Friday, April 22, 2011

Islam Blamers Ignore Real Mideast Trouble Source: Amity Shlaes


Amity Shlaes

Why is Libya exploding? Why are Iraq and Egypt always, even after many millennia, undemocratic? Why was there scarcely any looting or rioting in Japan even after the triple calamity of tsunami, earthquake and nuclear accident?

Blame the rain. Or rather, the lack of it. Egypt and Libya boil over because precipitation levels there are among the lowest in the world. Japan has received enough rain over the centuries to learn how to govern itself.

The idea that rainfall amounts might start wars or foster democracy is consistent with new research by Stephen Haber, a professor at Stanford University, and Victor Menaldo, a professor at the University of Washington. In their paper, Haber and Menaldo sort nations into three categories: those that are persistently authoritarian (Egypt) or democratic (the U.K.) and ones that cycle between the two. Next, the authors ranked nations by annual precipitation. The authors are talking about rainfall, not water from, say, a river.

Haber and Menaldo found that countries where rainfall averages between 50 and 100 centimeters (39.4 inches) a year are more likely to be democratic. In places with less than 50 centimeters annually, dictatorship predominates.

What does rain do that rivers don’t? For one thing, politicians can’t control the rain. Their efforts to turn the skies on and off like a faucet -- using cloud seeding or other measures -- were humiliating failures.

Middle-Class Values

In short, rain meant independence. Countries in the rainy midrange are ones whose inhabitants could grow and store grains, legumes and other crops. This meant farmers in temperate regions experienced less starvation than those in other places. They could accumulate enough to invest in more property or education.

Farmers working in Japan after World War II, in New England during the 18th century or in the Netherlands several centuries ago all fostered what we today consider middle-class values. Long after they abandoned agriculture and moved to the city, the farm-borne respect for the rule of law and property rights sustains a society stable.

Of course, crops thrive in high rainfall areas. The sugar of the moist Caribbean is one example. However, what’s grown in tropical climates often can’t be stored long. This was especially true in the days before refrigeration.

Ruling a Swamp

Big institutional farmers -- whether colonial governments or wealthy foreign companies -- were the only ones with the resources to make cultivation in such places profitable. Individuals in these regions tended to be laborers, not owners. No middle class arose, and citizens, with less to lose, were more willing to back regime change. That’s why swampy, high- precipitation territories (like the Philippines) tend to change direction -- heading now toward democracy, then toward dictatorship -- like lightning in a rainstorm.

Can irrigation create democracy where rainfall is infrequent? No, because the ruler’s hand is always ready to divert the river or close the dam. All the wealth a farmer has built up is in jeopardy if his water supply can be cut off.

There is one example of a heavily irrigated democracy: Israel. However, the authors argue, the immigrants who settled Israel -- whether Germans, Poles or Russians -- came from agricultural countries, and therefore had amassed the human capital necessary for democracy. In other words, Israel’s democracy was created before Israel itself.

Controlling the Flow

Here’s a current example of the Haber-Menaldo theory: Ethiopia wants to dam the Nile, diverting water from Egypt and Sudan to the benefit of Ethiopia, Kenya or Uganda, which may provoke yet another round of conflict in Africa.

You can see this idea at work even in movies: the parched town of Dirt in the animated film “Rango” is held hostage by a corrupt mayor who diverts the precious gallons to Las Vegas, driving Dirt’s townsfolk to pick up their pitchforks.

In the Biblical story, Joseph stored grain and created wealth for the pharaoh, but that helped neither Jews nor non- royal Egyptians in the long run because “there came a new king, which knew not Joseph,” and didn’t build on Joseph’s contribution.

Haber says studying the relationship between rainfall and regimes is useful because it reminds us of our (military) limits: “Societies are an outcome of nature’s constraints,” Haber wrote in an e-mail to me. “Iraq is highly unlikely to ever look like Ohio, no matter how much money we pour into it.”

Another valuable takeaway: It is more important for a farmer to own a farm than to get subsidies for it.

This paper should spur doubt among those who emphasize radical Islam at the expense of other forces at work in the Mideast. “Egypt was a dictatorship long before Islam even existed,” Haber said. “Overall, rain is a better predictor of stable democracy than the percentage of Muslims in a country.”

Atlas’s Ayn Rand Resists Hollywood’s Call

Atlas’s Ayn Rand Resists Hollywood’s Call: Caroline Baum


Caroline Baum

How is it a novel so many readers describe as “life-changing” took 54 years and a gaggle of producers, writers and directors to bring to the screen?

One answer is Ayn Rand herself, author of “Atlas Shrugged,” which was published in 1957. Earlier attempts to make a movie based on the book were foiled by Rand’s insistence on creative control.

The second reason is the nature of the 1,168-page book. It’s about ideas. Rand’s characters are caricatures that reflect her ideas and ideals. Businessmen are good, government bureaucrats are bad. There is no middle ground.

A third reason, one implied by those involved, is the nature of the material.

“She’s a very controversial author,” said John Aglialoro, one of the film’s producers, who acquired the rights to “Atlas” in August 1992 from Rand’s estate. “She threw selfishness as a virtue in the face of society.”

That virtue is better described as rational self-interest. For Rand, capitalism was the only moral system, with each individual acting in his own self-interest. Productive achievement was the noblest activity and happiness, the ultimate goal.

You can see how Rand’s philosophy, so outlined, might ruffle the feathers of Hollywood’s do-gooders. Add that to the movie’s history of false starts, including six screenplays commissioned by Aglialoro alone, and it’s not hard to understand the industry’s resistance.

Rush to Production

“It was clear we were not going to get support from the Hollywood machinery, including talent agencies,” said producer Harmon Kaslow, who hooked up with Aglialoro in April 2010, three months before the rights were set to lapse.

Starting with a clean slate, the duo managed to assemble a team, come up with a fresh screenplay, cast the 41 speaking roles and begin “full principal photography” by June 15, 2010, according to Aglialoro.

“Atlas Shrugged, Part 1” opens tomorrow in 298 theaters across the U.S. A press release classifies the movie as “drama/mystery.” Veteran Hollywood producer Al Ruddy, who was the first to acquire the rights to “Atlas Shrugged” in 1974, was taken by the love story before he parted ways with Rand because of her insistence on final script approval.

