Deepish Thought

Atlantic blogger Megan McCardle doesn’t think much of the the ongoing discussion about whether or not the next President should meet with controversial foreign leaders.

To date, the current administration has been pretty resolute in its policy of not talking to people it doesn’t like.  This could reasonably be described as the angry two-year-old approach to foreign policy.

Unsurprisingly, the lack of invitations to the White House has not had a huge impact on the policies of Iran, Venezuela or North Korea.

To be fair, the President’s lack of involvement has little to do with the administration’s difficulties in dealing with the country’s various foreign antagonists.  The fact is, getting unfriendly regimes to do what you want is largely a question of leverage.  For various reasons, the US doesn’t have any.

Going further, the administration’s no talking policy isn’t quite as pigheadedly stupid as it sounds.  A meeting with the President can be a significant carrot.  It’s the kind of thing that you might reasonably want to hold back until the final stages of negotiation.

More importantly high level talks with dictatorships can be dangerous for the President.  In any high profile meeting the administration tends to be under enormous pressure to show results.  Dictators, who don’t have answer to voters or the press, have no such concern.   The playing field is thus not level, which can easily result in the good guys making concessions that they probably shouldn’t.

However, this is a concern that can easily be addressed.  We have tended to get very hung up on whether or not the President should speak to problematic foreign leaders.  What really matters is what the President would say. Obama could largely eliminate concerns about his engagement policy by addressing the issue along the following lines:

“Would I speak with President Ahmadinejad?  Certainly.  Communicating with foreign leaders is part of the President’s job.  Would President Ahmadinejad enjoy the conversation?  Probably not.  I would tell him in no uncertain terms that his country is on a dangerous path that could lead to conflict with the United States.

We should have no illusions that my words alone will change the policies of the Iranian government.  However high level engagement is one of the tools we have at our disposal.  I will not neglect any opportunity to communicate our views and apply pressure to the Iranian regime.  This is one of those times we need a full court press.”

Harvard economist Greg Mankiw supports the “plague on both your houses” view of Congress’ role in the Freddie & Fannie fiasco.

Events are moving so quickly that this post is already two massive bailouts behind the times. However, the quasi-nationalization of Freddie and Fannie is such a significant event in the history of finance and government that it bares belated comment.

One of the (many) great tragedies of the Bush administration is that its reputation for untrustworthiness, incompetence, and blatant political hackery became so overpowering that people stopped listening. So on the rare occasions when the administration displayed the foresight so conspicuously lacking in Iraq and New Orleans, nobody listened.

The Bush administration repeatedly warned that Freddie Mac and Fannie May were dangers to the stability of the financial system. Congress, determined to show that the administration doesn’t have a monopoly on self righteous, arrogant bungling, and always mindful of the flow of campaign contributions, chose not to listen. The result is that taxpayers are on the hook for Freddie and Fannie’s losses.

Congress has (shamefully) shown itself to be not so very different from the administration. When it came to Freddie and Fannie, Congress chose to believe what was personally and politically convenient, regardless of the evidence. Faced with a crisis, Congress reached for the quick fix solution of having Freddie and Fannie expand their operations, without considering the risk. Ignoring outside advice they took their cue from lobbyists who wanted to use the housing crisis to help Freddie and Fannie escape the restrictions imposed as a result of their respective accounting scandals.

Finally, Congress appears to be dead set on learning nothing from the experience. The political groundwork is already being laid for the resurrection of Fannie and Freddie. No doubt bigger, more political and even less transparent than before.

Perhaps the most depressing aspect of this whole sad saga is that it really deosn’t seem to matter much who controls Congress.  Between 2002 and 2006 the Bush administration and the Republican Congress put on a master class in bad government. Sadly, it appears from their recent performance that congressional Democrats were taking notes.

It appears that poor loser Boeing is going to appeal the Air Force’s decision to buy Northrop Grumman/Airbus tankers on the grounds that choosing the winner based on which proposal gave the best value for taxpayer money was patently unfair.

Whatever spurious reasons Boeing actually comes up with for challenging the contract, the real issue is whether the Air Force can weather the political storm it’s decision has created. The key concerns are jobs, the award of a lucrative contract to a foreign company and national security. All these concerns will receive plenty of air time, but none have any real foundation.

