We Need a Bailout Exit Strategy

Let’s not forget that free markets made America strong.

When the Securities and Exchange Commission was created in 1934, its purpose was to serve as an independent regulator of the unbridled profit-seeking activity of self-interested individuals and firms in the securities markets. It was not intended to supplant the market or directly participate in it. Instead, it marked a deliberate effort to clearly define and separate the role of the national government, on the one hand, and the capital markets, on the other.

[Commentary] David Klein

Henceforth, fraud and unfair dealing in the stock and bond markets would be subjected to external discipline by the federal government. Minimum standards would be enforced, such as requiring that investors be told the essential details about securities in which they were investing. Registration of securities and licensing of broker-dealers would be required. It was, in short, arms-length regulation of an unabashedly private market.

Over the years, the agency has acquired three explicit goals: protecting investors; maintaining fair and orderly markets; and promoting capital formation. These three complementary missions are logically consistent with the original premise of the securities laws, which was that government is an auxiliary to the market, not a substitute for it or a participant in it. Virtually every aspect of the 1933 and 1934 Acts, and the regulations implementing them, follows from the notion that markets should be efficient, competitive, transparent and free of fraud.

The normative judgment implicit in this legislative and regulatory scheme is that markets are good. So long as they are in fact operating efficiently, competitively, openly and honestly, they are good for consumers, investors, producers and our entire economy. We have not spent enough time reminding ourselves of this essential premise during the past several months, when events have called it into question. But because the idea of the market is so fundamental to everything that the SEC does, we must focus again on why we value markets so highly.

Our emphasis on private ownership is directly tied to America’s dedication to individual freedom. It’s in our DNA. It is, in large part, why the United States came to be at all. Our Declaration of Independence is a recitation of the abuses of excessive government power. Our Constitution is a brilliantly crafted system of checks and balances to prevent that abuse by limiting government’s authority over individuals — including in the economic realm, where we’re guaranteed our constitutional rights to liberty and property, to freedom from expropriation, and to freedom of contract.

But beyond that, beyond ideals of freedom, the national preference for private ownership is also based on the most basic practicality: It works. America’s rise from New World outpost to global superpower was fueled by the dramatic growth of our free enterprise economy into the world’s largest. Free enterprise has produced spectacular results. Compared to other national economies with substantial government ownership and central planning, America’s economy has been more creative, resilient and dynamic.

We’ve found that decentralized decision-making, in which millions of independent economic actors make judgments using their own money, results in the wisest allocation of scarce resources across our complex society. And we’ve found the market to be more reliable in heeding price signals and meting out discipline to failing enterprises than government could ever be.

Financial markets, of course, are not perfect. In particular, they are susceptible to boom-and-bust cycles. Cycles of this sort have been a hardy perennial over the past 400 years of experience with organized markets. Addressing the results of these cycles is why we have protective mechanisms such as the Federal Reserve System and federal deposit insurance.

But clearly these mechanisms proved inadequate to prevent the current crisis. As the Congress and the new administration consider what improvements are necessary, they should take exceptional care to preserve the premise of well-ordered markets that underlies our enforcement and regulatory regime. Maintaining the arm’s length relationship between government, as the regulator, and business, as the regulated, is essential. Otherwise, when the government becomes both referee and player, the game changes dramatically for every other participant.

Rules that might be rigorously applied to private-sector competitors will not necessarily be applied in the same way to the sovereign who makes the rules. On several occasions during the past year the Treasury and the Fed took on the unusual role of negotiators and principals in merger and acquisition transactions that normally would have been arranged by private parties. Even in these extraordinary cases, however, it remained the role of the SEC to regulate these transactions for the protection of investors. We took pains to stay at arms length in these cases, but our close collaboration with these same government agencies has made this truly terra incognita.

