Wednesday, December 22, 2010

Attorney General's Blunt Warning on Terror Attacks

http://abcnews.go.com/print?id=12444727


AG Eric Holder Says 'Terrorists Only Have to Be Successful Once'

By JACK CLOHERTY and PIERRE THOMAS

WASHINGTON, Dec. 21, 2010

Attorney General Eric Holder has an urgent message for Americans: While he is confident that the United States will continue to thwart attacks, "the terrorists only have to be successful once."
And while it is not certain we will be hit, the American people, he told ABC News, "have to be prepared for potentially bad news."
"What I am trying to do in this interview is to make people aware of the fact that the threat is real, the threat is different, the threat is constant," he said.
In a rare and wide-ranging interview, the attorney general disclosed chilling, new details about the evolving threat of homegrown terror, and touched on topics ranging from Wikileaks to the prisoners at Guantanamo Bay.
What was uppermost on his mind, however, is the alarming rise in the number of Americans who are more than willing to attack and kill their fellow citizens.
"It is one of the things that keeps me up at night," Holder said. "You didn't worry about this even two years ago -- about individuals, about Americans, to the extent that we now do. And -- that is of -- of great concern."
"The threat has changed from simply worrying about foreigners coming here, to worrying about people in the United States, American citizens -- raised here, born here, and who for whatever reason, have decided that they are going to become radicalized and take up arms against the nation in which they were born," he said.
In the last 24 months, Holder said, 126 people have been indicted on terrorist-related charges, Fifty of those people are American citizens.
"I think that what is most alarming to me is the totality of what we see, the attorney general said. "Whether it is an attempt to bomb the New York City subway system, an attempt to bring down an airplane over Detroit, an attempt to set off a bomb in Times Square ... I think that gives us a sense of the breadth of the challenges that we face, and the kinds of things that our enemy is trying to do."
Holder says many of these converts to al Qaeda have something in common: a link to radical cleric Anwar Al Awlaki, an American citizen himself.
Authorities suspect Awlaki helped mastermind last year's Christmas Day underwear bombing plot in Detroit, and a recent scheme to blow up cargo planes travelling from Yemen to Europe and the United States.
"He's an extremely dangerous man. He has shown a desire to harm the United States, a desire to strike the homeland of the United States," Holder said. "He is a person who -- as an American citizen -- is familiar with this country and he brings a dimension, because of that American familiarity, that others do not."
Holder said that as a threat to the United States, Awlaki ranks right up there with Osama bin Laden.
"He would be on the same list with bin Laden," the attorney general said. "He's up there. I don't know whether he's one, two, three, four -- I don't know. But he's certainly on the list of the people who worry me the most."
When asked whether the United states has a preference between killing or capturing and prosecuting Awlaki, Holder replied: "Well, we certainly want to neutralize him. And we will do whatever we can in order to do that."
Awlaki is believed to be in Yemen, but thanks to the Internet, his reach is global, and his influence dangerous.
Authorities say his teachings and writings have been discovered on the computers of a number of radicals who have tried to carry out terror plots here in America. Holder said Awlaki is able to preach violence on al Qaeda websites, and reach new converts.
"The ability to go into your basement, turn on your computer, find a site that has this kind of hatred spewed ... they have an ability to take somebody who is perhaps just interested, perhaps just on the edge, and take them over to the other side," he said.
To combat the threat of Americans turning to al Qaeda and violence, the United States is monitoring scores of radicals and has set up stings to blunt the threat.
The increasing number of FBI stings, such as the alleged plot to detonate a bomb at a Christmas tree lighting in Portland, are not without controversy, but Holder vigorously defended them.
"Options are always given all along the way for them to say, 'You know what, I have changed my mind. I don't want to do it.' Everyone that we have charged has said, 'No I want to go forward,'" he said. "All those actions were designed to kill Americans.
"I have to have all those tools available to me to try to keep the American people safe, and to do the job that I'm supposed to do as a 21st century attorney general," Holder said.
Holder said the United States has made great strides in improving its ability to detect and block attacks, which is shown by the number of would-be terrorists who have been stopped before they could kill Americans. The intelligence community is working around the clock, he said, with little time off.
"We are doing everything that we possibly can to keep the American people safe," Holder said. "We are vigilant, we are doing everything we can to keep our homeland secure,"
Turning to how terror suspects are tried, Holder said he still believes the "decision as to how people get prosecuted, where they get prosecuted, is an executive branch function. Even if those suspects are being held now at Guantanamo Bay. Holder said Congress should not be interfering with that.
"It's -- from my perspective -- a constitutional issue," he said.
As for Julian Assange and Wikileaks, Holder said "it's an ongoing investigation."
"What Wikileaks did, at the end of the day, was harmful to American security, put American agents and properties ... at risk ... and I think for arrogant and misguided reasons," he said.

