The Chicago Way, on Tape

This wiretap was golden.

The list of crooked politicians is long, and the list of stupid politicians even longer. But if the criminal allegations made yesterday against Illinois Governor Rod Blagojevich are proven in court, rarely will a politician have combined the two qualities with such efflorescence.

[Review & Outlook] AP

Rod Blagojevich.

The second-term Democrat knew that a grand jury probe was under way into corruption in Illinois politics, and that one of his fund raisers, Tony Rezko, had been convicted and is cooperating with prosecutors. Yet according to those prosecutors, Mr. Blagojevich talked openly in recent weeks about selling a U.S. Senate seat, trading government favors for campaign cash, and punishing the owner of the Chicago Tribune if it didn’t fire members of the newspaper’s editorial board.

The Governor’s comments were taped in court-approved wiretaps and include such self-incriminating classics as: “I’ve got this thing [the power to appoint Barack Obama’s Senate replacement] and it’s [expletive] golden, and, uh, uh, I’m just not giving it up for [expletive] nothing. I’m not gonna do it. And, and I can always use it. I can parachute me there.” We recommend the entire 76-page FBI affidavit for every high school civics course as proof of the need for political checks and balances.

If convicted, Mr. Blagojevich would be the second consecutive Illinois Governor to be found guilty of a felony, and the fourth in 35 years. We’d ask if it’s something in the water, but that would be unfair to the Chicago River. It is certainly something in the Chicago political culture, where money and government power seem especially fungible.

Among the remarkable facts of the recent Presidential election is that Barack Obama emerged from this political culture virtually untainted — and with Chicago’s political mores all but unexamined by the press. Prosecutor Patrick Fitzgerald said yesterday there is no evidence that Mr. Obama knew about the Governor’s allegedly crooked ambitions. However, as a Chicago-area pol himself, Mr. Obama did help Mr. Blagojevich plot his first statehouse victory in 2002.

Now would be a good time for the President-elect to say that Mr. Blagojevich and his cronies should have nothing to do with naming Mr. Obama’s successor. And that, given the taint of corruption that now hangs over any choice, the state should hold a special Senate election.

Tuesday, December 9, 2008

White House ‘agrees’ car bail-out

Chrysler vehicles for sale

Any deal would still have to be passed by Congress

The White House and leading congressional Democrats have reached agreement on a $15bn (£10bn) bail-out for the “Big Three” US car firms.

Administration officials say the tentative agreement covers key points but details still need clarification.

General Motors and Chrysler say they risk ruin without the aid, while Ford says it may need funds in the future.

US President George W Bush is said to want strict conditions attached to any agreement to bail out the firms.

He is said to be seeking tough oversight for the three car-makers to ensure that the money is accompanied by sound financial recovery plans.

This follows criticism that the $700bn bail-out of the financial sector was insufficiently detailed.

‘Car Tsar’

Despite the continuing disagreements, analysts expect a deal to be agreed before the end of the week.

From left, GM's Richard Wagoner, Chrysler's Robert Nardelli, and Ford's Alan Mulally

The bosses of Ford, GM and Chrysler had been seeking more money

However, this would then have to be passed by both houses of Congress, before being finally signed off by Mr Bush.

And with the Democrats only having a majority of one in the current lame-duck Senate, some analysts say the bill may struggle to get through without extensive amendment.

“We want to complete this as soon as possible,” said Harry Reid, Democratic majority leader in the Senate.

“The American people want us to make a decision.”

Under the proposal, the government is expected to take non-voting shares in General Motors, Ford and Chrysler.

Also expected is the appointment of a “Car Tsar” to oversee the money.

The three firms had been calling for $25bn between them, and their bosses recently went before Congress to push their case.

‘Disappointed’

GM, Ford and Chrysler have all seen sales fall sharply this year in their home market.

While this decline reflects an industry-wide fall that has also hit European and Japanese carmakers in the US, the “Big Three” have also been criticised for offering too narrow a range of vehicles.

They have been said to be too slow in responding to the growing popularity of smaller, more fuel-efficient vehicles.

GM admitted on Monday that it had “disappointed” American consumers by letting “our quality fall below industry standards and our designs became lacklustre”.

The eurozone depends on a strong US recovery

By Martin Wolf

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I think of it as an “oops” moment: the US goes into a recession; Europeans believe this deserved punishment has little to do with them; the European economy slows unexpectedly; the US throws everything at restoring growth; finally, the US recovers, pulling Europe behind it.