Without a Trace

“Atlas” doesn’t fit into either genre. For those unfamiliar with Rand’s novel, “Atlas Shrugged” tells the story of the gradual disappearance of the nation’s entrepreneurs as government bureaucrats impose increasingly burdensome rules and regulations to stifle their success and confiscate their wealth.

One by one, these captains of copper, steel, and oil industries quit, abandoning the businesses they built, refusing to work for the benefit of anyone except themselves.

“Atlas Shrugged, Part I,” takes place in 2016 and ends before we even meet Rand’s hero, John Galt, who is the first to quit and inspires others to join him in his effort to stop the world. (Readers should look for the mysterious man in the raincoat.)

“Atlas” is unlikely to win the Palme d’Or at the Cannes film festival this year. I say this as both an admirer of Rand’s ideas and a devotee of the book.

Casting Errors

No one can accuse the producers of type-casting. The actors, pretty much a cast of unknowns, are too young. James Taggart, president of Taggart Transcontinental, looks 22, unlike the middle-aged, pathetic character, reliant on government favors, that Rand paints for us in the book.

“Everything was built around Dagny,” Kaslow told me.

Dagny Taggart, James’ sister, is the story’s protagonist, struggling to save her family’s railroad from government bureaucrats out to destroy it. She is young, played by a 26- year-old Taylor Schilling. Therefore everyone else is young.

It was hard to look at the actor playing Francisco d’Anconia, heir to the d’Anconia Copper empire. Couldn’t the producers have found someone more dapper who could speak with a Spanish accent?

The pressure to start shooting before the rights lapsed forced the producers to focus on the ideology at the expense of potential cinematic qualities.

“We put words from the book into the characters’ mouths,” Kaslow said.

I suppose if it had been possible to do otherwise, someone would have done it by now.

A is A

Fans of the book, 7 million and counting, may not notice or care. They’ll get chills, as I did, when Dagny’s new railroad line, the John Galt Line, makes its first run on tracks made of Rearden metal, a new alloy created by fellow industrialist Hank Rearden that threatens to put steel producers out of business.

The government tries to scare the public by fabricating stories about the dangers of the new metal. Defiant, Dagny and Hank man the train’s locomotive as it speeds across the Colorado landscape, over the new Rearden bridge made from, of course, Rearden metal.

Above all, the movie is faithful to Rand’s philosophy, which is known as objectivism: the idea that reality is objective. Or, as encapsulated by Galt in a 60-page monologue near the end of the book, “A is A.”

No wonder the faithful are heaping lavish praise on the movie. For them, adherence to Rand’s ideas is enough. A is A. “Atlas Shrugged” is “Atlas Shrugged.”

Roots of Crisis Buried Deep After Inquiry: Peter J. Wallison

No one wants to excuse the managers and regulators of financial companies from responsibility for the financial crisis. But it is too easy to assign blame and walk away, without doing the serious work of finding out what really happened.

This observation was triggered by news last week that the U.S. Securities and Exchange Commission is considering an enforcement action against Daniel Mudd and Richard Syron, the chief executives of Fannie Mae and Freddie Mac, respectively, before the two government-sponsored enterprises collapsed.

If, as news reports suggest, Fannie and Freddie failed to fully disclose the potential subprime mortgage losses, the implications would extend beyond a violation of securities laws. It would also have important implications for the causes of the financial crisis and the thoroughness of the work of the Financial Crisis Inquiry Commission.

The commission’s majority report blamed the crisis on financial executives who failed to understand or didn’t care about the risks they were taking. Regulators didn’t do their jobs either, according to the commission.

The conclusion to draw from this is that the crisis was caused by private greed and the indolence or lack of authority of regulators. The remedy implied by this narrative was tighter regulation, and the now-notorious Dodd-Frank Act was the result.

Nearing Truth

Yet the commission, headed by Phil Angelides, a former Democratic candidate for governor of California, and Bill Thomas, a former Republican congressman from that state, never investigated what information about Fannie and Freddie’s loans was available at the time, or why investors and regulators continued to believe that mortgage-backed securities were safe.

With the SEC’s impending enforcement action, we are getting close to the truth.

Under legislation adopted in 1992, Fannie and Freddie were required to meet affordable housing goals when they bought loans from mortgage originators. Initially, the goals required that 30 percent of all mortgage acquisitions had to be classified as affordable -- that is, made to borrowers who were at or below median income in the areas where they lived.

Over succeeding years the goals were increased so that, by 2007, 55 percent of all mortgages the two companies acquired had to be made to borrowers at or below median income.

Competing for Loans

It’s possible to find prime borrowers at this income level. But not when more than half of all loans had to meet this test, and especially when the companies were competing for the same loans with the Federal Housing Administration, and insured banks, and savings and loan associations with similar requirements under the Community Reinvestment Act.

By 2008, Fannie and Freddie held or had guaranteed 12 million loans that were made to borrowers with FICO credit scores below 660 -- a common definition of a subprime loan -- or were otherwise risky because they had no or very low down payments and other deficiencies. By then, 27 million loans, or half of all U.S. mortgages, were subprime or otherwise risky.

When the housing bubble began to deflate, these loans started defaulting at unprecedented rates, dragging down housing prices and the financial companies holding securities backed by these mortgages.

Subprime Exposure

For many years, Fannie Mae defined subprime mortgages as loans that it bought from subprime lenders, not by credit score. This had the effect of making its investment holdings seem less risky. In its 2007 10-K annual report, for example, the company estimated its subprime exposure at about 0.3 percent of its single-family mortgages. Tables deeper inside the report showed loans with FICO credit scores of less than 660 were 18 percent of the company’s single-family holdings.

The significance of this for the financial crisis is that Fannie and Freddie’s reports might have lulled analysts and risk managers into believing that if the housing bubble collapsed, the damage would be limited because the number of risky loans was small.

We now know the damage was severe. Had those 12 million Fannie Mae and Freddie Mac loans been prime instead of subprime, delinquencies and defaults probably would have been around 2 percent, not almost nine times higher.