How Obama Thinks

http://www.forbes.com/forbes/2010/0927/politics-socialism-capitalism-private-enterprises-obama-business-problem.html

How Obama Thinks
Dinesh D'Souza, 09.27.10, 12:00 AM ET
Correction Appended
Barack Obama is the most antibusiness president in a generation, perhaps in American history. Thanks to him the era of big government is back. Obama runs up taxpayer debt not in the billions but in the trillions. He has expanded the federal government's control over home mortgages, investment banking, health care, autos and energy. The Weekly Standard summarizes Obama's approach as omnipotence at home, impotence abroad.
The President's actions are so bizarre that they mystify his critics and supporters alike. Consider this headline from the Aug. 18, 2009 issue of the Wall Street Journal: "Obama Underwrites Offshore Drilling." Did you read that correctly? You did. The Administration supports offshore drilling--but drilling off the shores of Brazil. With Obama's backing, the U.S. Export-Import Bank offered $2 billion in loans and guarantees to Brazil's state-owned oil company Petrobras to finance exploration in the Santos Basin near Rio de Janeiro--not so the oil ends up in the U.S. He is funding Brazilian exploration so that the oil can stay in Brazil.
More strange behavior: Obama's June 15, 2010 speech in response to the Gulf oil spill focused not on cleanup strategies but rather on the fact that Americans "consume more than 20% of the world's oil but have less than 2% of the world's resources." Obama railed on about "America's century-long addiction to fossil fuels." What does any of this have to do with the oil spill? Would the calamity have been less of a problem if America consumed a mere 10% of the world's resources?
The oddities go on and on. Obama's Administration has declared that even banks that want to repay their bailout money may be refused permission to do so. Only after the Obama team cleared a bank through the Fed's "stress test" was it eligible to give taxpayers their money back. Even then, declared Treasury Secretary Tim Geithner, the Administration might force banks to keep the money.
The President continues to push for stimulus even though hundreds of billions of dollars in such funds seem to have done little. The unemployment rate when Obama took office in January 2009 was 7.7%; now it is 9.5%. Yet he wants to spend even more and is determined to foist the entire bill on Americans making $250,000 a year or more. The rich, Obama insists, aren't paying their "fair share." This by itself seems odd given that the top 1% of Americans pay 40% of all federal income taxes; the next 9% of income earners pay another 30%. So the top 10% pays 70% of the taxes; the bottom 40% pays close to nothing. This does indeed seem unfair--to the rich.
Obama's foreign policy is no less strange. He supports a $100 million mosque scheduled to be built near the site where terrorists in the name of Islam brought down the World Trade Center. Obama's rationale, that "our commitment to religious freedom must be unshakable," seems utterly irrelevant to the issue of why the proposed Cordoba House should be constructed at Ground Zero.
Recently the London Times reported that the Obama Administration supported the conditional release of Abdel Baset al-Megrahi, the Lockerbie bomber convicted in connection with the deaths of 270 people, mostly Americans. This was an eye-opener because when Scotland released Megrahi from prison and sent him home to Libya in August 2009, the Obama Administration publicly and appropriately complained. The Times, however, obtained a letter the Obama Administration sent to Scotland a week before the event in which it said that releasing Megrahi on "compassionate grounds" was acceptable as long as he was kept in Scotland and would be "far preferable" to sending him back to Libya. Scottish officials interpreted this to mean that U.S. objections to Megrahi's release were "half-hearted." They released him to his home country, where he lives today as a free man.
One more anomaly: A few months ago nasa Chief Charles Bolden announced that from now on the primary mission of America's space agency would be to improve relations with the Muslim world. Come again? Bolden said he got the word directly from the President. "He wanted me to find a way to reach out to the Muslim world and engage much more with dominantly Muslim nations to help them feel good about their historic contribution to science and math and engineering." Bolden added that the International Space Station was a model for nasa's future, since it was not just a U.S. operation but included the Russians and the Chinese. Obama's redirection of the agency caused consternation among former astronauts like Neil Armstrong and John Glenn, and even among the President's supporters: Most people think of nasa's job as one of landing on the moon and Mars and exploring other faraway destinations. Sure, we are for Islamic self-esteem, but what on earth was Obama up to here?
Theories abound to explain the President's goals and actions. Critics in the business community--including some Obama voters who now have buyer's remorse--tend to focus on two main themes. The first is that Obama is clueless about business. The second is that Obama is a socialist--not an out-and-out Marxist, but something of a European-style socialist, with a penchant for leveling and government redistribution.

