John Cassidy's Blog, page 119

Facebook-Goldman: Where Is the S.E.C.?

Happy New Year everybody. I'm working on a post about the economic prospects for 2011, but, first-up, a quick memo to Mary Schapiro, the head of the Securities and Exchange Commission: Mary, once again the boys and girls at Goldman Sachs appear to be making a mockery of you and your colleagues.

How else to describe the news from Dealbook that Goldman is setting up a special purpose vehicle to allow rich people to invest in Facebook? Under the securities laws, once a company has more than five hundred investors it is obliged to convert into a public company by issuing stock to investors at large. It is well known that Mark Zuckerberg, the founder of Facebook, doesn't want the hassle of running a public company, not yet, at least, and Goldman's latest wheeze seems to be designed to let him have his cake and eat it. If the deal goes ahead, Facebook will get up to two billion dollars of new capital to invest in its business but will, for the moment, remain a private company—of sorts.

As part of the deal, Goldman will reportedly invest $450 million in Facebook and Digital Sky Technologies, a Russian investment firm which already has a substantial stake in the social network platform, will invest another $50 million, but that is only stage one. In stage two, according to Dealbook, "Goldman is expected to raise as much as $1.5 billion from investors for Facebook at the $50 billion valuation, people involved in the discussions said." The story goes on: "While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, Goldman's proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients."

Say one thing for Goldman: the firm has chutzpah. Just last July, there it was acting all contrite and paying $550 million to settle an S.E.C. suit that charged it with misleading investors in marketing some complex securities tied to sub-prime mortgages. Goldman failed to disclose that one of its biggest clients, John Paulson, the hedge fund manager, had helped to select the sub-prime loans underpinning the securities, and that he stood to gain handsomely if the securities fell in value, which they quickly did. Six months later and Goldman again appears to be trying to twist the securities laws for the benefit of itself and one of its clients—Facebook.

Maybe, there's more to the story than this, but based on today's reports it looks like Goldman is, once again, running rings around the regulators.

Over to you, Mary…

Top 10

Over at the News Desk blog, read my post on the top business stories of 2010, along with many other end-of-year lists.

I Come to Bury Larry Summers, Not to Praise Him…

Thump! Thwack! Clang!

That was the sound of the door to the West Wing press room crashing into Lawrence Summers's skull, shoulders, and derriere earlier this week as he departed his post as President Obama's top economic adviser and headed back to Harvard.

To say certain people in the media weren't sorry to see Big Larry go is understating matters. The Washington Post's Dana Milbank described him as a man who "rose to national prominence because of his intellect but is now leaving government known more for his dyspepsia." In Summers's final public appearance in Washington, Reuters blogger Felix Salmon noted, he failed to thank President Obama for hiring him as head of the National Economic Council. Why would he do this? "I don't think Summers thinks that way," Salmon wrote. "In his mind, the thanks should all flow the other way." At the National Interest, Jacob Heilbrunn dismissed Summers thus: "He exemplifies the Ivy League syndrome: He is a high-IQ moron."

O.K. There are things not to like about Summers, one of which is the fact that he appears to hold the Fourth Estate in contempt. At the same event where he failed to thank his boss, a speech to the Economic Policy Institute, a journalist asked him what he would miss most about being in the White House. "Reporters like you," he replied with a chuckle. Doubtless, Summers thought he was being amusing. Still, reporters need to get over it. After all, we aren't the only folks Larry considers intellectually beneath him. Such a category would include most members of President Obama's cabinet and their top policy advisers; many of his colleagues in the White House; virtually all foreign officials; ninety per cent of the Harvard faculty; and a similar proportion, or possibly higher, of his fellow academic economists.

Sometimes, but not often enough, Summers kept his overweening intellect and ego in check. Recently, I heard Steve Rattner, the embattled Wall Street banker and former auto czar, say that he thoroughly enjoyed dealing with Summers when they were both toiling on the rescue of General Motors. However, another senior Administration official told me that working with Summers was exasperating. Even when Summers lost internal debates about a given subject, or had his views falsified by subsequent events, he would never concede that he had been mistaken, this person said.