Perhaps the most ridiculous claim to date is that the decision will somehow cost thousands of American jobs. Both Boeing and Airbus have global supply chains with a high degree of overlap. US suppliers, who are barely keeping up with with demand for parts for civilian planes, may see a small decline in future orders from Boeing, which will likely be offset by increased orders from Airbus.

Boeing itself will have to shut down it’s 767 production line sooner than it might like. However this will only be a pause for retooling. The company currently has an epic backlog of civilian aircraft orders, which means that there is precisely zero chance of layoffs.

You could argue that Boeing might have hired more people in the future had it won. Of course these hypothetical jobs are balanced by the actual hiring Northrop Grumman will be doing in Alabama, where the Airbus tankers are to be assembled.

The national preference and national security concerns are only marginally less idiotic. EADS (the corporate parent of Airbus) is a joint French/German company. France and Germany are of course close NATO allies, who already have access to any military secrets likely to be involved in what is essentially a flying fuel truck.

If anything, the Airbus tanker represents a major opportunity to strengthen trans-Atlantic military co-operation. Committing to a partly European tanker is an obviously friendly gesture, which may will be reciprocated in the form of better access to the European market for US military suppliers. Over the long run, a reduction in irrational national preference biases in arms purchases would increase supplier competition and decrease costs for all NATO countries. In addition, it would likely result in greater commonality of equipment, and thus greater interoperability, amongst NATO forces.

Perhaps the most important aspect of the whole situation is that Air Force has demonstrated the ability to make a purchasing decision based solely on military considerations. This will, assuming the decision is allowed to stand, have a very salubrious effect on future acquisition contests. If suppliers get the idea that their efforts are best spent on engineering rather than lobbying, the result will be a military that is both better equipped and much less expensive.

The only real losers will be Boeing shareholders. Right from the start, Boeing’s tanker proposal was basically a scam designed to keep the obsolete 767 in production. This would have been a fabulous deal for Boeing. The development and tooling costs for the 767 were paid off long ago, so every additional 767 sold would have had a very pleasing effect on the bottom line.

While I’m sure Boeing stockholders are rooting for the Airbus deal to be overturned, such an outcome would be a travesty of justice and a gross insult to common sense. Still, this is an election year, so anything is possible.

Today Justice Minister Annette King tabled 150 amendments to the government’s highly controversial Electoral Finance Bill.  A couple of these amendments “urge the Electoral Commission, which deals with parties, and the Chief Electoral Officer, who deals with individuals, to use their discretion to not refer ‘inconsequential’ cases to the police for prosecution.”

This is a very slick trick.  Instead of putting in all the tiresome effort required to put together a coherent piece of legislation the government is proposing to ram through a thoroughly hashed up law that people will then be invited to ignore.

Were this simply a case of governmental ineptitude it might be forgivable, however the this particular legislative boondoggle may well have a chilling effect on future political campaigns.  What constitutes a ‘consequential’  breech is going be a highly subjective judgment with serious political implications.  Would anyone be surprised if, in the midst of future elections, the government demonstrates extraordinary enthusiasm for investigating possibly ‘consequential’ breeches on the part of the opposition?

I just came across this intriguing article on using the dollar auction as a model for understanding the war in a Iraq. This is not the only applicable economic model. For example, you could gain insight into the administration’s decision making on Iraq by considering the Asset Substitution Problem.

Imagine a firm that is mostly financed by debt. The bondholders of the firm will tend to prefer that management adopt a conservative strategy, in order to maximize the chance that the debt will be paid off.  However a conservative  strategy has little appeal for shareholders, since low risk implies low return and thus low net profits.  For this reason the shareholders will tend to prefer higher risk/higher reward strategies, since these increase the probability that there will be something left over after the debt has been paid.

Since the shareholders control the firm, they can have management adopt a strategy that increases the chance of losses for the bondholders in the hope that there will be some return to the shareholders. In effect, the shareholders can choose to gamble with bondholder’s money.

Applying this model to the situation in Iraq, the American public are the bondholders while the the administration takes the role of shareholder.