No Inquiry

In writing my dissent from the commission’s majority report, I searched widely for examples of anyone -- academic researcher, credit rating analyst or housing market expert -- who knew before 2008 that half of all mortgages in the financial system were subprime or otherwise risky, or that Fannie and Freddie had contributed almost half of that total. I found none.

The commission had a chance to investigate the risks that Fannie and Freddie were taking and why the information available in the market was so deficient. But this would have required the commission to examine the losses caused by government housing policy. Angelides refused to do so. Instead, Fannie and Freddie’s contribution to the housing crisis was called “marginal” in the commission’s report.

As a result, the American people and Congress received a distorted picture of the causes of the financial crisis, not the thorough investigation they deserved.

U.S. Finances Are ‘Unsustainable,’

U.S. Finances Are ‘Unsustainable,’ Obama Says at Facebook Town Hall Event

Obama, at Facebook, Says U.S. Finances ‘Unsustainable’

U.S. President Barack Obama, left, speaks while Mark Zuckerberg, co-founder and chief executive officer of Facebook Inc., listens during a town hall event at Facebook headquarters in Palo Alto, California, U.S. Photographer: David Paul Morris/Bloomberg

President Barack Obama, on a cross- country trip to sell his deficit reduction plan, said yesterday that the nation’s finances are “unsustainable.”

At a campaign-style town hall meeting at the headquarters of Facebook Inc., Obama described the House Republicans’ budget plan as “fairly radical,” and said members of both political parties in Washington need to work together to start reducing the federal deficit in a “balanced way.”

“We have an unsustainable situation,” he said. “We face a critical time where we are going to have to make some decisions -- how do we bring down the debt in the short term, and how do we bring down the debt over the long term?”

After his appearance at Facebook, Obama turned his attention to political fundraising.

During remarks to Democratic donors today at a San Francisco hotel, a group of people at one table stood and broke into song, demanding the release of Bradley Manning, the U.S. soldier accused of leaking secret documents to the website. Obama brushed off the interruption: “Now there’s an example of creativity,” he said.

Obama attended a dinner in San Francisco last night hosted by Marc R. Benioff, chairman and chief executive officer of, a cloud computing company.

Obama’s ‘Startup’

Obama spoke after a performance by singer Stevie Wonder, telling a roomful of early supporters: “Some of you were involved in startups. Well, I was a startup.”

“We started something in 2008,” Obama said of his first presidential campaign. “We haven’t finished it yet,” he said, reeling off needs to overhaul education, improve clean energy programs and reduce debt and deficits. “I’m going to need you to help me finish it.”

Tickets for today’s event, which drew about 200 donors, and yesterday’s dinner, attended by about 60 people, cost as much as $35,800 a person, according to a Democratic official who wasn’t authorized to discuss such details publicly. The president yesterday also attended a “Gen44” Obama fundraising event at the Nob Hill Masonic Center, where ticket prices ranged between $25 and $2,500, according to another Democratic official.

Obama is to fly today to Nevada, a politically important state in the 2012 campaign. The president is scheduled to hold a town hall meeting in Reno at ElectraTherm Inc., a small renewable energy company, giving him a chance to reinforce his push for increased spending on clean-energy technology.

Job Approval

A poll released today showed that 42 percent of Americans surveyed approved of Obama’s job performance, down from 48 percent last month. In the poll by American Research Group Inc., of Manchester, New Hampshire, 53 percent of respondents disapproved of Obama’s performance, up from 47 percent in March. Pollsters questioned 1,100 adults nationwide from April 17-20. The margin of error is plus or minus 2.6 percentage points.

Later today, Obama returns to California for fundraisers in Los Angeles, including events at Sony Pictures where actor- singer Jamie Foxx is scheduled to appear.

The fundraising events in San Francisco and Los Angeles are expected to bring in between $4 million and $5 million, a Democratic official said.

Bill Carrick, a Democratic strategist based in Los Angeles, described the trip as “not a full-fledged campaign trip, but it has some of the dynamics of preparing to run a campaign,” such as efforts to “start focusing on swing states early so you can broaden the electoral map.”

Reach Out

Facebook, with more than 500 million users, is the world’s largest social network website. It was founded in 2004 by Mark Zuckerberg.

Obama has used social media sites such as Google Inc. (GOOG)’s YouTube to reach out to voters. Yesterday’s session is the first time he has appeared on Facebook, which passed Google last year to become the most visited website in the U.S.

Zuckerberg, joined by Chief Operating Officer Sheryl Sandberg, moderated the event. Obama took questions filed online through the White House’s Facebook page and website, along with those from an audience of Facebook employees, small-business leaders and Silicon Valley entrepreneurs.

Obama said using Facebook allows us to “make sure this isn’t just a one-way conversation.”

“This format and this company, I think, is an ideal means for us to be able to carry on this conversation,” the president said. “We’re having a very serious debate right now about the future direction of our country.”

Separate Plans

The White House and House Republicans have offered separate plans to reduce cumulative budget deficits by $4 trillion, over 12 years and 10 years respectively. Obama’s plan would include $1 trillion in tax increases that his advisers say could be raised from families earning at least $250,000, while the Republicans’ measure wouldn’t raise taxes.

“The Republican budget that was put forward I would say is fairly radical. I wouldn’t call it particularly courageous,” he said. “I would call it short-sighted.”

Obama criticized the Republican plan for preserving tax breaks while chopping funds from programs such as clean energy and for seeking to overhaul Medicare and Medicaid health insurance programs for the elderly and the poor.

“Nothing is easier than solving a problem on the backs of people who are poor or people who are powerless,” he said.

Treasury Yields

While the deficit dominates political debate in Washington, bond market yields in the U.S. are lower now than when the government was running a budget surplus a decade ago even as Treasury Department data show that the amount of marketable debt outstanding has risen to more than $9 trillion from about $4.3 trillion in mid-2007. The yield on the benchmark 10-year note is below the average of about 7 percent since 1980 and the average of 5.48 percent in 1998 through 2001, the last time the U.S. had a budget surplus, according to Bloomberg Bond Trader prices.