So, Larry can be a pain in the patootie: that much, we know. But we knew it long before he entered the White House, or most of us did. Was he an effective head of the National Economic Council? That is the real question.

Insomuch as his role involved presenting the the Administration's economic policies in a positive light, and helping to build popular support for them, the answer is no. Perhaps for good reason, the White House seemed nervous about using him as its front man. Yes, he did the odd Sunday morning interview and contributed an occasional op-ed piece. Most of the time, though, he remained behind the scenes. Even from there, he could have been more active in getting across the Administration's worldview. Unlike Richard Holbrooke and Henry Kissinger, say, he made little effort to cultivate the Washington press corps, which, still today, is the indispensable intermediary between the White House and the public. Not for him the regular "off-the-record" chat with favored reporters and columnists, which would serve up juicy tidbits about internal debates and other insider details that journalists crave. For many reasons, such cozy dealings are reprehensible. But from the point of view of a Holbrooke or a Kissinger they provided invaluable leverage—something Summers, with his grounding in game theory, should have realized. For whatever reason, Larry failed to feed the dog. Not surprisingly, it turned around and bit him.

The report card so far: Personal Skills, C; Communication Skills, C-. (At Harvard virtually nobody gets a "D." It's against the élitist ethos of the place.)

Let's be honest, though. Back in late 2008, President Obama didn't bring in Summers for his television face or his ability to make nice with David Brooks and George Will. With the credit markets frozen and the economy in free-fall, the President-elect ignored the counsel of some of his campaign advisers and hired the controversial professor to guide him in the right policy direction. Did Larry do that? Ultimately, this is the criterion on which he deserved to be judged.

With the unemployment rate still close to ten per cent, the consensus view, as reflected in the results of the midterms, is that President Obama's economic policies have failed. But think back to the collapse of Lehman Brothers, and what could have happened. Between September, 2008, and April, 2009, the stock market fell more sharply than in the six months after Black Tuesday in 1929. Global trade declined more rapidly than in the first year of the Great Depression. Companies were shedding jobs at a rate of seven hundred thousand a month.

Summers, to his eternal credit, was one of the first mainstream economists to understand what was happening. The carnage on Wall Street had unleashed a series of vicious cycles, which were wreaking havoc throughout the economy. In the financial markets, falling asset prices were leading to margin calls and more forced selling. In the housing market, the rush of foreclosures meant there were more unsold homes on the market, which was putting more downward pressure on prices. And on Main Street, ordinary Americans, shocked at the sight of Wall Street imploding, were spending less and saving more, which, in turn, was prompting firms to lay off more workers.

To anybody running a business or managing a Wall Street trading desk (or anybody who knew their Keynes), the downward spiral was glaringly obvious. But many academic economists couldn't or wouldn't see it. They remained committed to the view of the economy as a self-equilibrating mechanism that would rebound of its own accord. Some economists criticized the Fed and the Treasury Department for doing too much to help Wall Street. Others argued against an aggressive stimulus program, saying it was unnecessary. In his column in the Financial Times, and later, in internal Administration debates, Summers vigorously supported both of these policies, which did, eventually, halt the downward spiral.

"Had it not been for President Obama's willingness to support a sufficiently aggressive response—from the late stage of the presidential campaign to his first days and months in office—I have little doubt that we would be looking at a vastly different world today," Summers said in his remarks to the Economic Policy Institute. "His stalwart advocacy of efforts to support the economy through the Recovery Act, to rescue the financial system, to ensure the health of key industries, and to maintain stability in the global system halted the vicious cycles in less time and at less cost than virtually anyone thought possible."

Yes, these remarks were self-serving. As far as I can see, though, they are an accurate statement of the historical record. The blanket government guarantee to the financial sector stemmed the panic selling on Wall Street. Rock-bottom mortgage rates and various anti-foreclosure programs put something of a bottom on house prices. And the $787 billion federal stimulus program helped offset falls in spending on the part of consumers, corporations, and state and local governments. Yes, we can argue about the precise impact of the stimulus on spending and jobs, but it defies the laws of arithmetic to argue, as some prominent conservative economists do, that it had no effect at all. (As for the critique from the left—that the stimulus program was too small—in retrospect, it may well be correct. But I doubt a few hundred billion dollars of extra spending over three years would have made much difference to the economy's overall path.)