At this point the President’s reputation is pretty much shot. If he adopts a conservative strategy in Iraq, say phased withdrawal, his administration will almost certainly be remembered as one of the worst in US history. If however he adopts a riskier strategy, like continuing the surge, there is a slight chance that the situation will turn around, which in turn might redeem his standing.

From the President’s perspective there is nothing to lose, his reputation already being shot, and everything to gain. A small chance at redemption is very much better than no chance at all. It should thus not come as a surprise that the President is vigorously opposed to any admission of defeat in Iraq.

It should also not be surprising that the American public, who will ultimately carry the cost of the much more likely negative outcome of gambling in Iraq, are less than enthusiastic about doubling down.

In the commercial world bondholders control the gambling tendencies of stockholders through including covenants (contractual limitations on management) in debt agreements, which is generally effective.

In the political sphere, Congress is supposed to counter any executive tendency towards gambling with the lives and treasure of the nation. However, with the focus on not appearing soft in the run-up to the 2008 election, there seems to be little stomach in Congress for reigning in the President. For the moment it appears that our only alternative is to hope that the President’s gamble pays off.

It recently came to light that everybody’s least favorite Attorney General, Alberto Gonzales, has acquired new powers to “fast track” death penalty cases in federal courts. While the headline may play well with the Republican base, which remains infatuated with the death penalty, the measure itself is extremely limited and probably won’t make all that much difference to the rate at which death row inmates meet their ends.

The death penalty itself remains intensely controversial and thus politically useful. Support for the death penalty is the tough, god fearing, law upholding, capital “C” conservative candidate’s favorite way of distinguishing himself from all those namby-pamby, soft on crime Democrats who like nothing more than pandering to criminals and recklessly compromising the safety of honest Americans.

Not being particularly enamored with the culture wars, I would like to propose a solidly conservative argument for dispensing with the death penalty and it’s accompanying political, legal and media circus. My hypothetical pragmatic Republican candidate might make an argument something like this:

“I have not one single shred of sympathy for the inmates on death row. They are undoubtedly the vilest of criminals and thoroughly deserve to be put to death.

Nevertheless I oppose the death penalty, not because it is cruel, but because it is far too kind.

Consider what happens when a convict is placed on death row. For a start he is handled with extraordinary care by his jailers least some incident provide grounds for appeal, or the psychological stress of his situation render him medically unfit to be executed.

Once comfortably installed on death row the convict is practically overrun with sympathetic media types and bleeding-heart liberal lawyers, who explain to the convict, in the most understanding tones, how he is really the victim.

This wouldn’t be so bad were it not for the glacial pace of the legal system. Our laudable desire to ensure that no innocent citizen is ever put to death has resulted in a near endless menu of legal avenues by which liberal lawyers can seek to delay or subvert the course of justice.

On being convicted of a capital crime the criminal knows two things. He will enjoy at least 15 years (probably many more) of the most comfortable accommodation the prison system can provide while the appeals process plays out. He will also receive attention, understanding and sympathy that he absolutely doesn’t deserve and may even achieve a measure of celebrity. What is absolutely not certain is whether he will ever be executed.

Is it any wonder that the death penalty isn’t much of a deterrent?

The people who really suffer in a capital case are the victims. Ignored in the outpouring of concern for the criminal, the victims are deprived of any sense of finality or justice. Through the years, as appeal follows appeal, the victims can be called back any number of times to reiterate their testimony, always knowing that one slip in testimony or error in memory may be enough to allow their attackers to escape punishment.

For the sake of justice, for the sake of the victims, I call on all true conservatives everywhere to write to the president and ask that he commute the sentences of every death row inmate to life with hard labor and no possibility of parole. We may not be able to make the death penalty work, but we can sure as heck make our worst offenders wish they were dead.”

This week the New Zealand stock exchange ‘shockingly’ came out in favor of looser monetary policy. The main reason the NZX is pushing this ‘bold’ reform appears to be that interest rates are inconveniently high.

The NZX50 has essentially doubled since 2003 despite New Zealand consistently having some of the highest interest rates in the OECD. Unsatisfied with this very solid performance the NZX has apparently been watching the low interest rate fueled Dow over the past couple of years and come to the conclusion that things could be even more fun if only those killjoy central bankers weren’t so fixated on controlling inflation.