The U.S. government is now a major shareholder in banking and financial institutions and other private firms across the United States. Recipients of federal funding and guarantees are naturally coming under scrutiny by Congress, which rightfully believes it should control the purse strings in our government. As a result, there will be demands for compliance with congressional investment preferences and corporate governance policies, which will grow in direct proportion to the length of time that the federal investments and guarantees remain outstanding.

For all of these reasons, it is incumbent upon federal policy makers to ensure that the extraordinary actions of the past months are understood to be temporary, and constructed so that they are self-liquidating. Since government programs do not on their own go away, there has to be a deliberate design to eliminate them, and a relentless adherence to execution of that plan. Anything short of this will almost certainly guarantee eternal life for these vast new federal roles.

Focusing on exit strategies now is of vital importance to ensure that we do not stumble along a dangerous path of confusion that may end in far greater financial exposure for the American people, and a far worse situation for America’s taxpayers and investors. If we answer the tough questions now, and make sturdy plans for the future, we can position our mortgage market, our financial services industry, and the broader economy for renewed growth and prosperity.

Mr. Cox is chairman of the Securities and Exchange Commission and a member of the oversight boards for the Federal Housing Finance Agency (FHFA) and the Troubled Assets Relief Program (TARP).

Bankruptcy Doesn’t Equal Death

The auto industry could use the process to get competitive.

The spectacle of corporate magnates from Detroit pleading to be on Uncle Sam’s dole is a sordid one. So why aren’t more Americans appalled? One reason is widespread misunderstanding — much of it sowed by these auto makers — about the size of their firms. The Big Three, we are told, are “too big to be allowed to fail.”

This myth begins with the idea that GM, Ford and Chrysler are so huge that if they go belly-up, the livelihoods of a disproportionately large number of workers and suppliers would be affected. At once, the market for their services and products would close. Therefore, the argument concludes, government must prevent any such failures.


Bankruptcy doesn’t make assets — such as factories, machines, contractual options to buy raw materials, workers’ skills — disappear. If markets still exist for products produced by these firms, Chapter 11 is the best way to discover this. Some workers might lose their jobs and some suppliers might lose their markets, but there would be no industry-wide collapse of the sort portrayed by the bailout’s cheerleaders.

But what if refusal to bail out these firms results in their complete failure? Even then — especially then — the case for a bailout crashes. Really big firms such as GM, Ford and Chrysler are really big users of productive inputs, like rubber and steel. Almost all of these inputs have alternative uses and could be used by other firms or in other industries.

A government bailout of the Big Three keeps huge amounts of productive inputs in firms that can’t use them efficiently. Forcing taxpayers to subsidize the continued employment of gargantuan quantities of raw materials, labor and capital goods in unproductive pursuits is a recipe for economic stagnation. The popular and politically convenient myth has matters backwards: The bigger the unprofitable firm, the more vital it is that it be allowed to fail.

As it happens, I doubt that GM, Ford and Chrysler will all stop operating without a bailout. Firms that together produce close to half of all new cars and trucks sold and leased in the U.S. each year are unlikely to find the market for their products suddenly too small to justify continued operations. (And if they do, what would this development say about the quality of those firms’ products and about the efficiency of their operations?)

Restructuring under Chapter 11 will oblige Detroit’s Big Three to shrink, and perhaps even to merge together or with other automakers. This will unquestionably cause hardships to some workers and suppliers, but hardships no different than those suffered routinely by workers and suppliers in other industries whenever economic change reduces consumer demands for some products.

If Washington gives no special subsidies to workers and suppliers outside of the auto industry, why treat GM, Ford and Chrysler differently? Are their workers or owners more worthy? Not at all. The jobs and good pay that they’ve enjoyed were made possible by the very economic openness that now requires significant restructuring of these three firms. Their shareholders, workers and suppliers have no moral or economic claim on special treatment from government.

It is precisely because the Big Three differ in no essential way from America’s other firms that bailing them out runs a real risk of cascading into a march on Washington by countless firms unable to see why they are less entitled to taxpayer funds.