Yet this is not just a slow-down. It is also a financial crisis. What if the solvency of a eurozone member came into doubt? After all, spreads over rates on German bunds and the prices of credit default swaps have risen already, the most affected countries being Belgium, Greece, Ireland, Italy, Portugal and Spain (see charts).

Eurozone members are like local governments. If they were unable to refinance their debt, they would be forced to default or need outside rescue. True, even the Greek spread of 165 basis points does not imply a high probability of default. The actual rate of interest – 4.7 per cent – is not unmanageable either. Yet markets can shift at great speed. It is possible to imagine a “sudden stop” on higher-risk sovereign bonds. That would force the debt to become short term – a classic route to a crisis.

The apparent elimination of exchange-rate risk did not eliminate risk itself. Inside the eurozone, inflation and exchange-rate risks become credit risk, instead.

So what determines sovereign credit risk? The traditional European approach focuses only on visible fiscal deficits and debt. This is far too limited. That is not only because it ignores contingent public debt. It is even more because it ignores the national balance sheet and so the close links between private and public sector balance sheets. It also ignores the balance of payments. It is often said that the current account does not matter in a currency union. This is true: an exchange rate crisis is impossible. But it is also false: a credit crisis may happen instead.

If a country runs a current account deficit, residents must be selling financial claims to foreigners. If private parties are the sellers of claims, foreign suppliers of funds must believe in their solvency. If the public sector is the seller, suppliers must believe the same thing.

When the domestic counterpart of the external deficit is a private sector deficit, it is frequently a boom in the supply of non-tradeable services that drives the economy. Property bubbles are a part of this story – very much so in the recent cases of Ireland and Spain (and also in the US and UK).

So what happens if this boom collapses? The supply of creditworthy private issuers of financial claims shrinks and capital inflows become more expensive or more restricted. Three things will then happen: first, the economy will slow; second, the external deficit will shrink; and, third, the fiscal deficit will rise. The more determined any offsetting fiscal action, the smaller the shrinkage in the current account deficit and slow-down in the economy will be.

If a country has relatively weak international competitiveness, an inflexible labour market and an irrevocably fixed exchange rate, the end of the property boom will reduce domestic demand, without generating a significant offsetting expansion in net exports. The fiscal deterioration is then likely to be large and sustained.

Thus, as the private sector deficit moves into surplus, the public sector moves in the opposite direction. Ireland’s is a dramatic case: according to the Organisation for Economic Co-operation and Development’s latest Economic Outlook, the general government fiscal deficit will move from a surplus of 3 per cent of gross domestic product to a deficit of 7.1 per cent just between 2006 and 2009.

Spain’s fiscal deficit is forecast to move from a surplus of 2 per cent to a deficit of 2.9 per cent over the same period. Yet Spain still runs a large current account deficit (see chart). So the private sector also runs a sizeable deficit, forecast at 4.5 per cent of GDP in 2009. If that were to shrink faster than expected, very likely in today’s circumstances, the slowdown in the economy and jump in the fiscal deficit would be even bigger.

Other eurozone members running big current account and private sector financial deficits are Greece and Portugal. Meanwhile, Italy, Belgium and Greece have high public sector indebtedness. These six, then, are the vulnerable countries, with Greece much the most vulnerable.

So how likely is a fiscal crisis? The answer is that it depends on the length and depth of the eurozone’s recession, a member’s initial public debt position, the credibility of its fiscal authorities, its difficulty in achieving improvement in external competitiveness and, not least, on whether a crisis happens in any of these countries. Panic is contagious.

The decision by the European Central Bank to cut rates by 0.75 percentage points last week is at least recognition of the danger, though surely far too little far too late. But it is impossible to escape from the central problem: the characteristics of Germany as the eurozone’s anchor economy. For the problem of the eurozone is not just that it is an assemblage of countries, but that its most important country has such distinct features.

What are Germany’s characteristics? It has an overwhelmingly competitive manufacturing sector; it is a chronic surplus country, with structurally weak domestic demand (ameliorated briefly during unification); and it has managed to avoid any housing or domestic credit booms. Its elite appears indifferent to the country’s rate of economic growth, even in the medium term; it is obsessed with the dangers of inflation; and it believes that countries that spend more than their incomes are somewhat immoral.

