I never meant to write this in the first place.  It was just my good fortune that a series of emails simply grew into a website, and all of a sudden instead of shouting at a TV screen I was typing at a computer screen.  Which is far more healthy.

When I got up and running in February, the economy was in the tank.  Breaking up accounts to get under the deposit insurance threshold was, for one brief shining moment, the stuff of practical people and not survivalists who have spent too much time with the SAS handbook.

It was also the time that it seemed real change might happen.  We had a vigorous new President who, at the difference of his predecessor, did not seem like a twig floating down a rapid.  Some early decisions were unfortunate – picking Rahm Emanuel and letting Rahm pursue his feud with Howard Dean, picking Tim Geithner and Larry Summers while exiling Joe Stiglitz and Paul Volker – and some were, perhaps, inevitable – telling the unions they would not get card check or a renegotiation of NAFTA, telling gays that they could keep waiting.

Still, change seemed inevitable, if only because the market meltdown was its own change agent.  It only took about a week in September 2008 for the three-quarter-of-a-century Republican crusade to privatize Social Security to run aground.  One more good push and the major banks were about to restructure themselves.  And Eastern Europe looked set to provide that push.

Health care reform was inevitable.  It was the Administration’s signature issue, the key project on which the team was all in.  With a huge majority – 58 seats outright, 59 with Franken, 60 with Lieberman – the once-in-a-generation opportunity was at hand.  The country could not afford to do otherwise.

The one question mark was carbon.  A carbon tax would pit region against region – broadly, the coasts against the center – and with the public opposed to anything with “tax” in the name, there wasn’t that much support, even though it would come from guys in the Middle East who hate us and go to people in the midwest who are God’s children.  Just ask them.

Those were the days.

Then the government managed to prove that it would really, positively, absolutely funnel as much money as was necessary into the financial services industry.  All of a sudden – and it was terribly sudden – two things happened:

• The stock market rocketed;
• The government lost all power to change.

The first was evident off the bat, although of course the duration of the rally surprised me and continues to surprise me.  You will note the current issues in Dubai and Greece, in case you thought the dead would stay buried forever.

The second was far more subtle.  It was the discovery of a hollow threat.  Like a parent who tells his misbehaving child that he will leave him at a faraway gas station and finds the child still unwilling to behave, the Obama team found that in their unseemly haste to shovel money into the market, the market had no reason to listen to them.  Strange as it may be, Jake DeSantis might be 2009′s Man of the Year.  Once he proved that you could go public and not cower in fear at the government’s Sternly Worded Letters, the rest of the country saw that the Administration could be crossed with impunity, at least as long as you were not a creditor of an auto company.

To skip ahead to the present, can you imagine – just imagine – some marginal senator who might or might not represent a filibuster-breaking vote jerking around Lyndon Johnson when Lyndon wanted something?  A marginal senator hanging onto a committee chairmanship, a marginal senator with no natural allies in either party?  But that’s why Lyndon fought so hard on every vote – he never wanted someone to get the idea that he could be beaten.

We are all products of our environment, and Obama’s environment was one where a naturally sunny and charismatic person was encouraged to appear even sunnier.  He didn’t just have to beat Hillary Clinton – a task most would have described before the Iowa primary as only slightly easier than climbing Everest in early January dressed in flip-flops and a beer helmet – he had to beat her and get her and her supporters to like him.  I find it hard to believe even now; a woman famous for holding grudges and her grudge-holding supporters decided at the end of a nasty campaign to circle up and support Obama in exchange for an uncertain claim at a meaningless position.  If that’s not winning with grace, I don’t know what is.

The difference between campaigning and governing, however, is that when you govern you need to deal with the irreconcilables.  Hillary Clinton could be convinced that Obama was the best deal she was going to get.  Jim DeMint cannot, and if Socrates himself came back to debate him would not concede the merit of Obama’s actions.  And quite clearly the various factions in the Afghan drama, or the Iraqi drama, could care less what happy thoughts come from 1600 Pennsylvania Avenue.

What these people respect is victory.  Jim DeMint doesn’t know his history any better than his politics, but this much is certain: if he knew Obama would win, as so many potentates around Europe knew Napoleon would win, he would be looking to settle on whatever terms were offered.  It is Obama’s very refusal to punish that has made people so relaxed opposing him.

There is a great shame to it all.  There is nothing particularly wrong about the country today; by the standards of virtually all of human history, we are blessed beyond comprehension to live in this place and time.  With no great reforms, we will lead wonderful lives of overwhelming plenty.

Others could as well, if only the government tried.  The big things.  The lack of a meaningful carbon tax to take control of our energy policy.  The lack of resolve in driving down health care costs.  The compulsive need to bail out not only the financial system but also the risk capital profiting from the system.

And it’s the little things that have knock-on effects.  If you are reading this, you know my perspective on rescission.  But take, for example, the refusal of all parts of the political spectrum to recognize that the solution to a lack of affordable product is to reduce the price of the product, not to increase it and then try to come up with some sort of magic subsidy to more than make up the difference.  And yes, housing is a product like any other.  Or our lobbyist-driven insistence on ignoring the problems in our food supply, even though we know people are getting sick and we know how to prevent it.

The thing that was so refreshing about Obama in the primaries was the sense that he really understood the issues and had the courage to stand up for doing the right thing.  And now that is gone.

So that was my year of thoughts and observations.  I would be nice to imagine that I contributed to the national conversation somehow; about 69,000 people viewed my rescission post, so that’s a bit like getting the crowd at Lambeau Field to listen to me for a few minutes. 

Mostly, though, I learned.  I learned from thinking, I learned from writing, and I learned from interacting with the fascinating characters in this Mos Eisley of the internet.