What will President-elect Barack Obama tell these other firms when they come begging? If he says no, he’ll be seen as having played favorites with three firms that deserved no such special treatment. If he says yes, he gives private industry a blank check drawn on the American economy. To imagine that firms will not draw on that account too often, too greedily, and without real justification is a dangerous fantasy.

Mr. Boudreaux is chairman of the George Mason University department of economics.

How the GOP Should Prepare for a Comeback

Organization and ideas are what matters.

What a difference a month makes. Since November’s election, the GOP is three wins, no losses.

The first win came in Georgia, where Sen. Saxby Chambliss crushed his Democratic opponent by 15 points in a run-off election on Dec. 2. The other wins came in Louisiana congressional races on Saturday. One was in a Republican-leaning district in the state’s northwest corner. Democrats outspent the GOP three to two and still lost. In the other, Republican Anh “Joseph” Cao defeated nine-term Democrat William Jefferson in a district where John McCain received 24% of the vote.

[Commentary] AP

These victories have boosted Republican spirits. So has Sen. Norm Coleman maintaining a narrow lead in the Minnesota recount, leadership elections that injected new blood into the GOP congressional hierarchies, and a positive race (so far) for Republican National Committee chairman. Republican governors emerged from meeting in Miami energized, optimistic and eager for the 38 gubernatorial races in the next two years.

But many challenges lie ahead. Much of the GOP’s work is away from Capitol Hill, governor’s offices and party committees. In recent years, Democrats have done a much better job of tending the networks, initiatives and institutions important to political success. There are at least seven important functions, communications channels or institutions the GOP must launch or strengthen.

First, Republicans need something similar to Democracy Corps, a James Carville and Stan Greenberg creation that uses polls that are made public to help party leaders pick themes likely to resonate with voters and draw attention to the Democratic narrative on issues.

Second, while it’s the responsibility of all, someone must take the lead on training candidates and party leaders and nurturing their focus on ideas. Under its founder, Newt Gingrich, GOPAC once did this. It needs to be revitalized or its original mission taken up by a fresh group.

About Karl Rove

Karl Rove served as Senior Advisor to President George W. Bush from 2000–2007 and Deputy Chief of Staff from 2004–2007. At the White House he oversaw the Offices of Strategic Initiatives, Political Affairs, Public Liaison, and Intergovernmental Affairs and was Deputy Chief of Staff for Policy, coordinating the White House policy making process.

Before Karl became known as “The Architect” of President Bush’s 2000 and 2004 campaigns, he was president of Karl Rove + Company, an Austin-based public affairs firm that worked for Republican candidates, nonpartisan causes, and nonprofit groups. His clients included over 75 Republican U.S. Senate, Congressional and gubernatorial candidates in 24 states, as well as the Moderate Party of Sweden.

Karl writes a weekly op-ed for The Wall Street Journal, is a Newsweek columnist and is now writing a book to be published by Simon & Schuster. Email the author at Karl@Rove.com or visit him on the web at Rove.com.

Third, more than one out of five Americans eligible to vote is unregistered, meaning there are millions of unregistered Republicans. The RNC once used sophisticated “micro-targeting” to develop a list of 291,000 unregistered Texans who voted in the GOP primary or were registered Republicans in the state or community where they last lived. There were 1.3 million more likely Texas Republicans with no primary voting history. The GOP needs to take this nationwide. New ways must be found to encourage party organizations and independent efforts to focus on registration.

Unions and third-party groups spent $194 million on independent ads for Democrats over the past two years, giving them a five-to-two advantage over similar third-party assistance to GOP candidates. This doesn’t include hundreds of millions in unreported expenditures by unions.

So fourth, GOP fund-raisers and allies must create cost-effective independent expenditure groups for House and Senate races, or Republicans will sink under the weight of negative ads, mail, calls and canvassing.

