By Roger Altman
Published: October 11 2009 15:57
More poor economic data have put Washington in a nearly impossible fiscal position. The US economy requires more stimulus than provided by the original package passed in March. But the dismal deficit outlook poses a huge longer-term threat. Indeed, it is just a matter of time before global financial markets reject this fiscal trajectory.
That could lead to a punishing dollar crisis. To avoid it, America’s leaders should commit now and in detail to implement deficit reduction once the economy has strengthened. Vague promises will not work.
America’s fiscal dilemma is unprecedented because the short-term need differs so dramatically from the long-term one. Today, all the data are signalling weakness. Consumer spending, which represents 70 per cent of gross domestic product, and employment are especially downbeat. Joblessness, having hit a 26-year high, will not improve much through 2010. That puts pressure on consumers. The pace of recovery, therefore, will be painfully slow.
This requires that policy remain stimulative over the next year. The economy could slip backwards without it. That is why the Federal Reserve is maintaining a zero Fed funds rate. It also explains why the $787bn (£492bn, €534bn) stimulus will expand, perhaps to $900bn.
But for 2011 and beyond, the fiscal challenge is fearsome. A combination of prior tax cuts, years of high spending and a brutal recession have produced the worst budget conditions in 75 years. Through 2019, private forecasts predict deficits averaging $1,000bn a year. In 2019 the deficit would represent 6.5 per cent of GDP and be rising. Worse, national debt will hit nearly 85 per cent of GDP. Annual interest costs on it would exceed the US defence budget and the whole category of discretionary spending. The Treasury’s annual borrowing, including refinancings, would average a breathtaking $4,000bn. All this occurs before the Medicare/Medicaid share of GDP explodes beyond 2019.
This debt surge comes against a fragile backdrop. The national savings rate is essentially zero. Net borrowings are being supplied entirely by foreigners. Foreigners already hold half the national debt. Not only do we know, empirically, that massive deficits raise interest rates, cut private investment and depress standards of living. But there is no precedent for financial markets lending such amounts, over 10 years, at anywhere near current interest rates and exchange rates. Indeed, does anyone think that once recovery takes hold and private demand for capital strengthens, the Treasury will raise $4,000bn a year at below 4 per cent, as it is doing today?
The acute threat is the foreign exchange market. When markets lose confidence in a nation’s financial policy, a sharp and often panicky decline in its currency follows. This has happened before to the dollar and this dire fiscal outlook risks triggering it again.
We saw this in the 1978-79 dollar crisis that shook Jimmy Carter’s administration, in whose Treasury I served. Then, rising inflation and perceived indifference to the dollar’s stability eroded nearly half its value against the yen. Global anxiety rose and an emergency rescue was arranged. It required that the deficit be halved and the Fed raise rates. This was costly to growth and the administration’s goals.
In recent weeks, the dollar has lost 15 per cent against the euro and gold has soared above $1,000 per ounce. There are technical factors involved, too, but these signs are not healthy. They suggest concern over currency stability – and the recovery, with its inflation and financing pressures, has not even begun yet. President Barack Obama and Congress should not risk a replay of the Carter experience. The scale is so much larger now that the impact of a dollar stabilisation programme would be more punitive. It would jeopardise the entire recovery. This is why an overt commitment to deficit reduction should be made now.
It could take the form of legislation creating a bipartisan deficit reduction group modelled on the successful budget summit of 1990 and consist only of administration and congressional leaders. Its recommendations, by law, would be submitted by December 31 2010 and face an up or down vote within three to four months. It would acknowledge the need for higher taxes and spending cuts.
It is true that Mr Obama inherited the deficit. But, like Afghanistan, it is his responsibility now. Only he can forge a process for solving it.
The writer is chairman of Evercore Partners and was deputy US Treasury secretary under President Bill Clinton
Showing posts with label financial policy. Show all posts
Showing posts with label financial policy. Show all posts
Sunday, October 11, 2009
Sunday, September 27, 2009
A Risky Revival
By John Authers
Financial Times
September 25, 209
This should have been a week for traders in the stock market to feel good about life. US stocks have rallied by close to 60 per cent in barely six months since they hit bottom in March. The Federal Reserve meanwhile pronounced this week that “economic activity has picked up” – the most confident language the central bank has used for some time.
But Crispin Odey, one of London’s most respected hedge fund managers, was seeing things differently. He chose Wednesday, the day of the Fed’s pronouncement, to ruminate, both in a note to clients and in the Financial Times, that the rally was “entering a bubble phase”. The word “bubble” is highly emotive but Mr Odey could justify it. He argued that markets were being distorted by governments’ deliberate attempts to push down the price of money by buying bonds, a policy known as quantitative easing. “At some point the quantitative easing will have to come to an end,” he said, “but, until it does, this bull market is sponsored by [Her Majesty’s Government] and everyone should enjoy it.”
The remarks struck a chord. Stocks endured a sharp sell-off after his words . The fear that the unprecedented supply of cheap money from governments is creating another bubble has been circulating in Wall Street and the City of London for months.
To some, this seems alarmist. History is full of examples of strong rallies after big sell-offs – it is all part of the “physics” of markets. The all-time highs for developed market stocks, set in 2007, are not in sight. On conventional valuation measures, stocks are nowhere near as expensive as at the top of past investment bubbles. Also, the economic “free-fall” at the end of last year appears to have been halted. In addition, the Fed’s pronouncement signalled interest rates will remain low for a while – a sweet spot for risky assets such as stocks. A strong recovery for share prices since March, when there was a real fear of a second Great Depression, seems reasonable.
But the question of whether this is a real recovery or a bubble must still be asked, and there are worrying signs. The rally has been achieved with global economic growth barely above zero and unemployment still rising. The S&P 500 index of US stocks is already far above the forecasts nine out of 10 Wall Street strategists have in place for the end of the year, according to a Bloomberg survey. Concerns are prevalent that US consumers will not return to their old buying habits because of high unemployment and the debts they need to pay off.
There are also concerns that China, the other leading source of growth, has achieved that only by stoking lending – notably, Chinese stocks sold off sharply in August when authorities hinted at tightening lending.
The speed of the rally is itself cause for concern. Historically, big sell-offs have typically been followed by big bounces. But as measured by the S&P 500, the current rally is stronger after six months than any predecessor, including those that followed the lowest points of the market in 1932, 1974 and 1982.
Relationships between markets also imply unhealthy levels of speculation. Currency and stock markets had minimal correlations before the crisis took hold in 2007, while oil and stocks were usually inversely correlated. But oil and stocks have been rising in tandem this year, just as they fell together during the crisis, while the correlations between the dollar and stock markets remain remarkably close.
The implication of such correlations is alarming. Tim Lee, of Pi Economics in Connecticut, puts it this way: “[Since early 2007] 40 per cent of all movement in the S&P 500 can be predicted or explained from the movement of the yen and vice versa. If we assume, quite reasonably, that the yen and the S&P 500 should be fundamentally unrelated instruments, this implies a breakdown of efficient price discovery in the markets.”
So does this qualify as a bubble? The classic definition came from the economist Charles Kindleberger in his 1978 book Manias, Panics and Crashes. For him, a bubble is a phenomenon of mass psychology, and refers to the last stage of an investment mania, when assets are bought “not because of the rate of return on the investment but in anticipation that the asset or security can be sold to someone else at an even higher price”. The bubble bursts when there is no longer a “greater fool” ready to pay too much for the asset.
Thus, in a true bubble, stocks are wildly overvalued compared with their fundamental measures, such as their earnings or the value of the assets on their balance sheets. But conventional valuation measures of stocks suggest they are still far from a true bubble. US stocks are trading at a multiple of 18.7 times their average earnings for the past 10 years, according to the data kept by Professor Robert Shiller of Yale University. Historically, extremes in cyclical price/earnings ratios have accurately signalled long-term market peaks and troughs. The cyclical p/e stood at 27 immediately before the crisis in 2007, for example, and reached 43 at the peak of the internet boom. So it looks premature to say stocks are in a bubble.
. . .
But an argument that this is an incipient bubble, carrying real risk that a mania will develop, is easier to sustain. First, according to Kindleberger, bubbles are driven by cheap credit. With US interest rates at zero, credit is very cheap. Second, many investors seem to be using bubble-like logic; they believe others will soon be prepared to buy even more.
There are true “bulls” who believe the global economy will recover strongly from here, bringing up corporate earnings in its wake. But others focus on the cash that has been on the sidelines, and on the pressures on fund managers who want to avoid the embarrassment of having stayed out of the market during the rally.
Mark Lapolla, of Sixth Man Research in California, who has called aggressively for investment in the market, says he “cannot emphasise strongly enough just how big a role simple game theory will play”. He argues it is large equity mutual fund managers who are driving the market. Most have done well this year, and are ahead of the benchmark stock market indices against which they are compared. “Therefore the incentive is to not lose ground rather than gain it,” he says, so they will stick closely to stocks in the main indices to protect their year-end bonuses.
Jeremy Grantham, co-founder of GMO, a large Boston-based fund manager, says: “Fund managers are simply not prepared to take the career risk of being wrong for a little while and losing business.” Thus they are herding into the index, though Mr Grantham – who advocated buying at the bottom in March – already considers stocks too expensive given the many risks in the world economy.
Another concern comes from more recent history. After the internet bubble in 2000, world stocks endured a bear market, falling 49 per cent before hitting a bottom shortly before the invasion of Iraq in March 2003. They then enjoyed a four-year rally in which the main stock indices doubled. It was rational, and successful, to be in the market from 2003 to 2007 but with hindsight it was a “fools’ rally”, triggered by cheap money, as Alan Greenspan’s Fed cut its target interest rate to 1 per cent. This fuelled a bubble in mortgages and housing.
The 2003 bounce came when stocks were not cheap – they traded at a multiple to cyclical earnings of about 21, according to Prof Shiller, when at the bottom of previous bear markets this multiple had fallen below 6. So it looks as though cheap money stopped markets taking all the medicine they needed. Similarly the current rally began with stocks trading at a multiple of 13 times the previous 10 years’ earnings. This was the cheapest in 21 years but still double the lows seen after previous great sell-offs, implying cheap money had once again saved prices before all speculative excess had been cleaned out of the system.
. . .
The danger, in this scenario, is that lenders lose confidence in the creditworthiness of governments, which could cause rates to rise and spark a renewed sell-off. But that is not imminent.
Just as it made sense to stay in the market while the booming mortgage market kept credit unnaturally cheap, it may make sense to do so while state intervention keeps credit unnaturally cheap. And when bonds and cash pay so little, raising the risks of inflation in the future, the rational response is to buy assets that generate more reliable cash flows, such as stocks; or that act as a hedge against inflation, such as commodities. On this logic, investors may as well heed Mr Odey and “enjoy the bubble”.
They should do so now because, if this theory is right, the denouement will be painful. David Bowers of Absolute Strategy Research in London, who has been bullish for a while and advises staying in stocks, says: “It’s the last game of pass the parcel. When the tech bubble burst, balance sheet problems were passed to the household sector [through mortgages]. This time they are being passed to the public sector [through governments’ assumption of banks’ debts]. There’s nobody left to pass it to in the future.”
Financial Times
September 25, 209
This should have been a week for traders in the stock market to feel good about life. US stocks have rallied by close to 60 per cent in barely six months since they hit bottom in March. The Federal Reserve meanwhile pronounced this week that “economic activity has picked up” – the most confident language the central bank has used for some time.
But Crispin Odey, one of London’s most respected hedge fund managers, was seeing things differently. He chose Wednesday, the day of the Fed’s pronouncement, to ruminate, both in a note to clients and in the Financial Times, that the rally was “entering a bubble phase”. The word “bubble” is highly emotive but Mr Odey could justify it. He argued that markets were being distorted by governments’ deliberate attempts to push down the price of money by buying bonds, a policy known as quantitative easing. “At some point the quantitative easing will have to come to an end,” he said, “but, until it does, this bull market is sponsored by [Her Majesty’s Government] and everyone should enjoy it.”
The remarks struck a chord. Stocks endured a sharp sell-off after his words . The fear that the unprecedented supply of cheap money from governments is creating another bubble has been circulating in Wall Street and the City of London for months.
To some, this seems alarmist. History is full of examples of strong rallies after big sell-offs – it is all part of the “physics” of markets. The all-time highs for developed market stocks, set in 2007, are not in sight. On conventional valuation measures, stocks are nowhere near as expensive as at the top of past investment bubbles. Also, the economic “free-fall” at the end of last year appears to have been halted. In addition, the Fed’s pronouncement signalled interest rates will remain low for a while – a sweet spot for risky assets such as stocks. A strong recovery for share prices since March, when there was a real fear of a second Great Depression, seems reasonable.
But the question of whether this is a real recovery or a bubble must still be asked, and there are worrying signs. The rally has been achieved with global economic growth barely above zero and unemployment still rising. The S&P 500 index of US stocks is already far above the forecasts nine out of 10 Wall Street strategists have in place for the end of the year, according to a Bloomberg survey. Concerns are prevalent that US consumers will not return to their old buying habits because of high unemployment and the debts they need to pay off.
There are also concerns that China, the other leading source of growth, has achieved that only by stoking lending – notably, Chinese stocks sold off sharply in August when authorities hinted at tightening lending.
The speed of the rally is itself cause for concern. Historically, big sell-offs have typically been followed by big bounces. But as measured by the S&P 500, the current rally is stronger after six months than any predecessor, including those that followed the lowest points of the market in 1932, 1974 and 1982.
Relationships between markets also imply unhealthy levels of speculation. Currency and stock markets had minimal correlations before the crisis took hold in 2007, while oil and stocks were usually inversely correlated. But oil and stocks have been rising in tandem this year, just as they fell together during the crisis, while the correlations between the dollar and stock markets remain remarkably close.
The implication of such correlations is alarming. Tim Lee, of Pi Economics in Connecticut, puts it this way: “[Since early 2007] 40 per cent of all movement in the S&P 500 can be predicted or explained from the movement of the yen and vice versa. If we assume, quite reasonably, that the yen and the S&P 500 should be fundamentally unrelated instruments, this implies a breakdown of efficient price discovery in the markets.”
So does this qualify as a bubble? The classic definition came from the economist Charles Kindleberger in his 1978 book Manias, Panics and Crashes. For him, a bubble is a phenomenon of mass psychology, and refers to the last stage of an investment mania, when assets are bought “not because of the rate of return on the investment but in anticipation that the asset or security can be sold to someone else at an even higher price”. The bubble bursts when there is no longer a “greater fool” ready to pay too much for the asset.
Thus, in a true bubble, stocks are wildly overvalued compared with their fundamental measures, such as their earnings or the value of the assets on their balance sheets. But conventional valuation measures of stocks suggest they are still far from a true bubble. US stocks are trading at a multiple of 18.7 times their average earnings for the past 10 years, according to the data kept by Professor Robert Shiller of Yale University. Historically, extremes in cyclical price/earnings ratios have accurately signalled long-term market peaks and troughs. The cyclical p/e stood at 27 immediately before the crisis in 2007, for example, and reached 43 at the peak of the internet boom. So it looks premature to say stocks are in a bubble.
. . .
But an argument that this is an incipient bubble, carrying real risk that a mania will develop, is easier to sustain. First, according to Kindleberger, bubbles are driven by cheap credit. With US interest rates at zero, credit is very cheap. Second, many investors seem to be using bubble-like logic; they believe others will soon be prepared to buy even more.
There are true “bulls” who believe the global economy will recover strongly from here, bringing up corporate earnings in its wake. But others focus on the cash that has been on the sidelines, and on the pressures on fund managers who want to avoid the embarrassment of having stayed out of the market during the rally.
Mark Lapolla, of Sixth Man Research in California, who has called aggressively for investment in the market, says he “cannot emphasise strongly enough just how big a role simple game theory will play”. He argues it is large equity mutual fund managers who are driving the market. Most have done well this year, and are ahead of the benchmark stock market indices against which they are compared. “Therefore the incentive is to not lose ground rather than gain it,” he says, so they will stick closely to stocks in the main indices to protect their year-end bonuses.
Jeremy Grantham, co-founder of GMO, a large Boston-based fund manager, says: “Fund managers are simply not prepared to take the career risk of being wrong for a little while and losing business.” Thus they are herding into the index, though Mr Grantham – who advocated buying at the bottom in March – already considers stocks too expensive given the many risks in the world economy.
Another concern comes from more recent history. After the internet bubble in 2000, world stocks endured a bear market, falling 49 per cent before hitting a bottom shortly before the invasion of Iraq in March 2003. They then enjoyed a four-year rally in which the main stock indices doubled. It was rational, and successful, to be in the market from 2003 to 2007 but with hindsight it was a “fools’ rally”, triggered by cheap money, as Alan Greenspan’s Fed cut its target interest rate to 1 per cent. This fuelled a bubble in mortgages and housing.
The 2003 bounce came when stocks were not cheap – they traded at a multiple to cyclical earnings of about 21, according to Prof Shiller, when at the bottom of previous bear markets this multiple had fallen below 6. So it looks as though cheap money stopped markets taking all the medicine they needed. Similarly the current rally began with stocks trading at a multiple of 13 times the previous 10 years’ earnings. This was the cheapest in 21 years but still double the lows seen after previous great sell-offs, implying cheap money had once again saved prices before all speculative excess had been cleaned out of the system.
. . .
The danger, in this scenario, is that lenders lose confidence in the creditworthiness of governments, which could cause rates to rise and spark a renewed sell-off. But that is not imminent.
Just as it made sense to stay in the market while the booming mortgage market kept credit unnaturally cheap, it may make sense to do so while state intervention keeps credit unnaturally cheap. And when bonds and cash pay so little, raising the risks of inflation in the future, the rational response is to buy assets that generate more reliable cash flows, such as stocks; or that act as a hedge against inflation, such as commodities. On this logic, investors may as well heed Mr Odey and “enjoy the bubble”.
They should do so now because, if this theory is right, the denouement will be painful. David Bowers of Absolute Strategy Research in London, who has been bullish for a while and advises staying in stocks, says: “It’s the last game of pass the parcel. When the tech bubble burst, balance sheet problems were passed to the household sector [through mortgages]. This time they are being passed to the public sector [through governments’ assumption of banks’ debts]. There’s nobody left to pass it to in the future.”