I would have had no readers whatsoever without the help of James Kwak at Baseline, Mike Konczal at Rortybomb, Felix Salmon at Reuters, Yves Smith at Naked Capitalism, and of course the incomparable Paul Krugman for a plug he has surely forgotten.  For all of you who did find this spot - the folks who commented regularly, Albrt, Anne, Bond Girl, CrocodileChuck, Cyrano, DMW, Dutch Richardson, Economista Non Grata, Joe, Mark Hartzer, Mike3550, Pete Muldoon, Ribald, Sparhawk, StatsGuy, Stephen Dodson, Twist, WiscoDude – thank you very much for making this such a wonderful experience.  I am the better for it, and I appreciate it. 

But consider the history as seen by Pakistanis.  Twice in recent history America abandoned its democratic values to support dictators and manipulate and exploit us. In the 1980s, the United States supported Gen. Muhammad Zia ul-Haq’s iron rule against the Pakistani people while using Pakistan as a surrogate in the war against the Soviets in Afghanistan. That decade turned our peaceful nation into a “Kalashnikov and heroin” society — a nation defined by guns and drugs.

Did he say “peaceful”?

Muhammad Zia ul-Haq was a vicious thug, but his accession to office in 1977 marked no great change for Pakistan.  Perhaps it was not a banner day for the Bhutto family – he did, after all, execute his predecessor, Zulfikar Ali Bhutto – but consider Pakistan’s peaceful history to date:

• 1947.  Unable to separate peacefully from India, Pakistan and India launch a blood-curdling war.  Particularly bizarre as this fight began with the same person – Claude Auchinleck – in charge of both the Pakistani and Indian militaries.
• 1965.  Having resolved nothing the first time around, India and Pakistan decide to fight again.  And resolve nothing.
• 1971.  Third time lucky.  The people of East Pakistan, fed up with being separated from West Pakistan by all of India and more than a little annoyed about being ruled by a clique of Punjabi officers. decide to separate.  Pakistan intervenes, India intervenes, everyone fights, Bengalis are killed in droves, and at the end, East Pakistan is called Bangladesh.

Without battlefield success, the suddenly half-sized Pakistan then decided to pursue Islamic fundamentalism – the better to inspire irregular warriors – and get itself a nuclear weapon.  Charming.

And what does this peaceful nation want today?  Kashmir.

I know it is the conventional wisdom in Washington that my nation is obsessed with India. But even to those of us who are striving toward accommodation and peace, the long history and the unresolved situation in Kashmir give Pakistanis reason to be concerned about our neighbor to the east. Just as the Israeli-Palestinian dispute cannot be resolved without accommodating the Palestinian people, there cannot be permanent regional peace in South Asia without addressing Kashmir.

The history of Kashmir is sad.  A majority-Muslim princely state ruled by a Hindu, there was no natural home for it at Partition.  It might have hoped to remain independent, but neither India nor Pakistan seemed remotely interested in allowing this to happen.  The ruler refused to decide, Pakistan invaded, he called for Indian help, the land was divided.

And that is in the past.  There is nothing lost by accepting the Line of Control as the international border and getting on with life.  The government of Pakistan has dedicated itself to the premise that it, and it alone, can return all of Kashmir.  It is a fool’s errand.  India is five times the size of Pakistan; there are more Muslims in India than in Pakistan.  Pakistan is not going to be able to dislodge India by force.  By setting the return of Kashmir as the litmus test for government performance, successive Pakistani governments only encourage the cycle of coups that stems from discovering that yet another set of leaders cannot deliver.

Mature nations get over their territorial issues.  The US claimed a northern border of the Oregon Territory at 54°40′, a latitude that would give us British Columbia and great heli-skiing and marijuana.  We compromised on 49° in 1846 so we could focus on fighting our southern neighbors instead.

The intervening years have been good for our conventional forces.  John Candy movies notwithstanding, it is likely that our military could seize British Columbia.  But even our worst presidents have managed to avoid the temptation.

Oceans of blood have been shed trying to fly flags over Alsace and Lorraine, but today the border is quiet.  Both France and Germany accept the current border.

If Pakistan wants to be recognized as a part of the community of nations, it should find the courage to settle its border issues and stand down.  As long as it doesn’t, we should see it for what it is: a nuclear-armed mafia with some loose control over territory to the west of India.

The problem is in the text overlay essentially complaining that NY has a dearth of affordable housing.  The site proceeds to advocate more affordable housing programs.  It’s a shame, because it is exactly these affordable housing programs that have created the high costs in the first place.

First of all, to concede a point often made by Mike Bloomberg, NY is a luxury good and will cost more than other parts of the country.  This does not mean that property will appreciate more quickly than elsewhere – it was a luxury good last year, too – but it does mean that absolute values for any item will probably be higher.

Still, the cost of real estate in NY is astronomical when compared with both the cost of real estate in other dense, vertical markets – think downtown Chicago, which has no shortage of skyscrapers – and the cost of construction.  Whenever discussing real estate, I feel the need to bring in Edward Glaeser’s great observation:

As Glaeser says: “It’s so easy to forget the world that we were living in around 1970, when basically almost all of the value of houses was in the physical infrastructure. That was actually the cost. There was some land, and it was worth something, but it wasn’t worth more than 20 percent of the value of the house.” Even in New York City, Glaeser says, the price of an apartment back then was essentially the cost of building the next floor. In researching New York City’s housing prices, in fact, Glaeser and Gyourko discovered that over the past 30 years, the average height of new residential buildings in Manhattan decreased in size. “That’s crazy,” he insists, especially in light of how much the demand to live in New York has increased. “You know, if prices in Manhattan are skyrocketing, you should be building more and more at 50 stories, rather than at 30. Not the reverse.”