And what was the cost of these policies? The hated TARP bailout will almost certainly turn a small profit for the taxpayer. The stimulus program raised the deficit, but not by as much as many people think. The recession caused most of the increase: spending on unemployment benefits and other social programs increased, and tax revenues plummeted. (Perhaps the biggest cost of the monetary and fiscal rescue packages is a largely invisible one related to the Fed's emergency lending programs. In extending cash to to virtually anybody and everybody at near-zero interest rates during the height of the financial crisis, the Fed has created the expectation that it will do the same thing next time around—an expectation that is sure to influence behavior in the years ahead.)

Now, the decisions to introduce a sizable stimulus and support the Wall Street bailout were taken two years ago. Since then, it can be argued, the Obama Administration has made a series of policy errors for which Summers must share responsibility. I agree. Take unemployment. By the late spring of 2009, it was pretty obvious that job losses were rising even faster than Summers had thought likely. At that point, he should have torn up the official White House forecast, which said unemployment would top out at about eight per cent, and ordered its replacement with a new set of more pessimistic figures. The failure to make this adjustment handed the Republicans a hefty stick that they have been beating the Administration with ever since.

Or health care. Even at this remove, and despite the fact that a comprehensive reform bill was eventually passed, I think that placing this issue front and center in the summer and fall of 2009 was a big political mistake. Surely it would have better to concentrate on financial reform, placing the President at the head of the effort to clamp down on Wall Street recklessness. Instead of doing this, the White House largely outsourced financial reform to the Treasury, which has close ties to Wall Street. The result was an unexciting set of reform proposals, such as increasing capital requirements, that largely left intact the existing system. It took the intervention of Paul Volcker to force the Administration to support even the modest of principle of trying to prevent deposit-taking institutions from speculating with their depositors' money.

There were other missteps, too, such as the failure to support a surtax on bankers' bonuses. Somehow the Administration allowed the Republicans, and particularly the Tea Party, to depict it as a tool of rich financiers. But how much of this was really Summers's fault? Yes, he initially opposed the Volcker Rule, and I'm pretty sure he opposed the bonus tax, too. But in other debates, such as the one in the spring of 2009 about whether to nationalize struggling banks, he was to the left of the Treasury Department. Taken overall, many of the Administration's failures have been political rather than economic. The bonus tax is a good example. Its economic impact would have been trivial, and yet, despite the obvious political benefits it would have generated, President Obama allowed Treasury Secretary Tim Geithner to veto it. (It was Obama himself who said he didn't resent bankers and C.E.O.s getting huge payouts.)

Summers, for all his blemishes, has never pretended to be a politician or a political tactician. His job was to give the President economic advice and present the options available to him. This he did for two years. He made some mistakes and he failed to articulate an overarching narrative for Obamanomics, but on the defining question of the age—how to react to the financial crisis of 2008—Summers got things largely right. For this, at least, we owe him some gratitude.

Photograph: Joshua Roberts/Bloomberg via Getty Images

The China "Threat"

China, China, China. Everywhere you look, reporters, commentators, and policy wonks are examining the threats posed by the resurgent Middle Kingdom. The cover of this week's Economist features the headline: "The dangers of a rising China." Inside, there is a fourteen-page report on Beijing's military and strategic ambitions, which reports that China has been busy modernizing its weapons systems. These efforts include the deployment of cruise missiles similar to the ones that the United States uses in Pakistan, Yemen, and other places, and the development of anti-ship ballistic missiles that could sink U.S. warships sailing a thousand miles out in the Pacific.

In today's Financial Times, John Gapper has an insightful column on the Chinese economic model, and how many of its state-owned companies are appropriating other countries' intellectual capital. He cites the example of CSR Corporation, a Chinese company that builds bullet trains, and which, in partnership with General Electric, hopes to win contracts for proposed high-speed networks in Florida and California. CSR acquired much of its technological know-how from one of its former partners, Kawasaki Heavy Industries—the firm that constructed many of the original bullet trains in Japan. China is "determined to gain technological ascendancy by any means possible," Gapper writes, "including taking western technology and reworking it just enough to claim it as its own."

