. G.D.P. is stagnating and unemployment is rising, yet fiscal policy remains on autopilot, with any significant changes seemingly set to go in the wrong direction. The Fed, too, remains on hold. Whether you are a Keynesian, a supply-sider, or a Zoroastrian, the implications of this policy paralysis are alarming.

Is it really surprising that the U.S. stock market quickly reversed the gains it made at the open of trading on Monday and resumed last week's downward move? I don't think so.

AP Photo/Carolyn Kaster.

G.D.P. Shocker: U.S. on Verge of Double-Dip Recession

Amid all the absurd posturing over raising the debt ceiling comes some real news—and it's very bad. According to new government figures, the economy has hardly grown at all in 2011. The recovery that began in early 2009 is now officially stalled. Some economists will quibble, but I think it is fair to say that the dreaded "double dip" recession is at hand.

However it is labelled, the economic relapse is sure to have a big impact on politics. In the immediate term, it will increase pressure on Congress to raise the debt ceiling so the U.S. government can move on to more important issues, such as creating jobs. There is now the alarming prospect of the unemployment rate heading back to double figures over the next few months. It hardly needs saying that this would create problems for President Obama, who has staked his credibility on the economic recovery that began in mid-2009.

When healthy, the American economy grows at an annual rate of close to three per cent. The Commerce Department's latest report on the gross domestic product (pdf) shows that between April and June, it expanded at an annual rate of 1.3 per cent, and between January and March it grew at an annual rate of just 0.4 per cent. The first-quarter figure is particularly stunning. Previously, the Commerce Department had estimated growth in the period at 1.9 per cent. What is to prevent a similar downward revision to the second-quarter figures? Nobody can say.

Consumer spending, which is the driving force of the American economy—it makes up more than two thirds of G.D.P.—has stalled badly. After expanding at an annual rate of more than two per cent for the previous year and a half, it was essentially flat in the second quarter. Unless consumers spend more readily in the second half of the year, there is no prospect of an economic rebound. But with gas prices still high, unemployment ticking up again, and their elected representatives in Washington paralyzed, it seems unlikely that American families will be flocking back to the malls anytime soon.

To the extent that there is any growth, business investment and exports are providing it. But these items are too small to offset a slump in consumer spending and cutbacks in government expenditures. (Tea Party activists and other fiscal hawks take note: the Commerce Department report provides official confirmation that spending cuts, particularly at the state and local level, are acting as a drag on the economy.)

In one sense, the new G.D.P. figures are even worse than they seem. Bear in mind that they are all annualized. This means the government statisticians take the actual growth rate in the quarter and (roughly speaking) multiply it by four. Reversing the process (dividing by four) reveals that the economy expanded by just 0.1 percent in the first quarter and by roughly 0.3 per cent in the second quarter. These figures are so small as to be trivial.

So are we in another recession? That depends on how the word is defined. One simple definition is that a recession is two or more quarters of negative G.D.P. growth. By that standard, this is not yet another recession. It is what economists call a "growth recession"—i.e., a period when the economy expands but at a rate that is too slow to create jobs and bring down unemployment.

The two-negative-quarters-of-growth definition is clear and unambiguous: in the past, I have expressed support for it on those grounds. However, the National Bureau of Economic Research's Business Cycle Dating Committee, which is the official arbiter in these matters, prefers a broader and fuzzier definition. Here is what it says about recessions: "During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year."

But what is "economic activity"? Back to the N.B.E.R.: "The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as retail sales and the Federal Reserve's index of industrial production."

On the basis of the N.B.E.R.'s definition, what we are going through looks suspiciously like the beginnings of another recession. Payrolls, after growing at a monthly rate of more than two hundred thousand jobs earlier in the year, have essentially been flat since the end of April, and the unemployment rate has crept up from 8.8 per cent to 9.2 per cent. The sharp falloff in job growth was a development that very few economists predicted.

Retail sales hardly grew at all in June. Wall Street analysts who had been predicting growth of close to three per cent for the rest of the year are now busy trimming their estimates. Industrial production, the other item that the N.B.E.R. watches closely, has also been showing weakness. The Fed's index of industrial production declined slightly in April and May, before rising slightly in June. Manufacturing, the biggest component of industrial production, had its weakest quarter since the previous recession ended in mid-2009.