…

Let’s go back to Manhattan in the 1920′s, Glaeser says. “New York in the 1920′s is a pretty developed place, a pretty mature place. But they’re producing a hundred thousand units a year. They’re tearing up swaths of Manhattan and building higher buildings.” That would be legally and politically impossible today, but as he and Gyourko see things, it is precisely those legal and political roadblocks to “tearing up” the city that have made the place so expensive. Actually, in 2004, the two men took a close look at Manhattan and estimated that one half or more of the value of condominiums in the borough could be thought of as arising from some type of regulatory constraint preventing the construction of new housing.

There has never been a national policy to create affordable plasma televisions.  There are no subsidized plasma televisions.  Plasma televisions have never been subject to price controls.  Certain plasma televisions are not removed from the general plasma pool and sold at discounted prices to individuals who have won lotteries or been television viewers the longest.

Despite the government’s benign neglect for the plasma television industry, plasma quality has doubled in the past five years and prices are perhaps a quarter to a sixth of comparably-sized units then.  Indeed, prices fell so quickly that otherwise accomplished manufacturers, such as Pioneer and Fujitsu, lost so much money they had to exit the market.

If NY wants affordable housing, it should encourage the sort of arms race that governed the plasma industry.  Encourage developers to build ever-larger and ever-nicer apartments.  Get rid of the tax abatements for segregating units for an “affordable” pool.  Every new “luxury” unit makes the existing units slightly less luxurious by comparison.  Keep going quickly enough and the entire housing stock is lifted up.

Furthermore, NY has a completely insane system of rent control that, despite being the one thing that unites all economists, is still beyond the comprehension of most of the population and its legislators.

In 2008, there were 2,092,363 rental units in New York City.  Only a third of these are free market rentals; the other two thirds fall into one of the many flavors of rent regulation.  Most of these regulated units are in the outer boroughs, and depending on the neighborhood the regulated rent may actually be higher than the market clearing rent, so these cases do not matter much.

The ~250,000 rent regulated units in Manhattan south of 96th street, however, have a massive effect on the market.  Essentially a third of the entire housing stock is held off the market.  Remind me what happens when supply is incredibly constrained?

If NY were remotely serious about housing affordability, the easiest thing to do would be remove rent control.  In 2007, at the height of the bubble, 6,584 housing units were built in Manhattan.  It would take the better part of half a century at that pace to accomplish what could happen overnight with rent deregulation.

Amazingly, Massachusetts managed to deregulate its rental market in 1994 – Boston and Cambridge voted to keep it, the rest of the state voted to scrap it, and the rest of the state just barely won.  The sky did not fall.  Poor people were not thrown into the streets wholesale…largely because the people who have been in town the longest and occupy the land that has appreciated the most are not poor.  The poor are the people overcrowded in substandard housing that are squeezed between the desire of residents to maintain zoning that allows for light to reach the ground and the lack of a free market in those units that do exist.

Government attempts to deliver an economic windfall via the back door become endlessly complex as the importance of shielding the back door grows with the value of the windfall.  Take the curious case of 101 Warren/89 Murray.

The developers who built the complex decided to build some units for direct sale and some units for rental.  By reserving 77 of the rental units for the city’s “affordable housing” program, the developers received tax credits.

77 people whose incomes fell below a threshold amount were selected by lottery to receive the units at a greatly reduced rent – a rent that is “affordable” to them.  That means 77 fewer market-rate rentals in Tribeca – and 77 fewer units whose rental income generates valuable tax revenue for the city, and a useful tax shield for the entire building that was worth more to the developers than the foregone income.

Now, if people with genuinely low incomes had been given money for housing, there is virtually zero chance they would have spent the money purchasing Tribeca housing.  Of course, there is no chance the government would give someone a housing voucher twice the size of his annual pretax income (which is effectively what is happening for the lucky 77)…but even if that were the case, the odds are overwhelming that the beneficiaries would bank part of the money and use the rest to find a place in a lower-rent district.  But if the city is giving away Tribeca, who is to complain?

Well, plenty of people, but they just don’t know it.  The other renters in the area, of course, who face a greater scarcity of housing.  But also the guy in Chelsea who could afford Tribeca if only there were a few more units, and the guy in Brooklyn who could afford Chelsea if only there were a few more units, and the guy in Queens who could afford Brooklyn if only there were a few more units.

The solution to affordable housing issues is pretty simple: come up with more units.  That requires a lot of construction, particularly in the outer boroughs; Atlantic Yards may be a giant fraud, but the general idea that five and change million people in Brooklyn and Queens – more people than Chicago and Houston together – should live in a place without hotels, shopping or large employers  is bizarre.  And it also requires using the units that exist today.

This balance was broken only when the Athenians decided to send a fleet to Sicily to intervene in an intra-Sicilian fight.  The Athenians bungled the initial campaign, and Syracuse – the target of their ire – was able to send for Spartan help.  The Spartans defeated the Athenians.

At this point, nothing had really changed in the Greek balance of power.  Unfortunately, the Athenians decided to double down, sending another fleet to bail out the original expeditionary fleet.  When this force was annihilated, Athens had nothing left in the tank.

I try to keep this in mind when I read arguments that democracies don’t have the stomach for war.  Dictatorships may enjoy the fruits of national mobilization, but most dictators are keenly aware that in the absence of free elections, all ballots are nine millimeters.  They settle their wars before their power base is eroded.  Democracies, on the other hand, do not abide the subtleties of international intrigue.  Roused to war, they tend to stay at war as their grievances grow.