The challenge that China poses is evident enough, but before we all get too worked up about the new "Red Peril," it is important to point out that, on the economic front, many of the tactics that Beijing is utilizing aren't exactly new. In acquiring know-how from abroad, protecting its infant industries, and using the levers of the state to hasten development, it is following a blueprint that most other developed countries used at some point—from Britain, to the United States, to Japan, to Taiwan and South Korea, to India. Indeed, as I argued in an essay in this week's magazine, the Chinese mode of development—"state capitalism" is the phrase often used to describe it—rather than being something radical and new, can be seen as the country's greatest knock-off. To quote myself: "Far from subverting the Western way of doing business, the developing world is, at last, stealing some of its tricks."

If you are a subscriber, I would encourage you to read the piece in full (it is currently behind a paywall), and, if your interest is piqued, to buy some of the books I mention. Briefly, however, I point out that China is arguably less protective of its industries than Britain and the United States were at comparable stages of development. (From the War of 1812 until well into the twentieth century, American manufacturers thrived behind high-tariff walls.) Similarly, it is silly to suggest that non-Chinese corporations don't get any favors from their governments. From Boeing to Airbus to Google, Western governments have played a key role in subsidizing the development of new industries and technological leaders. (Q: Who or what built the Internet? A: It wasn't anybody who worked in the private sector.)

My main point is to appeal for some historical perspective. If China sometimes appears overly sensitive to outside criticism and dangerously nationalistic, is it surprising? This is a country that, in the nineteenth century, the West attacked and subjugated purely for commercial reasons. American school kids (and American adults) don't know much, if anything, about the two Opium Wars, but in China they are an ever-present reminder of national humiliation. In the twentieth century, China suffered a devastating civil war and eventually adopted a particularly disastrous type of Communist ideology that, for five decades, impoverished the country while turning it into an international pariah.

Given this record, what has happened in China over the past twenty-five years is remarkable—a miracle, almost. Rather than blasting the Chinese for failing to live up to standards of conduct that our forebears rarely met and lecturing them on the merits of a mythical free market, we should be congratulating them for the progress they have made, engaging with them, and encouraging them to adopt Western standards of intellectual-property protection, and the like. Where necessary, we should also challenge them, but through established channels such as the World Trade Organization—much as we challenge the European Community for protecting French farmers, and they challenge us for protecting southern cotton growers.

From its vast purchases of Treasury bonds to its central role in lowering the cost of many consumer goods, China is an invaluable trade partner of the United States, and should be treated as such rather than as a potential enemy. This is an issue where fairness and self-interest come together. In its leader this week, the Economist says: "The best way to turn China into an opponent is to treat it as one." Amen to that!

Illustration: John Ritter.

Tax Deal is Stimulus 2.0

For months, I have been telling anybody who would listen that, come early 2010 and barring a sharp upturn in the economy, there would be a second stimulus package. Don't listen to all the rhetoric from Republicans (and Democrats) about deficit reduction, I recall jabbering on a recent New Yorker podcast, if unemployment is still close to ten per cent at the end of the year, the President and the Congress will act.

Well, I got the timing wrong. The stimulus package arrived last night rather than in February or March 2011, and it was disguised as a deal to extend the Bush tax cuts. As part of the agreement, Republicans have apparently agreed to cut the employee portion of the payroll taxes and to extend some existing tax-relief measures aimed at poor people and businesses. As of this writing, it is hard to say how much these tax cuts will be worth, but it could well be about $150 billion a year, which is roughly one per cent of G.D.P.: not enormous, but not chump change either.

From a political perspective, the agreement is a humiliating moment for President Obama, and one that may forever rupture his relations with the liberal wing of his party. For all the spin that the White House will try to put on the deal, he didn't extract very much from his Republican tormentors. Getting Republicans to agree to more tax cuts in return for preserving existing tax cuts is roughly equivalent to getting crack addicts to agree to try a different brand of cocaine in return for allowing them to keep their existing stash.

From an egalitarian standpoint, the failure to end Bush's giveaway to the rich is an inexplicable failure. It will only strengthen the impression that the United States is, as Nicholas Kristof has recently been arguing in the Times, a banana republic—or, more precisely, a country in which a small group of rich people wield an inordinate amount of political power.