Fifth, there must be a special focus on state legislative races. Legislators elected in 2009 and 2010 will redistrict Congress and themselves in 2011. Today, there are 25 state Senates where either party’s majority is smaller than 10 seats and 21 state Houses where the majority is less than 20 seats. In eight states, legislative control is divided, with one party controlling the Senate and the other the House. State parties and congressional delegations have a vital stake in recruiting, training and funding effective legislative campaigns over the next two years.

Sixth, new media require attention. Younger voters are increasingly getting their information from the Web — twice as many 18-24 year olds get their news online than from newspapers. Political Web 1.0 was about faster and easier communications and Republicans had the advantage. Political Web 2.0 is about networking and Democrats grabbed the lead. The party that figures out where Web 3.0 goes will grab the decisive high ground in high-tech warfare.

Finally, ideas are always the most important currency of politics and never more so than after a party loses. The relationship between GOP policymakers and conservative policy thinkers should be strengthened.

It’s not just conservative think tanks. There are independent scholars, academics, staff in governor’s offices and state legislatures, and knowledgeable people throughout the country who can help make the party’s conservative principles relevant today.

To do this effectively, candidates and party leaders must remember who they need to reach — young voters who tilt Democratic; Hispanics and Catholics; and suburban and exurban families who were bedrock Republicans, but who have become disenchanted with both parties.

The GOP has the right principles to become the majority party again. What it must have are fresh, energetic voices who apply those principles to meeting the needs of American families. And it must put in place the infrastructure that will take that message and amplify it.

Those are challenging tasks — but the last month has reminded us that the GOP remains formidable. The age of Obama may have begun, but so, perhaps, has the GOP comeback.

Mr. Rove is the former senior adviser and deputy chief of staff to President George W. Bush.

Obama Was Mute on Illinois Corruption

The president-elect could use his bully pulpit to drive a clean-up.

This week Illinois Gov. Rod Blagojevich was arrested on charges that he conspired to sell Barack Obama’s U.S. Senate seat, among other misdeeds. At first the president-elect tried to distance himself from the issue: “It is a sad day for Illinois. Beyond that, I don’t think it’s appropriate for me to comment.” But it quickly became clear that Mr. Obama would have to say more, and yesterday he called for Mr. Blagojevich to resign and for a special election to fill the vacant Senate seat.

[Commentary] AP

What remains to be seen is whether this episode will put an end to what Chicago Tribune political columnist John Kass calls the national media’s “almost willful” fantasy that Mr. Obama and Chicago’s political culture have little to do with each other. Mr. Kass notes that the media devoted a lot more time and energy to investigating the inner workings of Sarah Palin’s Wasilla, Alaska, than it has looking at Mr. Obama’s Chicago connections.

To date, Mr. Obama’s approach to Illinois corruption has been to congratulate himself for dodging association with it. “I think I have done a good job in rising politically in this environment without being entangled in some of the traditional problems of Chicago politics,” he told the Chicago Tribune last spring. At the time, Mr. Obama was being grilled over news that he bought his house through a land deal involving Tony Rezko, a political fixer who was later convicted on 16 corruption counts. Rezko is mentioned dozens of times in the 76-page criminal complaint against Mr. Blagojevich.

Mr. Obama has an ambiguous reputation among those trying to clean up Illinois politics. “We have a sick political culture, and that’s the environment Barack Obama came from,” Jay Stewart, executive director of the Chicago Better Government Association, told ABC News months ago. Though Mr. Obama did support ethics reforms as a state senator, Mr. Stewart noted that he’s “been noticeably silent on the issue of corruption here in his home state including, at this point, mostly Democratic politicians.”

One reason for Mr. Obama’s reticence may be his close relationship with the powerful Illinois senate president Emil Jones. Mr. Jones was a force in Mr. Obama’s rise. In 2003, the two men talked about the state’s soon-to-be vacant U.S. Senate seat. As Mr. Jones has recounted the conversation, Mr. Obama told him “You can make the next U.S. senator.” Mr. Jones replied, “Got anybody in mind?” “Yes,” Mr. Obama said. “Me.”