We can debate the meaning of the word "recession" all day. The fact is that the official statistics have now caught up with what many ordinary Americans have been saying to each other all along. Five years after the bursting of the housing bubble, the country is still living through tough times. The economic "recovery" is so weak as to be virtually nonexistent.

Once the debt-ceiling impasse is resolved—and I still believe it will be resolved—the President needs to do something he should have done months ago: go all out for a meaningful jobs program. This could be in the form of subsidies to employers, job sharing, public-works projects, or targeted tax cuts. If the Republicans resist, as they surely will, he can portray them as do-nothings more concerned with ideological posturing (c.f. the debt-ceiling talks) than getting people back to work.

Over to you, Mr. President. Time is fast running out…

Debt, Debt, Debt: At Last, Some Good News

Lord save us from more stories about Eric Cantor, Grover Norquist, and Jacob Lew. It's 101 degrees in Brooklyn, and I can't take it any more!

As much of the media fixates on the tortuous (and torturous) budget negotiations, an important story about a serious debt crisis is unfolding. But the action is in Brussels, not Washington. And for once, there is some positive news to report. Yesterday's deal on a second Greek bailout suggests that European leaders may (finally) be getting their act together.

That's good for the Europeans, and it's good for us, too. For the past few months, there has been a real danger that the European Union's failure to get a handle on the debt worries that are now afflicting numerous countries could set off a 2008-style global financial conflagration. That threat still exists, but it is diminished.

It's not the details of yesterday's deal that are so important—although they are pretty interesting. To see it through the next few years, the Greek government received a commitment worth 160 billion euros, of which 110 billion euros will come from other European countries and the International Monetary Fund, with the rest coming from private investors who own Greek bonds. This won't solve Greece's financial problems, much less the overall European debt crisis, but it suggests that Angela Merkel and Nicolas Sarkozy, who between them have the power to dictate European policy, are, at long last, coming to terms with the scale of the problem.

For far too long, the E.U. has been paralyzed by a three-sided dispute among the French, the Germans, and the European Central Bank over how to deal with Greece, which is fast running out of money. (Last year's bailout assumed the Greek government would be able, through bond issues, to attract tens of billions of dollars in private capital, practically none of which has been forthcoming.) With the policymakers deadlocked, hedge funds and other investors have been making piles of money selling short bonds issued by Spain and Italy, in the anticipation that the debt crisis would soon afflict these countries. As long as the policymakers dithered, this anticipation was self-fulfilling, and the speculators were laughing.

Not today. On news of the Franco-German agreement, Italian and Spanish bond yields fell sharply, which meant big losses for anybody who had shorted them. For once, the European governments had outgunned the markets by coming up with an agreement that surpassed expectations. At least for now, wagering against Europe is no longer a one-sided bet.

The new bailout package contains several significant elements. In empowering the E.U.'s 750-billion-euro bailout fund to purchase from investors Greek bonds at a discount to their face value, it provides a mechanism for reducing Greece's debts rather than simply rolling them over. In accepting the possibility that some Greek government paper may formally go into default, it prevents the ratings agencies from holding the continent hostage. And in cutting the interest rate that Greece, Ireland, and Portugal will pay on their bailout loans from 5.5 per cent to 3.5 per cent, it rewards these countries for taking harsh budget measures.

As for the ongoing charade in D.C., it reminds me of nothing but Albany, where budget stalemates—and walkouts, and threats to shut down the government, and all the rest of it—have been an annual ritual for as long as I can remember. Of course, nobody takes much notice of what happens upstate, and why should they? We all assume that, in the end, the governor, state senators, and assemblymen will reach a deal. Invariably, they do, and life goes on as before.

From the very beginning, it has been pretty clear that some sort of deal would eventually be reached to raise the federal debt ceiling. (For both sides, the alternative is too awful to contemplate.) When the Republicans walked out of the talks on a "grand bargain," it became evident that the agreement would involve a relatively minor amount of deficit reduction—perhaps two trillion dollars over ten years.