Ten-year yields fell three basis points, or 0.03 percentage point, to 3.38 percent at 11:48 a.m. in New York, according to Bloomberg Bond Trader prices. The Dow Jones Industrial Average rose 0.3 percent to 12,492.10 at 12:59 p.m., after surging 1.5 percent yesterday to its highest closing level since June 2008.

Housing Market

The president said the economy is still “not growing quite as fast as we would like” even after creating almost 2 million jobs in the past 18 months. He called the housing market “probably the biggest drag” on the economy.

“What I’m really concerned about is making sure that the housing market overall recovers enough that it’s not such a huge drag on the economy because, if it isn’t, then people will have more confidence, they’ll spend more, more people will get hired, and overall the economy will improve,” he said. “It’s still tough out there.”

S&P Tells Biggest Debtor Don’t Blow Final Act

S&P Tells Biggest Debtor Don’t Blow Final Act: Caroline Baum


Caroline Baum

Rarely has a credit rating company made such an astute observation of the human condition.

“We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013,” Standard & Poor’s said on assigning a negative outlook to the U.S. AAA-credit rating Monday.

Any observer of the budget debate in Washington would have to believe there’s a material risk, too.

The U.S. Treasury, aware that any rise in interest rates from increased credit risk would further damage its fiscal position, was quick to counter S&P’s shot across the bow. The negative outlook “underestimates the ability of America’s leaders to come together” to solve the debt problem, Assistant Secretary for Financial Markets Mary Miller said.

Come together? Miller must be watching a different theatrical production than I am. Treasury Secretary Tim Geithner was shuttled off to TV business channels yesterday to tell us that, unlike S&P, his outlook on the U.S. fiscal situation isn’t negative.

Take a look at the first four acts of this drama, and you decide who’s right.

Act I: Dec. 1, 2010. Moment of Truth.

President Barack Obama’s National Commission on Fiscal Responsibility and Reform releases its report. The commission’s plan relies on tax simplification and spending cuts to increase revenue. It aims to save $4 trillion over 10 years, reducing projected budget deficits to 2.3 percent of gross domestic product by 2015 from an estimated 10.9 percent this year. It includes a rise in the Social Security retirement age, lower federal entitlement benefits, a three-year freeze on federal workers’ pay and the elimination of “tax expenditures,” or the estimated $1.1 trillion of revenue lost each year to tax exemptions and loopholes. Small-government conservatives are unhappy that outlays as a share of GDP would increase to 21 percent, above the long-term average. Most everyone else sees the commission’s report as a fine start.

Act II: Feb. 14, 2011. La-La Land.

Obama ignores the recommendations of the commission and submits his $3.7 trillion budget request for fiscal 2012 to Congress. The blueprint is long on generalities and short on specifics. It purports to return annual deficits to a “sustainable” level by mid-decade but fails to address entitlement spending on programs such as Medicare, Medicaid and Social Security. Obama’s budget looks a lot like the Congressional Budget Office’s baseline, or auto-pilot projection, over the next 10 years and is sustainable only to the extent that the current trajectory of spending and revenue is sustainable.

Act III: April 5, 2011. “Path to Prosperity.”

House Budget Committee Chairman Paul Ryan, Republican of Wisconsin, offers his plan to cut spending and simplify the tax code, lowering the rates and broadening the base. Ryan is applauded for his bold vision and reviled (by Democrats) for his bold vision. Ryan’s plan slashes government spending to below 20 percent of GDP and lowers the top tax rate for households and business to 25 percent from its current 35 percent. He claims to find cost savings by harnessing competition, allowing future retirees to choose a Medicare plan from private insurers while providing assistance for lower-income beneficiaries with greater health risks.

Act IV: April 13, 2011. Get Serious.

Obama tells an audience at George Washington University the U.S. has to live within its means and pay down its debt. Any serious plan to tackle the deficit has to address entitlements, he says. (See Act II for his unserious plan.) The president spends more time explaining how we got here (Bush’s fault) and trashing the Ryan budget than advocating for his own. His role in the debt binge is limited to emergency spending in response to the financial crisis he inherited. Obama proposes to reduce the deficit by $4 trillion in 12 years by cutting discretionary spending, finding savings in the defense budget, reducing the cost of health care via Obamacare and eliminating tax breaks. The president will protect seniors, the middle class and investments in education, medical research and clean energy by taxing the rich.

Act V: Sometime in the future. “Pray for the Gang of Six.”

In the final act of a Shakespearean tragedy, the conflict is resolved. In real life, the two political parties are on opposite sides of the stage separated by what President George H.W. Bush called the “vision thing.”

Former Senator Alan Simpson, co-chair of the president’s deficit commission, summed up the impasse after listening to Obama’s partisan speech last week, telling reporters to “Pray for the Gang of Six.”

The Senate’s bipartisan “Gang of Six” has yet to complete or release its deficit-reduction proposal. The fact that the three Democrats and three Republicans can be in the same room together offers the best hope for some kind of compromise. Obama has yet to invite Ryan to the White House even though the congressman has been teeing up budget ideas for a couple of years.

Some analysts viewed S&P’s surprise shift to a negative outlook for the U.S.’s long-term credit rating as a timely kick in the pants. If the warning of higher borrowing costs -- Treasuries rallied Monday -- creates some urgency to address these problems now, then it was a good thing.

Of course, there’s bad news too. As with earlier downgrades to companies about to go under, S&P may already be late.

Gold Touches Record

Gold Touches Record, Set for Third Weekly Gain

Gold Climbs to Record on Concern Inflation Accelerating

Gold, which has surged 31 percent in the past year, has gained every year since 2001 on increased investment demand for commodities and on concern that currencies may be debased as central banks stimulate their economies. Photographer: Frantzesco Kangaris/Bloomberg

April 21 (Bloomberg) -- Robert McEwen, chief executive officer of Minera Andes Inc., talks about the outlook for gold prices. McEwen talks with Julie Hyman on Bloomberg Television's "Fast Forward." (Source: Bloomberg)

Gold advanced for a third week as a weaker dollar and debt concerns boosted the metal’s appeal as an alternative investment. Silver gained to the highest level in 31 years.