Iraq is the obvious analogy to the Sicilian expedition: we had no need to fight there, fought there poorly, and then sent wave after wave to try to rescue our original bad decision.  We are still there, years after any possible objective was either achieved or proven preposterous.

Afghanistan was the good war – incompetently fought, but against a group that attacked us and had every intention of attacking us again.

The problem is that our incompetence has allowed our enemy to grow, while our strategy has bogged down.  We are still making our chess moves from early October 2001, and that game has been played.

One of the first things we seem to have forgotten – and perhaps the most crucial – is that we do not care about Afghanistan.  We went to Afghanistan because Al Qaeda was there.  If Al Qaeda had been in Yemen or Somalia or Colombia we would have gone there.  It just happened to be Afghanistan.

Al Qaeda is not wedded to Afghanistan.  Their name might be “the base,” but the base is quite mobile.  Right now, rumor is the leadership is in Pakistan.  Maybe it is, maybe it isn’t.  But we should have at least as much flexibility to move as they do.

Instead, we are beefing up our involvement in the static elements of Afghan life.  We are now supposed to be winning hearts and minds – whatever that means, when the thing that sets the hearts and minds against us is the fact that we are there – and creating security in Kabul and Kandahar.  It is a fool’s errand, for the simple reason that we cannot protect Kabul from Kabul.  If the Afghans want to live in a civilized society, they will build one for themselves.  If they do not, we are hardly going to impose one upon them.  Meanwhile, the cost in blood and treasure is borne by us.

It should go without saying after our experience in Vietnam that acting as the muscle end of a notoriously corrupt government is not a sustainable position.  Without US backing, the Karzai regime would fall.  Let’s not put too fine a point on electoral fraud; the real act of denying popular will is keeping Karzai alive.  For his part, Karzai is holding himself hostage; in essence, his threat to the US is “turn a blind eye to my corruption, because if you stop supporting me, the Taliban will take over.”  It’s a bluff that might as well be called.

The elephant in the room in Pakistan.  Pakistan is the real supporter of Al Qaeda and LeT and the rest of the jihadist movement.  Jihadism is a key element of Pakistan’s security strategy; the Pakistani military exists to recapture Kashmir, and Pakistan cannot take Kashmir by conventional means.  Terror is the only lever that can work against an enemy nearly five times larger.  So it is probably wishful thinking to imagine that Pakistan would ever sell out the jihadists.  Not only would the jihadists kill the Pakistani leader who tried, but too many stakeholders in the current Pakistani power structure depend on them.

One of terrorists’ great advantages is that they have the initiative.  The good guys have to defend all the days that nothing is happening; terrorists fight on the time and place of their choosing.  Reversing this trend is imperative.  Somehow we need to chase sufficiently quickly that we can bring our resource advantages to bear.  We will always miss the lone crazy – we cannot even stop a couple of losers trying to get on a reality TV show – but we ought to be able to break up large groups.

Obama’s decision to increase modestly seems calculated to split the political difference: to not be seen evacuating under fire while keeping the cost down.  Appearances matter, and the position has some merit.  But the war is too important and too expensive to leave on the back burner.  We spend a monstrous amount on defense, and every one of those dollars is money we did not spend shoring up our financial affairs at home – the ultimate mainspring of our strength in the first place.

We need a fluid force that is able to take the battle to Al Qaeda wherever it may be.  To get this force we need to remove the other demands on our military resources.  We need to get out of Iraq and Afghanistan, to stop our troops from sitting in a defensive posture on behalf of other people and put them on offense in our own service.  Standing still is the wrong war at the wrong time, and digging in 30,000 extra troops to prolong the period of standing still only gives us 30,000 more troops to remove down the line.

The cause that brought us to Afghanistan was just, and remains just.  But it wasn’t Afghanistan, and we forget it at our peril.

General Motors Co. Chief Executive Officer Fritz Henderson resigned after eight months on the job as directors concluded he hadn’t done enough to fix GM’s finances and culture, people familiar with the matter said…Henderson’s exit caps a tenure that included aborted deals to sell the Saturn, Saab and Opel units, a struggle to replace top managers such as Chief Financial Officer Ray Young, and U.S. market-share losses.

I am all for firing GM managers.  But I cannot help but suspect that the real reason Fritz was fired isn’t that the board wants change, but rather that this is the most change-looking thing they can do without really changing anything.

Let’s be clear: the love child of Steve Jobs and Napoleon Bonaparte couldn’t fix GM in a hundred days.  So saying that Fritz failed to accomplish enough during his tenure is a bit ridiculous; he is probably still waiting for them to pull the RICK WAGONER stencil off his parking place.

And what of the terrible comedy of errors that is GM.  The decision to sell Opel, followed by the hasty backtrack.  The blowup of the Saturn and Saab deals.  The continued loss of domestic market share.

That would be a lot easier to fix if anyone had any idea what the controlling shareholder wants, now wouldn’t it?

If the goal is to build a globally competitive auto company, sure, it would be silly to unload a solid, functioning European brand – Opel – for a modest price, especially when you know that two things are going to happen within a decade:

• GM will want to set up its own distribution network in Europe to avoid being shut out of the market;
• An independent Opel will follow Volkswagen into the US market with small, fuel-efficient cars and a German feel.

But if your goal were to be the best car company you could be, you would also have dropped all of the dealer contracts in bankruptcy and picked them back up one at a time on the terms of your choosing.  You would have abrogated your UAW contract and health care obligations in one fell swoop, let the union strike your bankrupt estate, and either shut down for want of DIP financing or allowed your overseas facilities to sell into the US market.  You would place all of your new facilities in the cheapest place possible, diversified to reduce exposure to any one government or union.