These theories aren't wrong so much as they are inadequate. Even if they could account for Obama's domestic policy, they cannot explain his foreign policy. The real problem with Obama is worse--much worse. But we have been blinded to his real agenda because, across the political spectrum, we all seek to fit him into some version of American history. In the process, we ignore Obama's own history. Here is a man who spent his formative years--the first 17 years of his life--off the American mainland, in Hawaii, Indonesia and Pakistan, with multiple subsequent journeys to Africa.
A good way to discern what motivates Obama is to ask a simple question: What is his dream? Is it the American dream? Is it Martin Luther King's dream? Or something else?
It is certainly not the American dream as conceived by the founders. They believed the nation was a "new order for the ages." A half-century later Alexis de Tocqueville wrote of America as creating "a distinct species of mankind." This is known as American exceptionalism. But when asked at a 2009 press conference whether he believed in this ideal, Obama said no. America, he suggested, is no more unique or exceptional than Britain or Greece or any other country.
Perhaps, then, Obama shares Martin Luther King's dream of a color-blind society. The President has benefited from that dream; he campaigned as a nonracial candidate, and many Americans voted for him because he represents the color-blind ideal. Even so, King's dream is not Obama's: The President never champions the idea of color-blindness or race-neutrality. This inaction is not merely tactical; the race issue simply isn't what drives Obama.
What then is Obama's dream? We don't have to speculate because the President tells us himself in his autobiography, Dreams from My Father. According to Obama, his dream is his father's dream. Notice that his title is not Dreams of My Father but rather Dreams from My Father. Obama isn't writing about his father's dreams; he is writing about the dreams he received from his father.
So who was Barack Obama Sr.? He was a Luo tribesman who grew up in Kenya and studied at Harvard. He was a polygamist who had, over the course of his lifetime, four wives and eight children. One of his sons, Mark Obama, has accused him of abuse and wife-beating. He was also a regular drunk driver who got into numerous accidents, killing a man in one and causing his own legs to be amputated due to injury in another. In 1982 he got drunk at a bar in Nairobi and drove into a tree, killing himself.
An odd choice, certainly, as an inspirational hero. But to his son, the elder Obama represented a great and noble cause, the cause of anticolonialism. Obama Sr. grew up during Africa's struggle to be free of European rule, and he was one of the early generation of Africans chosen to study in America and then to shape his country's future.
I know a great deal about anticolonialism, because I am a native of Mumbai, India. I am part of the first Indian generation to be born after my country's independence from the British. Anticolonialism was the rallying cry of Third World politics for much of the second half of the 20th century. To most Americans, however, anticolonialism is an unfamiliar idea, so let me explain it.
Anticolonialism is the doctrine that rich countries of the West got rich by invading, occupying and looting poor countries of Asia, Africa and South America. As one of Obama's acknowledged intellectual influences, Frantz Fanon, wrote in The Wretched of the Earth, "The well-being and progress of Europe have been built up with the sweat and the dead bodies of Negroes, Arabs, Indians and the yellow races."

Anticolonialists hold that even when countries secure political independence they remain economically dependent on their former captors. This dependence is called neocolonialism, a term defined by the African statesman Kwame Nkrumah (1909--72) in his book Neocolonialism: The Last Stage of Imperialism. Nkrumah, Ghana's first president, writes that poor countries may be nominally free, but they continue to be manipulated from abroad by powerful corporate and plutocratic elites. These forces of neocolonialism oppress not only Third World people but also citizens in their own countries. Obviously the solution is to resist and overthrow the oppressors. This was the anticolonial ideology of Barack Obama Sr. and many in his generation, including many of my own relatives in India.
Obama Sr. was an economist, and in 1965 he published an important article in the East Africa Journal called "Problems Facing Our Socialism." Obama Sr. wasn't a doctrinaire socialist; rather, he saw state appropriation of wealth as a necessary means to achieve the anticolonial objective of taking resources away from the foreign looters and restoring them to the people of Africa. For Obama Sr. this was an issue of national autonomy. "Is it the African who owns this country? If he does, then why should he not control the economic means of growth in this country?"
As he put it, "We need to eliminate power structures that have been built through excessive accumulation so that not only a few individuals shall control a vast magnitude of resources as is the case now." The senior Obama proposed that the state confiscate private land and raise taxes with no upper limit. In fact, he insisted that "theoretically there is nothing that can stop the government from taxing 100% of income so long as the people get benefits from the government commensurate with their income which is taxed."
Remarkably, President Obama, who knows his father's history very well, has never mentioned his father's article. Even more remarkably, there has been virtually no reporting on a document that seems directly relevant to what the junior Obama is doing in the White House.
While the senior Obama called for Africa to free itself from the neocolonial influence of Europe and specifically Britain, he knew when he came to America in 1959 that the global balance of power was shifting. Even then, he recognized what has become a new tenet of anticolonialist ideology: Today's neocolonial leader is not Europe but America. As the late Palestinian scholar Edward Said--who was one of Obama's teachers at Columbia University--wrote in Culture and Imperialism, "The United States has replaced the earlier great empires and is the dominant outside force."
From the anticolonial perspective, American imperialism is on a rampage. For a while, U.S. power was checked by the Soviet Union, but since the end of the Cold War, America has been the sole superpower. Moreover, 9/11 provided the occasion for America to invade and occupy two countries, Iraq and Afghanistan, and also to seek political and economic domination in the same way the French and the British empires once did. So in the anticolonial view, America is now the rogue elephant that subjugates and tramples the people of the world.
It may seem incredible to suggest that the anticolonial ideology of Barack Obama Sr. is espoused by his son, the President of the United States. That is what I am saying. From a very young age and through his formative years, Obama learned to see America as a force for global domination and destruction. He came to view America's military as an instrument of neocolonial occupation. He adopted his father's position that capitalism and free markets are code words for economic plunder. Obama grew to perceive the rich as an oppressive class, a kind of neocolonial power within America. In his worldview, profits are a measure of how effectively you have ripped off the rest of society, and America's power in the world is a measure of how selfishly it consumes the globe's resources and how ruthlessly it bullies and dominates the rest of the planet.
For Obama, the solutions are simple. He must work to wring the neocolonialism out of America and the West. And here is where our anticolonial understanding of Obama really takes off, because it provides a vital key to explaining not only his major policy actions but also the little details that no other theory can adequately account for.
Why support oil drilling off the coast of Brazil but not in America? Obama believes that the West uses a disproportionate share of the world's energy resources, so he wants neocolonial America to have less and the former colonized countries to have more. More broadly, his proposal for carbon taxes has little to do with whether the planet is getting warmer or colder; it is simply a way to penalize, and therefore reduce, America's carbon consumption. Both as a U.S. Senator and in his speech, as President, to the United Nations, Obama has proposed that the West massively subsidize energy production in the developing world.