Germans claim, with reason, that their country is a pillar of rectitude. But it can be hard for ordinary countries to live with such rectitude. Of course, the rest of the eurozone has chosen this option. But countries with structural surpluses, such as Germany, compel their partners to run the deficits Germans despise. In present circumstances, those deficits are evidently deflationary and could lead to waves of private, or even public sector, defaults.

Yet, would a member’s government be allowed to default? Or would there be a rescue and if so, by whom and at what price? It is conceivable that the world will find out. Maybe, fiscal federalism will be the outcome. But it might be much messier. Some countries might be badly damaged.

Yet a robust recovery would eliminate this danger. If it does arrive, there is no doubt where it will come from – not from Germany’s actions to sustain domestic demand, but from profligate “Anglo-Saxons”. Once again, Europeans will enjoy condemning the US for its hedonism, while taking full advantage of it – the customary “win-win” strategy for all.

American carmakers

A deal for Detroit?

Congress appears poised to agree upon a temporary bail-out for troubled American carmakers

THERE are two ways of fixing a broken-down car. A nut-and-bolt restoration of the whole vehicle would return it to top condition, whereas a patch-up of the worst problems might keep it on the road. Late on Monday December 8th congressional Democrats agreed in principle to opt for the latter fix, putting off big repairs, but making available $15 billion in emergency loans in exchange for some shares in the companies. It is unclear, however, whether the Bush administration will support the deal.

Car bosses have spent as much time in Washington, DC, as they have in Detroit of late, trying to convince lawmakers of the urgent need for cash to keep their industry alive. And they learned a little about politics along the way. A first visit to hold out the begging bowl was ill-received, not least because the beggars whizzed in on corporate jets. For the second round of congressional investigation they opted to drive in green vehicles. That piece of belated PR and the prospect that General Motors and Chrysler could go bust before the year ends prompted lawmakers to dip into a previously approved fund which is intended to help carmakers build more fuel-efficient vehicles.Detroit’s “Big Three” have not had it all their way. Between them they had asked for a $34 billion bail-out (in addition to the $25 billion fund to make their cars greener). And such is the plight of GM and Chrysler that Ford, in better shape than its rivals, seemed modest in its request merely for a $9 billion emergency credit line. Given the precarious cash position of Chrysler and GM the money will only help them to splutter and bang into the early days of the Obama presidency.

The intention of the Democrats’ draft legislation is to keep the carmakers solvent until March. By the end of that month they must submit detailed plans for turning themselves into leaner firms that produce the hybrid and electric vehicles that lawmakers assume Americans will want to buy. These plans will be overseen by a “car tsar”, who can demand the cash back if the carmakers fail to deliver the green reorganisation demanded. He will also have some power to knock heads together by convening meetings if the carmakers, union leaders, parts suppliers or shareholders stand in the way of the cost cutting and restructuring. And as part of the deal those private jets must go.

Sceptics will point out that it is most unlikely that the American car industry will fundamentally remake itself within four months, at a time of immense stress. The slow motion car crash that is Detroit has played out over several years. Ever-declining market share, to the benefit of foreign and non-union transplant manufacturers in America, has been met with foot dragging. The firms have struggled to design new models that would satisfy the changing taste of car buyers who began, at least when the price of fuel spiked this year, to care more about miles per gallon than cubic capacity of vast engines. Another difficulty is that union bosses have been slow to make concessions over benefits for workers and pensioners, although a deal struck in 2007 was a step in the right direction.

Perhaps now the unions can be persuaded to take further steps. And maybe the car companies can look to their European arms (where high taxes on fuel have long encouraged more efficient models) and bring smaller, less thirsty, cars in to their line-ups. But it seems unlikely that a complete remodelling will be possible by the end of March. Enormous doubt hangs over a scheme that at its core reckons that government direction can succeed where the forces of the market have failed.

And though investors have reacted with enthusiasm to the likelihood that Detroit will be thrown a lifeline when Congress votes on the matter, Mr Obama should be worried. Sales that were already plunging have fallen ever more rapidly as it has seemed that one or more of the car giants might go bust. That same threat still hangs over the car-buying public but has been extended until March. Who knows what dire straits the car firms will find themselves in by then? Mr Obama, who reckons that the Big Three are too big to fail, will have to dig deeper and deeper into the public purse just to keep Detroit running.

Riots in Greece

Anarchy in Athens

Riots in Greece put pressure on the government of Costas Karamanlis

GREECE prides itself on the robust quality of its democracy. Despite frustration at the number of traffic-choking demonstrations outside parliament every year—the reported average is two a week—politicians stress that modern Greeks’ enthusiasm for protesting underlines continuity with the golden age of ancient Athens.