But that’s not what the owner wants.  The owner wants production in the Great Lakes.  And the owner isn’t exactly quiet about his desires.  This means the CEO has to play cards-up; the UAW knows that he can’t go to the mattresses, the dealers get to cry to their congressmen, and every buyer of a foreign asset understands the pressure to repatriate cash.

After all that, you turn around and claim the guy isn’t running GM like enough of a business?  That’s rich.

The problems holding GM back aren’t in the CEO’s office.  More visionary CEOs might do better, but only by immediately crossing the red lines the government established.  Playing by the rules, no one – not John Malone, not Richard Branson, not Sam Walton (even a living Sam Walton), no one gets the company to improve.

General Motors makes cars that are inferior in user experience to the competition, spends more money making and distributing them, and has to date failed to come up with a compelling reason for the consumer to buy them.  A great CEO would build better cars for less money and give the brands a sense of purpose.

Building better cars takes a few years and billions of startup costs, and before any of that could even start the existing engineering and design teams would have to be purged.  This would blow up the largest chunk of white-collar jobs remaining in Michigan.

Building cars more cheaply means either getting UAW workers to receive less money per unit of productivity or reducing the proportion of cars assembled by UAW workers.  The UAW wouldn’t like that, and they vote.

Building a compelling brand identity is probably the longest and most difficult of the projects.  GM’s brands are known; they are just known for being lousy, or at best indifferent.  Each needs to be revitalized until it makes people outside the pickup truck market identify with the brand.  Until someone is proud to drive a Buick.

These are difficult tasks.  They are difficult because they offend large interest groups and contain a large risk of failure.  Since the board didn’t want to do difficult, it chose “change” instead, banking on the fact that most people associate “change” with “dynamic” and “progress.”  In this case, “change” means the path of least resistance; piss off one guy who has no constituency, and let everyone spend the next several months assuming that you’re on their team.

Sending more soldiers to Afghanistan doesn’t do anything to address our foreign policy, security, or geopolitical challenges.  It costs more and gets a few more people killed, but the money is hard to track and the dead don’t vote.  Mostly, it lets everyone run around talking about the need to give the “new” strategy time to play out, even though the new strategy is the old strategy in a different font.  We celebrate the surge in Iraq, but we are just as stuck there as we were before we surged.

I have the sneaky suspicion Obama just punted on second down.

Suppose you had a tiny country that decided it wanted to be important.  Playing on confusion with its oil-rich neighbors, it goes out and borrows a lot of money to build buildings.  Taking the Paris Hilton strategy that if you insist on your caricature long enough others will eventually believe it, the country makes a big show of people piling into the buildings.  Real estate developers, the ultimate momentum players, pile in.  The country goes the offshore tax haven route – no income taxes – and throws in absolutely no labor standards to ensure that construction can proceed on whatever blistering pace can be achieved by malnourished Thais and Pakistanis welding in 115F heat.  Eventually it hits the wall – for reasons completely beyond its control, at some point people look around and realize they have the world’s largest Potemkin village.  There is no market.  The locals are preposterously corrupt.  Islam is not compatible with the hedge fund lifestyle.  What then?

I don’t know what Dubai will do.  I suspect Dubai doesn’t know what Dubai will do.  Abu Dhabi has the resources to make good Dubai’s promises, and perhaps among the emirates that will be seen as the smart thing to do, or at least the path of least resistance.  In a part of the world where we are speaking less about nations and more about families with flags, perhaps some quiet accommodation is best for everyone.  Dubai could give Abu Dhabi Emirates, for example – eliminating the completely duplicative Etihad – and some amount of offshore assets, and Abu Dhabi could advance the money to pay off the debts.

I do know that I would like Dubai to tell its creditors to pound sand.  As Willem Buiter points out:

The debt of the Dubai World Group and of Nakheel was not Dubai sovereign debt or sovereign-guaranteed debt. The sole shareholder may be the state of Dubai (indistinguishable from its ruling family), but limited liability applies to governments as well as to private entities. The government of Dubai is under no legal or moral obligation to provide an ex-post guarantee of the debts of the Dubai World Group and Nakheel. The creditors will have to manage this contingency the way God meant them to: hoping for the best, but living with the restructuring and taking their losses. Requiring the debt holders to live with their losses will not damage the reputation of the Dubai sovereign. The only way a bail out by the Dubai sovereign of the debt holders of Dubai World and Nakheel would enhance the sovereign’s reputation would be by enhancing its reputation as a sucker.

A curious thing has happened over the past seven months of stock market frothiness:  governments have come to believe that they should be suckers.  Here is Brad DeLong stating essentially the orthodox party line:

The fact that investment bankers did not go bankrupt last December and are profiting immensely this year is a side issue. Each extra percentage point of unemployment lasting for two years costs us $400 billion. A recession twice as deep as the one we have had would have cost us as a country some $2 trillion–and cost the world as a whole four times as much. In that scale and context the bonuses of Goldman Sachs are rounding error. And any attempt to make investment bankers suffer more last fall and winter would have put the entire support operation at risk: as Federal Reserve Vice Chair Don Kohn said, ensuring that a few thousands investment bankers receive their just financial punishment is a non-starter when attempts to do so put the jobs of millions of Americans–and tens of millions outside the United States–at risk.

This view accepts as its starting point the premise that banks have some sort of preferred claim upon the economy of the state, that there is no way to get around the banks in delivering some measure of stimulus.

That’s preposterous.