Rejecting the socialist formula, Obama has shown no intention to nationalize the investment banks or the health sector. Rather, he seeks to decolonize these institutions, and this means bringing them under the government's leash. That's why Obama retains the right to refuse bailout paybacks--so that he can maintain his control. For Obama, health insurance companies on their own are oppressive racketeers, but once they submitted to federal oversight he was happy to do business with them. He even promised them expanded business as a result of his law forcing every American to buy health insurance.
If Obama shares his father's anticolonial crusade, that would explain why he wants people who are already paying close to 50% of their income in overall taxes to pay even more. The anticolonialist believes that since the rich have prospered at the expense of others, their wealth doesn't really belong to them; therefore whatever can be extracted from them is automatically just. Recall what Obama Sr. said in his 1965 paper: There is no tax rate too high, and even a 100% rate is justified under certain circumstances.
Obama supports the Ground Zero mosque because to him 9/11 is the event that unleashed the American bogey and pushed us into Iraq and Afghanistan. He views some of the Muslims who are fighting against America abroad as resisters of U.S. imperialism. Certainly that is the way the Lockerbie bomber Abdel Baset al-Megrahi portrayed himself at his trial. Obama's perception of him as an anticolonial resister would explain why he gave tacit approval for this murderer of hundreds of Americans to be released from captivity.
Finally, nasa. No explanation other than anticolonialism makes sense of Obama's curious mandate to convert a space agency into a Muslim and international outreach. We can see how well our theory works by recalling the moon landing of Apollo 11 in 1969. "One small step for man," Neil Armstrong said. "One giant leap for mankind."
But that's not how the rest of the world saw it. I was 8 years old at the time and living in my native India. I remember my grandfather telling me about the great race between America and Russia to put a man on the moon. Clearly America had won, and this was one giant leap not for mankind but for the U.S. If Obama shares this view, it's no wonder he wants to blunt nasa's space program, to divert it from a symbol of American greatness into a more modest public relations program.
Clearly the anticolonial ideology of Barack Obama Sr. goes a long way to explain the actions and policies of his son in the Oval Office. And we can be doubly sure about his father's influence because those who know Obama well testify to it. His "granny" Sarah Obama (not his real grandmother but one of his grandfather's other wives) told Newsweek, "I look at him and I see all the same things--he has taken everything from his father. The son is realizing everything the father wanted. The dreams of the father are still alive in the son."
In his own writings Obama stresses the centrality of his father not only to his beliefs and values but to his very identity. He calls his memoir "the record of a personal, interior journey--a boy's search for his father and through that search a workable meaning for his life as a black American." And again, "It was into my father's image, the black man, son of Africa, that I'd packed all the attributes I sought in myself." Even though his father was absent for virtually all his life, Obama writes, "My father's voice had nevertheless remained untainted, inspiring, rebuking, granting or withholding approval. You do not work hard enough, Barry. You must help in your people's struggle. Wake up, black man!"
The climax of Obama's narrative is when he goes to Kenya and weeps at his father's grave. It is riveting: "When my tears were finally spent," he writes, "I felt a calmness wash over me. I felt the circle finally close. I realized that who I was, what I cared about, was no longer just a matter of intellect or obligation, no longer a construct of words. I saw that my life in America--the black life, the white life, the sense of abandonment I'd felt as a boy, the frustration and hope I'd witnessed in Chicago--all of it was connected with this small piece of earth an ocean away, connected by more than the accident of a name or the color of my skin. The pain that I felt was my father's pain."
In an eerie conclusion, Obama writes that "I sat at my father's grave and spoke to him through Africa's red soil." In a sense, through the earth itself, he communes with his father and receives his father's spirit. Obama takes on his father's struggle, not by recovering his body but by embracing his cause. He decides that where Obama Sr. failed, he will succeed. Obama Sr.'s hatred of the colonial system becomes Obama Jr.'s hatred; his botched attempt to set the world right defines his son's objective. Through a kind of sacramental rite at the family tomb, the father's struggle becomes the son's birthright.