Of course Wall Street hasn’t looked so hot over the past couple of weeks. The resulting panic has also knocked around the NZX, which suggests a second reason that NZX management may be interested in monetary policy reform. They may be trying to create a kiwi version of the ‘Greenspan Put’. Essentially a Reserve Bank that takes a ‘balanced view’ would chop interest rates whenever the markets take a tumble, helping to mitigate losses. Such a policy reduces the risk inherent in the share market and thus tends to increase valuations, which wouldn’t upset the NZX in the slightest.

While a ‘balanced’ monetary policy may well be in the best interests of the NZX, a come what may attitude to inflation has some serious downsides. Contrary to some reports inflation is very far from dead. In fact it is likely to be back about thirty seconds after we conclude it doesn’t matter anymore. To paraphrase a famous quote, ‘The price of stable money is eternal vigilance’.

Sunday saw the 90th running of the somewhat faded crown jewel of American motor sport, the Indianapolis 500 (New Zealander Scott Dixon came second). While fan interest has rebounded over the last couple of years, thanks largely to the participation of the eminently marketable Danica Patrick, Indy car racing is still a pale shadow of its former glory.

It all went horribly wrong in 1994 when Tony George, owner of the Indianapolis Motor Speedway, founded the breakaway Indy Racing League. Since then the US has had two supposedly premier open wheel racing leagues, IRL and CART (now the Champ Car World Series), neither of which have enjoyed anything like the popularity of CART before the split.

The rump CART organization even declared bankruptcy in 2003 and had to be rescued by a consortium of team owners. Meanwhile rival NASCAR has grown to become one of the most popular sports in the US, with TV viewership second only to the NFL.

Ironically, the reasons for the split are now largely irrelevant. The IRL has come to be dominated by a few of the same elite teams whose hegemony over the old CART series helped motivate the split. Meanwhile, in order to control costs and promote competitive racing, the Champ Car World Series has abandoned its Formula 1 style technological arms race in favor of nearly standardized cars, similar to the system used by the IRL.

All of which suggests that there is a significant investment opportunity. Open wheel racing was once very popular in the US. There is no reason that it couldn’t be again if only the warring sides could be persuaded to bury the hatchet.

Is there a private equity group out there with the cash and, perhaps more importantly, the diplomatic skill required to put humpty-dumpty back together again? If this isn’t a merger and rationalization opportunity, I don’t know what is.

Yesterday the “Imus in the Morning” show was canceled after a prolonged and entirely predictable insensitive comment scandal. The well known ‘as long as you don’t offend anyone’ clause of the first amendment was invoked and formerly popular radio host Don Imus lost his job. Chalk up another victory for over the top moral outrage.

Ordinarily I wouldn’t care, but this particular case got me thinking, how should the Rutgers basketball team have responded to Mr Imus’ mortal insult?

This is the news conference I would like to have seen:

“Ladies and gentlemen of the press, on behalf of the Rutgers women’s basketball team I would like to formally respond to the comments made by Mr Imus.

I believe I speak for the team, the coaches and the fans when I say that nobody at Rutgers gives a damn what that cantankerous old fool has to say. We are too busy celebrating a fantastic run in the NCAA championship to spare even a moment’s consideration for the asinine opinions of a washed up radio hack.

This is a free country, which means that Mr Imus is perfectly entitled to hold and express any dumb ass opinion he likes.

And we are free to treat that opinion with the contempt it so obviously deserves.

Sticks and stones may break our bones, but the moronic ramblings of aging radio shock jocks will never hurt us.

While we would like to thank Jesse Jackson for his interest, he can take his moral outrage dog and pony show somewhere else. We are not fragile little flowers in need of his protection. Rutgers University takes pride in turning out strong confident young women who aren’t going to wilt in the face of a few unkind words.

If Mr Jackson is really interested in supporting the team he is more than welcome to purchase season tickets.

Regarding Mr Imus’ specific comments about the appearance of our team we will make one comment only. They were somewhat ironic, coming as they did from someone who has, to be brutally frank, a great face for radio.

I will now take questions about basketball.”