Gold for immediate delivery rose 1.4 percent this week and was little changed at $1,506.85 an ounce at 6:48 p.m. in Paris after climbing to an all-time high of $1,512.47 earlier today. June-delivery futures touched a record $1,509.60 yesterday on the Comex in New York, the 10th all-time high this month. The exchange is closed today for the Good Friday holiday.

“The weak dollar is having the most influence on gold at the moment,” said Chae Un Soo, a Seoul-based trader at Korea Exchange Bank Futures Co. “The market is getting more jittery now that we have sovereign-debt concerns about the U.S. in addition to Europe and the Middle East problems, which increasingly boosts safe-haven demand for gold.”

The dollar slid to the lowest level since August 2008 against a basket of six major currencies this week on speculation that the U.S. Federal Reserve will be slow to raise borrowing costs. The Dollar Index is little changed today and is set for a 0.9 percent weekly drop. The Fed has kept the benchmark rate between zero percent and 0.25 percent since December 2008 and pledged to purchase $600 billion in Treasuries through June to stimulate the economy.

Standard & Poor’s this week cut its debt outlook for the U.S. to negative from stable. Violence in the Middle East, sovereign-debt turmoil in Europe and Japan’s nuclear crisis have helped propel bullion 31 percent higher in the past year.

“Overall trade for gold and other precious metals was extremely thin due to the market holiday in the U.S. and U.K.,” said Hiroyuki Kikukawa, general manager of research at IDO Securities Co. in Tokyo.

Silver for immediate delivery climbed 2.1 percent to $47.25 an ounce, the highest price since 1980. The metal has climbed 11 percent this week, a fifth weekly advance and the biggest weekly gain since Feb. 18.

Spot palladium fell 0.1 percent to $767.50 an ounce, while cash platinum was 0.3 percent higher at $1,822.50 an ounce.

Libya Rebels Need More Help

Libya Rebels Need More Help, McCain Says in Benghazi as Drones Take Flight

Libya Rebels Urge More NATO Force to Avert Misrata Massacre

Rebel fighters gear up on the main highway awaiting a rumored Libyan Army advance between the crucial towns of Ajdabiyah and Brega, Libya, on April 11, 2011. Photographer: Chris Hondros/Getty Images

The U.S. and its allies should provide more air support and financial aid to Libyan rebels, Senator John McCain said in Benghazi after President Barack Obama sent armed Predator on missions to the nation.

Those seeking to oust Muammar Qaddafi’s regime are “patriots who want to liberate their nation, they are not al- Qaeda,” McCain told a press conference today in the rebel capital city.

The Arizona Republican said North Atlantic Treaty Organization states need to “urgently” increase close air support for rebel ground operations. He also said the rebels’ Transitional National Council should receive some of Qaddafi’s frozen assets to fund its operations and that the Council should be recognized as Libya’s government.

McCain made his comments after France, Italy and the U.K. sent military advisers to help rebels with communications and training and the U.S. authorized drones armed with Hellfire missiles in a bid to break the stalemated campaign against Qaddafi’s 42-year rule without sending troops into combat.

“I fear a stalemate could give rise to radical Islamic forces,” McCain told the press conference.

“We need to step up the pressure on every front” short of sending ground troops, U.K. Prime Minister David Cameron said yesterday on BBC Scotland radio. Troops are prohibited under the United Nations Security Council resolution authorizing the no- fly zone.

Drones, Advisers

The drones, unmanned aircraft, previously have been used for reconnaissance. They provide better visibility of targets. That’s important when Qaddafi’s forces are fighting in and around cities, said Marine General James Cartwright, vice chairman of the Joint Chiefs of Staff.

The remotely piloted aircraft were unable to complete missions on their first outing yesterday due to bad weather, Cartwright said yesterday. The Predator is made by closely held General Atomics Aeronautical Systems of San Diego.

The European military advisers, who will total fewer than 50, will be the first official Western military forces in Libya since the Western intervention began a month ago. The NATO-led, UN-sanctioned mission is to police a no-fly zone, protect civilians and enforce an arms embargo on the Qaddafi regime.

The uprising, which began in mid-February, has ground to a military stalemate near the central oil-port city of Brega.

Oil Exports

Fighting has halted most oil exports from Libya, which has Africa’s biggest oil reserves, as regional turmoil has sent oil prices up more than 30 percent from a year ago. Crude oil for June delivery rose 84 cents to settle at $112.29 a barrel on the New York Mercantile Exchange. Markets were closed for the Good Friday holiday today.

Residents of the rebel-held western city of Misrata, besieged for more than six weeks, suffer daily shelling by Qaddafi’s forces.

Pilots in North Atlantic Treaty Organization warplanes have had difficulty identifying Qaddafi’s forces once they move into cities and have had to exercise extra caution to avoid civilian casualties. The Predator gives NATO the ability to get closer to possible targets, review the scene and strike with precision.

Earlier this week, the U.S. said it would provide $25 million in non-lethal aid, such as radios and body armor, to Libya’s rebels.

U.S. Secretary of State Hillary Clinton yesterday called for “some degree of patience” about the outcome of the conflict. She referred to the fact that the U.S. and its NATO allies bombed Serbia for 78 days in 1999, during the presidency of her husband, Bill Clinton, to stop its attacks on Kosovo. The air campaign over Libya began just over a month ago.

“It is always a temptation in any conflict to expect there to be a resolution quickly,” she told reporters after meeting with Dutch Foreign Minister Uri Rosenthal in Washington.

Geithner Downgrades His Credibility to Junk

Geithner Downgrades His Credibility to Junk: Jonathan Weil


Jonathan Weil

Fox Business reporter Peter Barnes began his televised interview with Treasury Secretary Tim Geithner two days ago with this question: “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”

Geithner’s response: “No risk of that.”

“No risk?” Barnes asked.

“No risk,” Geithner said.

It’s enough to make you wonder: How could Geithner know this to be true? The short answer is he couldn’t.