But from an immediate macroeconomic perspective, and, hence, from the perspective of a President preparing for a reëlection campaign in 2012, the tax-cutting agreement makes some sense. By boosting the overall level of spending power, it will reduce the chances of the economy falling back into recession sometime next year or in 2012. That is very good news for President Obama. Jimmy Carter, George Bush Sr., and George Bush Jr. all discovered to their cost that there is nothing as threatening to an incumbent President as an economic slump in the year or two before polling day.

Don't forget, the backdrop to this deal is a very uncertain economic outlook. Some signs are positive: retail sales, consumer confidence. Some signs are negative: house prices, unemployment. But what we know for sure is that in 2011-2012 the economy faces another negative shock, in the form of the $787 billion Stimulus 1.0 winding down, and, eventually, coming to an end. Roughly, speaking, about $300 billion in annual spending financed by the federal government is going to disappear. If our $15 trillion economy was enjoying a healthy recovery, that wouldn't be too much of a problem: other forms of spending would fill the gap. But the recovery isn't a healthy one. It is tepid and faltering.

Will the second stimulus be enough to revive the economy and bring down unemployment sharply? By itself, almost certainly not. Will it significantly reduce the likelihood of an even worse outcome: a double-dip recession that would see the jobless rate rise above ten per cent? Certainly it will. President Obama, with his political options limited, has made an ugly deal. But it isn't an illogical one.

Unemployment Rate Hits 9.8 Per Cent

Today's awful job figures crossed the wires just as I was mulling a post on how the Fed's policy of pumping money into the bond market—a.k.a. quantitative easing—was showing signs of working. Over the past couple of weeks, a number of indicators have suggested that the economy is picking up a bit: purchases of cars and trucks have jumped significantly, retailers posted solid sales over Thanksgiving, and consumer confidence has rebounded. Even the bombed-out housing market—a direct beneficiary of Fed policy, which is largely aimed at keeping down mortgage rates—has shown signs of life: the number of home sales jumped last month. The U.S. economics team at Goldman Sachs, which has been one of the most pessimistic on Wall Street, just upgraded its forecast for G.D.P. growth in 2011 from 2.0 per cent to 2.7 per cent. That's still not a great figure—after a recession, economies often expand at a rate of four or five per cent for a couple of years—but the upgrade was a signal that worries of a "double dip" recession were receding.

Then came this morning's shocker: the economy created just 39,000 jobs in November, compared to 172,000 in October, and the unemployment rate jumped from 9.6 per cent to 9.8 per cent. Health care and temporary help services were the only sectors reporting significant new hiring. Most other sectors reported flat payrolls or reductions. The sectors cutting jobs included retailing and finance, which had appeared to be doing relatively well. What is going on? In ascending order of frightfulness, here are four possibilities.

1) These are "rogue" figures. The payroll data from the Bureau of Labor Statistics jumps around a lot from month to month, and it is sometimes revised sharply in subsequent releases. Perhaps there was some sampling error, or perhaps the government statisticians got their tweaking wrong. The published job figures are not the raw ones that the government collects. They are adjusted for seasonal variation, a process that is always somewhat arbitrary. (For example, the unemployment rate before seasonal adjustment is actually 9.4 per cent, not 9.8 per cent.)

2) The economy is genuinely picking up, but many businesses don't quite believe it yet, so they are balking at taking on any permanent new workers. Evidence to support this theory includes the fact that the hiring of temps did pick up last month, but the retail sector actually cut 28,000 jobs. If this is what is happening, then permanent hiring should pick up again in the next couple of months as the level of overall demand in the economy continues to rise.

3) The recovery is real, but it's a jobless recovery. Thanks to advances in information technology, the application of more aggressive management techniques, competition from China, an expansion in the informal economy, or (enter here your own pet theory) the U.S. economy simply doesn't need as many permanent workers as it used to need. In which case, unemployment is likely to remain high for the foreseeable future.

4) Armageddon. The recent pickup in spending is a blip, and businesses are right to be worried. Households are still burdened with too much debt, the banks face another wave of housing foreclosures, Washington is in gridlock, and Europe looks like falling apart. Come the New Year, consumers will pull back, the stock market will lurch downward, and the Fed will be out of ammo.