The Fed could very easily have stated that it would intervene to guarantee the custodial accounts of Goldman Sachs but not its bonds or its equity.  Goldman would have been unable to roll its debts and would have defaulted on its short-term paper at some point in October 2008.  If the goal was to preserve the economic unit of Goldman Sachs, the Treasury could have bought the bankrupt company – office space, letterhead, org chart – for pennies on the dollar from its creditors in bankruptcy court.  If you have any doubt that this was possible, note that this is exactly what happened with GM and Chrysler.  The only difference is that the government was willing to allow any number of stakeholders of the auto companies to get crammed if it would maintain employment, while the government was unwilling to allow any stakeholder of Goldman (with the possible exception of shareholders) to suffer.  That’s a decision, not an inherent fact of life.

Buiter points to the several nations that have run out of room to bail out their private sector creditors:

Given the severely-impaired fiscal-financial positions and prospects of so many countries, the notion of a sovereign of one of these countries assuming responsibility for any debt that is not sovereign or sovereign-guaranteed is ludicrous. Even banks and other financial institutions that would in the past (when fiscal pockets were deeper) have been considered too big and too systemically important to fail are now too big to save. Ireland’s government could not today afford to guarantee virtually all of the liabilities of its banking system, as it felt compelled to do at the beginning of this year.

If I may, a small disagreement on language: not doing something you cannot do is not ludicrous.  It is simply impossible.  Ludicrous is deciding to do something stupid and then going through with it because there is no one to stop you.  Dubai not paying foreign debts that it cannot perform is recognizing reality; the US debasing two centuries of bankruptcy law in an attempt to shield a few private banks from the consequences of their decisions is ludicrous.

The Krug offers three explanations of the drama in the desert, before settling for a combination of #2 and #3:

First, there’s the view that this is the beginning of many sovereign defaults, and that we’re now seeing the end of the ability of governments to use deficit spending to fight the slump. That’s the view being suggested, if I understand correctly, by the Roubini people and in a softer version by Gillian Tett.

Alternatively, you can see this as basically just another commercial real estate bust. Either you view Dubai World as nothing special, despite sovereign ownership, as Willem Buiter does; or you think of the emirate as a whole as, in effect, a highly leveraged CRE investor facing the same problems as many others in the same situation.

Finally, you can see Dubai as sui generis. And really, there has been nothing else quite like it.

That is correct but insufficient.  Dubai itself can do nothing.  Even if #1 were the case, it would only be important in the way that the assassination of Franz Ferdinand was important to the beginning of World War I: the pretext seized by a bunch of players to do what they always wanted to do anyway.  The key question is how the lessons of Dubai are applicable to economies of relevant size.  What would we do if, say, Fannie Mae failed?  And if we would find the temptation to do something overwhelming, what should we be doing before the storm hits to ensure that there is no such organization that would be able to compel us to act?

It is this second part that curiously seems left out of serious discussion about our own financial house.  I disagree on large bank failures; fair enough.  But even if I could agree that there is something particularly earth-shattering about the restructuring of obligations of a massive bank (mind you, the US survived a four-year intramural war of unspeakable carnage and two subsequent world wars; I think we’d handle a Citigroup filing with some degree of resilience), wouldn’t that make it all the more imperative to gain control over the operations of the bank?  So long as Citi, for example, is too big to fail, Vikram Pandit is essentially running his own branch of government.  In fact, he has the power to print money; whatever losses he runs come straight from the Treasury/Fed if there isn’t money in the till.  And once the government publicly allows this state of affairs to continue, it loses any meaningful supervisory authority.  Sure, the government could fire Pandit…but what would that accomplish?  The next guy would face all the same incentives.  The only way to control any aspect of the bank is to remove the bank’s ability to write checks on the taxpayers’ checkbook – and that is the step the government appears most loathe to take.

It’s a case of learning the wrong lessons from last fall, and the wrong lessons from the sands.

By the way, if any of you are tempted to feel bad for the emirs, note that this couldn’t have happened to nicer guys:

Wal-Mart, the mightiest retail giant in history, may have met its own worthy adversary: Amazon.com.  In what is emerging as one of the main story lines of the 2009 post-recession shopping season, the two heavyweight retailers are waging an online price war that is spreading through product areas like books, movies, toys and electronics.

Used to be that every year, right around the hotel convention season, the Miami Herald would run an article about how the hotel industry was doomed and price wars were just around the corner.  The New York Times would return the favor during Seatrade, offering some expose about tax shelters and shipboard rapes by undocumented crewmen.  It’s a nice way to thank your advertisers.

That doesn’t seem to explain this article, and I can’t imagine what does.  How does a $450bn company get worked up about a $20bn company that sells through an entirely different channel with at best tiny, tiny overlap?

Wal-Mart, at its core, is about push marketing.  It may not have the limited SKU approach of a European hard discounter such as Aldi, but given a 160,000 square foot supercenter, there is surprisingly little choice within a category.  There just happen to be a lot of categories.

Amazon, by contrast, is the long tail.  Its growth has been horizontal; you can find ever-more obscure merchandise from its partner vendors, as well as the typical high-touch predictive book and video selling (side note: I have a tough time believing there is any complex algorithm to its recommendations; after buying hundreds of books over the past decade, my recommendations from Amazon are still some derivative of “as similar as possible to the last three books ordered”).

Why would Wal-Mart want to bother?  The low value-to-weight stuff they sell isn’t going to be helpful for Amazon, unless Amazon wants to go the way of pets.com.

And there is no point in Wal-Mart replicating Amazon’s habit of stocking obscure movies; how many of its customers are likely to buy a movie outside of the top 100 sellers?

One of the odd lessons of the internet seems to be that the perfect place to cross-sell isn’t that perfect after all.  Once upon a time, Microsoft had the leading email client.  That was sticky, but it didn’t get its users to read MSN content; they went to Yahoo’s pages.  Yahoo’s enormous user base didn’t stick with it for search; people with My Yahoo pages still searched with Google.  Google’s dominance of search couldn’t even get people to use Google Video; they ended up buying YouTube just to prevent someone else from getting into search through the back door.