Some demonstrations turn violent. Several times a year a group of hooded young men, who style themselves as “anarchists”, bring up the rear of a march. They carry metal bars and petrol bombs and ritual clashes with riot police ensue. Shop windows are smashed and tear gas fills Syntagma Square outside parliament for a few hours.

This week violence erupted on an unprecedented scale after Alexandros Grigoropoulos, a 15-year-old schoolboy, was shot dead by a policeman in Exarchia, a scruffy central district known as the anarchists’ home base, on Saturday December 6th. Shouting insults at passing patrol cars is a Saturday-night ritual for some young Athenians. But the last time police killed a teenager was in 1985. This time protests quickly spilled into main boulevards as anarchists torched cars, broke windows of shops decorated for Christmas and tossed petrol bombs inside. Beyond Athens demonstrators attacked police stations and government offices in a dozen cities.

By the evening of Tuesday, after four days of rioting, a respite still seemed far off. Hundreds of high-school students battled police after the teenager’s funeral in the Faliron suburb, while other protesters threw rocks at those on guard outside parliament. Appeals for calm by Costas Karamanlis, the Conservative prime minister, were ignored. Talks have failed between political leaders who were seeking a consensus to quell the unrest. George Papandreou, the Socialist opposition leader, has told Mr Karamanlis to resign and call a general election. “Effectively there is no government…we claim power,” he said.

Mr Karamanlis looks vulnerable. His New Democracy party controls just 151 seats in the 300-member parliament and trails by 4-5 percentage points in opinion polls. The prime minister’s personal approval rating has stayed ahead of Mr Papandreou’s, but if civil disorder continues for much longer that will probably slide too. Retailers and families that run small businesses are the backbone of support for the Conservatives and they are furious over the failure of police to protect their property. Worse, the latest upheaval comes on top of anger directed towards the government over a series of financial scandals. While demonstrators rampaged outside, a parliamentary committee was hearing evidence this week about an illegal exchange of land by Vatopedi monastery on Mount Athos. Senior cabinet ministers are alleged to have swindled taxpayers out of an estimated 100m euros ($Xm) while lining their own pockets.

Mr Karamanlis’s biggest mistake has been to ignore social reform, in particular of education, health and policing. As the global economic slowdown starts to have an impact on the country young Greeks see their parents struggling to pay bills. If one cannot afford to study abroad, a Greek university offers poor quality tuition and, unless one’s family can pull strings, few opportunities for getting a job afterwards. The unemployment rate for young graduates is 21%, compared with 8% for the whole workforce.

Weak policing has allowed the anarchists to flourish in Exarchia, which has become a haven for drug dealers and racketeers. Protesters have also exploited a constitutional loophole that bans police from entering a university campus. In the past few days demonstrators have regrouped behind barricades at the Athens Polytechnic and picked up fresh supplies of petrol bombs before venturing back on the streets.

Mr Karamanlis’s attempts to abolish “university asylum” two years ago failed because he could not attract the cross-party support needed to change the constitution. Another set of educational reforms collapsed because a majority of academics refused to raise teaching standards and submit themselves to peer reviews. As the demonstrators rampage through laboratories and lecture rooms, the professors, like the politicians, must wish that they had tried harder.

Stimulus Shouldn’t Be an Excuse for Pork

The nation’s mayors have presented a revealing wish list to Washington.

Dictionary.com defines infrastructure as “the fundamental facilities and systems serving a country, city, or area.” The nation’s mayors define it a bit differently.

[Commentary] David Gothard

On Monday, the U.S. Conference of Mayors went to Capitol Hill to ask for a handout, or as they put it: “We are reporting that in 427 cities of all sizes in all regions of the country, a total of 11,391 infrastructure projects are ‘ready to go.’ These projects represent an infrastructure investment of $73,163,299,303 that would be capable of producing an estimated 847,641 jobs in 2009 and 2010.”

A wish list that is 11,391 projects strong! What vital infrastructure projects would cash-strapped taxpayers get for their $73 billion? Here’s a sampling:

– Hercules, Calif., wants $2.5 million in hard-earned taxpayer money for a “Waterfront Duck Pond Park,” and another $200,000 for a dog park.

– Euless, Texas, wants $15 million for the Midway Park Family Life Center, which, you’ll be glad to note, includes both a senior center and aquatic facility.