Monday, July 6, 2009
Liquidity injections alone are not enough
By Wolfgang Münchau
Published: July 5 2009 20:05 | Financial Times
Monetary policy’s various guises from near-zero short-term interest rates, to massive liquidity injections, to quantitative easing and its relatives have so far had no traction in this crisis. While the global economy is no longer shrinking at quite the speeds seen at the beginning of the year, it is still trapped in a bad recession.
The main reason for its longevity is the state of the banking sector. The European Central Bank has recently pumped €442bn ($620bn, £380bn) in one-year liquidity into the system, but the money is not reaching the real economy. Japanese-style stagnation is no longer possible – it is already here. The only question is how long it will last. Even in an optimistic scenario, global economic growth will be weighed down by a combination of credit squeeze, rising unemployment, rising bankruptcies, rising default rates, and balance sheet adjustment in the household and financial sectors.
I would expect the US to have something approaching a genuine recovery at some point in the next decade, but probably not in 2010 or 2011. Judging by the co-ordination failure at the level of the European Union, the persistent failure to deal with the continent’s 40 or so cross-border banks at European level, and in particular Germany’s inability to sort out its toxic-asset contaminated Landesbanken, the economic prospects for the eurozone are infinitely worse.
From comments by senior central bankers in the US and Europe, I am sure they understand the gravity of the situation very well. Janet Yellen, present of the Federal Reserve Bank of San Francisco, warned last week that the recovery would be agonisingly slow, that unemployment could stay high for many years, and that interest rates might stay low for a long time.
I would also interpret the decidedly downbeat statement last week by Jean-Claude Trichet, president of the European Central Bank, as a sign that the ECB is getting more worried – when others are getting more optimistic. In Europe, there is some evidence that the credit crunch has deteriorated in recent weeks. Much of that evidence is anecdotal, but these anecdotes are disquieting.
Companies who file for bankruptcy increasingly blame the banks, and the number of bankruptcies is rising rapidly. Only a fool would take comfort from the strength in economic indicators. During a financial crisis, these indicators could be a metric of its respondents’ degree of delusion.
The problem is that the trillions of dollars and euros in liquidity are not getting through. There is no point in blaming the banks. Mr Trichet appealed to the banks to behave responsibly. Over the weekend, German politicians also made desperate and implausible threats against the banks unless they increased lending. Not only is this a waste of time but the banks are, in fact, behaving responsibly when they deny credit to customers whom they judge to have lost creditworthiness.
Left to its own devices, banking is inherently pro-cyclical. This is one of the reasons restoring the health of the banking sector by whatever means necessary is a precondition for an economic recovery. Liquidity injections by a central bank, however large, cannot restore health to the banking sector in a sufficiently short period of time if the underlying problem is lack of solvency. Nor do accounting tricks that allow banks to freeze their bad assets in bad banks without any resolution mechanism, such as the German law passed last week. And since the European economies are far more dependent on the banking sector than their Anglo-Saxon counterparts, the need to sort out the banking sector is even more urgent there.
The interactions between the financial sector and the real economy have both a short-term and a long-term, or structural, component. The European Commission’s most recent quarterly report on the eurozone states bluntly that the crisis will lead to a permanent loss in economic output, unless EU member states begin to pursue very different kinds of economic policies. With several European countries now obsessing with premature crisis exit strategies, which may kick in as early as 2010, the chances of a vicious cycle of fading economic growth, falling tax receipts, deficit cuts and further output losses are high. If Ms Yellen is right about the US economy, there will be no bail-out of the European and Asian economies through the US consumer. If the situation persists even for only five years, it will lead to a structural slump for some of those export-reliant economies on the European continent.
The Europeans have a bigger task and they operate in a more difficult political environment. The economic policy framework of Europe’s monetary union only barely succeeded during a normal economic cycle, during which its most important framework of policy co-ordination, the stability and growth pact, was dislodged. The policy framework proved utterly dysfunctional during this economic crisis, as leaders like Angela Merkel or Nicolas Sarkozy have resorted to their nationalist instincts. It would take an even bigger crisis for them to agree on a joint resolution strategy for the banking system.
There is a good chance they might get it.
Published: July 5 2009 20:05 | Financial Times
Monetary policy’s various guises from near-zero short-term interest rates, to massive liquidity injections, to quantitative easing and its relatives have so far had no traction in this crisis. While the global economy is no longer shrinking at quite the speeds seen at the beginning of the year, it is still trapped in a bad recession.
The main reason for its longevity is the state of the banking sector. The European Central Bank has recently pumped €442bn ($620bn, £380bn) in one-year liquidity into the system, but the money is not reaching the real economy. Japanese-style stagnation is no longer possible – it is already here. The only question is how long it will last. Even in an optimistic scenario, global economic growth will be weighed down by a combination of credit squeeze, rising unemployment, rising bankruptcies, rising default rates, and balance sheet adjustment in the household and financial sectors.
I would expect the US to have something approaching a genuine recovery at some point in the next decade, but probably not in 2010 or 2011. Judging by the co-ordination failure at the level of the European Union, the persistent failure to deal with the continent’s 40 or so cross-border banks at European level, and in particular Germany’s inability to sort out its toxic-asset contaminated Landesbanken, the economic prospects for the eurozone are infinitely worse.
From comments by senior central bankers in the US and Europe, I am sure they understand the gravity of the situation very well. Janet Yellen, present of the Federal Reserve Bank of San Francisco, warned last week that the recovery would be agonisingly slow, that unemployment could stay high for many years, and that interest rates might stay low for a long time.
I would also interpret the decidedly downbeat statement last week by Jean-Claude Trichet, president of the European Central Bank, as a sign that the ECB is getting more worried – when others are getting more optimistic. In Europe, there is some evidence that the credit crunch has deteriorated in recent weeks. Much of that evidence is anecdotal, but these anecdotes are disquieting.
Companies who file for bankruptcy increasingly blame the banks, and the number of bankruptcies is rising rapidly. Only a fool would take comfort from the strength in economic indicators. During a financial crisis, these indicators could be a metric of its respondents’ degree of delusion.
The problem is that the trillions of dollars and euros in liquidity are not getting through. There is no point in blaming the banks. Mr Trichet appealed to the banks to behave responsibly. Over the weekend, German politicians also made desperate and implausible threats against the banks unless they increased lending. Not only is this a waste of time but the banks are, in fact, behaving responsibly when they deny credit to customers whom they judge to have lost creditworthiness.
Left to its own devices, banking is inherently pro-cyclical. This is one of the reasons restoring the health of the banking sector by whatever means necessary is a precondition for an economic recovery. Liquidity injections by a central bank, however large, cannot restore health to the banking sector in a sufficiently short period of time if the underlying problem is lack of solvency. Nor do accounting tricks that allow banks to freeze their bad assets in bad banks without any resolution mechanism, such as the German law passed last week. And since the European economies are far more dependent on the banking sector than their Anglo-Saxon counterparts, the need to sort out the banking sector is even more urgent there.
The interactions between the financial sector and the real economy have both a short-term and a long-term, or structural, component. The European Commission’s most recent quarterly report on the eurozone states bluntly that the crisis will lead to a permanent loss in economic output, unless EU member states begin to pursue very different kinds of economic policies. With several European countries now obsessing with premature crisis exit strategies, which may kick in as early as 2010, the chances of a vicious cycle of fading economic growth, falling tax receipts, deficit cuts and further output losses are high. If Ms Yellen is right about the US economy, there will be no bail-out of the European and Asian economies through the US consumer. If the situation persists even for only five years, it will lead to a structural slump for some of those export-reliant economies on the European continent.
The Europeans have a bigger task and they operate in a more difficult political environment. The economic policy framework of Europe’s monetary union only barely succeeded during a normal economic cycle, during which its most important framework of policy co-ordination, the stability and growth pact, was dislodged. The policy framework proved utterly dysfunctional during this economic crisis, as leaders like Angela Merkel or Nicolas Sarkozy have resorted to their nationalist instincts. It would take an even bigger crisis for them to agree on a joint resolution strategy for the banking system.
There is a good chance they might get it.
Tuesday, June 30, 2009
The cautious approach to fixing banks will not work
By Martin Wolf
Published: June 30 2009 20:03 Financial Times
With one bound the banks are free, or so it seems. Already, the panic of the autumn of 2008 is fading. The period within which lessons can be learnt and changes made is closing. Yet without radical changes, another crisis is certain. It may not even be that long delayed.
In a recent speech, governor Elizabeth Duke of the Federal Reserve told an anecdote from just after the failure of Lehman Brothers last September. Ben Bernanke, chairman of the Federal Reserve, was asked: “Well, what if we don’t do anything?” To which he replied: “There will be no economy on Monday.” Instead, all institutions deemed systemically significant were saved, by shifting almost all of the risk on to taxpayers.
“Never again” might be too much to ask. But “not for a generation” is essential. Governments cannot afford an early repeat, financially, politically, perhaps morally: the lives of so many cannot soon be sacrificed to the whims of a foolish few.
Yet what has emerged after the crisis is, as I argued last week , an even worse financial system than the one with which we began. The survivors are an oligopoly of “too-big-and-interconnected-to-fail” financial behemoths. They are the winners not because they are necessarily the best businesses, but because they are the best supported. It takes no imagination to realise what these institutions might now do, given the incentives for risk-taking.
So what is to be done? The characteristic, but futile, response is to move the regulatory deckchairs on the deck of the Titanic. Recent proposals from the US Treasury fall partly into this category. But the financial system had to be rescued from its own mismanagement of risk. This is not going to be changed by external supervision. It is going to be changed only by fixing incentives.
The starting point has to be with “too big to fail”. We need a credible system for winding up even huge financial institutions. The most attractive proposals are for “good banks”, in which unsecured creditors become shareholders. That would be easier if, as President Barack Obama has proposed, and Mervyn King, governor of the Bank of England, has argued, a regulated institution has to produce a plan for an orderly wind-down of its activities.
Yet bank failures are like buses: you do not see one for hours and then a fleet arrives together. The authorities cannot make a credible promise that they would be prepared to put all affected institutions through bankruptcy in a systemic crisis. This would be a recipe for still-greater panics. “Too big and interconnected to fail” is a reality. It is so, because, as Andrew Haldane of the Bank of England pointed out in a recent speech, the financial system is an increasingly tight network.*
My colleague John Kay has argued that the right response is to create “narrow banks”, which are perfectly safe, leaving the rest of the financial system to go on its merry way, subject to a then-plausible threat of bankruptcy. I find this idea both attractive and unpersuasive. The attraction seems evident. It is unpersuasive in part because it is so hard to agree on what narrow banks should do. It is also unpersuasive because the narrower the banks are made to be, the more vital is the role of the rest of the financial system and so the less plausible it is that governments would let it collapse.
If institutions are too big and interconnected to fail, and no neat structural solution can be identified, alternatives must be found: much higher capital requirements and greater attention to liquidity are the obvious ones. At present, big financial institutions operate with next to no capital: in the US, the median leverage ratio of commercial banks was 35 to 1 in 2007; in Europe, it was 45 to 1 (see chart). As I noted last week, this makes it rational for shareholders to “go for broke”, with the results we have seen. Allowing institutions to be operated in the interests of shareholders, who supply just 3 per cent of their loanable funds, is insane. Trying to align the interests of management with those of shareholders is then even crazier. With their current capital structure, big financial institutions are a licence to gamble taxpayers’ money.
So how much capital makes sense for systemically significant institutions? “Much more than today” is the answer. Moreover, the required capital must also not be risk-weighted on the basis of banks’ models, which are not to be trusted. Shareholders’ funds should make up a minimum of 10 per cent of capital. In the US, it used to be far higher.
Higher capital is, in addition, a good way to internalise the negative “externalities” – more precisely, risks – created by one institution for the entire system. Ideally, therefore, the required capital should be correlated with the systemic significance of institutions, as the excellent new annual report from the Bank for International Settlements argues. Moreover, the requirement should be set against all activities, on the basis of fully consolidated accounts.
Within a far better capitalised financial system, it would also be relatively easy to operate a “macroprudential” regime, with the required capital rising during booms and falling during busts. Again, the bigger the stake of shareholders, the less one would worry if the rewards of managers were aligned with them. Even so, regulators have to have some sort of control on the incentives of management, as long as taxpayers bear residual risk.
Two difficulties remain: the transition; and regulatory arbitrage.
On the former, a demand for much higher capital ratios today would imperil the recovery. The answer is a lengthy transition, perhaps of as much as a decade. On the latter, it is evident that the so-called “shadow banking” system cannot be allowed to operate outside capital constraints if entities within it are likely to be systemically significant, as proved to be the case for money market funds. Moreover, capital ratios would have to be imposed by all significant countries. But the US is powerful enough to force movement in that direction by insisting that any foreign bank operating within it must be appropriately capitalised.
In sum, deleveraging is the right starting point for a healthier financial system. This would work best if we also eliminated today’s huge fiscal incentives for borrowing.
It is cautious incrementalism, not radicalism, that is now the risky option. Where should such radicalism start? The answer is clear: it is the incentives, stupid.
Published: June 30 2009 20:03 Financial Times
With one bound the banks are free, or so it seems. Already, the panic of the autumn of 2008 is fading. The period within which lessons can be learnt and changes made is closing. Yet without radical changes, another crisis is certain. It may not even be that long delayed.
In a recent speech, governor Elizabeth Duke of the Federal Reserve told an anecdote from just after the failure of Lehman Brothers last September. Ben Bernanke, chairman of the Federal Reserve, was asked: “Well, what if we don’t do anything?” To which he replied: “There will be no economy on Monday.” Instead, all institutions deemed systemically significant were saved, by shifting almost all of the risk on to taxpayers.
“Never again” might be too much to ask. But “not for a generation” is essential. Governments cannot afford an early repeat, financially, politically, perhaps morally: the lives of so many cannot soon be sacrificed to the whims of a foolish few.
Yet what has emerged after the crisis is, as I argued last week , an even worse financial system than the one with which we began. The survivors are an oligopoly of “too-big-and-interconnected-to-fail” financial behemoths. They are the winners not because they are necessarily the best businesses, but because they are the best supported. It takes no imagination to realise what these institutions might now do, given the incentives for risk-taking.
So what is to be done? The characteristic, but futile, response is to move the regulatory deckchairs on the deck of the Titanic. Recent proposals from the US Treasury fall partly into this category. But the financial system had to be rescued from its own mismanagement of risk. This is not going to be changed by external supervision. It is going to be changed only by fixing incentives.
The starting point has to be with “too big to fail”. We need a credible system for winding up even huge financial institutions. The most attractive proposals are for “good banks”, in which unsecured creditors become shareholders. That would be easier if, as President Barack Obama has proposed, and Mervyn King, governor of the Bank of England, has argued, a regulated institution has to produce a plan for an orderly wind-down of its activities.
Yet bank failures are like buses: you do not see one for hours and then a fleet arrives together. The authorities cannot make a credible promise that they would be prepared to put all affected institutions through bankruptcy in a systemic crisis. This would be a recipe for still-greater panics. “Too big and interconnected to fail” is a reality. It is so, because, as Andrew Haldane of the Bank of England pointed out in a recent speech, the financial system is an increasingly tight network.*
My colleague John Kay has argued that the right response is to create “narrow banks”, which are perfectly safe, leaving the rest of the financial system to go on its merry way, subject to a then-plausible threat of bankruptcy. I find this idea both attractive and unpersuasive. The attraction seems evident. It is unpersuasive in part because it is so hard to agree on what narrow banks should do. It is also unpersuasive because the narrower the banks are made to be, the more vital is the role of the rest of the financial system and so the less plausible it is that governments would let it collapse.
If institutions are too big and interconnected to fail, and no neat structural solution can be identified, alternatives must be found: much higher capital requirements and greater attention to liquidity are the obvious ones. At present, big financial institutions operate with next to no capital: in the US, the median leverage ratio of commercial banks was 35 to 1 in 2007; in Europe, it was 45 to 1 (see chart). As I noted last week, this makes it rational for shareholders to “go for broke”, with the results we have seen. Allowing institutions to be operated in the interests of shareholders, who supply just 3 per cent of their loanable funds, is insane. Trying to align the interests of management with those of shareholders is then even crazier. With their current capital structure, big financial institutions are a licence to gamble taxpayers’ money.
So how much capital makes sense for systemically significant institutions? “Much more than today” is the answer. Moreover, the required capital must also not be risk-weighted on the basis of banks’ models, which are not to be trusted. Shareholders’ funds should make up a minimum of 10 per cent of capital. In the US, it used to be far higher.
Higher capital is, in addition, a good way to internalise the negative “externalities” – more precisely, risks – created by one institution for the entire system. Ideally, therefore, the required capital should be correlated with the systemic significance of institutions, as the excellent new annual report from the Bank for International Settlements argues. Moreover, the requirement should be set against all activities, on the basis of fully consolidated accounts.
Within a far better capitalised financial system, it would also be relatively easy to operate a “macroprudential” regime, with the required capital rising during booms and falling during busts. Again, the bigger the stake of shareholders, the less one would worry if the rewards of managers were aligned with them. Even so, regulators have to have some sort of control on the incentives of management, as long as taxpayers bear residual risk.
Two difficulties remain: the transition; and regulatory arbitrage.
On the former, a demand for much higher capital ratios today would imperil the recovery. The answer is a lengthy transition, perhaps of as much as a decade. On the latter, it is evident that the so-called “shadow banking” system cannot be allowed to operate outside capital constraints if entities within it are likely to be systemically significant, as proved to be the case for money market funds. Moreover, capital ratios would have to be imposed by all significant countries. But the US is powerful enough to force movement in that direction by insisting that any foreign bank operating within it must be appropriately capitalised.
In sum, deleveraging is the right starting point for a healthier financial system. This would work best if we also eliminated today’s huge fiscal incentives for borrowing.
It is cautious incrementalism, not radicalism, that is now the risky option. Where should such radicalism start? The answer is clear: it is the incentives, stupid.