Colonialism today is a dead issue. No one cares about it except the man in the White House. He is the last anticolonial. Emerging market economies such as China, India, Chile and Indonesia have solved the problem of backwardness; they are exploiting their labor advantage and growing much faster than the U.S. If America is going to remain on top, we have to compete in an increasingly tough environment.
But instead of readying us for the challenge, our President is trapped in his father's time machine. Incredibly, the U.S. is being ruled according to the dreams of a Luo tribesman of the 1950s. This philandering, inebriated African socialist, who raged against the world for denying him the realization of his anticolonial ambitions, is now setting the nation's agenda through the reincarnation of his dreams in his son. The son makes it happen, but he candidly admits he is only living out his father's dream. The invisible father provides the inspiration, and the son dutifully gets the job done. America today is governed by a ghost.
Dinesh D'Souza, the president of the King's College in New York City, is the author of the forthcoming book The Roots of Obama's Rage (Regnery Publishing).
Correction: Dinesh D'Souza writes that on June 15, 2010, Obama gave a speech in response to the BP oil spill that was "focused not on cleanup strategies but rather on the fact that Americans 'consume more than 20% of the world’s oil but have less than 2% of the world’s resources.'" D'Souza slightly misquoted the President who said, "2% of the world's oil reserves." In addition, Obama's speech did discuss concrete measures to investigate the oil spill and bring it under control.

Saturday, September 25, 2010

Why Is Paul Krugman Blaming Foreigners for the Financial Crisis?

http://www.foreignpolicy.com/articles/2010/09/20/why_is_paul_krugman_blaming_foreigners_for_the_financial_crisis?page=0,0

Two years after the collapse of Lehman Brothers, economists are still debating the causes of and villains behind the 2008 financial crisis, whose ongoing fallout can be seen in the weak recovery and stagnant job market that continues to bedevil U.S. President Barack Obama and his economic advisors. In a recent article in the New York Review of Books, Paul Krugman and Robin Wells lay down another marker in this debate, while caricaturing my recent book, Fault Lines, in the process.