That may sound like a lot of readies, but this is Washington money, not the real stuff. Whatever the details of the final deal, the spending cuts and tax increases it contains will be spread out over ten years, with most of them slated for the later years, by which time Congress may well have reversed them. Moreover, the proposed deficit reduction is relative to a "baseline" that grows year by year, rather than to a flat line. (This distinction conveniently allows Republicans in the "Gang of Six" to present their plan as a tax cut, while the gang's Democratic members present the same proposals as a tax increase.)

Personally, these sleights of hand don't bother me—in fact, I welcome them. Given the perilous state of the economy, I think that cutting spending and raising taxes significantly at this juncture would be a disaster. If funny-money accounting enables the U.S. government to raise the debt ceiling while not doing very much else (and perhaps even incorporating a short-term stimulus into the agreement), I'm all for it.

But please don't ask me to follow every twist and turn in the negotiations. Life isn't long enough to spend it parsing the relationship between Cantor and John Boehner; speculating about the negotiating tactics of Lew—he's Obama's budget director, in case you were wondering; or reading Op-Eds by my old pal Grover.

Photograph by Jock Fistick/Bloomberg via Getty Images.

Murdoch Catches a Pie—and a Break

Memo from Rupert Murdoch: Thank goodness for Jonnie Marbles and his fake custard pie!

Just when it looked like the headlines from today's extraordinary parliamentary hearing would be about how frail and out of touch Murdoch appeared, forward stepped Marbles, a comedian and left-wing activist, armed with a plateful of white foam. In a perfect tabloid world, Joel Klein, the former New York schools chancellor, who now works for Murdoch in a vaguely defined but doubtless lucrative role, and who was sitting at his right shoulder, would have leapt up and grappled Marbles to the ground. Alas, Klein was as shocked and immobile as everybody else in the hearing room. Marbles's pie reached its target, with its hurler reportedly shouting out, "You greedy billionaire." It was left to Wendi Murdoch, Murdoch's forty-two-year-old third wife, to leap to her husband's defense, which she did with impressive alacrity.

"It is a far better thing that I do now than I have ever done before," Marbles subsequently tweeted. (Did he preload the Dickens quote, or do British suspects under arrest now have access to Twitter?) Murdoch would surely agree with Marbles's sentiments. The pie-throwing attack was the first break that he has caught in weeks. Shortly before Murdoch walked into the hearing room, Bloomberg reported that the independent directors of News Corporation had met to discuss removing him from his post as chief executive and chairman. According to Bloomberg's story, some senior executives at News Corp. were alarmed at how poorly Murdoch performed in preparation sessions for today's hearing, and this prefigured the talk of staging a coup against him. (The article has since been updated to include quotes from the hearing, and the news that News Corp.'s stock rose 4.8 per cent this afternoon.)

If the original Bloomberg story turns out to be true, the answers Murdoch gave before the pie-throwing incident won't have alleviated the concerns of his colleagues on News Corp.'s board. Many of his statements consisted of one word, and there were long pauses between them. Overall, he displayed very little grasp of detail.

Long renowned as the grand puppeteer who pulls the strings from afar, Murdoch, perhaps on the advice of his lawyers, portrayed himself as the otherwise engaged head of a big global corporation—a busy man who knew little about what was happening at his individual London newspapers. "The News of the World is less than one per cent of our company," Murdoch said, adding that he may have "lost sight" of the paper because it was "so small in the general frame of the company."

To the hundreds of current and former Murdoch editors who were watching around the world, this portrait of a disengaged and hands-off proprietor will have come as something of a shock, as will the evident decline of his hearing and overall mental sharpness. On the BBC, Mary Ann Sieghart, the former opinion editor of the Times of London (a Murdoch paper), said the questioners had made Murdoch "look like a doddering old man." Toby Harnden, the U.S. editor of the Daily Telegraph, posted a blog post headlined "Rupert Murdoch and the 'know nothing' senility defence."