Monday, June 29, 2009
Germany and France need to sing in tune
By Wolfgang Münchau
Published: June 28 2009 19:20 Financial Times
I never expected a message of austerity to emerge from the Palace of Versailles, where Nicolas Sarkozy, France’s president, spoke last week to outline his economic strategy for the rest of his term. He left no doubt that he is not prepared to follow Angela Merkel, Germany’s chancellor, in the direction of a balanced budget. Instead, he distinguished between “good” and “bad” government deficits, went on to explain that a good deficit is cyclical, a bad deficit structural, and then produced yet another category: a temporary deficit that would be brought down through higher economic growth in the future.
In theory, this is all fine. In practice we have reason to doubt whether he will make an earnest effort to get rid of the deficits, good or bad. One can have endless debates about the relative benefits of Germany’s legalistic approach or Mr Sarkozy’s alternative version. Whatever side of the debate you support, you will probably agree that it is not a good idea for the two largest members of the eurozone to move in opposite directions.
In fact, it could prove highly destabilising to the eurozone. Germany, as I argued last week, is heading in the direction of a zero level of government debt in the long run as a consequence of a new constitutional balanced-budget law. It is perhaps not intuitive that a balanced budget, pursued indefinitely, would eventually lead to a complete eradication of public debt. But this is what will happen.
In fact, Germany’s new law imposes an upper deficit ceiling of 0.35 per cent of gross domestic product over the economic cycle. But remember this is a ceiling. There is no floor. If the cyclically adjusted deficit came in exactly at that ceiling, year after year, and assuming a nominal rate of output growth of 4 per cent, this would stabilise Germany’s debt-to-GDP ratio at just under 10 per cent. So if this constitutional law sticks, Germany’s debt-to-GDP ratio will settle somewhere between zero and 10 per cent in the long run.
Now, Germany is a country with a large current account surplus, or excess of domestic savings over domestic investments – 6.6 per cent of GDP in 2008 and 7.6 per cent the year before. It is no surprise therefore that German banks have been hit so heavily by the securitisation crisis. They had to channel masses of surplus savings abroad. In the event, they bought US subprime mortgages and their derivative products.
They will not repeat the same mistake, but they will still be facing a problem. If Germany’s national debt converges towards zero, Germany’s surplus savers will have to invest huge amounts of their savings outside the country, since the supply of German government bonds will diminish over time as the outstanding stock of debt is depleted.
Now this is where Mr Sarkozy’s bad deficits come in. Most German savers, especially pension funds, will want to invest in euro-denominated government debt, which, for practical purposes in this scenario, means French debt, because no other domestic European bond market is sufficiently large and mature. As a result France may enjoy a version of America’s exorbitant privilege.
If Germany unilaterally goes down the road of deficit reduction, and if France unilaterally goes the opposite way, the result will be a serious imbalance. France will find it progressively easy to finance its public sector deficit, as German savers have no choice but to buy French debt instruments. They will get trapped in French debt, just as the Chinese got trapped in US debt.
This means that Germany will suffer two successive blows. The first is a sacrifice of economic growth as a result of the pro-cyclical policies needed to do away with the deficits for ever. We got a taste of that last week, when Klaus Zimmermann, president of the German Institute for Economic Research, advocated an increase in value added tax from 19 to 25 per cent. Such action would obviously be disastrous for economic growth. It would throw Germany into a full-scale depression. But he is right in a narrow technical sense. If Germany is hell-bent on eliminating its structural deficit by 2016, some drastic measures are inevitable. Ms Merkel has said she will not raise VAT, but she will either have to raise other taxes or cut spending. Politically, the first will be easier than the second.
Once budgetary balance is achieved, at huge economic cost, German savers will then suffer the second blow in the form of poor returns on investment, as their surplus savings will be financing Mr Sarkozy’s good, bad and ugly economic policies.
How long can this go on? Imbalances can last a long time, but they do not last for ever. Something will have to give. It could be that future generations of German politicians find ingenious ways around the balanced budget law. Or that they find a two-thirds majority to overturn it. Or that Mr Sarkozy or his successors follow Germany into a future of austerity. But as long as one of those three events fails to happen, Germany may discover that unilateral fiscal rigour in a monetary union could prove extremely costly.
For the sustainability of the euro, you surely do not want to get into a position where a large member state has a rational economic reason to quit. So if Germany and France really do what they both promise, you may as well start the egg timer.
munchau@eurointelligence.com
Published: June 28 2009 19:20 Financial Times
I never expected a message of austerity to emerge from the Palace of Versailles, where Nicolas Sarkozy, France’s president, spoke last week to outline his economic strategy for the rest of his term. He left no doubt that he is not prepared to follow Angela Merkel, Germany’s chancellor, in the direction of a balanced budget. Instead, he distinguished between “good” and “bad” government deficits, went on to explain that a good deficit is cyclical, a bad deficit structural, and then produced yet another category: a temporary deficit that would be brought down through higher economic growth in the future.
In theory, this is all fine. In practice we have reason to doubt whether he will make an earnest effort to get rid of the deficits, good or bad. One can have endless debates about the relative benefits of Germany’s legalistic approach or Mr Sarkozy’s alternative version. Whatever side of the debate you support, you will probably agree that it is not a good idea for the two largest members of the eurozone to move in opposite directions.
In fact, it could prove highly destabilising to the eurozone. Germany, as I argued last week, is heading in the direction of a zero level of government debt in the long run as a consequence of a new constitutional balanced-budget law. It is perhaps not intuitive that a balanced budget, pursued indefinitely, would eventually lead to a complete eradication of public debt. But this is what will happen.
In fact, Germany’s new law imposes an upper deficit ceiling of 0.35 per cent of gross domestic product over the economic cycle. But remember this is a ceiling. There is no floor. If the cyclically adjusted deficit came in exactly at that ceiling, year after year, and assuming a nominal rate of output growth of 4 per cent, this would stabilise Germany’s debt-to-GDP ratio at just under 10 per cent. So if this constitutional law sticks, Germany’s debt-to-GDP ratio will settle somewhere between zero and 10 per cent in the long run.
Now, Germany is a country with a large current account surplus, or excess of domestic savings over domestic investments – 6.6 per cent of GDP in 2008 and 7.6 per cent the year before. It is no surprise therefore that German banks have been hit so heavily by the securitisation crisis. They had to channel masses of surplus savings abroad. In the event, they bought US subprime mortgages and their derivative products.
They will not repeat the same mistake, but they will still be facing a problem. If Germany’s national debt converges towards zero, Germany’s surplus savers will have to invest huge amounts of their savings outside the country, since the supply of German government bonds will diminish over time as the outstanding stock of debt is depleted.
Now this is where Mr Sarkozy’s bad deficits come in. Most German savers, especially pension funds, will want to invest in euro-denominated government debt, which, for practical purposes in this scenario, means French debt, because no other domestic European bond market is sufficiently large and mature. As a result France may enjoy a version of America’s exorbitant privilege.
If Germany unilaterally goes down the road of deficit reduction, and if France unilaterally goes the opposite way, the result will be a serious imbalance. France will find it progressively easy to finance its public sector deficit, as German savers have no choice but to buy French debt instruments. They will get trapped in French debt, just as the Chinese got trapped in US debt.
This means that Germany will suffer two successive blows. The first is a sacrifice of economic growth as a result of the pro-cyclical policies needed to do away with the deficits for ever. We got a taste of that last week, when Klaus Zimmermann, president of the German Institute for Economic Research, advocated an increase in value added tax from 19 to 25 per cent. Such action would obviously be disastrous for economic growth. It would throw Germany into a full-scale depression. But he is right in a narrow technical sense. If Germany is hell-bent on eliminating its structural deficit by 2016, some drastic measures are inevitable. Ms Merkel has said she will not raise VAT, but she will either have to raise other taxes or cut spending. Politically, the first will be easier than the second.
Once budgetary balance is achieved, at huge economic cost, German savers will then suffer the second blow in the form of poor returns on investment, as their surplus savings will be financing Mr Sarkozy’s good, bad and ugly economic policies.
How long can this go on? Imbalances can last a long time, but they do not last for ever. Something will have to give. It could be that future generations of German politicians find ingenious ways around the balanced budget law. Or that they find a two-thirds majority to overturn it. Or that Mr Sarkozy or his successors follow Germany into a future of austerity. But as long as one of those three events fails to happen, Germany may discover that unilateral fiscal rigour in a monetary union could prove extremely costly.
For the sustainability of the euro, you surely do not want to get into a position where a large member state has a rational economic reason to quit. So if Germany and France really do what they both promise, you may as well start the egg timer.
munchau@eurointelligence.com
Tuesday, June 23, 2009
Reform of regulation has to start by altering incentives
By Martin WolfPublished: June 23 2009 20:16 Financial Times
Proposals for reform of financial regulation are now everywhere. The most significant have come from the US, where President Barack Obama’s administration last week put forward a comprehensive, albeit timid, set of ideas. But will such proposals make the system less crisis-prone? My answer is, no. The reason for my pessimism is that the crisis has exacerbated the sector’s weaknesses. It is unlikely that envisaged reforms will offset this danger.
At the heart of the financial industry are highly leveraged businesses. Their central activity is creating and trading assets of uncertain value, while their liabilities are, as we have been reminded, guaranteed by the state. This is a licence to gamble with taxpayers’ money. The mystery is that crises erupt so rarely.
The place to start is with the core of modern capitalism: the limited liability, joint-stock company. Big commercial banks were among the most important products of the limited liability revolution. But banks are special sorts of businesses: for them, debt is more than a means of doing business; it is their business. Thus, limited liability is likely to have an exceptionally big impact on their behaviour.
Lucian Bebchuk and Holger Spamann of the Harvard Law School make the big point in an excellent recent paper.* Its focus is on the incentives affecting management. These are hugely important. Still more important, however, is why a limited liability bank, run in the interests of shareholders, is so risky.
In a highly leveraged limited liability business, shareholders will rationally take excessive risks, since they enjoy all the upside but their downside is capped: they cannot lose more than their equity stake, however much the bank loses. In contemporary banks, leverage of 30 to one is normal. Higher leverage is not rare. As the authors argue, “leveraged bank shareholders have an incentive to increase the volatility of bank assets”.
Think of two business models with the same expected returns: in one these returns are sure and steady; in the other the outcome consists of lengthy periods of high returns and the occasional catastrophic loss. Rational shareholders will prefer the latter. This is what one sees: high equity returns, by the standards of other established businesses, and occasional wipe-outs.
Profs Bebchuk and Spamann add that four features of the modern financial system make the situation even worse: first, the capital of banks is itself partly funded by debt; second, the role of bank holding companies may further increase the incentives of shareholders to underplay risk; third, managers are rewarded for aligning their interests with those of shareholders; and, fourth, some of the ways managers are rewarded – options, for example – are themselves a geared play on rewards to shareholders. So managers have an even bigger economic interest in “going for broke” or “betting the bank” than shareholders. As the paper notes, the fact that some managers lost a great deal of money does not demonstrate they were foolish to make these bets, since their upside was so huge.
A solution seems evident: let creditors lose. Rational creditors would then charge a premium for lending to higher-risk operations, leading to lower levels of leverage. One objection is that creditors may be ill-informed about the risks being run by banks they are lending to. But there is a more forceful objection: many creditors are protected by insurance backed by governments. Such insurance is motivated by the importance of financial institutions as sources of credit, on the asset side, and suppliers of money, on the liability side. As a result, creditors have little interest in the quality of a bank’s assets or in its strategy. They appear to have lent to a bank. In reality, they have lent to the state.
The big lesson of the current crisis is just how far such insurance may go in the case of institutions deemed too big or interconnected to fail. Big banks rarely get into trouble in isolation: they often make very similar errors; moreover, the failure of one impairs the actual (or perceived) solvency of others. Thus, creditors are most at risk in a systemic crisis. But a systemic crisis is precisely when governments feel compelled to come to the rescue, as they did at the end of last year.
According to the International Monetary Fund’s latest Global Financial Stability Report, support offered by the US, UK and eurozone central banks and governments has amounted to $9,000bn (€6,400bn, £5,500bn), of which $4,500bn are guarantees. The balance sheet of the state was put behind the banks. This does not mean creditors bear no risk at all. But their risk is attenuated.
The well-known solution is to regulate such insured institutions very tightly. But an enormous part of what banks did in the early part of this decade – the off-balance-sheet vehicles, the derivatives and the “shadow banking system” itself – was to find a way round regulation. The obvious question is whether it will be “different this time”. Sensible people must doubt it. Indeed, it must be particularly unlikely when the capitalisation of banks is so small. This is the time to go for broke.
In a speech delivered just last week, Mervyn King, governor of the Bank of England, made clear why finding a better approach matters so much: “The costs of this crisis are not to be measured simply in terms of its impact on public finances, the destruction of wealth and the number of jobs lost. They are also to be seen in the lost trust in the financial sector among other parts of our economy ... ‘My word is my bond’ are old words. ‘My word is my CDO-squared’ will never catch on.”
Such a crisis is not only the result of a rational response to incentives. Folly and ignorance play a part. Nor do I believe that bubbles and crises can be eliminated from capitalism. Yet it is hard to believe that the risks being run by huge institutions had nothing to do with incentives. The unpleasant truth is that, today, the incentive to behave in this risky way is, if anything, even bigger than it was before the crisis.
Regulatory reform cannot end with incentives. But it has to start from incentives. A business that is too big to fail cannot be run in the interests of shareholders, since it is no longer part of the market. Either it must be possible to close it down or it has to be run in a different way. It is as simple – and brutal – as that.
Monday, June 22, 2009
Financial Regulation and Its Limits
Respinning the web
By John Plender
Published: June 21 2009 19:23 Financial Times
If the financial crisis has taught us anything,” says Michael Taylor, “it is that too much conventional wisdom can be dangerous.” So there is something “slightly unnerving”, adds the former International Monetary Fund economist, about the speed with which a new consensus has emerged on the re-regulation of the financial system – especially when it comes to the concept known in bankerly jargon as “macro-prudential” regulation.
In essence this boils down to the idea that regulation should focus much more on systemic risks instead of assuming that a sound system can be built simply by supervising individual banks. It aims to restrain the kind of build-up of systemic risk that occurred during the credit bubble and which is difficult to address by raising interest rates to damp down asset prices. The chief weapon in the macro-prudential armoury is a capital regime for banks that curbs excessive credit growth.
The effectiveness of macro-prudential regulation is a core assumption behind the capital proposals in last week’s US Treasury white paper on financial regulation. The concept was also roundly endorsed by the de Larosière report to the European Union and in the Turner review in the UK. The underlying philosophy is that if macro-economic analysis had been brought to bear on the design of the financial system, the current debacle might have been either pre-empted or rendered less devastating.
Heavy reliance, then, is being placed on the ability of this new regulatory approach to prevent a future global financial crisis. Yet there is no agreement on how it might work in practice and good reason to question whether it will live up to its advance billing. One very senior former member of the global central banking establishment even says “not only is macro-prudential regulation rubbish, but it gives rubbish a bad name”.
The starting point in the argument is that banking is different. First, because banks borrow short and lend long in the interests of the wider economy but at the cost of putting themselves in a fundamentally risky position: if depositors demand their money back simultaneously, banks cannot pay up because of the mismatch in the maturity of their assets and liabilities. Second, because a loss of confidence in one bank can become contagious across the system. Third, bank failures have externalities, or side effects, that not only inflict losses on other banks but also damage the wider economy – for example, by curbing the supply of credit.
An important role of bank regulation, as the US Treasury white paper underlines, is precisely to address such externalities. It proposes to compel the largest, most interconnected, highly leveraged institutions “to internalize the costs they could impose on society in the event of failure” by imposing tougher capital requirements.
In the run up to the financial crisis the regulatory approach was entirely micro-prudential: it assumed that, if bank supervisors ensured individual banks were safe, systemic stability would look after itself. Yet in a recent report – The Fundamental Principles of Financial Regulation – a group of prominent bankers and academics points out that this view “sounds like a truism, but in practice it represents a fallacy of composition”. This is because, in trying to make themselves safer in a crisis, banks can behave in a way that collectively undermines the system.
It may be prudent, for example, for an individual bank to sell assets when the price of risk increases. Yet if many banks do the same, the asset price will collapse, causing banks to take further steps that can lead to a vicious, self-reinforcing downward spiral in asset prices.
The Turner Review highlights the practical consequences of an unbalanced regulatory approach. In the build-up to the crisis, it says, the Bank of England tended to focus on monetary policy analysis, as required by its inflation target. While the review praises the Bank’s analytical work for its regular Financial Stability Review, it notes that the analysis did not result in policy responses to off-set the risks identified.
For its part, the Financial Services Authority, the UK’s principal regulator, focused too much on the supervision of individual institutions, and insufficiently on wider sectoral and system-wide risks. The review concludes that the vital activity of macro-prudential analysis fell between two stools, leading to what Paul Tucker, deputy governor of the Bank of England, has called “underlap”.
Systemic instability has been further compounded by the pro-cyclicality of regulation, whereby banks are not required to build up enough capital in the good times and are obliged to increase capital in the downturn, so accentuating boom and bust. Much of the damage wrought in the financial crisis was a direct result of Basel I, the global capital regime agreed by the world’s financial regulators. This treated all mortgages as equally risky, so that bankers could take on very high-risk, high-reward subprime mortgage business without having to back it with more capital than that required for safer mortgage business.
Basel II, which started to be implemented last year, addressed this problem by breaking assets down into subcategories and applying risk weights to them. Yet this actually increases pro-cyclicality: as risk grows in the recession, in contrast to Basel I, banks are required to hold more capital just when they are most under pressure. This pro-cyclicality is further exacerbated by mark-to-market accounting, which adds to asset values in the good times and inflicts additional shrinkage when markets turn down.
Bank regulators around the world are already working to reduce the pro-cyclical bias in the system by tinkering with capital adequacy requirements. Yet Lord Turner, chairman of the UK’s FSA, argues that there is a case for going further to introduce overt counter-cyclicality, whereby required and actual capital would rise in good years when loan losses are below long-run averages, creating capital buffers that would be drawn down in bad years as losses increased. He also argues for an overall leverage ratio, looking at assets in relation to capital, as a backstop control measure. Such a ratio also features in the financial regulation plans of the administration of US President Barack Obama.