The article says a lot about the policy views of Krugman (for simplicity, I will say "Krugman" and "he" instead of "Krugman and Wells" and "they"), with whom I have disagreed in the past. Rather than focus on the innuendo about my motives and beliefs in the review, let me focus instead on differences of substance.
First, Krugman starts with a diatribe on why so many economists are "asking how we got into this mess rather than telling us how to get out of it." Krugman apparently believes that his standard response of more stimulus applies regardless of the reasons why we are in the economic downturn. Yet it is precisely because I think the policy response to the last crisis contributed to getting us into this one that it is worthwhile examining how we got into this mess, and to resist the unreflective policies that Krugman advocates.
My book emphasizes a number of related issues that led to our current predicament.
Krugman discusses and dismisses two -- the political push for easy housing credit in the United States and overly lax monetary policy in the years 2002-2005 -- while favoring a third, global trade imbalances (which he does not acknowledge are a central theme in my book). Focusing exclusively on the imbalances as Krugman does, while ignoring why the United States became a deficit country, gives us a grossly incomplete understanding of what happened. Finally, Krugman ignores an important factor I emphasize -- the incentives of bankers and their willingness to seek out and take the wild risks that brought the system down.
Let's start with the political push to expand housing credit. I argue that in an attempt to offset the consequences of rising income inequality, politicians on both sides of the aisle pushed easy housing credit through government units like the Federal Housing Administration, and by imposing increasingly rigorous mandates on government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac.
Interestingly, Krugman neither disputes my characterization of the incentives of politicians nor the detailed documentation of government initiatives and mandates calling for easy credit for the poor. What he disputes vehemently is whether government policy contributed to the housing bubble, and in particular, whether Fannie and Freddie were partly responsible.
In absolving Fannie and Freddie, Krugman has been consistent over time, though his explanations as to why Fannie and Freddie are not partially to blame have morphed as his errors have been pointed out. First, he argued that Fannie and Freddie could not participate in sub-prime financing. Then he insisted that their share of financing was falling in the years mortgage loan quality deteriorated the most. Now he claims that if they indeed did acquire substantial amounts of sub-prime exposure (and he says they did not), it was because of the profit motive and not to fulfill a social objective.
In a July 14, 2008 op-ed in the New York Times, Krugman explained why Fannie and Freddie were blameless. "Partly that's because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off," he wrote. "Also, they didn't do any subprime lending, because they can't: the definition of a subprime loan is precisely a loan that doesn't meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income. So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works." [emphasis mine]
Critics were quick to point out that Krugman had his facts wrong. As Charles Calomiris, a professor at Columbia University, and Peter Wallison of the American Enterprise Institute (and member of the financial crisis inquiry commission) explained, "Here Krugman demonstrates confusion about the law (which did not prohibit subprime lending by the GSEs), misunderstands the regulatory regime under which they operated (which did not have the capacity to control their risk-taking), and mismeasures their actual subprime exposures (which he wrongly states were zero)."
So Krugman shifted his emphasis. In his blog critique of a Financial Times op-ed I wrote in June 2010, Krugman no longer argued that Fannie and Freddie could not buy sub-prime mortgages. Instead, he emphasized the slightly falling share of Fannie and Freddie's residential mortgage securitizations in the years 2004 to 2006 as the reason they were not responsible. Here again he presents a misleading picture. Not only did Fannie and Freddie purchase whole sub-prime loans that were not securitized (and are thus not counted in its share of securitizations), they also bought substantial amounts of private-label mortgage backed securities issued by others. When these are taken into account, Fannie and Freddie's share of the sub-prime market financing did increase even in those years.
Of course, one could question this form of analysis. Asset prices and bubbles have momentum. Even if Fannie and Freddie had simply ignited the process, and not fueled it in the go-go years of 2004-2006, they would bear some responsibility. Krugman never considers this possibility.
In the current review piece, Krugman first quotes the book by Nouriel Roubini and Stephen Mihm: "The huge growth in the subprime market was primarily underwritten not by Fannie Mae and Freddie Mac but by private mortgage lenders like Countrywide. Moreover, the Community Reinvestment Act long predates the housing bubble.... Overblown claims that Fannie Mae and Freddie Mac single-handedly caused the subprime crisis are just plain wrong."
Clearly, Fannie and Freddie did not originate sub-prime mortgages directly -- they are not equipped to do so. But they fuelled the boom by buying or guaranteeing them. Indeed, Countrywide was one of the GSEs' largest originators of sub-prime mortgages, according to work by Ed Pinto, a former chief credit officer of Fannie Mae, and participated from very early on in Fannie Mae's drive into affordable housing.
Consider, for instance, this press release from 1992:
Countrywide Funding Corporation and the Federal National Mortgage Association (Fannie Mae) announced today that they have signed a record commitment to finance $8 billion in home mortgages. Fannie Mae said the agreement is the single largest commitment in its history.… The $8 billion agreement includes a previously announced $1.25 billion of a variety of Fannie Mae's affordable home mortgages, including reduced down payment loans....
"We are delighted to participate in this historic event, and we are particularly proud that a substantial portion of the $8 billion commitment will directly benefit lower income Americans," said Countrywide President Angelo Mozilo.… "We look forward to the rapid fulfillment of this commitment so that Countrywide can sign another record-breaking agreement with Fannie Mae," Mozilo said.
Of course, as Fannie and Freddie bought the garbage loans that lenders like Countrywide originated, they helped fuel the decline in lending standards. Also, while the Community Reinvestment Act was enacted in 1979, it was the more vigorous enforcement of the provisions of the act in the early 1990s that gave the government a lever to push its low-income lending objectives, a fact the Department of Housing and Urban Development (HUD) once boasted about (see here and here). If the government itself took credit for its successes in expanding home ownership, why is Krugman not willing to accept its contribution to the subsequent bust as too many lower middle-class families ended up in homes they could not afford? I agree there is room for legitimate differences of opinion on the quality of data, and the extent of government responsibility, but to argue that the government had no role in directing credit, or in the subsequent bust, is simply ideological myopia.