– Natchez, Miss., “needs” a new $9.5 million sports complex “which would allow our city to host major regional and national sports tournaments.”

– Henderson, Nev., is asking for $20 million to help “develop a 60 acre multi-use sports field complex.”

– Brigham City, Utah, wants $15 million for a sports park.

– Arlington, Texas, needs $4 million to expand its tennis center.

– Miami, Fla., needs $15 million for a “Moore Park Community Center, Tennis Center and Day Care” facility. The city is also desperate for $3.6 million to build a covered basketball court and a new tennis court at Robert King High Park. Then there’s the $94 million Orange Bowl parking garage you are being asked to pay for.

– La Porte, Texas, wants $7.6 million for a “Life Style Center.” And Oakland, Calif., needs $1 million for Fruitvale Latino Cultural and Performing Arts Center.

And you thought infrastructure investment meant roads, bridges and schools. It is clear that any infrastructure stimulus money given to the country’s mayors will lead to thousands of tennis centers to nowhere. News alert for mayors: We are officially in a recession. American families have to get by with less, and so do American cities.

The country does indeed need to invest in critical infrastructure. We have a backlog of deferred maintenance on both highways and bridges. According to Reason Foundation’s Annual Highway Report, 24% of U.S. bridges were reported structurally deficient or functionally obsolete in 2006. At the current rate of repair it will take 62 years for those bridges to be brought up to date. But it won’t take six decades to fix them because the government doesn’t have the money; it will take that long because our political leaders don’t prioritize. Too often they choose ribbon-cutting ceremonies at sports complexes over repairing bridges.

The current centralized process of parceling out infrastructure and gas-tax money does not invest resources wisely, and “stimulus” handouts would be even more wasteful. Consider how the Los Angeles area is spending its transportation money. A 2006 study by University of North Carolina at Charlotte Prof. David Hartgen found that in Los Angeles less than 5% of the area’s workers use public transit to commute, yet over 50% (nearly $67 billion) of the area’s long-range plan (to the year 2030) money will be spent on transit projects. Planners admit the cash going towards those transit projects won’t significantly increase transit’s share of commuters, which means over half the spending won’t do anything to reduce the region’s infamous traffic jams, which drain the economy and hurt businesses.

Hartgen’s study showed we could eliminate severe congestion in all of the nation’s urban areas for $21 billion a year — less than we are spending on transportation today, and $52 billion less than the mayors just asked for. And by investing in the right projects we’d save 7.7 billion hours each year.

Reducing traffic congestion, which costs Americans well over $63 billion a year in wasted time and fuel, should be a primary criterion for any transportation project that is funded. Our economy depends on it.

Today, over 80% of all goods (by value) in this country are shipped by truck. Time is money. A national network of truck-only toll lanes would enable truckers to carry more goods, faster. In our 21st century economy, spurred by companies like Amazon.com, Apple and FedEx, truck lanes would do more for the economy than any cultural or aquatic center. And, perhaps most notably, taxpayers wouldn’t have to foot the bill alone. The private sector would pay to build the truck lanes in many major urban areas, recouping their money by charging tolls.

There is good evidence that well-targeted additions of capacity to congested urban freeway systems and truck-heavy interstate corridors would not merely have benefits greater than costs but could achieve commercial rates of return.

Right now the stock market is experiencing a flight to quality, as investors look for the best-run, most stable companies. Involving the private sector in infrastructure funding would induce a similar shift in our transportation investments.

Secretary of Transportation Mary Peters says there is over $400 billion in private capital available for high-priority U.S. infrastructure projects. That sum, if properly spent on the most-needed transportation projects, would transform our roads, transit systems and airports into a 21st century transportation network that would unleash the economy.

We can be sure the private sector won’t pay for everything on the mayors’ Christmas lists though. Since neither a massive subway system nor high-speed train system even exist in Northern California, investors will probably pass on the $200 million high-speed train station that San Francisco hails as “the Grand Central Station of the West Coast” in its ready-to-go list.

It was very nice of the country’s mayors to hand taxpayers a wish list worth $73 billion. But before taxpayers give them a dime, let’s see the mayors rank those 11,391 goodies — I mean “infrastructure” projects — based on effectiveness and potential return on investment for taxpayers.

Mr. Poole is founder and director of transportation at Reason Foundation (www.reason.org) where he has advised the last four presidential administrations on transportation issues.

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