Capital requirements that track the cycle, together with overall leverage ratios, are thus central planks of the macro-prudential approach. Yet the attempt to counter pro-cyclicality raises huge questions, most notably on the issue of whether regulators should have discretion to change capital requirements in the course of the cycle or whether the capital regime should be subject to pre-determined rules. In a perfect world, giving discretion to regulators to calibrate capital requirements according to the state of the economy makes sense. In the real world, regulators would face the ever-difficult problem of defining where they were in the economic cycle.
Sir Andrew Large, former deputy governor of the Bank of England for financial stability, says the problems of judging how close the system is to a tipping point can be overstated. “I argue that people could put levels of probability on their assessment and then act to calm things down.”
Yet few deny that regulators making such judgments would be subject to huge pressures because, by definition, the purpose is to prevent financial institutions doing what they want to do by making it more expensive or off limits. Charles Goodhart of the London School of Economics, and a former member of the Bank of England monetary policy committee, says regulators and supervisors “will be roundly condemned for tightening regulatory conditions in asset price booms by the combined forces of lenders, borrowers and politicians, the latter tending to regard cyclical bubbles as beneficent trend improvements due to their own improved policies”.
As with monetary policy, it is politically difficult for the guardians of the financial system to take measures that will reduce economic growth in the short term in the interests of fending off a recession no one thinks will happen while the good times still roll.
There lies the case for a rules-based approach. Yet designing a set of rules is no easy task (see box). It would also bring added complexity, not least because big multinational banks operating in different economies would be affected by many different cycles. And there is a risk that inflexible rules could lead to regulatory arbitrage.
Regulatory expert Michael Taylor compares counter-cyclical capital buffers with the “corset”, a form of quantitative control introduced in the UK in 1973 that penalised banks whose deposits grew faster than a pre-set limit. This simply drove money off-shore and the regime had to be scrapped in 1980.
Nor are rules a guarantee against lobbying pressure. The Bank of Spain has been much praised for introducing counter-cyclical provisioning that helped the Spanish banking system to weather the crisis better than most. Yet, as Mr Taylor points out, the Spanish central bank watered down its rules in 2004 because of lobbying by the industry, which argued that the length of the economic expansion had made such rules redundant.
These difficulties with macro-prudential regulation notwithstanding, the direction of travel is clear. Perhaps the most articulate advocate is the FSA’s Lord Turner, who argues in his review for the counter-cyclical regime to be substantially rules based. Yet he wants the best of both worlds, saying that this could be combined with regulatory discretion to add a further layer of requirements if macro-prudential analysis suggested this was appropriate.
The debate on rules versus discretion is set to run and run. There is a risk that more is expected of the macro-prudential approach than it is capable of delivering. This is because financial crises are often precipitated by unprecedented shocks that are inherently difficult to foresee. Yet Sir Andrew Large makes a parallel with the argument for independent central banking 30 or 40 years ago. Most people thought it was too difficult. But it happened, with what he regards as quite creditable results. “We need to have the self-confidence to do the same with systemic stability,” he adds, “for without such a policy we will be condemned to repeat today’s disaster in 10 or 20 years time.”
Fallout and factions: the drama of rewriting the rules
The next 12 months could bring the most dramatic change in financial services regulation in decades, as the US, the UK and the European Union try to tackle the causes of, and fallout from, the global downturn. Plans are moving forward to tighten the rules on everything from hedge funds and over-the-counter derivatives to mortgages and basic bank capital requirements, writes Brooke Masters.
In the US, President Barack Obama has unveiled detailed reform plans. He wants to consolidate several federal banking regulators and give the Federal Reserve new power to regulate systemic risk, supplemented with a council of regulators from other agencies. He also wants to create a consumer financial protection agency to regulate credit cards and mortgages, and require registration for hedge funds and central clearing for many derivatives. Parts of the scheme are already meeting scepticism from Congress, so it is not clear how much will become reality.
The EU is moving in a more piecemeal fashion. The European Commission has put forward an alternative investment directive that would force hedge funds and private equity firms to seek regulatory authorisation, report their strategies and set aside capital against losses. Regulators would also be able to set limits on borrowing. The proposal has drawn sharp criticism from London, where much of the European alternative investment management industry is based, for being restrictive and anticompetitive.
EU leaders are also considering plans to create a pan-European board to monitor systemic risk, as well as a college of supervisors that would provide more consistency among national bank supervisors and resolve disputes among countries. But Gordon Brown, UK prime minister, is fighting plans to make the president of the European Central Bank (to which the UK does not belong) chair of the systemic risk board. London has already secured guarantees that the new supervisory system cannot force any single country to commit taxpayer funds to bail out a troubled bank.
In the UK, the Treasury is due to bring forward its proposal for financial regulation shortly, but splits are opening up. Mervyn King, governor of the Bank of England, wants his institution to be in charge of systemic regulation and has asked for more power to do it. But the Labour government is largely defending the tripartite system it set up more than a decade ago, which divides power among the Bank, the Treasury and the Financial Services Authority.
***
The beauty of the Spanish method
Creating a counter-cyclical capital regime for banks is tough but it has been done, most notably in Spain. Since 2000 banks there have had to make provisions for latent portfolio losses – those likely to occur but which are unrecognised by conventional accounting. This buffer takes the form of a reserve deducted from capital in good times and released in the downturn. It is calculated by comparing long-run credit growth in the economy with the current rate of credit growth. “Dynamic provisioning” offers a better idea of profitability and solvency over time and helps prevent dividend increases in good times that might undermine banks’ solvency. But the Spanish model is not compliant with global accounting standards. And it did not prevent a housing bubble as the macro-prudential approach battled a fierce monetary headwind – the European Central Bank’s one-size- fits-all interest rate was lower than appropriate for a boom economy. Spain’s banking system has nonetheless come through the crisis in better shape than most.
By John Plender
Published: June 21 2009 19:23 Financial Times
If the financial crisis has taught us anything,” says Michael Taylor, “it is that too much conventional wisdom can be dangerous.” So there is something “slightly unnerving”, adds the former International Monetary Fund economist, about the speed with which a new consensus has emerged on the re-regulation of the financial system – especially when it comes to the concept known in bankerly jargon as “macro-prudential” regulation.
In essence this boils down to the idea that regulation should focus much more on systemic risks instead of assuming that a sound system can be built simply by supervising individual banks. It aims to restrain the kind of build-up of systemic risk that occurred during the credit bubble and which is difficult to address by raising interest rates to damp down asset prices. The chief weapon in the macro-prudential armoury is a capital regime for banks that curbs excessive credit growth.
The effectiveness of macro-prudential regulation is a core assumption behind the capital proposals in last week’s US Treasury white paper on financial regulation. The concept was also roundly endorsed by the de Larosière report to the European Union and in the Turner review in the UK. The underlying philosophy is that if macro-economic analysis had been brought to bear on the design of the financial system, the current debacle might have been either pre-empted or rendered less devastating.
Heavy reliance, then, is being placed on the ability of this new regulatory approach to prevent a future global financial crisis. Yet there is no agreement on how it might work in practice and good reason to question whether it will live up to its advance billing. One very senior former member of the global central banking establishment even says “not only is macro-prudential regulation rubbish, but it gives rubbish a bad name”.
The starting point in the argument is that banking is different. First, because banks borrow short and lend long in the interests of the wider economy but at the cost of putting themselves in a fundamentally risky position: if depositors demand their money back simultaneously, banks cannot pay up because of the mismatch in the maturity of their assets and liabilities. Second, because a loss of confidence in one bank can become contagious across the system. Third, bank failures have externalities, or side effects, that not only inflict losses on other banks but also damage the wider economy – for example, by curbing the supply of credit.
An important role of bank regulation, as the US Treasury white paper underlines, is precisely to address such externalities. It proposes to compel the largest, most interconnected, highly leveraged institutions “to internalize the costs they could impose on society in the event of failure” by imposing tougher capital requirements.
In the run up to the financial crisis the regulatory approach was entirely micro-prudential: it assumed that, if bank supervisors ensured individual banks were safe, systemic stability would look after itself. Yet in a recent report – The Fundamental Principles of Financial Regulation – a group of prominent bankers and academics points out that this view “sounds like a truism, but in practice it represents a fallacy of composition”. This is because, in trying to make themselves safer in a crisis, banks can behave in a way that collectively undermines the system.
It may be prudent, for example, for an individual bank to sell assets when the price of risk increases. Yet if many banks do the same, the asset price will collapse, causing banks to take further steps that can lead to a vicious, self-reinforcing downward spiral in asset prices.
The Turner Review highlights the practical consequences of an unbalanced regulatory approach. In the build-up to the crisis, it says, the Bank of England tended to focus on monetary policy analysis, as required by its inflation target. While the review praises the Bank’s analytical work for its regular Financial Stability Review, it notes that the analysis did not result in policy responses to off-set the risks identified.
For its part, the Financial Services Authority, the UK’s principal regulator, focused too much on the supervision of individual institutions, and insufficiently on wider sectoral and system-wide risks. The review concludes that the vital activity of macro-prudential analysis fell between two stools, leading to what Paul Tucker, deputy governor of the Bank of England, has called “underlap”.
Systemic instability has been further compounded by the pro-cyclicality of regulation, whereby banks are not required to build up enough capital in the good times and are obliged to increase capital in the downturn, so accentuating boom and bust. Much of the damage wrought in the financial crisis was a direct result of Basel I, the global capital regime agreed by the world’s financial regulators. This treated all mortgages as equally risky, so that bankers could take on very high-risk, high-reward subprime mortgage business without having to back it with more capital than that required for safer mortgage business.
Basel II, which started to be implemented last year, addressed this problem by breaking assets down into subcategories and applying risk weights to them. Yet this actually increases pro-cyclicality: as risk grows in the recession, in contrast to Basel I, banks are required to hold more capital just when they are most under pressure. This pro-cyclicality is further exacerbated by mark-to-market accounting, which adds to asset values in the good times and inflicts additional shrinkage when markets turn down.
Bank regulators around the world are already working to reduce the pro-cyclical bias in the system by tinkering with capital adequacy requirements. Yet Lord Turner, chairman of the UK’s FSA, argues that there is a case for going further to introduce overt counter-cyclicality, whereby required and actual capital would rise in good years when loan losses are below long-run averages, creating capital buffers that would be drawn down in bad years as losses increased. He also argues for an overall leverage ratio, looking at assets in relation to capital, as a backstop control measure. Such a ratio also features in the financial regulation plans of the administration of US President Barack Obama.
Capital requirements that track the cycle, together with overall leverage ratios, are thus central planks of the macro-prudential approach. Yet the attempt to counter pro-cyclicality raises huge questions, most notably on the issue of whether regulators should have discretion to change capital requirements in the course of the cycle or whether the capital regime should be subject to pre-determined rules. In a perfect world, giving discretion to regulators to calibrate capital requirements according to the state of the economy makes sense. In the real world, regulators would face the ever-difficult problem of defining where they were in the economic cycle.
Sir Andrew Large, former deputy governor of the Bank of England for financial stability, says the problems of judging how close the system is to a tipping point can be overstated. “I argue that people could put levels of probability on their assessment and then act to calm things down.”
Yet few deny that regulators making such judgments would be subject to huge pressures because, by definition, the purpose is to prevent financial institutions doing what they want to do by making it more expensive or off limits. Charles Goodhart of the London School of Economics, and a former member of the Bank of England monetary policy committee, says regulators and supervisors “will be roundly condemned for tightening regulatory conditions in asset price booms by the combined forces of lenders, borrowers and politicians, the latter tending to regard cyclical bubbles as beneficent trend improvements due to their own improved policies”.
As with monetary policy, it is politically difficult for the guardians of the financial system to take measures that will reduce economic growth in the short term in the interests of fending off a recession no one thinks will happen while the good times still roll.
There lies the case for a rules-based approach. Yet designing a set of rules is no easy task (see box). It would also bring added complexity, not least because big multinational banks operating in different economies would be affected by many different cycles. And there is a risk that inflexible rules could lead to regulatory arbitrage.
Regulatory expert Michael Taylor compares counter-cyclical capital buffers with the “corset”, a form of quantitative control introduced in the UK in 1973 that penalised banks whose deposits grew faster than a pre-set limit. This simply drove money off-shore and the regime had to be scrapped in 1980.
Nor are rules a guarantee against lobbying pressure. The Bank of Spain has been much praised for introducing counter-cyclical provisioning that helped the Spanish banking system to weather the crisis better than most. Yet, as Mr Taylor points out, the Spanish central bank watered down its rules in 2004 because of lobbying by the industry, which argued that the length of the economic expansion had made such rules redundant.
These difficulties with macro-prudential regulation notwithstanding, the direction of travel is clear. Perhaps the most articulate advocate is the FSA’s Lord Turner, who argues in his review for the counter-cyclical regime to be substantially rules based. Yet he wants the best of both worlds, saying that this could be combined with regulatory discretion to add a further layer of requirements if macro-prudential analysis suggested this was appropriate.
The debate on rules versus discretion is set to run and run. There is a risk that more is expected of the macro-prudential approach than it is capable of delivering. This is because financial crises are often precipitated by unprecedented shocks that are inherently difficult to foresee. Yet Sir Andrew Large makes a parallel with the argument for independent central banking 30 or 40 years ago. Most people thought it was too difficult. But it happened, with what he regards as quite creditable results. “We need to have the self-confidence to do the same with systemic stability,” he adds, “for without such a policy we will be condemned to repeat today’s disaster in 10 or 20 years time.”
Fallout and factions: the drama of rewriting the rules
The next 12 months could bring the most dramatic change in financial services regulation in decades, as the US, the UK and the European Union try to tackle the causes of, and fallout from, the global downturn. Plans are moving forward to tighten the rules on everything from hedge funds and over-the-counter derivatives to mortgages and basic bank capital requirements, writes Brooke Masters.
In the US, President Barack Obama has unveiled detailed reform plans. He wants to consolidate several federal banking regulators and give the Federal Reserve new power to regulate systemic risk, supplemented with a council of regulators from other agencies. He also wants to create a consumer financial protection agency to regulate credit cards and mortgages, and require registration for hedge funds and central clearing for many derivatives. Parts of the scheme are already meeting scepticism from Congress, so it is not clear how much will become reality.
The EU is moving in a more piecemeal fashion. The European Commission has put forward an alternative investment directive that would force hedge funds and private equity firms to seek regulatory authorisation, report their strategies and set aside capital against losses. Regulators would also be able to set limits on borrowing. The proposal has drawn sharp criticism from London, where much of the European alternative investment management industry is based, for being restrictive and anticompetitive.
EU leaders are also considering plans to create a pan-European board to monitor systemic risk, as well as a college of supervisors that would provide more consistency among national bank supervisors and resolve disputes among countries. But Gordon Brown, UK prime minister, is fighting plans to make the president of the European Central Bank (to which the UK does not belong) chair of the systemic risk board. London has already secured guarantees that the new supervisory system cannot force any single country to commit taxpayer funds to bail out a troubled bank.
In the UK, the Treasury is due to bring forward its proposal for financial regulation shortly, but splits are opening up. Mervyn King, governor of the Bank of England, wants his institution to be in charge of systemic regulation and has asked for more power to do it. But the Labour government is largely defending the tripartite system it set up more than a decade ago, which divides power among the Bank, the Treasury and the Financial Services Authority.
***
The beauty of the Spanish method
Creating a counter-cyclical capital regime for banks is tough but it has been done, most notably in Spain. Since 2000 banks there have had to make provisions for latent portfolio losses – those likely to occur but which are unrecognised by conventional accounting. This buffer takes the form of a reserve deducted from capital in good times and released in the downturn. It is calculated by comparing long-run credit growth in the economy with the current rate of credit growth. “Dynamic provisioning” offers a better idea of profitability and solvency over time and helps prevent dividend increases in good times that might undermine banks’ solvency. But the Spanish model is not compliant with global accounting standards. And it did not prevent a housing bubble as the macro-prudential approach battled a fierce monetary headwind – the European Central Bank’s one-size- fits-all interest rate was lower than appropriate for a boom economy. Spain’s banking system has nonetheless come through the crisis in better shape than most.
Saturday, June 20, 2009
Credit crunch causes analysts to rethink rational market theory
By Gillian Tett, Capital Markets Editor
Published: June 16 2009 03:00 Financial Times
A new realisation has dawned among the most fervent advocates of financial analysis and collective investor wisdom: markets are not always rational.
For the past five decades, the Chartered Financial Analyst Institute has been teaching the tenets of analysis based on efficient markets to tens of thousands of adherents from banks, fund managers and investment houses that make up the global financial system.
Now, however, the credit crisis has forced high priests of rational market theory to question their own creed.
The British CFA recently asked members for the first time whether they trusted in "market efficiency" - and discovered more than two-thirds of respon-dents no longer believed market prices reflect all available information. More startling, 77 per cent of the group "strongly" or "very strongly" disagreed that investors behaved "rationally" - in apparent defiance of the "wisdom of crowds" idea that has driven investment theory.
The shift is significant as the assumption of efficient markets is a cornerstone of calculating the value of everything from stocks to pension fund liabilities to executive compensation.
William Goodhart, chief executive of the CFA Society of the UK, yesterday admitted the results showed a new mood of "questioning" following the financial crisis.
However, the trend appears to reflect a wider intellectual swing. In the past three decades, the global asset management industry has been dominated by the so-called "efficient markets" hypothesis, which has given birth to ideas such as the capital asset pricing model, that portrays investing as a trade-off between risk and return.
Extremities of recent market swings have sparked interest among politicians and investors in the field of behavioural finance, which asserts that markets do not behave rationally but can be driven by human emotions such as fear.
However, the CFA survey suggests the finance industry is not yet ready to rip up its creed.
Published: June 16 2009 03:00 Financial Times
A new realisation has dawned among the most fervent advocates of financial analysis and collective investor wisdom: markets are not always rational.