None of the portals has been able to sell stuff, and Amazon and eBay have struggled to build anything but transactional visits.  Facebook and Twitter have tremendous numbers of visitors, but few do anything other than check up on their friends; they don’t use it as a base of consuming or doing anything else.

We have the feeling that the Internet should be disruptive, and of course in the sense that technologies emerge and recede it is.  Just ask AOL or Alta Vista or Friendster.  Someday there will be a better way to look for what you want and “Google” will be the answer to a Silicon Valley trivia question. 

The tendency to compartmentalize, however, seems if anything to be greater.  And it only grows with a mobile web.  One of the things that surprised me the most about switching to the iPhone (other than the fact I was able to type without buttons) was the proliferation of applications that essentially replace the typical hierarchical browser.  It is an electronic Swiss Army knife. 

No need for the corkscrew to fight with the scissors.

That the entire debate happens offends good sense.  Drugs that are researched, tested, trialed, and manufactured in central New Jersey do not magically become cheaper from a round-trip drive along the New York Thruway.  If we are to discuss prescription drugs, the only policy question should be whether the US should do something to use the purchasing power of its 300mm person market to drive down the cost of drugs, not whether scattered northern seniors should be left to try to free ride on the purchasing power of 30mm Canadians.

I thought of this when looking at Dean Baker’s novel paper at the Center for Economic and Policy Research suggesting the globalization of Medicare and Medicaid.  He proposes a radical concept for America – considering outflow as well as inflow when looking at migration.

The idea of extending government benefits to people who are abroad is not that rare, although completely foreign to Americans.  The Australian government has expedited work visa arrangements with a variety of countries to allow college-aged Australians to travel and easily find employment; just ask any ski lift operator.  A fifth of New Zealanders are outside of New Zealand at any point in time, the product of a country that encourages outbound travel.  The Mexican government famously does everything it can to provide documents and services for the millions of Mexicans in the US who are one of the largest sources of capital inflow for the nation.

Baker suggests that the US address the cost imbalance between American medical care and the medical care of other OECD nations – nations that deliver higher quality care, by life expectancy – by contracting with other nations to put Americans on those nations’ health systems.  For example, if an American retiree moved to France, the US would fund his participation in the French medical system, and the savings from the cost difference would be split between the retiree, Medicare, and the French state.  Basically, seniors would get paid to move (barring Switzerland and Norway, where exchange rate/purchasing power parity currently would leave seniors with a small out of pocket).

There is one small quibble with Baker’s paper that it probably petty to mention: there is limited evidence that other nations’ health care systems are better than the American system for retirees.  That is to say, the life expectancy at 65 isn’t terribly different in the US from the rest of the OECD; some studies suggest it is higher.  Once Americans get on socialized medicine, we seem to be just as healthy as other people on socialized medicine (we spend more money on being healthy, but that’s a legitimate policy decision).  The lousy mortality issues arise from the stuff that happens before people turn 65, when Americans have a bizarre corporatist/free market system that flat-out doesn’t work.  So it’s far from clear that switching a retiree to another nation’s plan is going to improve his health.

Still, it won’t hurt, and it will save money.

Except it won’t.  Or, at least, it probably won’t.

Baker calculates the savings to Medicare, which are substantial, and to Medicaid for low-income retirees, which are enormous (the program goes away for those who move, since Medicare alone is able to cover all the costs and more).  But here’s the problem: the retiree is now in another country.

If Joe Smith pulls stakes and moves to France under the Baker Plan, the Medicare line of the Federal budget goes down by the US’ savings.  But now when Joe Smith goes to buy a cup of coffee, his 17% VAT goes to the French state, and the rest of the money goes to the cafe’s supply chain.  He will slowly but surely liquidate his assets in the US – real property, retirement accounts, claims on the US government such as Social Security and Medicare – for consumption in France.  What a great deal for France – it gets a new resident who is externally funded by a decent credit and does not pick up any of the obligations and responsibilties of taking care of a new citizen.

An expatriate Joe Smith who did not expect to return to the US would also have a curious set of voting interests.  To the extent that health care migration were a significant phenomenon – which it would have to be to save a significant amount of money – we could expect many retired Americans to move their US domicile to Wyoming or another state without an income tax.  It doesn’t take a lot of people to make a major voting block in Wyoming.  Why wouldn’t the expats vote for the candidate who would let the roads and schools rot in the name of low costs?  Why wouldn’t they vote for senators and congressmen who would be laser-focused on reducing taxes and maximizing Medicare expenditures?

You know, maybe it wouldn’t make such a difference after all.

Baker’s paper is flawed in its methodology, but it leads to a useful point about social cohesion.  The US would benefit tremendously from sending Americans to other countries, preferably without a rifle.  Immigrants to the US need to assimilate to American culture; the process is legendarily difficult, and in the case of the migrating generation, often does not happen at all.  Americans returning from time abroad bring with them the distilled experiences of their time away, without nearly the cultural baggage of someone who has never lived in the US.  Bill Bryson has a fantastic take on this. 

This benefit only happens when the Americans return.  By putting the elderly out to government-sponsored pasture abroad, we would be furthering our forty year experiment in lavishing governmental largesse on the least-deserving chunk of society.  Maybe it will happen.

In a ruling that could leave the government open to billions of dollars in claims from Hurricane Katrina victims, a federal judge said late Wednesday that the U.S. Army Corps of Engineers had displayed “gross negligence” in failing to maintain a navigation channel — resulting in levee breaches that flooded large swaths of greater New Orleans.

“Gross negligence”?  Hell, that’s what the Army Corp of Engineers does.