Then came Marbles. When Murdoch returned to the hearing room in his shirtsleeves, about twenty minutes after the attack, M.P.s from both parties expressed sympathy with him. The Conservative M.P. for Corby, Louise Mensch, a striking blonde who prior to going into politics was a noted writer of chick-lit, gushed to the press baron that he had shown "a lot of guts." Even Tom Watson, a double-chinned Labour M.P. who had earlier grilled Murdoch mercilessly about his knowledge of the phone-hacking affair, was moved to comment, "Mr. Murdoch, your wife has a very good left hook." (Actually, it was a crisp right cross that Wendy Murdoch landed on Marbles before the police dragged him away.)

Murdoch seemed to grow in confidence and vigor. He took the opportunity to read out a lengthy statement apologizing to the victims of phone hacking and saying that illegal behavior had no place at News Corp. He also stated categorically that he had no intention of resigning. "I think that, frankly, I am the best person to clean this up."

Earlier, it was left to James Murdoch, whose wordiness and smooth delivery contrasted starkly with his father's halting performance, to fill in some of the gaps, and to annunciate News Corp.'s legal strategy going forward in dealing with the still-mushrooming scandal. Put briefly, this consists of blaming one of its former law firms, Harbottle & Lewis, and some of its former executives and journalists for keeping under wraps between 2007 and 2011 information (e-mails, internal memos, etc) about rampant phone hacking and other illegal activities at the News of the World. The position remains that nobody at the top of the company—not the Murdochs, not Rebekah Brooks, not Les Hinton—knew anything of this evidence until April or May of this year, when it was discovered and turned over to the police.

This "heard nothing, knew nothing" story didn't sound any more convincing today than it has for the past two weeks, but it is the only one the Murdochs have left to them. Their survival depends on it holding up.

Photograph by Press Association via AP Images.

Rupert Murdoch's Reverse Ferret

Two weeks in, and the great phone-hacking scandal is beginning to resemble a remake of "The Alamo," with Rupert Murdoch reprising John Wayne's role as Davy Crockett and his son James standing in for Richard Widmark as Jim Bowie. The Murdochs' enemies are still besieging the fort, their own side's casualties are mounting, and their ammunition is running low. They are in desperate need of relief. But where will the U.S. Cavalry come from, and will it arrive in time?

Every day seems to bring a fresh disaster. On Sunday, close to midnight London time, the police finally released Rebekah Brooks, until Friday the chief executive of News International, who had been held in custody for almost twelve hours. "She was arrested on suspicion of conspiring to intercept communications, contrary to Section 1 of the Criminal Law Act 1977 and on suspicion of corruption allegations contrary to Section 1 of the Prevention of Corruption Act 1906," the police said in a statement.

So much for the suggestion that Brooks, who edited the News of the World from 2000 until 2003, knew nothing of the phone hacking that took place under her editorship. To be sure, she is entitled to the presumption of innocence until proven guilty. But as far as the police are concerned, she is now a suspect in not one but two big criminal investigations—one into phone hacking and a second into allegations that News International journalists paid policemen for non-public information on the royals and other celebrities.

What a difference a week makes. On interrupting his vacation and flying into London last Sunday, Murdoch adopted a typically defiant stance, going out to dinner and posing for photographs with the two executives at the center of the mess: Brooks and his son James. His top priority, Murdoch told reporters, was saving Brooks. For once, he had badly misjudged things. After both major parties turned against him and the police arrested Andy Coulson, a former editor of the News of the World who had gone on to become David Cameron's press secretary, the ageless octogenarian was forced into carrying out what is known on Fleet Street as a "reverse ferret"*.

On Friday, he met with the parents of Milly Dowler, the murdered schoolgirl whose cell-phone voicemails were hacked by some of his employees; he personally apologized for the actions of journalists and investigators employed by the News of the World; and he finally accepted the resignations of Brooks and her predecessor, Les Hinton, who had moved on to become the chief executive of Dow Jones. "Day of Atonement," said the front-page headline in Saturday's Times of London. (Proprietor: R. Murdoch)

If Murdoch was hoping these moves would get him out ahead of the scandal, he has already been disappointed. In addition to the arrest of Brooks, Sunday brought the resignation of Sir Paul Stephenson, the commissioner of the Metropolitan Police, who had an unusually cozy relationship with senior News International executives, particularly Neil Wallis, a former deputy editor of the News of the World. After leaving the Murdoch newspaper several years ago, Wallis went to work for Scotland Yard as a media consultant. Now that Wallis has also been arrested in the phone-hacking scandal, Sir Paul understandably took the view that his position was untenable.