For the past five decades, the Chartered Financial Analyst Institute has been teaching the tenets of analysis based on efficient markets to tens of thousands of adherents from banks, fund managers and investment houses that make up the global financial system.
Now, however, the credit crisis has forced high priests of rational market theory to question their own creed.
The British CFA recently asked members for the first time whether they trusted in "market efficiency" - and discovered more than two-thirds of respon-dents no longer believed market prices reflect all available information. More startling, 77 per cent of the group "strongly" or "very strongly" disagreed that investors behaved "rationally" - in apparent defiance of the "wisdom of crowds" idea that has driven investment theory.
The shift is significant as the assumption of efficient markets is a cornerstone of calculating the value of everything from stocks to pension fund liabilities to executive compensation.
William Goodhart, chief executive of the CFA Society of the UK, yesterday admitted the results showed a new mood of "questioning" following the financial crisis.
However, the trend appears to reflect a wider intellectual swing. In the past three decades, the global asset management industry has been dominated by the so-called "efficient markets" hypothesis, which has given birth to ideas such as the capital asset pricing model, that portrays investing as a trade-off between risk and return.
Extremities of recent market swings have sparked interest among politicians and investors in the field of behavioural finance, which asserts that markets do not behave rationally but can be driven by human emotions such as fear.
However, the CFA survey suggests the finance industry is not yet ready to rip up its creed.
Thursday, May 28, 2009
Don't Know Much about Recovery
Insight: Recovery not as easy as U, V, W
By Gillian Tett
Published: May 28 2009 20:09 Financial Times
Are you expecting a “V” shaped recovery this summer? Or do you anticipate a scenario more like a “U” or a “W”? That is the question I have been asked repeatedly this month, as the debate about “green shoots” roars on.
Personally, though, I suspect that none of the letters in the Roman alphabet quite captures what is most likely to go on. To be sure, the last year might seem to correspond to the start of a “V”, “U” or “W”
Last year, the financial system clearly fell off a cliff, like the downward slope of a pen. But this year, some form of reprieve got underway, marking a seeming turning point. Most notably, in the real economy, the data is looking a touch more optimistic, not least because western companies are restocking, after slashing their inventories late last year. And in the financial sphere, investors appear to have spotted the “floor” to last year’s crash – and started to jump back into the markets again, rediscovering their appetite for risk.
But the problem centres on what happens next. Optimists in the market – or those who like to parade the “V” scenario – argue that this rebound has a long way to run in both the real economy and financial sphere. For the sheer scale of government support seems set to spark a fully-fledged recovery – or so the argument goes.
But I find this scenario hard to accept. Right now, it is certainly hard to imagine a new round of banking collapses, given the current level of government support. It is also difficult to see deflation taking hold when central banks are being so hyperactive. Morgan Stanley, for example, calculates that the scale of excess liquidity sloshing around emerging and advanced economies is now “at a record high”, relative to gross domestic product.
‘The problem is there is still a vast amount of deleveraging and restructuring that needs to be done and that process could take years’
But while all that government support – and liquidity – might be enough to stave off collapse, it does not guarantee the rebound will prove truly dynamic.
The essential problem is there is still a vast amount of deleveraging and restructuring that needs to be done, after the recent credit bubble: and on current evidence, that cleansing process could take years.
Europe’s corporate landscape, for example, is currently littered with heavily-indebted companies in dire need of restructuring, but which are somehow still staggering on because their creditors are unwilling to pull the plug. Ineos, the chemical giant, is just one case in point. In America, consumers remain laden with debt which they have barely begun to pay down. On both sides of the Atlantic, numerous banks remain neither dead nor fully alive, propped up by government support.
Most pernicious of all, the government bond world is threatening to dampen any cheer. Until now, Western governments have found it relatively easy to sell debt, even as projected issuance has surged. But this week’s activity in the treasuries market suggests that investors are getting jittery.
And surveys echo that. Last week Citi, for example, polled European investors and discovered endemic concern about rising government debt. Separately, Barclays reported that 30 per cent of Japanese investors now anticipate a US credit rating downgrade.
My best bet is that the economy in coming months will look like the first half of a W, but then flatten out into a straight-ish, horizontal line
And while these predictions may be over-blown, this gnawing sense of unease will make it hard to create any aura of financial stability anytime soon. Moreover, in a practical sense, any rise in bond yields threatens to neutralise some – if not all – of the reflationary impact of the rate-cutting efforts by central banks.
So where does that leave all those “V”, “W” or “U” arguments? If you add the different elements of the picture together, my best bet is that the coming months will look like the first half of a “W”, but then flatten out into a straight-ish, horizontal line – meaning that after an initial, small rebound, there is likely to be a long, bumpy period of “flatlining”, as the forces for reflation and deflation pull in opposite ways.
That scenario may be overoptimistic. If government bond jitters turn more serious – say, if some auctions fail or there is serious political instability – it is entirely possible to imagine a far darker scenario, in which faith collapses in government finance. If that occurs, we would face both currency upheaval and more bank turmoil, as investors lost confidence that the state can keep propping up the banks.
But if that government bond crisis does not materialise – which remains an “if” – then by a happy coincidence the resulting outlook looks rather similar to a symbol that is already plastered all over my notebook.
Many years ago, when I was a rookie reporter, I learnt the Pitman system of shorthand. And it just happens that the half-squashed, assymetrical “W” pattern that I am struggling to describe is almost identical to the shorthand sign for “bank” (see right).
So there you have it: as long as we avoid a government bond crisis, my best prognosis is for a “bank” shaped recovery-cum-stagnation, at least as depicted by shorthand. It is a fitting twist for a crisis that started with the shadow banks; perhaps the Gods of finance (and journalism) have a sense of humour after all.
By Gillian Tett
Published: May 28 2009 20:09 Financial Times
Are you expecting a “V” shaped recovery this summer? Or do you anticipate a scenario more like a “U” or a “W”? That is the question I have been asked repeatedly this month, as the debate about “green shoots” roars on.
Personally, though, I suspect that none of the letters in the Roman alphabet quite captures what is most likely to go on. To be sure, the last year might seem to correspond to the start of a “V”, “U” or “W”
Last year, the financial system clearly fell off a cliff, like the downward slope of a pen. But this year, some form of reprieve got underway, marking a seeming turning point. Most notably, in the real economy, the data is looking a touch more optimistic, not least because western companies are restocking, after slashing their inventories late last year. And in the financial sphere, investors appear to have spotted the “floor” to last year’s crash – and started to jump back into the markets again, rediscovering their appetite for risk.
But the problem centres on what happens next. Optimists in the market – or those who like to parade the “V” scenario – argue that this rebound has a long way to run in both the real economy and financial sphere. For the sheer scale of government support seems set to spark a fully-fledged recovery – or so the argument goes.
But I find this scenario hard to accept. Right now, it is certainly hard to imagine a new round of banking collapses, given the current level of government support. It is also difficult to see deflation taking hold when central banks are being so hyperactive. Morgan Stanley, for example, calculates that the scale of excess liquidity sloshing around emerging and advanced economies is now “at a record high”, relative to gross domestic product.
‘The problem is there is still a vast amount of deleveraging and restructuring that needs to be done and that process could take years’
But while all that government support – and liquidity – might be enough to stave off collapse, it does not guarantee the rebound will prove truly dynamic.
The essential problem is there is still a vast amount of deleveraging and restructuring that needs to be done, after the recent credit bubble: and on current evidence, that cleansing process could take years.
Europe’s corporate landscape, for example, is currently littered with heavily-indebted companies in dire need of restructuring, but which are somehow still staggering on because their creditors are unwilling to pull the plug. Ineos, the chemical giant, is just one case in point. In America, consumers remain laden with debt which they have barely begun to pay down. On both sides of the Atlantic, numerous banks remain neither dead nor fully alive, propped up by government support.
Most pernicious of all, the government bond world is threatening to dampen any cheer. Until now, Western governments have found it relatively easy to sell debt, even as projected issuance has surged. But this week’s activity in the treasuries market suggests that investors are getting jittery.
And surveys echo that. Last week Citi, for example, polled European investors and discovered endemic concern about rising government debt. Separately, Barclays reported that 30 per cent of Japanese investors now anticipate a US credit rating downgrade.
My best bet is that the economy in coming months will look like the first half of a W, but then flatten out into a straight-ish, horizontal line
And while these predictions may be over-blown, this gnawing sense of unease will make it hard to create any aura of financial stability anytime soon. Moreover, in a practical sense, any rise in bond yields threatens to neutralise some – if not all – of the reflationary impact of the rate-cutting efforts by central banks.
So where does that leave all those “V”, “W” or “U” arguments? If you add the different elements of the picture together, my best bet is that the coming months will look like the first half of a “W”, but then flatten out into a straight-ish, horizontal line – meaning that after an initial, small rebound, there is likely to be a long, bumpy period of “flatlining”, as the forces for reflation and deflation pull in opposite ways.
That scenario may be overoptimistic. If government bond jitters turn more serious – say, if some auctions fail or there is serious political instability – it is entirely possible to imagine a far darker scenario, in which faith collapses in government finance. If that occurs, we would face both currency upheaval and more bank turmoil, as investors lost confidence that the state can keep propping up the banks.
But if that government bond crisis does not materialise – which remains an “if” – then by a happy coincidence the resulting outlook looks rather similar to a symbol that is already plastered all over my notebook.
Many years ago, when I was a rookie reporter, I learnt the Pitman system of shorthand. And it just happens that the half-squashed, assymetrical “W” pattern that I am struggling to describe is almost identical to the shorthand sign for “bank” (see right).
So there you have it: as long as we avoid a government bond crisis, my best prognosis is for a “bank” shaped recovery-cum-stagnation, at least as depicted by shorthand. It is a fitting twist for a crisis that started with the shadow banks; perhaps the Gods of finance (and journalism) have a sense of humour after all.
Tuesday, May 19, 2009
Obama at Manassas
by Mike Davis, New Left Review March-April 2009.
On election eve last November, the little city of Manassas, Virginia became the improbable Woodstock of Generation Obama as thousands gathered to hear their candidate close his almost two-year-long campaign with a final appeal for ‘Change in America’. It was a grand finale orchestrated with considerable self-confidence and irony. Although Manassas (population, 37,000) retains blue-collar grit, the rest of Prince William County (380,000) epitomizes the greedy sprawl of the Bush era: a disorganized landscape of older townhouses, newer McMansions, faux-historical shopping centres, high-tech business parks, evangelical mega-churches, pariah islands of apartment housing, and melancholy vestiges of a graceful Virginia countryside. Assuring the County a prominent footnote in Tom Clancy novels, its southeastern corner is annexed by Marine Corps Base Quantico and the FBI national training centre.
As the Dixie edge of ‘Los Angeles on the Potomac’ and the seventh richest large county in the United States, Prince William is precisely the kind of ‘outer’ or ‘emergent’ suburb which Karl Rove famously mobilized to re-elect George W. Bush in 2004. [1] Indeed, since Nixon’s victory over Hubert Humphrey in 1968, the Republican Party has counted on Sunbelt suburbs like Prince William County to generate winning margins in national elections. Reaganomics, of course, was incubated in the famous tax revolts that shook suburban California in the late 1970s, while Newt Gingrich’s 1994 ‘Contract with America’ was primarily a magna carta for affluent voters in Western exurbs and New South edge cities. Even as the suburbs aged and densified, the Republicans drew power from the contradiction that ‘post-suburban Americans remained resolutely anti-urban even as their world has become increasingly urbanized.’ [2]
Obama, in effect, signalled the beginning of a new epoch when he chose to climax his campaign on what has been the wrong side of the suburban Mason–Dixon Line for most national Democrats since the 1960s (Jimmy Carter and Bill Clinton only partly excepted). Although the rally was not scheduled to begin until 9pm, crowds were already streaming into the Prince William County Fairgrounds by sunset, and southbound Interstate 66 was jammed half way back to Washington DC, 26 miles to the northeast. A WashingtonPost blogger marvelled at the numerous Redskins fans, bedecked in team gear, who had chosen to hear Obama over attending Monday night’s classic game against the Pittsburgh Steelers. The state police estimated the multitude in excess of 80,000, but the Obama camp was certain that their candidate spoke to more than 100,000—perhaps the largest audience for an election-eve speech in American history.
The last time a throng this vast had converged on Manassas was in late August 1862, when Robert E. Lee’s Army of Northern Virginia collided with the larger Union Army led by the incompetent John Pope. Twenty thousand soldiers, dead and wounded, spilt their blood on soil already stained red from the opening major battle of the Civil War a year earlier. (Southern custom, which named battles after the nearest town, enshrined this slaughter as the ‘Second Battle of Manassas’, while in the North, where battles were baptized with the name of the nearest river or stream, it was ‘Second Bull Run’.) Obama, who had launched his general election campaign in Prince William, was well aware that he spoke on symbolic ground, hallowed by an ancient war yet incompletely redeemed from the legacy of slavery.
When, after a long delay in traffic outside Dulles Airport, he finally strode on stage about 10.30, he was weary but exultant. As he had done scores of times before, he promised his supporters that their ordinary ‘hard-working sense of responsibility’ would define his new government, not the ‘greed and incompetence’ that had characterized the age of Bush. Younger supporters repeatedly took up the signature campaign chant, borrowed from the struggle of California farmworkers in the 1960s, of ‘Yes we can!’ (‘¡Sí se puede!’ in the original). Almost as tall as Lincoln, and sometimes nearly as eloquent, Obama roused a final, immense cheer with the reassurance: ‘Virginia you can change the world’. [3]
Obama beats Lee
In 2004, George W. Bush won Virginia by 54 per cent and Prince William by 52.8 per cent. Since 1948 only Lyndon Johnson had managed to carry the Old Dominion for the Democrats, and John McCain was favoured to preserve Republican tradition in a state with famously large numbers of military and Christian conservative voters. Republican-controlled Prince William County, notorious for its right-wing delegation in the Richmond legislature, as well as its recent persecution of undocumented Latino immigrants, ‘prided itself as being the last Republican redoubt in northern Virginia’. [4]
In the event, Virginia’s voters, including the good burghers of Prince William, gave Barack Obama a 52.7 per cent victory in the state, and a 57.6 per cent margin in the county—a whopping 12-point improvement over 2004. Whereas Kerry won only one of Virginia’s four major regions (northern Virginia), Obama easily took three, adding the Capital region and Hampton Roads/eastern Virginia; while McCain eked poor consolation in the Appalachian southwest. [5] It was a stunning result. A Black Democrat with a Muslim name had come to Manassas and, in effect, beaten the ghosts of Robert E. Lee and Jim Crow. Is the world, as a result, changing? Have the gridlocked tectonic plates of American electoral politics finally lurched to the left?
Psephology—the statistical analysis of elections—is an inscrutably American obsession, like chewing tobacco or varmint hunting. Although Margaret Thatcher, Tony Blair and Ehud Barak have all toyed with the dark art, and a Brit originally coined the Greek-cognate term in the 1950s, only those native-born in a Louisiana bayou or a Washington law firm are likely to possess the consummate instinct for extracting winning strategies from a few shavings of an electoral vote. Some have compared voting analysis to the subtle skill of a sommelier, but it is actually more akin (to extend the French analogy) to the acute attentiveness of Louis XIV’s physicians to the contents of the royal chamber pot. With recent national elections decided by ‘hanging chads’ in Florida and a few absentee ballots in Ohio, the slightest statistical deviation from an established trend attracts intense scrutiny from the epigones of Lee Atwater and James Carville. In their quest for a few decisive votes, campaign ‘boiler rooms’ have become monastically dedicated to the tracking of obscure fads on YouTube and the micro-targeting of vegetarians in Nebraska.
From this perspective, Obama’s victories in Virginia and other ‘swing states’ like Colorado, Florida and North Carolina constitute the gold ring: a once-in-a-generation acceleration of attitudinal change in the electorate. Conservative analysts, especially, worry that the election may augur a political transformation comparable to Roosevelt’s epochal victory in 1932 or Reagan’s in 1980. Indeed, with Wall Street and Detroit suddenly in ruins, and fear eating the soul of the suburban middle class, the Republican Party seems to be dissolving into an endless acrimony of sectarian factions and cult leaders with limited national appeal, such as Sarah Palin. In contrast, Obama has generously opened the White House doors to Clintonites and Republicans, reinforcing his image as a pragmatic centrist focused on competent government and national unity.
Political pundits and party strategists in their majority weigh the meaning of this election upon the balance-scale of the theory of electoral realignment first proposed in 1955 by the legendary Harvard political scientist V. O. Key, Jr. and later developed in detail by his MIT protégé, Walter Dean Burnham. In order to explain the rise and fall of successive party systems from Andrew Jackson to Ronald Reagan, they postulated a causality analogous to Eldredge and Gould’s ‘punctuated equilibrium’ paradigm in paleontology, where electoral evolution is compressed into episodic reorganizations that are synchronized with major economic crises (1896, 1932 and 1980). Although many academics remain sceptical, Key and Burnham’s thesis of the ‘critical election’ that durably realigns interest blocs and partisan loyalties remains the holy grail of every actual presidential campaign. [6]
In his Critical Elections and the Mainsprings of American Politics, Burnham provides a reasonably canonical definition:
The critical realignment is characteristically associated with short-lived but very intense disruptions of traditional patterns of voting behaviour. Majority parties become minorities; politics which was once competitive becomes noncompetitive or, alternatively, hitherto one-party areas now become arenas of intense partisan competition; and large blocks of the active electorate—minorities, to be sure, but perhaps involving as much as a fifth to a third of the voters—shift their partisan allegiance. [7]
Although Obama’s 53 per cent majority of the popular vote is not the definitive landslide of FDR’s 1932 election (57 per cent), it improves upon Reagan’s 1980 performance (51 per cent) and, of course, overshadows Clinton’s first fortuitous plurality (43 per cent in a three-way race). [8] Excepting FDR’s four victories and Lyndon Johnson’s annihilation of Barry Goldwater in 1964, Obama did better than any Democratic candidate since the Civil War, and his campaign met Burnham’s criteria of opening enemy terrain to intense competition while galvanizing new voters and interest groups on behalf of the insurgent party.