Perhaps just to defy my reputation as a prophet of doom, I am leaning toward the second scenario. Come January or February, I think, the employment situation will finally start to brighten. But if hiring doesn't pick up over the next couple of months, we will all have to look more seriously at the third possibility, and even the fourth.

What are the words to the old Clash song? Ah, now I remember: "It's not Christmas time anymore. It's Armagideon." Watch below to cheer yourself up.

Gawker Stalker: Nick Denton Spotted in Cayman Islands

Taking a break from the thousands of pages of documents related to the 2008 bank bailout that the Fed released yesterday—more on them later—I indulge my reprehensible weakness for media gossip, perusing a six-thousand-word post by Felix Salmon, the financial blogger, about Gawker Media. In addition to being an excellent advertisement for restricted word counts—and Salmon's Stakhanovite work ethic—the post contains quite a bit of stuff that was news to me. (And, no, I don't mean all that guff about Gawker redesigning its home page to feature one lead story. Stop the presses: Nick Denton, a former newspaper man, discovers the front-page splash.)

Here's the real skinny:

1) Gawker's top advertising executive, Chris Batty, the person primarily responsible for bringing in the green that pays the rest of the staff's wages, has quit or been pushed out, and he's taking with him the firm's top salesman. Actually, the media-savvy Denton put this bad news out himself, in a long e-mail to staff that was leaked earlier this week. But Salmon has lots of background to Batty's departure, which he says is likely to hit Gawker's revenues in the coming months. Seems Batty and Denton disagreed about the wisdom of junking the blog format that Gawker pioneered and trying to become an online cable network, which is what appears to be in Denton's mind.

2) Gawker is organized like an international money-laundering operation. Much of its international revenues are directed through Hungary, where Denton's mother hails from, and where some of the firm's techies are located. But that is only part of it. Recently, Salmon reports, the various Gawker operations—Gawker Media LLC, Gawker Entertainment LLC, Gawker Technology LLC, Gawker Sales LLC—have been restructured to bring them under control of a shell company based in the Cayman Islands, Gawker Media Group Inc.

Why would a relatively small media outfit based in Soho choose to incorporate itself in a Caribbean locale long favored by insider dealers, drug cartels, hedge funds, and other entities with lots of cash they don't want to advertise? The question virtually answers itself, but for those unversed in the intricacies of international tax avoidance Salmon spells it out: "The result is a company where 130 U.S. employees eat up the lion's share of the the U.S. revenues, resulting in little if any taxable income, while the international income, the franchise value of the brands, and the value of the technology all stays permanently overseas, untouched by the I.R.S."

Mary Meeker Moves On

Can it be almost twelve years since I wrote a Profile of Mary Meeker, the technology-stock analyst who became known as the Queen of the Internet? Evidently, it is. News photographs accompanying the reports that she is leaving Morgan Stanley to become a partner at Kleiner Perkins Caulfield & Byers, John Doerr's venture capital firm in Silicon Valley, show her looking older and grayer than I remember, and I am sure she would say the same about me.

Looking back, the spring of 1999, which is when I first met Meeker at her office overlooking Times Square, seems like what it was: another century. At the time, she was preparing for an initial public offering of stock by Priceline.com, the travel site, which Morgan Stanley was leading. Officially, of course, Meeker didn't have very much to do with the IPO. At Morgan Stanley, as at other investment banks, there was a "Chinese wall" between the research and investment-banking divisions. Unofficially, she was heavily involved. In fact, the main reason Priceline had chosen Morgan Stanley to organize its stock offering was to obtain a buy rating from Meeker, which duly appeared soon after the stock started trading.

Not that she was corrupt, exactly. Unlike some of her rivals, who privately held the dotcoms they dealt with in disdain, Meeker was a true believer in the promise of online commerce. From the 1995 publication of The Internet Report onwards, she was convinced (correctly) that digitization would transform the economy, and that the companies which established an early foothold would have a great competitive advantage. Applying this logic, she was a big supporter of names such as eBay, Yahoo, and Amazon.com, which have, indeed, survived through various ups and downs. (She also supported Netscape and America Online, which didn't survive in their original forms.)