And that is yet more bad news for the Murdochs. Under new leadership and in the face of unprecedented public scrutiny, the London police have every incentive to assert their independence from News Corp. The way things are going, it seems certain that in the coming days they will haul in for more people connected to the News of the World. People in London are busy speculating whether James Murdoch will be among them. It seems inconceivable that the police won't want to question him as a witness, at the least.

And the net may widen beyond the News of the World. Reports are emerging that one of the shady private detectives at the center of the scandal may have met with journalists at other Murdoch titles, including the upscale Sunday Times. Nothing has been confirmed. But in this climate, every rumor, no matter how unlikely, is being taken seriously.

In short, the scandal has developed a momentum of its own. On Tuesday, Murdoch Sr. and Murdoch Jr. are due to appear before a parliamentary committee that is investigating the scandal. A much bigger judicial inquiry is about to get off the ground. Who knows where that will lead?

For now, the best the Murdochs can hope for is to get through a few days without any more damaging revelations. Even that might not be enough to save them. In London media circles, there is gleeful talk of dissension within the Murdoch family. According to a report in the Guardian, which is having the time of its hundred-and-ninety-year life, Elisabeth Murdoch, Rupert's second-oldest daughter, who also works for News Corp., was heard to remark last week at a book party: "James and Rebekah fucked the company."

As of now, that sounds about right.

*The etymology of this phrase is interesting: it goes back to the nineteen-eighties, when Kelvin MacKenzie, a legendary tabloid figure, edited the Sun, the daily stablemate of the News of the World. On those evenings when he was about to publish a particularly incendiary front page—a top-tier celebrity caught in a sex and drugs binge, say—a delighted McKenzie would sometimes cackle to his staff, "Ferret down the trousers, ferret down the trousers." The next day, if something went wrong and the story had to be retracted, or heavily modified, a stricken McKenzie would announce, "Reverse ferret, reverse ferret."

Photograph by Barry Batchelor/PA Wire.

Murdoch Folds 'Em; Prepares for Inquisition

During his long career as the pantomime villain of the media world, Rupert Murdoch has seen out many scandals, but nothing like this one. Back in 1983, under attack for his decision to publish a set of diaries from Adolf Hitler that turned out to be forged*, he famously remarked, "After all, we are in the entertainment business." Today, nobody, least of all Murdoch, is laughing.

With the British parliament about to come together in an unprecedented move to thwart him, Murdoch this morning accepted the inevitable and called off News Corporation's takeover bid for British Sky Broadcasting, which, together with the BBC, dominates British television. Meanwhile, one of his own papers, the Wall Street Journal, confirmed my suspicion that he might even be prepared to sell his three remaining British newspapers—the Times, the Sunday Times, and the Sun—assuming a buyer can be found.

The BSkyB announcement marks a humiliating climb down for Murdoch. At this stage, however, he has more important issues to deal with—namely, insuring the survival of himself and his family at the helm of his beloved News Corporation. In the midst of a media frenzy, it is always dangerous to make definitive judgments, but at the moment it is hard to see how Murdoch can ever fully recover from the blows he has suffered in the last few days.

Failing in his designs for BSkyB was the least of it. To all intents and purposes, the media company, whose satellite dishes protrude from the roofs of ten million British homes, is already part of the Murdoch empire. News Corp. owns thirty-nine per cent of BSkyB's shares, and Murdoch picks its boss. From 2003 until 2007, his youngest son, James Murdoch, was BSkyB's C.E.O. Since then, Murdoch, Jr., who now runs all of News Corp.'s operations in Europe and Asia, has held the post of non-executive chairman of BSkyB, a post he will continue to hold, the company said today.