Perhaps more interesting is that after citing Roubini and Mihm, Krugman repeats his earlier claim; "As others have pointed out, Fannie and Freddie actually accounted for a sharply reduced share of the home lending market as a whole during the peak years of the bubble." Now, however, he attributes the inaccurate claim that Fannie and Freddie accounted for a sharply reduced share of the home-lending market to nameless "others." But that is just the prelude to changing his story once again: "To the extent that they did purchase dubious home loans, they were in pursuit of profit, not social objectives -- in effect, they were trying to catch up with private lenders." In other words, if they did do it (and he denies they did), it was because of the profit motive.
Clearly, everything Fannie and Freddie did was because of the profit motive -- after all, they were private corporations. But I don't know how we can tell without more careful examination how much of the lending they did was to meet government affordable-housing mandates or to curry favor with Congress in order to preserve their profitable prime-mortgage franchise, and how much was to increase the bottom line immediately. Perhaps Krugman can tell us how he determined their intent?
Let me move on to Krugman's second criticism of my diagnosis of the crisis. He argues that the U.S. Federal Reserve's very accommodative monetary policy over the period 2003 to 2005 was also not responsible for the crisis. Here, Krugman is characteristically dismissive of alternative views. In his review, he says that there were good reasons for the Fed to keep rates low given the high unemployment rate. Although this may be a justification for the Fed's policy (as I argue in my book, it was precisely because the Fed was focused on a stubbornly high unemployment rate that it took its eye off the irrational exuberance building in housing markets and the financial sector), it in no way validates the claim that the policy did not contribute to the manic lending or housing bubble.
A second argument Krugman makes is that Europe, too, had bubbles; the European Central Bank (ECB), meanwhile, was less aggressive than the Fed, so monetary policy could not be responsible. It is true that the European Central Bank was less aggressive, but only slightly so; it brought its key refinancing rate down to only 2 percent while the Fed brought the Fed Funds rate down to 1 percent. Clearly, both rates were low by historical standards. More important, what Krugman does not point out is that different European economies had differing inflation rates, so the real monetary policy rate (that is, the difference between the nominal rate and inflation, reflecting the return investors get in purchasing power, which is what they care about) was substantially different across the Eurozone despite a common nominal policy rate. Countries that had strongly negative real policy rates -- Ireland and Spain are primary exhibits -- had a housing boom and bust, while countries like Germany with low inflation, and therefore higher real policy rates, did not. Indeed, a working paper by two ECB economists, Angela Maddaloni and José-Luis Peydró, indicates that the ultra-low rates by both the ECB and the Fed at this time had a strong causal effect in relaxing banks' commercial, mortgage, and retail lending standards over this period.
I admit that there is much less consensus on whether the Fed helped create the housing bubble and the banking crisis than on whether Fannie and Freddie were involved. Ben Bernanke, a monetary economist of the highest caliber, denies it, while John Taylor, an equally respected monetary economist, insists on it.
Krugman, of course, has an interest in defending the Fed and criticizing alternative viewpoints. He himself advocated the policies the Fed followed, and in fact, was critical of the Fed raising rates even when it belatedly did so in 2004. Then, as he does now, Krugman emphasized the dangers of a Japanese-style deflation, as well as the slow progress in bringing back jobs. Then, as he does now, he advocated more stimulus. Then, as he does now, Krugman ignored the adverse long-term consequences of the policies he advocated.
Finally, if he denies a role for government housing policies or for monetary policy, or even warped banker incentives, then to what does Krugman attribute the crisis? His answer is over-saving foreigners. In short, countries with trade surpluses, such as Germany and China, had to reinvest their resulting financial windfalls in the United States, pushing down U.S. long-term interest rates in the process, and igniting a housing bubble that eventually burst and led to the financial panic. But this is only a partial explanation, as I argue in my book. The United States did not have to run a large trade deficit and absorb the capital inflows -- the claim that it did sounds very much like that of the over-indulgent and over-indebted rake who blames his creditors for being willing to finance him. U.S. policies encouraged over-consumption and over-borrowing, and unless we understand where these policies came from, we have no hope of addressing the causes of this crisis. Unfortunately, these are the policies that Krugman wants to push again. This is precisely why we have to understand the history of how we got here, and why Krugman wants nothing to do with that enterprise.
There is also a matter of detail suggesting why we cannot only blame the foreigners. The housing bubble, as Monika Piazzesi and Martin Schneider of Stanford University have argued, was focused in the lower-income segments of the market, unlike in the typical U.S. housing boom. Why did foreign money gravitate to the low income segment of the housing market? Why did past episodes when the U.S. ran large current account deficits not result in similar housing booms and busts? Could the explanation lie in U.S. policies?
Many people -- bankers, regulators, governments, households, and economists among others -- share the blame for the crisis. Because there are so many, the blame game is not useful. Let us try and understand what happened in order to avoid repeating it.
Americans face hard choices: While it is important to alleviate the miserable conditions of the long-term unemployed today, we also need to offer them incentives and a pathway to building the skills that are required by the jobs that are being created. Simplistic mantras like "more stimulus" are the surest way to detract us from policies that generate sustainable growth.
Finally, a note on method. Perhaps Krugman believes that by labeling other economists as politically extreme, he can undercut their credibility. In criticizing my argument that politicians pushed easy housing credit in the years leading up to the crisis, he writes, "Although Rajan is careful not to name names and attributes the blame to generic ‘politicians,' it is clear that Democrats are largely to blame in his worldview." Yet if he read the book carefully, he would have seen that I do name names, arguing that both Bill Clinton with his "Affordable Housing Mandate" (p. 35) as well as George W. Bush with his attempt to foster an "Ownership Society" (p. 37) pushed very hard to expand housing credit to those who could not afford it. Indeed, I do not fault the intent of that policy, only the unintended consequences of its execution. Those consequence will be with us for years to come -- and perhaps longer if we learn the wrong lessons from this crisis.