Starting in 2003, Mr. Jones worked to burnish Mr. Obama’s credentials by making him lead sponsor of bills including a watered-down ban on gifts to lawmakers. Most of Mr. Obama’s legislative accomplishments came as result of his association with Mr. Jones.

In 2002, Mr. Obama turned up to help Mr. Blagojevich, a staunch ally of Mr. Jones, win the governor’s mansion. Rahm Emanuel, Mr. Obama’s incoming White House chief of staff, told The New Yorker earlier this year that six years ago he and Mr. Obama “participated in a small group that met weekly when Rod was running for governor. We basically laid out the general election, Barack and I and these two [other participants].”

Mr. Blagojevich won, but before long, problems surfaced. In 2004, Zalwaynaka Scott, the governor’s inspector general, said his administration’s efforts to evade merit-selection laws exposed “not merely an ignorance of the law, but complete and utter contempt for the law.” Nonetheless, Mr. Obama endorsed Mr. Blagojevich’s re-election in 2006.

This spring, many Democrats were so disgusted with Mr. Blagojevich that state House Speaker Michael Madigan drafted a memo on why Democrats should impeach Mr. Blagojevich. Mr. Madigan’s “talking points” compared the corruption going on in the state to a tumor that must be removed.

But Mr. Madigan’s move drew a rebuke from Mr. Jones. The Chicago Sun-Times story at the time quoted Mr. Jones saying he thought it was wrong for the speaker to “promote the impeachment of a Democratic Governor. . . Impeachment is unwarranted in my opinion, and should not be used as a political tool.”

Many people were curious who Mr. Obama would side with in the dispute. Would it be with those Democrats who wanted to move aggressively against an apparently corrupt governor or with his old Chicago ally, Mr. Jones, who preferred to wait? Mr. Obama did neither. He kept silent. (I emailed the Obama campaign about Mr. Blagojevich’s problems in June, but my question was ignored.)

To his credit, Mr. Obama did call Mr. Jones in September to urge passage of an ethics bill banning some office holders from accepting money from a business that has a $50,000 or larger contract with the state. The bill passed and takes effect on Jan. 1.

Mr. Obama has spoken out forcefully against corruption outside Illinois. Kathy Tate-Bradish, a Chicago teacher active in education in Africa, gushed on Mr. Obama’s campaign blog during his visit to Kenya last year about his “amazing” speech against corruption during his visit there.

“Corruption is the single biggest thing keeping not only Kenyans, but all Africans, down,” she wrote. “Corruption is just killing them but nobody has been able to speak out against it because they fear for their own security. Barack spoke out against it, publicly, in Kenya. I honestly think the speech he gave will be one of the major factors that turns the tide against corruption.”

Mr. Obama says he plans to return often to Chicago as president. “Our friends are here. Our family is here. And so we are going to try to come back here as often as possible,” he told the Los Angeles Times this month. Perhaps during one of those trips he could find time to forthrightly address the corruption issues that the state will be sorting through in the weeks and months ahead. A president has a powerful bully pulpit. A few words from Mr. Obama could force real and lasting change in Illinois.

Krugman on the Need for Stimulus

Fitzgerald: ‘Political corruption spree’ would ‘make Lincoln roll over in his grave’

Who will mourn local newspapers?

By John Gapper

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Ingram Pinn illustration

They say that journalists prefer bad news to good news. There is plenty of that close to home.

This is becoming a terrible week for the US newspaper industry. On Monday, the Tribune Company, which owns the Chicago Tribune and the Los Angeles Times, filed for bankruptcy. The New York Times Company followed by saying it might mortgage its Renzo Piano-designed headquarters building by Times Square to reduce debt.

The recession has turned the long, slow decline of newspapers into a brisk fall. On Tuesday, I dropped into a UBS investor conference in New York to catch Gary Pruitt, chief executive of the McClatchy newspaper chain, calling its results “lousy”. At this rate, US newspapers will be lucky to make it to the weekend.