All you have to do is read the research report Standard & Poor’s published on April 18 about its sovereign-credit rating for the U.S., and you will see it estimated the risk of a downgrade quite succinctly. “We believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years,” said S&P, which reduced its outlook on the government’s debt to “negative” from “stable.”

There you have it: Geithner says the chance of a downgrade is zero. S&P says the odds it will cut its rating might be greater than one out of three. So who are you going to believe? Geithner? Or the people at S&P who actually will be deciding what S&P will do about S&P’s own rating of U.S. sovereign debt?

It would be one thing to express the view that a downgrade would be unwarranted, or that the chance of it happening is remote. Either of these positions would be defensible. Geithner went beyond that and staked out an absolutist stance that reeks of raw arrogance: There is no risk a rating cut will occur. He left no room for a trace of a possibility, ever.

Battling Barney

The mystery is why Geithner would say such a thing. What’s he going to do if S&P or some other rating company winds up disagreeing with him? Send Barney Frank to beat them up? The problem for leaders who make indefensible claims like this one is that, after a while, nobody knows whether to believe anything they say. Just remember all those government officials in Greece, Ireland and Portugal who kept saying their countries didn’t need bailouts, long after it became clear they did.

This was the same answer Geithner gave during an ABC News interview in February 2010, when asked if the U.S. might lose its AAA rating. “Absolutely not,” he said. “That will never happen to this country.” So, an asteroid could destroy the entire Eastern seaboard 100 years from now. And, in the world according to Geithner, we’re supposed to believe America’s top rating would be safe.

Perhaps Geithner would be well-positioned to make such assessments if he were the only person on the planet with the authority to grade sovereign debt -- and if there were zero risk that he would ever die. Not only is Geithner mortal, he doesn’t even work for a nationally recognized statistical rating organization.

Great Error

In one of the great errors of financial history, the U.S. long ago bestowed that vaunted designation on the likes of S&P and Moody’s Investors Service. The raters showed they could be corrupted when they put their AAA marks on countless subprime mortgage bonds that quickly turned sour. Unlike the companies that bought those labels, though, the U.S. government didn’t solicit S&P’s ranking of its debt. Trying to predict with certainty what the raters may do next is a fool’s game.

Sure, it’s conceivable the government might threaten to strip the raters of their officially recognized franchise as retaliation if they dared to downgrade the U.S. We can only hope this isn’t what Geithner had in mind when he made his bold prediction. A move like that would risk a major scandal, and it might not even work.

Unwilling Leaders

Nothing the raters say should matter, of course. The markets are well aware the U.S. debt is on its way to surpassing the country’s annual gross domestic product, and that few leaders in Washington are willing to get federal spending under control again.

The least Geithner could have done was take a page from Lloyd Blankfein, the chairman and chief executive officer of Goldman Sachs Group Inc. (GS), and throw in a wiggle word or two. Testifying last year at a hearing led by Democratic Senator Carl Levin of Michigan, Blankfein said “we didn’t have a massive short against the housing market,” notwithstanding that Goldman made about $500 million shorting the housing market in 2007.

Levin says he wants to refer the matter to the Justice Department for a perjury investigation. Blankfein, of course, included the word “massive” in his statement, whatever that’s supposed to mean. Geithner could have done something similar. Yet for some inexplicable reason he didn’t, which, if nothing else, should tell us he probably wouldn’t have much of a future as a top executive at Goldman Sachs.

No risk at all? If Geithner is really as smart as his friends say he is, he doesn’t believe it either.

Most Asian Stocks Decline

Most Asian Stocks Decline, Led by China

China Stocks

An investor monitors stock prices at a securities exchange firm in Shanghai. Photographer: Qilai Shen/Bloomberg

Most stocks fell in Asia as Chinese shares slipped on speculation the country’s central bank may let the yuan strengthen to cool inflation. China’s currency touched a 17-year high against the dollar, gold climbed to a record and shares in Russia rose.

Declines by technology and materials stocks were offset by gains in automakers and industrial shares leaving the MSCI Asia Pacific Index unchanged at 138.82 even as six stocks retreated for every five that advanced. The Shanghai Composite Index slid 0.5 percent, while the yuan gained 0.2 percent to 6.5067. Gold increased to $1,512.47 an ounce, before trading at $1,506.85 at 5:25 p.m. in London. Russia’s Micex jumped 0.8 percent.

More rapid appreciation of the yuan may be a tool for curbing prices, Wang Yong, a professor at the People’s Bank of China’s training center in the city of Zhengzhou, wrote in a commentary published in today’s Securities Times newspaper. Stocks in Asia pared declines after Renesas Electronics Corp. (6723), a Japanese chipmaker, said it will restart operations at a plant damaged by the quake. Most markets in Europe and the Americas were closed today for Good Friday.

“It’s a difficult environment for investors to take a proactive stance right now,” said Yoshinori Nagano, a senior strategist in Tokyo at Daiwa Asset Management Co., which oversees about $104 billion. “There are still a lot of uncertainties for the global economy.”

The MSCI Asia Pacific gauge advanced 2.2 percent this week. Samsung Electronics Co. slid 2.6 percent today. The memory-chip producer said it sued Apple Inc. claiming patent infringement, a week after the iPhone maker filed a complaint in U.S. federal court alleging the South Korean company copied its products.

Toyota, Honda

Renesas Electronics advanced 1.4 percent after the chipmaker that supplies Japan’s carmakers said it plans to resume operations at its Naka plant in Ibaraki prefecture. Toyota Motor Corp. (7203), the world’s biggest carmaker, Honda Motor Co. and Nissan Motor Co. gained more than 2 percent.

The Shanghai Composite Index extended this week’s decline to 1.3 percent, its worst week in three months. The yuan gained after the central bank set the currency’s reference rate 0.11 percent stronger at 6.5156 per dollar, the highest level since July 2005. Twelve-month non-deliverable forwards rose 0.38 percent to 6.3235 per dollar.

Four interest-rate increases and higher bank reserve requirements have failed so far to curb prices, with the consumer-price index rising 5.4 percent in March. A stronger currency makes the country’s exports less competitive.

Gold for immediate delivery advanced 1.4 percent so far this week. Silver for immediate delivery climbed 1.4 percent to $47.25 an ounce, the highest price since 1980.