As the top-ranked Internet analyst, she and Ruth Porat, Morgan Stanley's top technology banker (and now its chief financial officer), were deluged with solicitations from flimsy online start-ups, and, for rather longer than others, they retained some standards. In the final analysis, though, they also threw their weight behind companies that didn't exactly set the world alight, such as drugstore.com and askjeeves.com. After the tech bust, Meeker and other analysts were sued by angry investors, but she kept working, and in 2004 Morgan Stanley was the lead bank on Google's I.P.O.

Now she is going to Kleiner Perkins, where she was rumored to be heading as long ago as 1999. Why didn't she go West back then? The answer can't be money. At her peak at Morgan, she reputedly earned twenty or thirty million dollars a year. That's a lot of cash, but it's nothing like the riches that a senior partner at KP can pull down. I can only guess that she enjoyed being at the center of the action, and she liked being a "thought leader" (like virtually everybody on Wall Street, she had a weakness for corporate speak). Recently, she has embraced mobile computing—"Web 3.0"—as the future; not exactly an original insight, but one that many American firms (and investors) have been relatively slow to grasp. KP is keen to catch up, and that, reportedly, is why they gave her a second chance to create what the really rich call "dynastic wealth."

As for Priceline's stock, by the way, it went public at $16, closed the first day of trading at $68 and then rose to more than $900. After the bubble burst, it fell below $1 in 2002. Today, it closed at a (split adjusted) price of $67.40, meaning it is almost back to its first-day close. Perhaps twelve years isn't so long after all.

Irish Lessons

To regular readers: sorry for my recent absence. I've been snowed under with my latest piece in the magazine, "What Good is Wall Street?" which I'll be talking about online this afternoon at 3 P.M. E.T. Now that it's finally been published, I promise I'll get to the two big economic stories of the past couple of weeks—quantitative easing and the Irish bailout. A lot of people still seem confused by the former, which is not surprising given the amount of misinformation it has produced. So I'll try and get up a Q. & A. on that.

As for what's happening in Ireland, I was going to put together a detailed piece about how it demonstrates the folly of pursuing austerity policies during a deep recession, especially if you have a fixed exchange rate (Ireland is part of the Euro zone), but it turns out that Martin Wolff, of the Financial Times, has already done the job for me. As Wolff points out, the Irish government hasn't been particularly profligate. In 2007, the country's net public debt was just 12 per cent of GDP, about a fifth of the U.S. level. What has done it for the state's finances is the bursting of a property bubble and the cost of bailing out the Irish banks, which may well be the world's worst.

Since the start of this year, Ireland has been cutting government spending and raising taxes, just as the guardians of financial orthodoxy in Frankfurt, London, and Washington were recommending. But rather than ending the economic crisis, these policies have made it worse. The basic point is straight out of Econ 101. Cutting government spending and raising taxes reduces the amount of demand in the economy, which makes the recession worse. This, in turn, causes more businesses and homeowners to default on their loans, which causes the banks to take even more losses. In short, austerity accentuates the downward spiral. Theoretically, there are two possible cases in which this doesn't automatically follow:

1) An investment boom. The story here is that businesses, seeing the government getting its finances in order, experience a recovery in "animal spirits," which prompts them to go out and build factories and hire people. The surge in investment offsets the fall in government spending, and the economy recovers. Personally, I always thought this was a fairy story. In Ireland, it simply hasn't happened.

2) An export boom. If a country can combine austerity with a devaluation of the exchange rate, its goods will be cheaper abroad, and a rise in exports can offset the fall in government spending. To some extent, this has been happening in the U.K., which has seen the value of the pound sterling fall by almost twenty per cent since 2007. But for Ireland it's even not an option.

About the only good thing about the Irish debacle is that it could serve as a warning to the rest of the world about what happens when you ignore seventy years of economics and call in Andrew Mellon (or his successors at the European Central Bank) for advice. But the way things are going, I'm not even sure anybody will be listening.

And now, of course, Ireland faces even bigger budget cuts—the cost of the E.U. bailout.

Is Obama Really a Big Loser?