His victory, moreover, was wrought by a novel strategy of political communications, operating inside web-based social networks that hardly existed in 2000 and are still poorly understood by older politicos. Although both the 1932 and 1960 presidential campaigns also introduced major innovations in political technology (radio and television, respectively), the 2008 Democratic campaign was a Marshall McLuhan-like leap from one media universe to another.
Building upon the template of Howard Dean’s Internet ‘shock and awe’ in the 2004 primary (and retaining Dean’s shrewd skills as Democratic national chair), the Obama campaign used Silicon Valley expertise to mine an El Dorado of small donations through social networking and campaign websites. [9] As Joshua Green pointed out admiringly in the Atlantic, ‘During the month of February . . . his campaign raised $55 million—$45 million of it over the Internet—without the candidate himself hosting a single fundraiser.’ [10] While trying to compete with this digital juggernaut, the Clinton campaign was driven into bankruptcy during the summer, and McCain was outspent by $154 million in the fall—a dramatic reversal of the usual Republican financial advantage in presidential elections. [11]
A flush war chest allowed the campaign to intensify voter-registration efforts across the country and mount media blitzkriegs in an unprecedented number of states. The Democrats also made brilliant use of early and absentee ballots (almost one-third of the total vote) to ensure the suffrage of blue-collar workers, elderly homebound people and inner-city residents—all of whom traditionally have trouble getting time off to vote or face unusually long waits at polls. New weapons, such as the candidate blog—a digital version of the fireside chat—and viral political messaging were deployed to support a huge army of volunteers (5,000 in Prince William County alone), while saturation television advertising, automated phone calls, and regiments of rock stars softened up enemy positions.
The Obama camp exploited every opportunity to portray the election as an epochal techno-generational conflict, pitting the youthful many-hued netroots against obese AM-hate-radio fans and robotic evangelical congregations. Multi-tasking on his beloved Blackberry or plugged into his MP3 player during his morning workout, Obama was easily cast as an epitome of those 21st-century competencies that some psychologists claim may represent a human evolutionary leap, while McCain, with his self-confessed computer phobia and archaic elocutions (‘My friends . . .’), was prone to caricature as an escaped Alzheimer’s patient.
But revolutions in political communications do not automatically make realignments, and widely hailed new eras in American political history have sometimes turned out to be short-lived mirages. In Burnham’s cautious construction, a ‘realigning election’ can only be ratified as a watershed after the political system has unambiguously begun to consolidate its results. Thus Carter’s 1976 victory, which some contemporaries hailed as a Democratic rebirth in the South, led a divided party straight into a hopeless cul desac, while Clinton’s defeat of George Bush senior in 1992 was an achievement shared with maverick billionaire Ross Perot, who hijacked 19 per cent of the vote, mainly from Bush, and soon checked by the Republican sweep of the House of Representatives in 1994. (As Matt Bai reminds us, ‘the booming nineties had, in fact, been the party’s worst decade since the roaring twenties.’) [12]
Obama, who will be the first president ever to face the dual challenges of foreign war and economic depression, undoubtedly risks the possibility of a Republican resurgence in 2010 or 2012. Moreover his popularity like Bill Clinton’s exceeds that of his party, and a less-than-stunning contingent of new Democrats rode his coattails to victory in November. (Democrats had hoped to win 10 new Senate seats and 30 or more new House seats; in the event, they had to settle for 7 and 21, respectively.) But psephologists are likely to give Obama better odds for leading a partisan realignment than they gave to Carter or Clinton. Even the most preliminary analysis of the 2008 presidential vote reveals new alliances and shifting loyalties that a deepening economic crisis may cement as a durable Democratic if not liberal majority.
These potentially realigning trends include the disappearance of ‘inverted 1896’ on the national election map; the probable peaking of the evangelical vote and the Republican ‘culture war’ strategy; Obama’s victories in Karl Rove’s bellwether suburban counties; the reappearance of a rainbow coalition in the electorate; a Latino backlash against nativism; and the political triumph of the New Economy over the Old.
Breakup of red America
In the famous ‘critical election’ of 1896, Ohio’s William McKinley, a Gold Standard Republican, won the White House with an overwhelming electoral mandate from the states of the Northeast and Great Lakes, plus the votes of California and Oregon. Conversely, his opponent, the Nebraska Democrat and ‘Silverite’ William Jennings Bryan, commanded the sparser electoral votes of the Intermountain West, the Great Plains and the former Confederacy. Pro-tariff Republicans, in other words, ruled the industrial heartlands while cheap-money Democrats voiced the discontent of miners and farmers in the Western and Southern peripheries.
For the last decade, the exact inverse of the 1896 vote has defined the distribution of so-called Red and Blue states. Thus, Bush’s Machiavelli, Karl Rove, squarely based presidential campaign strategies in 2000 and 2004 upon impregnable Republican majorities in the once Bryanite interior West and the South, while Gore and Kerry counted on solid Democracy in the former McKinleyite heartlands. The great swing states of the 1960s–80s era, California and Texas, had been captured, respectively, by liberal Democrats and conservative Republicans in the 1990s, so what remained in play in an era of extremely close popular votes was a handful of ‘purple states’: most importantly, electoral-vote-rich Colorado, Missouri, Ohio and Florida.
Although (as we shall see) a simple change in analytic magnification renders a different view of this reheated war between the states, as a complex struggle between electorates in the cores and peripheries of metropolitan systems and urban corridors, the concept of a primal regional divide in presidential politics was etched anew in the social imaginary of the Bush era. Indeed, the larger part of Sarah Palin’s role as McCain’s running mate was to incessantly and obnoxiously remind voters of the ‘real America’—apotheosized by her dreary Anchorage suburb—and its alien Other.
In theory, however, a candidate for president does not need to command a Red or Blue nation or even sweep a majority of states: the electoral votes of the eleven most populous states will suffice. Obama won nine, losing only Texas and Georgia. By subtracting three of the largest Southern states and three of the most populous Intermountain states from the inverted 1896 map, he destroyed the Rovian myths of the (new) Solid South and Red State America.
In the former Confederacy, containing about one-third of the American population, McCain lost Virginia, North Carolina and Florida: large states with advanced economies and well-educated, rapidly growing electorates. In both Virginia and North Carolina, Obama’s victory was built upon an alliance of African-Americans and white professionals, reinforced by immigrants and college students. [13] In Georgia, meanwhile, Obama earned a larger share of the vote (47 per cent) than any Democrat since Jimmy Carter, putting the Peach State back into the swing category. Republican strategists should be especially worried by his strong showing (45 per cent) in Atlanta’s outer-suburban belt—Cobb and Gwinnett counties with a population of nearly 1.5 million—where a growing Black middle class, along with a significant Latino migration, is eroding one of the most important conservative voting blocs in the country. Although McCain won Texas by almost one million votes, he lost both Dallas and Harris (metro Houston) counties, thereby boosting Democratic hopes of ending Republican supremacy in the next election cycle. [14]
In the West, the senator from Illinois ran away with the crucial electoral votes of Colorado, Nevada and New Mexico. For the first time, the Democrats became a majority, if only by a sliver, in the aggregate presidential vote of the five ‘megas’ of the Intermountain West, the fastest growing region in the country. These new Los Angeleses (heavily populated by fugitive Californians) have become first-division electoral battlegrounds and will gain at least three more congressional seats in the next Census reapportionment. [15] Accordingly, they figure large in Democratic hopes for an enduring realignment.
Elsewhere in the West, Obama made impressive progress over Kerry in Montana, gave the Democrats a reason for living in Idaho, increased their majority in Tucson, took Omaha (winning the first Democratic electoral vote in Nebraska since 1964), and conquered Salt Lake County (which Bush had carried by 80,000 in 2004). [16] The Republicans, on their side, retained millions of acres of uninhabited real estate in Alaska, Wyoming and the Plains states, and with the aid of their two most important Western constituencies—Mormons and retirees—avoided what some polls were predicting as a possible upset in John McCain’s home state of Arizona.
Throughout the Sunbelt, moreover, Obama was particularly successful in the all-important ‘tech corridors’ that drive regional growth: the northern Virginia suburbs of DC as well as the so-called ‘Chesapeake Crescent’: the Research Triangle of North Carolina, the Space Coast of Florida, the Front Range cities of Colorado, the Albuquerque–Santa Fe corridor in New Mexico, and Silicon Valley plus all of its outliers on the West Coast. Whereas Kerry in 2004 had lost 97 out of the 100 fastest-growing counties, Obama won 15, including the three largest, and added at least 8 points to the Democratic cause in 29 others.
Nor did the GOP find solace in the patriotism and family values of the old industrial heartlands. McCain originally had high hopes of stealing the largely Catholic, white working-class voters who had rallied during the primaries to Hillary Clinton’s impersonation of Rosie the Riveter. But in the shadow of a collapsing auto industry, falling home values, and shrunken retirement accounts, the vast majority of Clinton supporters disdained McCain’s ‘Joe the Plumber’ ads in favour of Obama’s oft-repeated if vague promise to save American manufacturing jobs. [17]
The most unexpected Democratic victory in the region was Indiana, a heavily blue-collar but culturally conservative state that gave Bush a larger share of its vote in 2004 (60 per cent) than Mississippi, and thus was scarcely considered competitive terrain. Over the last generation of plant closure and economic retrenchment, Hoosiers have probably offered an even better example than Kansans for Thomas Frank’s famous argument in What’s the Matter withKansas? (2004) that cultural rage has misled large segments of the white working class into voting against their economic self-interest. In Indiana, at least, class consciousness has undergone a revival.
Indeed Obama’s victory was mostly due to a dramatic increase in white support (45 per cent versus 34 per cent for Kerry), especially in smaller stricken industrial centres like Evansville, Kokomo and Muncie—the original ‘Middletown’ of the Lynds’ famous studies in the 1920s and 1930s—that had been solidly Bush in 2004. As James Barnes explained in the NationalJournal, ‘This is part of the state’s once-vibrant auto manufacturing patch, but much of that industry is gone, and voters who in past elections voted on social issues (Anderson is home to the Church of God) or national security can be won over with a strong economic pitch.’ [18]
This was exactly the pitch that the well-heeled Obama campaign made, sending out thousands of impassioned volunteers to talk about jobs and economic pain, while McCain relied on an underwhelming effort by ranting evangelical churches and dispirited chambers of commerce. [19] The Democratic success in Indiana was replicated in neighbouring northwestern Ohio, where highly energized Obama forces from rusted but still union-proud Toledo canvassed former Bush strongholds in adjacent exurbs and factory towns. As a result the Democrats now own the entire Great Lakes waterfront for the first time since Lyndon Johnson.
Obama also did surprisingly well in Lake Wobegone country: the Lutheran tier of the upper Midwest, historic crucible of political insurgency, where 50 rural white counties in Wisconsin, Minnesota and Iowa that had voted for Bush in 2004 switched in his favour. Although he lost North Dakota, he narrowed the 2004 Republican margin by a whopping 19 points. In Missouri, where Obama scored victories in several traditionally conservative St. Louis suburbs, the election produced a virtual dead heat, with McCain ultimately winning by less than 4,000 rural votes. [20]
In the Northeast, meanwhile, the election was an extinction-level event for the Republican Party, which lost its last House member from New England. Duchess County in New York—notorious in the 1930s and 1940s as a poison swamp of Roosevelt haters—quietly joined the Obama landslide, as did one of the suburban last stands of the Republican Party in greater New York City: Suffolk County on eastern Long Island.
McCain’s meagre improvements over Bush in 2004 were confined to the Cajun parishes of Louisiana and the upland South, a 400-mile long belt of majority white-evangelical counties stretching from the hills of eastern Oklahoma through the mountains of West Virginia. Here, apparently, race and/or fundamentalist religion decisively shaped the outcomes. Homespun, wisecracking Bill Clinton had been popular in this largely poor region, but it was small consolation for ‘William Jennings’ McCain to win Jonesboro and Hazard when he was losing key demographics in Charlotte and Orlando. [21]
Republicans lose their edge
If the shrewdest gambit of the Obama team during primary season was to outflank the Clinton juggernaut by wooing oft-ignored Democrats in largely Republican ‘caucus states’, their boldest move after the convention was to concentrate unprecedented resources to swing big suburban counties that had hitherto been considered unalterably Republican. Gore and Kerry, with fewer bucks and less audacity, had eschewed big raids into the Rovian heartland in favour of mobilizing more votes in reliably Democratic metropolitan cores and inner suburbs. But the Obama campaign embraced the ‘we-can-swing-the-suburbs’ strategy successfully tested in recent Virginia elections by Democratic master gamer Mike Henry. They therefore defiantly planted the flag in dynamic demographics such as Prince William County where they calculated that franchise managers, accountants and civil servants were more concerned about plunging 401-K retirement accounts and negative home equity than the spectre of gay monogamy. Although race remains a formidable obstacle to wholesale conversion of voters in former suburban bastions of white flight, the campaign believed that it no longer precludes the possibility of Democratic victories. [22]
This suburban strategy, however, came at a price: a campaign rhetoric that obsessively flattered the needs of the ‘middle class’, but seldom focused on structural unemployment or equity issues affecting millions of urban and non-white Obama voters. Moreover, most Democrats running in the outer suburbs (like the previous cohort in 2006) were competing on conservative platforms—often pro-gun, anti-tax and anti-immigrant—that demanded minimal ideological shift from voters. As Chris Cillizza, the Washington Post’s chief political analyst, warned liberals after the election: ‘The fact that roughly a third of the Democratic House majority sits in seats with Republican underpinnings (at least at the presidential level) is almost certain to keep a liberal dream agenda from moving through Congress. The first rule of politics is survival, and if these new arrivals to Washington want to stick around, they are likely to build centrist voting records between now and 2010.’ [23]
But most liberal Democrats were blinded by the light of Obama’s big victories in suburban counties that had been crucial to Bush’s in 2004: Jefferson and Arapahoe (metro Denver) in Colorado, Hillsborough (Tampa) in Florida, Wake (Raleigh) in North Carolina, Washoe (Reno) in Nevada, Berks and Chester (Philadelphia) in Pennsylvania, Hamilton (Cincinnati) in Ohio, Macomb (Detroit) in Michigan, and Riverside in southern California. [24] Indeed, he won 9 of 12 swing suburbs in twelve swing states monitored by the Metropolitan Institute (Kerry had eked narrow victories in only three). [25] He also conquered 2 of the 3 iconic Republican counties named Orange (Florida and New York), and gave the McCain camp a bad scare in the third (California).
‘Suburban’, however, is an obsolete, almost obscurantist characterization of the socio-spatial location of these swing voters. Urban geographers and political scientists have proposed competing typologies to describe the ‘post-suburban’ metropolis, but there has been little consensus about how to define or what to call the brave new world beyond Levittown. [26] Recent election analysis, however, has favoured the county-code schema developed by Robert Lang and Thomas Sanchez at the Metropolitan Institute at Virginia Tech:
Core Counties are densely populated central cities. Inner Suburbs are close-in suburbs that are densely built (90 per cent of residents live in an urban area) and at least half of workers commute in to the central city. Mature Suburbs are dense (75 per cent of residents live in an urban area), well-established counties whose populations are no longer booming. In Emerging Suburbs, at least 25 per cent of the population lives in an urban area, and at least 5 per cent commute back in to the central area. Most of their growth has occurred recently. In Exurban Counties, large-scale suburbanization is just beginning to take hold and they are most distant from the centre. [27]
The large-scale electoral trend over the last generation has been a growing Democratic majority in the ageing inner suburbs (the first, often disappointing rungs in non-white geographical and social mobility), political stalemate in the demographically more stable and segregated mature suburbs, and large, reliable harvests of Republican votes in outer suburbs and exurbs. ‘In either Red or Blue states’, write Lang and Sanchez,
the pattern remained the same. There is a metropolitan political gradient in the big US metro areas: the centre tilts to Democrats and the fringe to Republicans. In between these extremes, the vote slides along a continuum, coming to a midpoint mostly in the mature suburbs. [28]
But the housing bubble and suburban construction frenzy of the 2000s, coinciding with the maturation of job markets in now 20 and 30-year-old ‘edge cities’ (high-density clusters of office and shopping space, usually located at the intersection of radial and circumferential freeways), changed both the calculus of household locational decisions and the financing of mortgages, inducing more minority and immigrant families to leap-frog into emerging suburbs, often with the help of non-traditional loans. As a result, non-white households for the first time became the fastest-growing segment of suburban peripheries in many metropolitan areas. The challenge to the Obama campaign was to use this new demographics as an Archimedean lever to shift the suburbs, even in the South, toward the Democrats.
Prince William County again is a bellwether. A study last year by the Northern Virginia Regional Commission revealed that minorities, especially Latinos and Asians, have contributed a stunning 94 per cent of Prince William’s population growth from 2000. Since Bill Clinton became president, the County’s non-white population has burgeoned from less than one fifth to almost one half, and Prince William will soon become northern Virginia’s first ‘minority-majority’ county. ‘A seismic population shift’, wrote the report’s author, ‘has been sweeping across the entire southern rim of northern Virginia where more affordable housing prices, like a powerful magnet, have been pulling households [to the outer suburbs]—predominantly immigrant and minority families who are either finding it too expensive to live closer in or are looking further out for a place they can afford to buy.’ [29]
But ‘affordable’ mortgages turned abruptly into negative equity and then foreclosure during the course of the long presidential campaign. What Goldman Sachs back in 2006 had predicted would be a ‘happy slowdown’, turned into a general annihilation of popular wealth and home values. [30] By the eve of the Manassas finale, Prince William County had become the epicentre of the mortgage crisis in metropolitan Washington DC with nearly 8,000 foreclosures. Single-family homes had lost more than 30 per cent of their value; townhouses, at least 40 per cent. Between Obama’s first and last rally, dozens of businesses had been boarded up in downtown Manassas, tech companies had made deep cuts in their workforces, and a new website emerged to gleefully document the growing number of derelict McMansions in the region. [31]
Although no stratum of Prince William society was exempt from the subprime massacre, it was most lethal to minority new homeowners. In a series of articles, the Washington Independent chronicled the fate of Georgetown South, a subdivision of several hundred townhouses in Manassas where sheriff’s deputies have been working overtime to evict blue-collar residents, many of them Central American immigrants, caught in a vise between the exploding costs of their mortgages and the collapse of local job markets. A typical sad case was a Salvadorean housepainter earning $500 per week, who had been offered a no-down-payment ‘Alt-A’ loan from a subsidiary of (now defunct) Lehman Brothers in 2005 to finance a $280,000 home. In recent months, his townhouse lost more than $50,000 in value, monthly payments on his adjustable-rate mortgage jumped from $1,4000 to $2,600, his tenants were forced to flee a county crackdown on undocumented Latinos, and work in the construction industry evaporated. [32]
Projected upon a national canvas, such stories explain how McCain’s comfortable 48 per cent to 42 per cent lead in the suburbs following the Republican convention was eroded during the bleakest autumn in generations. [33] Polling showed that a significantly higher proportion of Obama’s suburban supporters had recently lost home equity, a job or both. The Obama campaign, in effect, became the party of suburban pain as well as ethnic diversity. [34] The general election as a result consolidated a Democratic majority in inner and mature suburbs, while closing the partisan gap on the periphery and mobilizing enough white voters to win many emergent suburbs.