Emerging Europe

Higher precious metals prices lifted OAO Polymetal, a Russian gold and silver producer, 2.1 percent higher, helping the biggest advance in the Micex. Benchmark equity indexes in Hungary and the Czech Republic declined, snapping three days of gains.

Japan’s bonds rose, pushing 10-year yields to a four-week low, after Prime Minister Naoto Kan’s government compiled a 4 trillion yen ($49 billion) extra budget that didn’t include new debt sales. The yield on the 2021 bond fell 1.5 basis points to 1.21 percent.

A warning shot

The credit-rating outlook

A warning shot

S&P’s bombshell means more politically than economically

SCEPTICS have wondered how long America could use its control of the world’s reserve currency as an excuse to rack up huge debts. Now they may have their answer. On April 18th Standard & Poor’s (S&P), a credit-rating agency, said it had lowered the outlook for America’s AAA credit rating, the highest, to negative.

Many rich countries have seen their debts and deficits balloon in recent years. According to S&P’s own calculations, America’s net debt of all levels of government, at 75% of GDP, is in the same range as the net debts of Germany, France and Britain, all rated AAA (see chart). But those countries, S&P frets, “are all now doing more about it” than America is. The agency had briefly put Britain’s rating on negative outlook, but lifted it when the coalition government swung towards austerity. The prospects of America following suit, says S&P, are hobbled by the fact that Republicans and Democrats cannot agree on how to tackle the deficit.

Although stocks fell and credit-default swaps on American debt widened when the news broke, the bond market remained oddly unruffled: yields ended lower on the day. For all the attention it drew, S&P’s move will have little effect on America’s ability to borrow. As their downgrades to subprime securities during the financial crisis showed, rating agencies usually act long after the economic fundamentals have become obvious.

Treasury investors care less about what S&P thinks than about inflation, growth, monetary policy and the relative appeal of other assets. Bond yields have edged lower lately because growth has slowed to a crawl (see article). Japan lost its AAA rating in 2009 because of a world-leading debt burden. But because of deflation, its bond yields remain at rock-bottom levels. America relies more on foreigners to buy its debt than Japan does, but many of those foreigners are official buyers such as central banks with little alternative.

S&P puts the odds of an actual downgrade at one in three. Moody’s Investors Service and Fitch, the two other leading agencies, have left the rating alone. If America actually loses its AAA, some investors who are obliged to own only AAA-rated paper might have to sell. But the sovereign wealth funds, foreign governments and central banks who are the biggest holders of Treasuries invest in a broad range of assets of varying riskiness, notes Dino Kos of Hamiltonian Associates, a firm of economic consultants. China’s central bank, for example, has been buying Spanish government bonds, rated AA.

S&P has chosen an odd moment to blame the lack of political action on the long-term deficit for making its move. The odds of such action are now better than they have been for a while, a point Moody’s made the same day as it affirmed its AAA rating. On April 15th the Republican-controlled House of Representatives adopted a budget plan that enacts sweeping cuts to Medicare, Medicaid and other government programmes. Not one Democrat voted for it; but at the same time Barack Obama was hitting the road to sell an alternative plan that relies more heavily on tax increases to achieve somewhat less deficit reduction. Meanwhile, a bipartisan “Gang of Six” senators are labouring towards their own deficit-reduction package.

Between mid-May and early June the Treasury will bump up against the legal limit on how much debt it may issue. Failure to raise the limit would force it to renege on payments such as benefits to the elderly and, potentially, interest on the debt. Republicans say they will not vote for an increase without agreement on spending cuts. Mr Obama seems to hope they will settle for a broad agreement on targets and triggers that would automatically cut spending and raise taxes if the targets are not met. That would leave the tougher details until after the 2012 presidential election.

For the moment both sides continue to talk tough, but S&P’s action has added to the pressure to strike a deal. After two years of being castigated by politicians for their irresponsible mortgage-ratings work, credit raters have turned the tables.

Thrusters v laggards

The 2012 primaries

Thrusters v laggards

The high tide of frontloading has passed and now seems to be ebbing

FOR decades Republicans and Democrats alike have bemoaned “frontloading”: the unseemly scramble among states to move their presidential primaries or caucuses earlier and earlier in election year, in the hope of exerting greater influence over the national result. As states such as Iowa and New Hampshire, which jealously guard the prerogative of going first, respond in kind, the point at which the nomination tends to be decided has retreated from June to March. For a time it looked as if the 2008 primary season might actually slide backwards into 2007, steeping even the Christmas holidays in election mania. In the end, Iowa went first on January 3rd. But that may have marked frontloading’s high tide. Although a few states are still trying to jump in early this time round, a concerted effort by the national leadership of both the Republicans and Democrats, and a desperate squeeze on state budgets, may actually succeed in delaying the primary schedule for once.

Uppity legislators in Michigan and Missouri have introduced bills to advance their primaries. But it is Florida, a habitual offender, which is causing the most fuss by trying to hold its primary in January. This violates rules set by both the Democratic and Republican National Committees, which co-ordinate the nominating process and organise the conventions that make the result official. The two parties have barred January primaries, and want only the four habitual starters—Iowa, New Hampshire, Nevada and South Carolina—to hold their contests in February. All other states are supposed to wait until the first Tuesday in March at the earliest.

The Republicans have tried to give the laggards extra clout by barring states with primaries in March from using a winner-takes-all voting system. Perhaps more compelling will be the penalties for going early: the loss of half of the offending state’s votes at the convention, which is due to take place in Tampa, Florida, in August 2012. Also at risk, the RNC says, are perks such as plum seating and accommodation at the convention and extra passes for guests: not trivial things, as state parties use them to butter up big donors.

Nonetheless, Florida’s Republicans are undeterred. They control the state legislature, and have so far refused to budge from January 31st. Republican officials in Iowa, New Hampshire and South Carolina are so incensed that they have asked the party to move the convention to a more law-abiding state. But Florida’s Republican bigwigs are unconcerned, suggesting (probably rightly) that the party would not dare to snub the voters of a large swing state.