Sixteen years ago tonight, I was in the newsroom of the New York Post, where I was the deputy editor, preparing the front-page wood (headline) for the next day's paper. For the early edition, we went with the news that George Pataki had defeated Mario Cuomo in the race for the governorship of New York, but by ten o'clock it was clear that an even bigger story was unfolding on the national stage: the Republican party, led by the firebrand Newt Gingrich, was regaining control of Congress, delivering a stunning rebuke to President Bill Clinton.

After tossing around a few ideas, I settled on a simple one-word headline—"LOSERS"—imposed on a picture of the Clintons smiling.

It personalized the election result in a provocative way, but it was cruelly accurate. Although they weren't on the ballot that night, the two-for-one Clintons, who two years previously had swept to power largely on the strength of their (comparative) youth, novelty, and inspiring rhetoric, were the biggest casualties by far, or so it seemed at the time. In the days that followed, many commentators wrote their obituary—only to see Team Clinton rebound and trounce Bob Dole in the 1996 election.

Watching the results come in tonight, I found the parallels with 1994 almost eerie. In 1994, the Republicans picked up fifty-three seats in the House and seven in the Senate, giving them control of both chambers for the first time since 1954. As I am writing these words, the networks are predicting very similar Republican gains. Now consider the votes of independents—the key voting group, always. In 1994, they went 55 percent Republican, 41 percent Democrat. Today, according to CNN's exit poll, they went 55 percent Republican, 41 percent Democrat.

Sure, the faces are different this time, but not so different. In '94, Newt Gingrich was the face of Republican insurgency; tonight it is Rand Paul, the new Republican Senator for Kentucky, who told CNN: "There are no rich, there are no poor, there are no middle class. We are all interconnected in the economy." (No, he didn't appear to have been drinking.)

So can Obama come back from this drubbing? That depends on the answers to three more questions. Does he have Bill Clinton's political skills? Will the Republicans self-destruct? What will happen to the economy?

On the first one, the jury is very much out. Clinton, for all his faults—possibly, because of all his faults—knew how ordinary Americans respond on the emotional level, as well as the intellectual level. Obama is a top-notch classical orator, but on a day-to-day basis he isn't a very effective communicator. Plus, he gives the impression that he disdains the idea of employing dark political arts, which are often necessary to survive, let alone succeed, in Washington. With his Presidency on the line, Clinton summoned Dick Morris and bamboozled the Republicans with his strategy of triangulation. Can Obama get down and dirty? We shall see.

In a way, things would have been easier for him if the Republicans had won the Senate as well, which would have allowed him to position himself in 2012 as the anti-Capitol Hill candidate. In a country where Congress's approval rating is usually in the teens (or lower), winning control of the legislature is a virtual guarantee of unpopularity ahead.

Which brings me to the Republicans' strategy. The midterm vote wasn't so much an endorsement of the G.O.P. as a protest vote against Obama and the Democrats. But now that the Republicans control the House, they can no longer afford to remain simply the party of no. Gingrich made that mistake in 1995, when he closed down the government during a row over budget cuts, only to see his popularity, and that of his party, plummet.

Now that Capitol Hill is divided, we face what one prominent Republican described to me today as "two years of guerrilla warfare." Sending the message that he was determined to avoid repeating Gingrich's errors, John Boehner, the Speaker-elect of the House, made it known that there was to be no gloating or dancing in the streets. He also gave a dignified victory speech. So far, so good. But with a big intake of freshman Representatives, Boehner now presides over an uneasy alliance of business conservatives, social conservatives, and Tea Party activists. Selling the American public on the notion that this lot could run the White House might not be so easy.

Still, absent another big terrorist attack or some other foreign-policy disaster, the path of the economy will be what matters most. If the shaky recovery gathers strength, and unemployment is falling steadily going into 2012, Obama will be in much better shape. But if the economy stalls, or, worse, enters a double-dip recession, the chances of him being reëlected are slim.

Which means the economic-policy decisions that have to be made in the next few months are vital. Will there be another stimulus package? What will happen to the Bush tax cuts? How will the Federal Reserve's policy of quantitative easing play out? On such questions President Obama's fate probably depends.