Many American journalists, facing job losses and the death of an industry they loved, regard it as a tragedy not just for them but for society. They fear that television, radio and blogs can never replace what newspapers provided for readers.

Bill Keller, executive editor of The New York Times, put the point succinctly to National Public Radio earlier this month: “Good journalism does not come cheap. And, therefore, you’re not going to find a lot of blogs or non-profit websites that are going to build a Baghdad bureau.”

Up to a point, Lord Keller. The failure of papers will deprive US readers – and those in countries where similar forces are at work – of plenty of useful information. But, let us face it, the industry also plays host to an immense amount of duplication and self-indulgence.

The internet brought trouble for regional and city papers not only because it gave an outlet to bloggers, and broke the monopoly they had on classified and display advertising, but because it let Philadelphians, for example, peruse publications other than the Inquirer.

There are things you can only learn about Philadelphia from the Inquirer, or Chicago from the Tribune, or Miami from the Herald. If they went away, they would also take with them a check on local abuses of political power, as the phone-tapped desire of Rod Blagojevich, the governor of Illinois, to get his critics on the Tribune fired shows.

Nor is it obvious that such coverage could be produced by internet sites instead. In theory, information about local events can be just as efficiently distributed online as in print – in some ways, better. In practice, papers’ dominance of local print advertising brought them a revenue base that is unlikely to be replicated.

This week, I had a chat with Joel Kramer, the founder of MinnPost, a news and analysis internet site devoted to politics and civic affairs in Minneapolis and St Paul. He was formerly publisher of the Minneapolis Star Tribune, which has cut jobs as it gets financially squeezed.

MinnPost is among a new breed of non-profit sites, including Voice of San Diego and ProPublica, which are trying to fill the gap left by the decline of city papers. He raised $1.5m (including $250,000 from himself) to start the site, which employs six editors and pays freelances to write.

It does some valuable work. But Mr Kramer admits that it functions more as a “complement” to the Star Tribune and its rival, the Pioneer Press, than as a substitute. He says that it tries to add depth and analysis to stories that are already in the news more than dig up news itself.

As Mr Keller says, reporting is expensive. It requires someone to get on the phone, gather information, balance conflicting views of what has just occurred, and present the result. Papers have done this basic work for cities and states for so long that we take it for granted.

Other aspects of US journalism will not, however, be missed. Some things, such as sports scores and weather forecasts, can be collated in a more timely and user-friendly way online. In addition, there is a swath of national and foreign coverage that is no longer needed.

There used to be a logic to the Chicago Tribune or the Miami Herald having large Washington bureaux and even foreign correspondents. People who lived in those places could not access The New York Times or The Washington Post online and relied instead on the local paper.

These days, they can do so free, which eliminates the need for a lot of coverage to be duplicated. Aggregation sites such as Google News have shone a harsh spotlight on the overlap and repetition in national coverage in hundreds of newspapers.

I am sure US citizens would lose something if fewer papers or wire services covered national affairs. But would it really be insufficient for society if five or six organisations (including Reuters and Bloomberg) competed to cover, for example, the Federal Reserve? I doubt it.

The question for national and international reporting is not whether city papers survive but whether news organisations such as The New York Times do. Clearly, if they did not, and blogs were left alone to provide coverage of Washington and Iraq, there would be a problem.

The honest answer is: we do not know. The New York Times, with its thriving online readership and global clout, seems in better shape than The New York Times Company, which has been indifferently managed by the Sulzberger family. A change of ownership might fix that.

My working assumption, in more ways than one, is that consolidation – or, more accurately, eradication – of local newspapers will strengthen the editorial position of the remaining elite: The New York Times, The Wall Street Journal, Bloomberg, the Financial Times etc.

I also assume that this elite will find some way to cover its costs. Here’s hoping, anyway.

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