Swedish rout highlights European socialist crisis

http://www.reuters.com/article/idUSTRE68J28520100920


(Reuters) - The crash of Sweden's long-ruling Social Democrats to their worst defeat since 1914 highlights the decline of socialist parties in much of Europe, drained by social change, economic crisis and the rise of new issues.
The re-election of a center-right Swedish government for the first time in modern history and the entry of a hard-right anti-immigrant party into parliament show how far the times have changed, even in social democracy's north European heartland.
How the center-left should respond, and whether it can regain the ascendancy in Europe at a time when loyalties are shifting across the political spectrum, are now being fought out in internal party tussles in Britain and France in particular.
In Sweden as in Germany, France, Denmark or the Netherlands, the main party of the center-left has hemorrhaged votes in all directions -- to the hard left, the ecologist Greens, the populist far right but also to mainstream conservatives.
"Social democracy comes across as a victim of the crisis, when it should appear as a refuge or a hope after years of neo-liberal excess," French political scientist Laurent Bouvet wrote earlier this year.
Technological change and globalization have shrunk the traditional industrial working class and the trade unions, made jobs more precarious and thrown up new issues such as climate change, population aging, immigration, obesity and drugs.
The mainstream left is torn between trying to reconnect with a lost popular electorate and reaching out to an aspiring new class in the knowledge economy.
Swedish Social Democratic leader Mona Sahlin alienated some centrist supporters by agreeing to a formal coalition with the ex-communist Left party -- a move that the German Social Democratic Party (SPD) continues to eschew.
ACCOMPLICE?
In countries such as Britain, France and Germany, where the center-left was in government in the early 2000s, it is regarded by many voters as having been a zealous accomplice in financial deregulation and economic liberalism.
Rising income inequality gave a hollow ring to the left's proclaimed ambition to redistribute wealth.
Now that most European countries are burdened with high deficits and debt mountains due to the financial crisis, the "big government" left is not seen as offering a credible answer to the question of where and how to shrink the state.
In many countries, public employees are the biggest bloc of socialist party members and constitute a brake on reform.
Socialists' long-standing support for European unification, religious tolerance and integrating immigrants has made them vulnerable to right-wing populists like the Sweden Democrats, Geert Wilders' Dutch Freedom Party or France's National Front.
These dilemmas are the backdrop to the choice of a new leader by Britain's opposition Labor Party this week, and of a presidential candidate by the French Socialist party next year.
In Britain, the choice is between sticking to the market-friendly New Labor ideology that marked Tony Blair's decade in office from 1997, or shifting to the left to try to win back disenchanted working class and public sector voters.
"We need to become 'effective state' social democrats, not 'big state' social democrats," Roger Liddle, one of the thinkers behind the New Labor project, said in a speech last week.
Former foreign secretary David Miliband embodies Blairite continuity, while his younger brother Ed, former cabinet minister Ed Balls and left-wing stalwart Diane Abbott offer varying degrees of the latter approach.
GREENS RISING
In France, the Socialists face a potential three-way choice between a social-liberal (International Monetary Fund chief Dominique Strauss-Kahn), an old-style socialist (current party leader Martine Aubry), and a left-populist (defeated 2007 presidential candidate Segolene Royal).
Aubry and Royal have vowed to reverse President Nicolas Sarkozy's pension reform, which pushes back the retirement age from 60 to 62 and makes many work until 67 for a full pension. Strauss-Kahn says retirement at 60 cannot be a "dogma" when people are living ever longer.
An ecologist list ran neck-and-neck with the French Socialist party in last year's European Parliament elections, siphoning off so-called Bobo voters (the bohemian bourgeois), while ex-communists and Trotskyists split another 10 percent.
In Germany, the Greens are snapping at the heels of the opposition SPD in opinion polls and may get a chance to lead a regional state government for the first time next year.
But the SPD has also lost support to the hardline Left party among working class and elderly voters who felt betrayed by its reduction of unemployment benefits and extension of the retirement age while in government over the last decade.
Where socialists are still in office, in Spain, Portugal and Greece, they risk alienating their core electorate by having to implement austerity measures mandated by the IMF and the European Union in exchange for financial support.
Only Greek Prime Minister George Papandreou has managed to retain his lead in opinion polls so far despite eye-watering spending cuts -- perhaps because his conservative opponents made such a shambles of running public finances until last year.