The rainbow fulcrum
This electoral shift in the suburbs, of course, mirrors even more fundamental changes in the American voting universe. In 1976 when Jimmy Carter beat Gerald Ford, the active electorate was 90 per cent white non-Hispanic. Last November, the white share was down to 74 per cent; a transition toward voter diversity whose future is assured by demographic momentum. Nearly half the babies, for instance, born in the United States during the last few years had Spanish surnames, and American ‘minorities’ separately counted would constitute the twelfth most populous nation on earth (100.7 million). [35] Over the course of the Bush administration, the Latino voting-age population in Virginia increased 5 times faster than the population as a whole, 11 times faster in Ohio, and almost 15 times faster in Pennsylvania. [36] As Karl Rove and other nervous Republican strategists well understand, the GOP has probably already harvested its maximum crop of white evangelical votes and will be culturally and politically marginalized unless it sinks new roots amongst immigrants and the coming ‘minority-majority’.
Indeed the real drama last November was not the relative size of the vote (only a smidgen larger than in 2004), but its prophetic demographics. [37] Electoral soothsayers paid particular attention to ‘Millennial generation’ voters (18–29 year olds)—supposedly weaned on the Web, comfortable with diversity, but angry over declining economic opportunity—as a potent force for realignment. [38] In the first instance, the Millennium did punctually arrive, with Obama winning two-thirds of the youth vote (with a turnout of about 53 per cent). But internal trends within this electoral sub-universe (58–60 million individuals) reflect dramatic variation over region and social class.
The generation gap amongst white voters, for example, was large in states like California, New York and Massachusetts where Millennials gave Obama 10 to 15 per cent more of their vote than did older cohorts, but the white age differential was negligible or even negative (South Carolina) in some Southern and Plains states. Class, meanwhile, remains a huge determinant of whether Millennials vote or not: in 2000 and 2004, more than two thirds of those who had finished college cast votes, while roughly one third of those with only high-school degrees entered a voting booth. But of those non-college Millennials who did vote in 2008, the difference was stunning, especially amongst whites. [39] Compared to the Kerry vote in 2004, Obama’s support in the young white working class increased 30 points amongst women, 14 points amongst men. A recent briefing to the Democratic Party emphasizes the strategic urgency of consolidating this partisan shift of young white Burger King workers and nurses-aides: ‘it could derail any Republican attempt to rebuild a Reagan coalition and eventually ensure a stable long-term Democratic majority’. [40]
But the ultimate fulcrum of the election was not so much the Millennial factor as the voting-day unity of Blacks and Latinos in a renewal of the ‘Rainbow Coalition’. [41] Nationally, whites cast 700,000 fewer votes than in 2004, but African-Americans almost three million more, thus providing Obama with a third of his winning margin. Considering the initial hostility of Civil Rights era leaders toward Obama and his ‘lack of roots’, the mobilization of African-American voters in battleground states was exceptional and nowhere more than in Missouri and Nevada, where turnout increased by 74 per cent and 67 per cent. [42]
But the African-American proportion of the national vote, like that of evangelical whites, will grow very slowly, if at all, over the coming decades. From the standpoint of a durable electoral majority, the Democrats’ most important gain in 2008 was the massive support that Obama received from the rapidly growing and much younger Latino electorate, now 12 per cent of total registrants. [43] Mexican-origin voters, for example, clinched his important victories in Colorado and Nevada, while Central Americans reinforced his majority in northern Virginia. In Texas, the Tejano (or, especially, the Tejana) vote was critical to sweeping the big cities and the Rio Grande Valley, despite the usual anti-Democrat anathemas from pro-life Catholic bishops. Obama won Florida thanks especially to a spectacular turnout of Puerto Ricans and Latino immigrants in central Florida, bolstered by the rebellion of a majority of younger Cuban-American voters against the geriatric exile leadership who have for so long been the authoritarian gatekeepers of Republican power in southern Florida. [44]
As in analyses of the causes of immigration, it is useful to distinguish between the ‘pull’ and ‘push’ factors in the Latino turnout. Despite much concern in recent years about the fraught state of minority inter-group relations, Obama’s sensational popularity amongst young Latino voters (76 per cent in Florida and 84 per cent in California) testifies to the growing importance of non-white or mixed identity as a cultural norm—as has long been the case in Obama’s home state of Hawaii—as well as the increased cultural and social integration of African-Americans, Latinos, Asians and immigrants of all kinds in big-city neighbourhoods and older suburbs. [45] Obama was clearly seen as opening the gates of opportunity to the larger Hip-Hop nation, including the possibility of a future Latino or Asian president.
Two ‘push’ factors were also decisive. First, Latinos/Hispanics in the aggregate lost ground in the Bush bubble economy. As the Economy Policy Institute recently reported,
the most significant economic change [since 2000] was a 2.2 per cent drop in the real Hispanic family income. This economic stagnation for Hispanics occurred during a period when the gross domestic product grew by 18 per cent and worker productivity by 19 per cent. Yet despite these gains, the Hispanic population did not benefit from the wealth that it helped create in the US economy over the 2000s. [46]
The situation for foreign-born Hispanic households has been more calamitous. According to the same EPI report, between 2000 and 2007 their median incomes fell by 9.1 per cent, and they now find themselves in the front rank of the unemployment being created by the construction industry collapse.
Second, the immigrant Latino community (and therefore anyone with brown skin) has been terrorized by the nativist insurgency in the Republican party—a reign of prejudice which has been mimicked or accommodated by many Democrats outside of the majority-minority core cities (such as Kirsten Gillibrand, the appointed replacement for Hillary Clinton in the Senate). Although the ‘Minutemen’ vigilantes who originally ignited the conservative grassroots are little more than a few fractious groupuscules, their core agenda—the construction of a literal Iron Curtain along the Mexican border, the local adoption of anti-immigrant laws, and their enforcement by local police—has become national Republican policy in hard repudiation of the Bush–Rove strategy of immigration reform and cultivation of the Latino vote. In some suburban counties and small cities, hometown experiments in immigration control have become de facto campaigns of ethnic cleansing.
Again, Prince William County is a paradigm. As the Latino population exploded with the building boom of the early 2000s, groups like ‘Help Save Manassas’ (which described Latinos as a ‘scourge that’s plaguing the neighbourhoods’) mobilized to drive undocumented immigrants out of the county. [47] In the summer of 2007, as the housing market soured and the demand for construction labour decreased, the county supervisors unanimously voted to cut off public services to undocumented workers. They also mandated the police, working with the federal immigration service (ICE), to check the status of every detainee. The schools, for their part, added the requirement that a parent must show proof of legal residency in order to pick up their child after school. ‘The message that we are sending’, bragged the chairman of the supervisors to the applause of Minutemen and their supporters nationwide, ‘is: “If you are an illegal alien, you are not welcome in Prince William County.”’ [48]
While the Help Save Manassas crowd debated ‘whether or not illegal aliens have a preferred breeding season’, the Washington Post reported that:
the vibrant Latino subculture built in Prince William County over more than a decade [has started] to come undone in a matter of months . . . With Latinos feeling the combined effects of the construction downturn, the mortgage crisis and new local laws aimed at catching illegal immigrants, Latino shops are on the brink of bankruptcy, church groups are hemorrhaging members, neighbourhoods are dotted with for-sale signs, and once busy strip malls have been transformed into ghost towns. [49]
Rules of avoidance
But immigrants, if omnipresent in the local combustion of the campaign, were missing persons in the national presidential debate. By what was surely negotiated agreement, the candidates avoided the mutual embarrassment of discussing each other’s opportunistic concessions on immigrant rights. McCain, incredibly, had disavowed his own major immigration reform bill, co-authored in 2006 with Teddy Kennedy, while Obama, as the New York Times observed, had ‘hardened his tone on how to deal with illegal immigrants’ in accord with the ‘new law-and-order language adopted in the Democratic Party platform at the convention’. [50] Since both candidates were also competing in the Spanish-language media as the best friend of immigrants, they had no reason to expose so much mutual hypocrisy.
A similar polemical balance of terror ruled the debate about the financial crisis and the federal bank bailout. As the debt pyramid collapsed, both candidates vied to denounce the vandals on Wall Street, but then voted meekly for the catastrophic class politics of the Paulson plan which (as even Jeffrey Sachs acknowledges) has ensured ‘a massive transfer of taxpayer wealth to the management and owners of well-connected financial institutions.’ [51] Polls at the beginning of October showed an overwhelming majority of Americans were fiercely opposed to Congress’s unprecedented abdication of power to friends of Wall Street, and an improbable coalition of conservative rural Republicans and progressive urban Democrats (including many members of the Black Caucus) made a brief attempt to build a legislative barricade across Pennsylvania Avenue. They received no encouragement from either campaign.
Indeed, the second town-hall-format presidential debate in Nashville, a few days after the passage of the bailout, was remarkable for its evasion of the audience’s anguished questions about unemployment and home foreclosures. [52] Neither candidate was ready to pick up a pike and lead the sans-culottes; instead, both clung doggedly to their old talking points as if the sky had not fallen. The exchange magnified differences in policy that rarely transcended the ordinary range of debate between the centre-right and centre-left, while both camps scrupulously avoided the nuclear red buttons marked ‘mortgage moratorium’, ‘immigration’, ‘nationalization’, ‘NAFTA’, and so on. Few presidential campaigns in American history have fled so completely from engagement with their actual moment.
Bush’s profound unpopularity, of course, required the senator from Arizona to act like a quantum particle, occupying several ideological spaces simultaneously. Although he claimed Teddy Roosevelt, the Progressive imperialist, as his hero, McCain veered unpredictably between ecumenical centrism and snake-wrestling fundamentalism, with meek forays into economic populism that were quickly followed by sermons on the priority of tax breaks for the rich people, like himself, who don’t know how many cars they own. His rants about the suffering of plumbers and small-business people were belied by his own dependence upon the largesse of Lower Manhattan, with Merrill Lynch CEO John Thain as the biggest ‘bundler’ of his corporate campaign contributions. Plus McCain had too many opponents—in addition to Obama and Bush, he was also running against himself (as in the case of immigration policy). In the end, the bomber of Hanoi had nothing left to spend but prison stories, racist innuendo and the spectre of Bill Ayers.
Obama, in contrast, was untroubled by zealotry in his grassroots and thus could rely upon hypnotic platitudes and steadiness of character rather than desperate impersonations and publicity stunts. The specification of ideas and policies was not a common practice in a campaign that was principally geared to the production of charisma, with a storyline that seldom strayed very far from the feel-good slogans that have characterized most Democratic campaigns in recent years. Despite his resumé, Obama had no plan for tackling urban poverty; although pro-worker he made only weak promises to the unions, and was deliberately vague on trade, urban policy, housing, education, and the one million prisoners of the War on Drugs.
Hillary Clinton’s ‘turn to the working class’ in the Pennsylvania primary (actually, a more subtle essay than McCain’s in racial text-messaging) threw Obama’s campaign seriously off track for a month or two, but he regained course with only a modest tacking of his sails to the enormity of the crisis. Like Roosevelt in 1932, Obama used eloquence and compassion, along with thick frostings of Founding Fathers and We Are One, to forge an emotional bond with stricken blue-collar voters, while offering few new ideas or concrete plans.
In this respect, however, he was sticking close to the larger team plan. Matt Bai, a New York Times reporter who has chronicled the role of dot.com millionaires, liberal foundations and bloggers in reshaping the party’s image, argues that Democratic leaders like Harry Reid and Nancy Pelosi have deliberately fostered ‘vapid slogans’ in order to present a smaller target to the Right. ‘By the fall of 2005’, Bai writes,
Bush’s approval ratings had slipped below 40 per cent, so party leaders decided it was better to let the Republicans collapse of their own weight than to offer an actual agenda and risk the possibility that some voters might not like it . . . ‘Tell us what you want to hear’, the party seemed to say, ‘and we’ll be sure to put it in our pamphlet’. [53]
Obama’s agenda, however, became less opaque in June 2008 when he chagrined labour supporters by appointing Jason Furman, the director of the Brookings-affiliated Hamilton Project, as the head of his economic policy unit. [54] The Project, founded by ex-Treasury secretary Robert Rubin in 2006, has been part of the institutional network that elaborates the legacy of the Clinton Administration: in this case as a megaphone for centrist economic policies that meld fiscal conservatism and financial deregulation with smarter public investment. Furman’s appointment was followed by the arrival in the inner circle of Rubin’s successor in the Clinton Treasury, Lawrence Summers, a devotee of Milton Friedman (‘any honest Democrat will admit that we are now all Friedmanites’), who with Rubin, Alan Greenspan and Phil Gramm had dismantled the last New Deal firewall, the Glass–Steagall Act, between traditional banks and derivative Ponzi schemes. By making the Hamilton Project his economic shadow cabinet, and later elevating the radioactive Summers to the directorship of the National Economic Council, Obama restored to power the auteurs of the catastrophe, and willingly entangled himself in the seedy history of ‘Rubinomics’ and the notorious back door between the Clinton White House and big investment banks and money funds. [55]
The counterfactual election
It would be difficult, then, to characterize the 2008 campaign as an epochal ideological confrontation, except in the limited sense that both candidates—McCain sometimes more pointedly than Obama—repudiated the horrors of the Bush White House and advocated a return to Arthur Schlesinger’s ‘vital centre’. It therefore falls short of a key Burnham criterion for a ‘critical election’:
In the campaign or campaigns which follow this breakthrough, the insurgents’ political style is exceptionally ideological by American standards; this in turn produces a sense of grave threat among defenders of the established order who in turn develop opposing ideological positions. [56]
The new Administration, in fact, seems determined at all cost to prevent such an ideological polarization by bringing on board as many temperate defenders of the ‘established order’ as possible. With economic crisis-management firmly in the hands of Citigroup and Goldman Sachs alumni, foreign policy delegated to the sub-presidency of Hillary Clinton and her spouse, and the ‘surge’ doctrine of Gates and Petraeus preserved in the Pentagon, Obama has built a dream team that delights The Economist and Foreign Affairs to the same degree that it disconcerts The Nation. As in the Clinton era, labour and environment have been seated at a second table, with important but secondary posts that lack leverage over the Administration’s line of march. [57]
Certainly the new President and his congressional majority are committed to humane relief policies that distinguish Democratic centrism from the Spencerian barbarism of Southern Republicans, but by itself this is hardly a cause for celebrating a new age. Whether or not his heart belongs to the left as many admirers believe, Obama’s appointments affirm stunning continuity with the Clinton era as well as bipartisan ‘realism’ in foreign affairs. Few political observers anticipated that a mandate for ‘change’ would immediately lead to a comprehensive merger of the Clinton and Obama camps, with the personnel of the former consistently awarded seniority. [58] It smacks of a pre-convention deal that gave Obama an uncontested nomination in exchange for a huge sharing out of power to the Clintons and their friends. [59]
This triumph of veteran centrism in the face of a bottomless crisis of unimaginable complexity attests to the failure of the Democratic Party’s progressive constituencies, especially the divided US labour movement, to exercise an influence commensurate with their immense financial and rank-and-file contributions to the party’s victory. (The New York Times estimated that labour spent $450 million backing Democrats and mobilized 250,000 volunteers. [60]) Labour would have had more sway over the shape of the final campaign—especially Obama’s response to the mortgage meltdown and the bank and auto industry bailouts—if it had been able to broker its vote better or control the balance of power in a contested convention. Neither scenario, in my opinion, would have been implausible if broad union support had sustained the initially impressive momentum of John Edwards’s unusual campaign.
However one now feels about Edwards’s character (as exposed in yet another bedroom scandal uncovered by right-wing bloggers), he was the only major primary candidate to meet Burnham’s critical-realignment standard of an insurgent with an ideologically distinctive platform—in his case, angry economic populism. The former senator from North Carolina (the son of a Piedmont millworker turned into millionaire lawyer) staked out a programmatic space that had been vacant since Jesse Jackson’s mobilization in the 1980s: the priority of economic justice for poor people and workers. [61] Discarding the banal euphemisms of his 2004 vice-presidential campaign, he spoke directly of exploitation and the urgency of unionization, proposed a new war on poverty, denounced ‘Benedict Arnold CEOs’ who exported jobs, and, in debate with Obama and Clinton in Iowa, argued that it was a ‘complete fantasy’ to believe that a progressive agenda could be advanced by negotiation with Republicans and corporate lobbies. Only an ‘epic fight’ could ensure healthcare reform and living wages. (Obama’s response was typical eloquent evasion: ‘We don’t need more heat. We need more light.’) [62]
In the event, Edwards won full-hearted support only from the progressive shards of the old CIO (mineworkers and steelworkers), the carpenters, and some independent-minded state councils of the service employees and the hotel workers. His campaign was doomed by the refusal of the two union confederations (the AFL–CIO and Change to Win) and their largest constituent internationals to endorse what otherwise was the most chemically pure pro-labour candidacy in a generation. The big unions instead fought each other (and sometimes their memberships) in a chaotic scramble to place a last-minute bet on the candidate they believed would be the sure winner. In some states, the rank and file defied their leadership to vote for Hillary (culinary workers in Nevada), and in others, for Barack (public-sector workers in California).