There is something comforting about the name “Army Corps of Engineers.”  You are raised on stories of military achievement and the name imparts some kind of excellence.  You imagine Seabees turning Pacific atolls into airports.  You wouldn’t feel very safe entrusting public works to the “Post Office Corps of Engineers”, even though the Post Office is probably a lot more efficient at managing details than the Army.

The ACE thrives at the intersection of the political parties.  The Republicans can never give enough money to the military, developers, and prime contractors; the Democrats don’t say no to organized labor and the building trades.  Both parties love a showpiece project that they can advertise at home, especially if a lucky someone can get the project named after himself.

The ACE exists to build things.  It is an answer in search of a question.  It will build if it is helpful to build and it will build if it is unhelpful to build.  Furthermore, the worse the project, the more attractive to ACE.  If a project were truly compelling on its merits, a variety of agencies would jump up and down to take a crack, including private utilities and ports.  If a project were merely moderate, it would be built once and moved on.  To really feed at the public trough, the project needs to be able to drag on for an indeterminate period of time, to provide enough opportunity for all politically relevant people to eat their fill.  And the project has to be poorly enough conceived that there will be a constant need for maintenance.

In the specific case of MR. GO, the Corps cut a shallow 37-mile path through the bayou that was so unpopular that before Katrina only a couple of boats a day even bothered to go down it.  You might think that a group of engineers would oppose putting an extra body of water in the New Orleans area; the city is below sea level, after all.  But who would have gained from not building it?  As Lyndon Johnson is said to have asked in the days of Southern Democrat dominance, why not vote for public works, the North is paying for it anyway.  Eventually, MR. GO managed to deteriorate without being touched, and with half a million dollars a mile of annual maintenance.  That’s just about perfect for ACE.

People in New Orleans are justifiably angry that the ACE’s levees did not hold, and that even after Katrina the ACE did not find it important to build shielding to protect against a category 5.

What they should really be upset about is that this was the government’s policy.  Gross negligence is when a decent idea turns out to have a major flaw.

The ACE is more akin to the nation’s energy policy.  We like the idea of consuming so much – and are so frightened of gas taxes - that we send enormous wealth to the small Gulf states that supply our fix.  Then we can’t figure out why we don’t have any money to provide decent social services, and why each guy who tries to provide them inevitably ends up trying to raise taxes.

ACE’s entire reason to be is to ignore the environment and build something that will appeal to a politican looking to employ people and mold the land to the benefit of his supporters.  Negligent?  As in, did not consider the situation and consequences?  What has ACE ever done that was not negligent?  That would be a shocking development worthy of investigation.

First of all, take James’ advice and check out this Interfluidity post:

An enduring truth about financial regulation is this: Given the discretion to do so, financial regulators will always do the wrong thing.

Steve touches on several of the themes I tried to articulate here, and he does a better job explaining the motivations of each of the players.

However, I think (as I pointed out in the comments) that it is precisely when someone has an incentive to do the wrong thing that there needs to be some sort of sanction for that act or external reward for doing the right thing.  For most of human history and in much of the present-day world, public officials are regularly bribed, and it is impossible to get anything done without paying under the table.  The areas that have done the best to address this tendency have combined some sort of carrot (social expectations of clean dealing) with sticks (prosecutions for bribery).  They have not merely said “public officials will take bribes” and left it at that.  We can make it more difficult for our regulators to act against our interests.  And we should.

I would also like to touch on a fairly innocuous post on the weak dollar that seems to have succeeded in dragging out some rather extreme conspiracy theorists and gold bugs.  I commented there as well, and noted a peculiar coincidence among the “strong dollar” folks: they manage to simultaneously believe:

• The economy has gone off the rails, with high unemployment masked by dodgy reporting;
• “Necessary” imports, such as oil, are going to ruin us;
• We are not globally competitive;
• We should have a strong dollar.

If you believe the first three, why would you believe the fourth?  High unemployment, lack of competitiveness in the production of goods and services, and an increasing portion of national wealth going to imports are all signs that the currency is overvalued.  What other indicators would you need before you believed?

A falling dollar would make imported commodities more expensive and reduce American demand for these products.  An electric car looks a lot better at $250/bbl oil than $50/bbl oil.  An American car looks a lot better at ¥50=$1 than ¥150=$1.

Supporting a strong dollar means trying to preserve global purchasing power for those who have already accumulated dollar assets at the expense of those who will accumulate dollar assets – anyone who will try to work in the future.  It’s the hallmark of kleptocracies; the Argentine junta kept exchange rates high so that its members and its associates with connections to the country’s resource base could convert their domestic position into nice houses in Sardinia.  Ordinary Argentines watched their country lose all ability to make anything, as imports substituted the entire economy.

I suspect the strong dollar folks are missing a subtle nuance: they are trying to block an effect instead of dealing with the cause.  Our economic situation is not good.  We have underinvested in our productivity; our people are overlevered and undereducated.  We spent the past decade building each other houses.  There are high-tax, high-benefit countries that still make quality items, whether automobiles in Germany, precision machines in Switzerland, even ball bearings in Sweden.  When was the last time you came across a product group where the US could fairly claim to make the best in the world?  Perhaps still some pharma or software…but the list shrinks daily.

So long as this is the case, our currency will be weak – and should be.  It is a medium of exchange and needs to convert our productivity to that of other nations.  To refuse to recognize it is about as intelligent as the Black Knight insisting he hasn’t lost.  All we are doing is bleeding our national wealth to China.

When we start living within our means, when our government stops needing to borrow more money every year, when our current account gets current, we won’t need to worry about revaluing our currency.  It will do so on its own.

Stop worrying about the exchange rate, and start worrying about all the things that have caused the exchange rate.