If the RNC can somehow resolve this impasse, points out Josh Putnam, an academic who runs Frontloading HQ, a website which tracks such rows, most other states should fall into line, undoing some of the frontloading of recent years. In fact, several states are now in the process of postponing their primaries. Virginia has already set its date almost a month later than last time; Maryland and Washington, DC are on the verge of delaying by two months or more. Some Republican officials in Texas are toying with a move from March to April.

The biggest proposed change would be in California, the most populous state, where legislation is in train to shift the primary from February to June. This is intended to save $100m by combining the presidential primary with those for other offices. Chris Christie, the Republican icon who is governor of New Jersey, wants to do the same. Washington state may scrap its primary altogether, leaving the parties to organise their own caucuses.

Suspicious minds suggest that states dominated by Democrats are particularly keen to delay their primaries, in an attempt to ensure that conservative states have a lopsided influence over the early part of the race—thus increasing the likelihood of an unelectable firebrand clinching the Republican nomination. But gaming the system does not always work as planned: last time round, the early birds ended up with less clout in the Democratic race, as the battle for the nomination dragged on through every last primary. At any rate, Republican officials do not sound too worried—although their main goal may be to preserve a primary-free Christmas.

Trump this

Trump this

Just when you thought American politics could not become more bizarre

IN AMERICAN politics, as at the theatre, it can help to suspend your disbelief. That helps you to entertain even the most improbable of possibilities, such as the possibility that Donald Trump, TV showman and property billionaire, really intends to seek, and may actually win, the presidency of the United States. There is, certainly, no questioning the putative candidate’s own gargantuan self-belief. In recent weeks he has left interviewers slack-jawed with amazement as he throws out his thoughts on how he would behave as president. In Libya, for example, he would have intervened only if America could keep its oil afterwards. “In the old days,” he reminisced, “when you have a war and you win, that nation is yours.”

You think such a man could not be president? Stifle that disbelief! An NBC News/Wall Street Journal poll at the beginning of this month suggested otherwise. When Republican and Republican-leaning primary voters were asked whom they would favour as a presidential nominee, Mr Trump scored 17%, sharing second place with Mike Huckabee, ahead of Sarah Palin and not impossibly far behind Mitt Romney, the front-runner, who was favoured by 21%. Since then his numbers have risen. A poll published on April 14th by Public Policy Polling put Mr Trump in the lead, with 26% to Mr Huckabee’s 17%.

Born in the USA, if nothing else

Like most of the Republican field, Mr Trump has not yet confirmed that he is a candidate. He says he may signal his announcement in the live finale of his reality-TV show, “Celebrity Apprentice”, which airs on May 22nd. But why shouldn’t he run? True, he claims to be happy and successful enough already (“I have fairly but intelligently won many billions of dollars”), and would far prefer to stand back if another “fantastic” candidate hove into view. Sad to say, none has done so yet. And America, after all, needs saving. Under its present management, laments Mr Trump (“our current president came out of nowhere”), it is sorely disrespected. It has become an international “whipping post” and “the laughing stock of the world”, jigged around by currency-manipulating Chinese and price-manipulating oil producers. When he is president, “We’ll be taking in hundreds of billions of dollars from other countries that are screwing us.”

Mr Trump has another big thing going for him. He was born in the United States, and he has the birth certificate to prove it, having paid New York the $38 required to have it sent to him. Until recently he thought that Barack Obama was born in America too, but now he is not so sure. Mr Trump has sent a team of investigators to Hawaii to look into the issue. But, in the meantime, he is positive that Mr Obama’s first book, “Dreams From My Father”, was written by Bill Ayers, the Vietnam-era terrorist. That book, after all, was “Ernest Hemingway-plus”, whereas the second book Mr Obama claims to have written, “The Audacity of Hope”, was plainly written by “someone much more average”.

Would it be unfair to attribute Mr Trump’s sudden popularity among Republicans to his sudden conversion to “birtherism”? There are certainly votes to be scooped up that way. More than a third of Republican voters do not believe that Mr Obama was born in America, and most conservative politicians are a little more restrained on the subject. A few, such as Michele Bachmann, try to have it both ways, saying on the one hand that they will accept the president’s word that he was born in Hawaii, while still implying on the other that there is room for doubt. But most steer clear of this canard for fear of looking foolish. (For the record, nobody needs to rely on Mr Obama’s word: the birth certificate has been posted online for all to see, and his birth was announced, at the time, in a local newspaper.)

Here, perhaps, is one secret of Mr Trump’s success so far. Though it is obvious that he is no fool, he has no fear of saying foolish things. People are used to it. Indeed, he seems impervious to criticism of almost any kind except of his remarkable hairstyle (or, the unkind aver, his hairpiece). At public meetings or in television interviews he brushes off boos, taunts and evidence with a supreme insouciance. He has little to lose by flirting with politics, and, when you think about it, rather a lot to gain.

No matter how he made his claimed billions, a part of his fortune depends now on his celebrity. Hence the appeal of another shot at politics. Outrageousness begets attention, being well-known helps you to run for president, and threatening to run for president makes you more famous still. As in the case of Mrs Palin, a whole sub-branch of psephology is now dedicated to figuring out whether Mr Trump is “serious” about running or merely burnishing his brand.

Now re-engage your disbelief. Polls taken this far before a primary campaign are notoriously useless. Mr Trump’s sudden good showing may say more about the weakness of the rest of the present Republican field than his own strengths. Though he has deep pockets, spending a fortune is not decisive in small states that take their caucuses and primaries seriously, such as all-important Iowa and New Hampshire. And trying to outflank them, like Rudy Giuliani in 2008, has proved a weak strategy.

Once serious Republicans take a closer look at Mr Trump, they are liable to be unimpressed. Like his party affiliations (he has in his time been a Democrat and a member of the tiny Reform Party as well as a Republican), his policy positions have meandered all over the place. In a book he wrote in 2000 while angling for the Reform Party nomination, he praised Canada’s single-payer health-care system. This is anathema to most Republican voters, who think Obamacare radical enough. In short, for all his undoubted entertainment value, there is virtually no chance of Mr Trump becoming president. Thank goodness.

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