The motivation for the takeover bid was purely financial. Having spent more than twenty years building up BSkyB—which was loathed on the left when it was launched, but which has since established itself as part of the fabric of British life—Murdoch is understandably keen to consolidate the business with the rest of News Corp., thereby gaining access to a hundred per cent of its cash flow. But now that the takeover bid has failed, nothing much has changed. News Corp. remains a formidable company with profitable businesses all over the world. After today's announcement, its stock price actually rose.

The question marks hang over the Murdochs, not News Corp. In the coming months, both Rupert and James will be called before a British judge to explain what they knew about phone hacking and when. The judicial inquiry that David Cameron, the British Prime Minister, announced today will be modelled on the 2003 Hutton Inquiry into the circumstances surrounding the death of David Kelly, the British weapons scientist who had expressed skepticism about government claims that Saddam Hussein had weapons of mass destruction. The evidence that Lord Hutton unearthed, about which I wrote a long article for the magazine, effectively destroyed Tony Blair's reputation.

Lord Justice Leveson will want to know not only about the phone hacking itself, much of which took place five or ten years ago, but about News Corporation's 2007 internal inquiry, which purported to establish that the misdeeds were the work on one "rogue reporter." From the outside, only two possibilities present themselves. The inquiry was horribly botched, or there was a deliberate coverup.

Leveson, a Liverpudlian with a reputation for independence, is also sure to take an interest in what happened subsequently. News International, the News Corp. subsidiary that runs the British newspapers, reached legal settlements with a number of phone-hacking victims, effectively buying their silence. James Murdoch, it is now known, explicitly approved some of these payments.

Scotland Yard, meanwhile, will be continuing its investigation into allegations that journalists from the Murdoch newspapers bribed police officers to obtain information about celebrities, the royals, and others. Bribery is a serious charge which carries long prison sentences. Who authorized these payments? Who else knew about them? From 1995 to 2007, the head of News International was Les Hinton, a longtime Murdoch aide who is now chief executive of Dow Jones. In 2009, Rebekah Brooks, who previously edited the Sun, took over as head of News International, a post she still holds, despite calls from all sides for her resignation.

Then there is the U.S. angle, such as it is. Yesterday, Senator Jay Rockefeller, who heads the Senate Commerce Committee, called on the American authorities to determine whether phone hackers tied to News International had targeted U.S. individuals. "I am concerned that the admitted phone hacking in London by the News Corp. may have extended to 9/11 victims or other Americans. If they did, the consequences will be severe," Rockefeller said in a statement.

In short, the Murdochs and News Corp. are going to be besieged for months and years to come. What now are the chances of James Murdoch, or any of his siblings, taking over from his father as chairman and chief executive of News Corp.? The odds are a lot longer than they were this time last week.

* It should be recalled that Murdoch and his editors weren't the only ones to fall for Konrad Kujau's handiwork: Hugh Trevor Roper, the late Oxford historian, pronounced it genuine; Stern and Newsweek both published extracts.

Photograph by Sang Tan/AP.

Murdoch Scandal: Gordon Brown Goes For Death Blow

Is Britain entering a post-Murdoch era? It's still too early to say for sure, but Tuesday's developments seem to point in that direction.

One thing is plain. For the first time since before Mrs. Thatcher came to power, it is open season on Rupert Murdoch. From all sides, his enemies (and erstwhile allies) are blasting away at him.

Tuesday's big news was a decision by the Conservative-Liberal government to join the Labour Party opposition in calling on News Corporation to drop its takeover bid for British Sky Broadcasting, about which I wrote earlier. On Wednesday, there will be a non-binding vote in Parliament along these lines, and it seems certain to gain overwhelming support. As far as I can recall, this is the first time that the three major British political parties have come together to try and block one of Murdoch's business schemes.

Simultaneously, Gordon Brown, the former Prime Minister, gave a lengthy interview to the BBC, in which he accused Murdoch's newspapers of conspiring with "known criminals" to dig up information about him and his family. Going back to the days of Harold Wilson and Ted Heath, I don't think I have ever seen such a remarkable performance from a sitting or former P.M. Just a couple of years ago, Brown and Murdoch were on amicable terms. (That was before Murdoch's newspapers switched their allegiances to David Cameron.) Now Brown is trying to put a stake through the heart of the wounded press baron.

Murdoch is trying to fight back, and he should never be underestimated. Late Tuesday, his company issued two statements defending the actions of its journalists at the Sun and the Sunday Times in pursuing news stories about Brown and his sick son. If Brown has overreached in his accusations, his intervention could conceivably rebound in Murdoch's favor.

For now, though, the big news is that Murdoch's aura of invincibility has disappeared.

Is Rupert Murdoch Preparing to Sell Out of Fleet Street?

Even late last week, I would have scoffed at this idea, which is doing the rounds on other blogs. Now I am not so sure.

With more damaging revelations appearing by the hour—on Monday, two more of Murdoch's British papers were dragged into the mire—the decision to close down the News of the World has failed to stem the phone-tapping scandal. Murdoch is in London, and more drastic measures appear to be under consideration, possibly including the option of selling or splitting off News Corporation's British newspaper division, which owns the Sun, the Times, and the Sunday Times.

For Murdoch to abandon Fleet Street after almost sixty years of involvement would come as a great shock to many, myself included, but I no longer think it can be ruled out as a possibility. (From 1986 to 1995, I held a variety of positions at two Murdoch newspapers: the Sunday Times and the New York Post.)

From a business perspective, ditching the newspapers would be an eminently defendable move. In recent years, they have contributed relatively little to News Corp.'s profits. Without them, News Corp. would be free to press its effort to purchase the entirety of British Sky Broadcasting, the dominant British satellite-television company, in which it owns a thirty-nine per cent stake. Murdoch and his son James have spent more than twenty years building up BSkyB, which is now minting money. After months of prevaricating, the British government today referred News Corp.'s bid for BSkyB to the U.K. anti-trust authorities.

The most interesting thing about this wasn't the fact that the Conservative-Liberal government had finally found the gumption to stand up to Murdoch. Given the public outrage over the phone-hacking scandal, it had no choice but to act. The interesting thing was how the decision came about.

In London this morning before the government's decision was announced, News Corp. took the initiative, saying it was dropping a previous offer to sell BSkyB's widely respected news operation, thereby preserving its independence after the takeover. In a news release, Murdoch's company said, "Should the Secretary of State for Culture, Olympics, Media and Sport decide on this basis to refer the proposed transaction to the Competition Commission for a detailed review, News Corporation is ready to engage with the Competition Commission on substance."

A cynical (and perhaps correct) interpretation of this move is that Murdoch was simply providing David Cameron's government with what both of them wanted: a convenient way to remove the BSkyB takeover from the headlines. It will take the Competition Commission several months, at least, to conduct its investigation, and during that time Cameron and Murdoch will both be able to deflect questions about its progress.

But what is the "substance" that News Corp.'s statement referred to? It is the fact that News Corp., through its ownership of the Sun, the Times, and the Sunday Times, already has a tight grip on the British media, and the suggestion (vigorously disputed by News Corp.) that allowing the company to consolidate BSkyB would convert that grip into a deadly stranglehold. Selling the newspapers, or spinning them off into a new company in which News Corp. maintained a minority stake, would remove the main barrier to the BSkyB takeover.

Could Murdoch bring himself to do it?

He'd hate the idea of being bested by people and institutions he sees as his liberal enemies, such as the Guardian and the New York Times. But he prides himself on being able to rise above personal feelings. Plus, he's always had a love-hate relationship with Britain. Even back when I used to work for his newspapers, he sometimes complained that the Brits didn't appreciate all he'd done for their country—all the money and time he'd invested there; all the hatred he'd incurred for breaking the Luddite print unions; all the effort he'd expended in attacking the stultifying British class system. "Sometimes, I don't know why I bother," I recall him saying once,
seemingly only partly in jest.

In recent years, Murdoch has been spending less time in Britain, leaving his son James to handle matters there. Despite the fact his papers supported the Conservatives in last year's election, his relationship with David Cameron is more remote than those he enjoyed with Margaret Thatcher and Tony Blair. At the age of eighty, with scarcely a voice to be heard defending him from Inverness to Brighton, maybe Murdoch has finally had his fill of the Poms.

Of course, that's only speculation. But I wouldn't be entirely surprised.