By the time of the convention in Denver, veteran columnist Harold Meyerson was warning Democratic progressives: ‘What’s disturbing is how poorly America’s unions performed in the Democratic primaries and how divided they are as they go into the fall.’ [63] Although union volunteers ultimately did epic work defeating McCain, especially in states like Indiana and Wisconsin, the labour movement, which is engaged in a truly life-and-death struggle in the private sector, lost its best chance to impose healthcare, labour law and trade reforms as the central planks of a White House recovery plan.
The Silicon Presidency and its limits
At the end of the day, the Crisis itself, not the Election, did the ideological heavy lifting, sending elite opinion back in panic to the protective apron of Old Mother Keynes. (Not perhaps the real Keynes who wrestled with the paradoxes of liquidity traps and perverse market signals, but the Keynes who supposedly smiles whenever governments print money to save banks.) Ironically none of the currently prominent Keynesians or post-Keynesians, such as Paul Krugman, Joseph Stiglitz or James Galbraith, have passed the qualifying exam for the new administration. In contrast to FDR’s One Hundred Days, when the President’s closest advisors included such trenchant critics of corporate power and managerial prerogative as Guy Rexford Tugwell, Gardiner Means and Adolf Berle, Obama’s economic-policy brains trust shares a defining conceit of the Hoover Administration: the architects of the crisis (Andrew Mellon then; Timothy Geithner and Larry Summers now) consider themselves its most competent doctors. [64]
But if the central bankers and financial morticians are still ceded reign over the ruins of Wall Street, Obama has allied with technology icons to lay the cornerstones of an economic renaissance based on massive public investment in ‘Green Infrastructure’. So far this is the flagship idea of the new Administration, the one that owes least to Clinton precedents and most closely resonates with the idealism of the campaign’s volunteers and the expectations of supporters in the big tech centres. The near constant presence of Google CEO Eric Schmidt at Obama’s side (and inside his transition team) has been a carefully chosen symbol of the knot that has been tied between Silicon Valley and the presidency. The dowry included the overwhelming majority of presidential campaign contributions from executives and employees of Cisco, Apple, Oracle, Hewlett-Packard, Yahoo and Ebay.
But the promise of Green Keynesianism may turn out differently than imagined by radical economists and environmental activists. A fundamental power-shift seems to be taking place in the business infrastructure of Washington, with ‘New Economy’ corporations rapidly gaining clout through Obama and the Democrats while Old Economy leviathans like General Motors grapple with destitution and welfare, and energy giants temporarily hide in caves. The unprecedented unity of tech firms behind Obama both helped to define and was defined by his campaign. Through his victory, they have acquired the credit balance to ensure that any green infrastructure will also be good industrial policy for their dynamic but ageing and cash-short corporations.
There is an obvious historical analogy. Just as General Electric’s Gerard Swope (the Steve Jobs of his day) and a bloc of advanced, capital-intensive corporations, supported by investment banks, enthusiastically partnered with Roosevelt to create the ill-fated National Recovery Administration (NRA) in 1933, so too have Schmidt and his wired peers, together with the ever-more-powerful congressional delegation from California, become the principal stakeholders in Obama’s promise to launch an Apollo programme for renewable energy and new technology. [65]
We should note that this realignment of politics by economics fits awkwardly within the Keys–Burnham paradigm, which asserts the primacy of public opinion and the durability of voter blocs. A ‘silicon presidency’, on the other hand, is perfectly accommodated by Thomas Ferguson’s ‘investment’ theory of political change which privileges political economy and class struggle within capital as modes of explanation. Analysing New Deal case-studies in his 1995 book, Ferguson—an intellectually supercharged descendant of Charles Beard—concluded that business elites, not voters, usually determine both the nature and course of electoral realignments. [66]
The fundamental market for political parties usually is not voters. As a number of recent analysts have documented, most of these possess desperately limited resources and—especially in the United States—exiguous information and interest in politics. The real market for political parties is defined by major investors, who generally have good and clear reasons for investing to control the state . . . During realignments . . . basic changes take place in the core investment blocs which constitute parties. More specifically, realignments occur when cumulative long-run changes in industrial structures (commonly interacting with a variety of short-run factors, notably steep economic downturns) polarize the business community, thus bringing together a new and powerful bloc of investors with durable interests. As this process begins, party competition heats up and at least some differences between parties emerge more clearly. [67]
But what has suddenly mobilized the self-identified New Economy as an ‘investor bloc’ in Ferguson’s sense? And why Obama?
One answer is straightforwardly cultural: Obama ‘gets’ and likes tech and entrepreneurs. As Joshua Green pointed out in the Atlantic, the young candidate exemplifies the legendary outsider who reinvents American politics in his own garage and then launches a history-changing IPO with the help of visionary venture capitalists. In addition, Obama—unlike Hillary Clinton, who seemed more at ease in Hollywood—came to the mountain (or rather, Mountain View) and listened. He discovered a volcano on the verge of eruption. No sector of the corporate workforce, bosses as well as employees, has probably been more outraged by the endless carnage in Iraq, the wanton incendiarism of Rove’s culture wars, the attacks on immigrants, and the Republicans’ contempt for evolutionary and earth sciences. [68]
But there were obviously deeper, more selfish priorities. Even before the crash, revered seers like Andy Grove (ex-CEO of Intel) were expressing fear about declining investment and innovation in the technology heartlands. As Business Week later summarized in a special report: ‘Federal funding of advanced computer science and electrical engineering research has dropped off sharply since the late 1990s, as has the number of Americans pursuing computer science degrees. And large technology companies are putting less emphasis on basic research in favour of development work with quicker payoffs’. [69]
Pessimists worry that the Valley is locked into the first stages of the Detroit product-cycle syndrome: the heroic age of Henry Ford followed by tailfins and corporate sclerosis. (Thus Web 2.0 has been criticized as mere product development rather than technological innovation.) The Obama Presidency, from this perspective, can ride to the rescue with Kennedy-scale commitments to basic science as well as stable subsidies to markets like renewable energy, smart utilities and universal broadband that are otherwise whipsawed by volatile energy prices or abdicated by corporations. [70]
The New Economy, like the Old, also recognizes that survival in the current economic hurricane depends upon presence at court: in the short term at least, Obama and the Democratic leadership will have extraordinary influence over the selection of winners and losers. The contrasting fates of Lehman Brothers and AIG (one left to bleed to death, the other given a government IV) sent tremors down the spine of every CEO and large shareholder in the United States. Even more than in Ferguson’s case-study of the 1930s, the future of every corporation or sector depends upon wise investments to ‘control the state’; which is why K Street, the Wall Street of lobbyists formerly owned by the Republican Party, has turned so blue in the last year. But of all the new Democratic investors, only the tech industries, with their captive universities and vast internet fandoms, still retain enough public legitimacy (domestic and international) and internal self-confidence hypothetically to act as a constructive hegemonic bloc rather than as a mob of desperate lobbyists.
But, then again, the tech industries may simply be swallowed up, with everyone else, in the Götterdämmerung of Wall Street, while Larry Summers and Ben Bernanke fight on in the bunkers until the last taxpayer’s bullet is spent. (The euphoric national unity of Roosevelt and Swope’s NRA, it should be recalled, quickly dissolved into strikes, tear gas and bayonets.) Obama’s nearly trillion-dollar stimulus package provides urgently needed relief as well as a modest down payment on the green infrastructure, but few economists seem to believe that it can actually stop the domestic downturn, much less generate enough ‘leakage’ through imports to stimulate Asia and Europe. The American financial system, in recent years the generator of 40 per cent of corporate profits, is dead—a colossal corpse hidden from full public view by the screen debates of the fall presidential campaigns. The market-oriented centrists and reformed deregulators whom Obama has restored or maintained in power have about as much chance of bringing the banks back to life as his generals do of winning the war against the Pashtun in Afghanistan. And no contemporary Walter Rathenau or Guy Rexford Tugwell has yet emerged with a scheme for rebuilding the wreckage into some plausible form of state capitalism.
Meanwhile, the financial press warns that trillions will ultimately be required to make a ‘bad bank’ or bank nationalization work. But if Obama’s domestic spending fails to produce significant collateral benefits for America’s trading partners, they may think twice about buying Washington’s debt or decide to impose some conditionalities of their own. (Beware the dogma that the Chinese are slaves of their trade surplus and undervalued currency and have no alternative but to subsidize the US Treasury.) At Davos, Putin and Wen reminded the new President that he is no longer the master of his own house in the same way that Roosevelt or Reagan were. The dollar threatens to become the dog collar on the new New Deal. In any event, the bubble world of American consumerism, as it existed at the start of Obama’s formal candidacy in 2007, will never be restored, and protracted stagnation, not timely tech-led recovery, seems the most realistic scenario for the era that may someday bear his name.
[1] Befitting the capital of an empire, Washington DC has the nation’s most affluent suburban fringe. As Thomas Frank points out in The Wrecking Crew: How Conservatives Rule (New York 2008), five of the seven richest US counties with populations over 250,000 are DC suburbs in neighbouring Maryland and Virginia (pp. 11 and 277). On the strategic role of emergent suburbs in 2004, see Ronald Brownstein and Richard Rainey, ‘GOP Plants Flag on New Voting Frontier’, LA Times, 22 November 2004; and Gregory Giroux, ‘A Line in the Suburban Sand’, CQ Weekly, 27 June 2005.
[2] Jon Teaford, Post-Suburbia: Government and Politics in the Edge Cities, Baltimore 1997, p. 6.
[3] The Manassas rally can be viewed on YouTube. Unless otherwise attributed, exit poll data is from Edison Media Research and Mitofsky International, the pollsters for the National Election Pool (ABC, CBS, NBC, CNN, Fox and AP), and can be accessed from any of the sponsors’ sites. County-level presidential returns are from the New York Times’s updated map at elections.nytimes.com.
[4] Kristen Mack, ‘Prince William, the State’s Bellwether’, Washington Post, 12 November 2008.
[5] ‘Blue Virginia’, 2008 Election Brief, Metropolitan Institute, Virginia Tech.
[6] V. O. Key, ‘A Theory of Critical Elections’, Journal of Politics, vol. 17, no. 1, 1955; and Walter Dean Burnham, Critical Elections and the Mainsprings of American Politics, New York 1970. For an influential critique, see David Mayhew, Electoral Realignments, New Haven 2004.
[7] Burnham, Critical Elections, p. 6.
[8] The national turnout of 56.8 per cent (as a proportion of the universe of registered voters) did not break historical records, partly because of a relative decline in votes cast on the West Coast and in New York where Obama’s victory was assured. On the other hand, there was a dramatic increase in voter participation in the Deep South (by both whites and Blacks), the Intermountain West, Latino counties and smaller industrial cities of the Midwest. See ‘New Voters, New Power Bases’ with map, NYT, 6 November 2008.
[9] Internet politics’ moment of conception, however, was the creation of MoveOn.org in 1998. Carl Cannon, ‘Movin’ On’, National Journal, 2 December 2006.
[10] Joshua Green, ‘The Amazing Money Machine’, The Atlantic, June 2008.
[11] Federal Election Commission: www.fec.gov.
[12] Matt Bai, The Argument: Billionaires, Bloggers and the Battle to Remake Democratic Politics, New York 2007, p. 7.
[13] Obama won 39 per cent of the white vote in Virginia compared to Kerry’s 32 per cent; and 35 per cent in North Carolina, compared to 27 per cent. See Charles Franklin, ‘White Vote for Obama in the States, Part 2’, Pollster.com, 15 November 2008.
[14] Dave Mann, ‘Turning Houston Blue’, The Texas Observer, 17 October 2008.
[15] Michael Teitelbaum, ‘Census Estimates Show Clout Again Likely to Go West and South’, CQToday Online News, 23 December 2008.
[16] In addition to the slim Obama victory, Democrats—including two Japanese-Americans—took control of the Salt Lake County Council. The consequences are likely to include domestic-partner health benefits, collective bargaining for county employees and an independent redistricting commission. The capital of Brigham Young’s Deseret thus continues its recent evolution toward the left. See Jeremiah Stettler, ‘In Salt Lake County, election shifted power swings to Dems’, The Salt Lake Tribune, 6 November 2008.
[17] The major exception was the former steel region around Pittsburgh in western Pennsylvania, but Obama easily carried the state with the help of crossover voters in the formerly Republican suburbs of Philadelphia.
[18] James Barnes, ‘Obama Pulls Off a Hat Trick of Outreach’, National Journal, 8 November 2008. Rather unbelievably, exit polls in Indiana indicated a slight decline in Black voters’ preference for Obama vis-à-vis Kerry.
[19] ‘Exit polls show that nearly a quarter of voters questioned said they had been contacted by the Obama campaign about coming out to vote, compared with 8 per cent for the McCain campaign. Of those contacted as part of the Obama effort, almost three-quarters said they voted for him’. ‘State by State’, NYT, 6 November 2008.
[20] Although the Nader campaign was ignored in the national media this time around, his 17,000 votes in Missouri certainly vexed the hopes of local Democrats.
[21] National and state politics do not necessarily recapitulate each other in the United States. For example, five of the states comfortably won by Bush in 2004 and McCain in 2008 have solid Democratic majorities in their state houses (Arkansas, Alabama, Kentucky, Mississippi and West Virginia).
[22] Alec MacGillis and Jon Cohen, ‘Democrats Add Suburbs to Their Growing Coalition’, Washington Post, 6 November 2008.
[23] Chris Cillizza, ‘Five Myths About an Election of Mythic Proportions’, Washington Post, 16 November 2008. See also Richard Cohen and Brian Friel, ‘The New Centre’, National Journal, 7 March 2008.
[24] Alec MacGillis and Jon Cohen, ‘Democrats Add Suburbs’.
[25] Swing suburb list from Robert Lang, et al., ‘The New Suburban Swingers: How America’s Most Contested Suburban Counties Could Decide the Next President’, 2008 Election Brief, Metropolitan Institute, Virginia Tech, p. 5.
[26] Robert Lang and Patrick Simmons, ‘“Boomburbs”: The Emergence of Large, Fast-Growing Suburban Cities’, in Bruce Katz and Robert Lang, eds, Redefining Urban and Suburban America: Evidence from Census 2000, Brookings Institution, Washington DC 2003, p. 104.
[27] Lang, et al., ‘The New Suburban Swingers’, p. 2.
[28] Lang and Thomas Sanchez, ‘The New Metro Politics: Interpreting Recent Presidential Elections Using a County-Based Regional Typology’, 2006 Election Brief, Metropolitan Institute, Virginia Tech, p. 5.
[29] Ken Billingsley quoted in Nick Miroff, ‘Diversity Blooms in Outer Suburbs’, Washington Post, 3 November 2008.
[30] ‘A Happy Slowdown?’, CEO Confidential, Goldman Sachs, 8 September 2006.
[31] David Sherfinski, ‘Sick Suburb’, The Examiner, 10 December 2008; and Mary Kane, ‘At the Frontline of the Foreclosure Crisis, Counties Go It Alone’, Washington Independent, 24 November 2008.
[32] Mary Kane, ‘Foreclosure Machine Grinds On Through Holiday Season’, WashingtonIndependent, 4 December 2008.
[33] Poll statistic from Dallas News, 5 October 2008.
[34] Press release, ‘National Centre for Suburban Studies Releases Results of Only 2008 Presidential Poll to Focus Exclusively on Suburban Voters’, Hofstra University, 29 September 2008.
[35] US Census Bureau News, ‘Minority Population Tops 100 Million’, 17 May 2007.
[36] Kevin Pollard, ‘Swing, Bellwether, and Red and Blue States: Demographics and the 2008 US Presidential Election’, Population Reference Bureau website, October 2008.
[37] Indeed, voter participation in the United States remains extremely low by world standards. About 100 million eligible American citizens did not vote last year, despite $1.6 billion in political advertising by both parties.
[38] Scott Keeter, ‘The Aging of the Boomers and the Rise of the Millennials’, in Ruy Teixeira, Red,Blue and Purple America: The Future of Election Demographics, Brookings Institution, Washington DC 2008.
[39] Karlo Barrios Marcelo and Emily Hoban Kirby, ‘Quick Facts about US Young Voters: The Presidential Election Year 2008’, CIRCLE Fact Sheet, Tufts University, Boston.
[40] Andrew Levison, ‘How Democrats Can Keep and Expand the Support of the Younger White Working-Class Voters Who Voted for Obama in 2008’, The Democratic Strategist White Paper, 2008, pp. 1–2.
[41] Almost but not quite true was the assertion by Stephen Ansolabehere and Charles Stewart: ‘had Blacks and Hispanics voted Democratic in 2008 at the rates they had in 2004, McCain would have won’. See ‘Amazing Race: How post-racial was Obama’s victory?’, Boston Review, Jan–Feb 2009.
[42] Jody Herman and Lorraine Minnite, ‘The Demographics of Voters in America’s 2008 General Election’, Project Vote research memo, 18 November 2008.
[43] The median age of the Hispanic population in 2006 was 27.4, contrasted to 36.4 for the population as a whole. Census Bureau News, ‘Minority Population Tops 100 Million’, 17 May 2007.
[44] Barnes, ‘Obama Pulls Off a Hat Trick of Outreach’.
[45] See William Frey, ‘Melting Pot Suburbs’, in Katz and Lang, pp. 155–79.
[46] Algernon Austin and Marie Mora, ‘Hispanics and the Economy’, EPI Briefing Paper 225, Washington DC, 31 October 2008, p. 1.
[47] Kristen Mack, ‘Activists Want Answers on Panel Choice’, Washington Post, 23 September 2008.
[48] Nick Miroff, ‘Prince William Immigration, Housing Ills Seen as Linked’, Washington Post, 5 October 2007. Arlo Wagner, ‘Prince William Sees Exodus of Hispanics’, Washington Times, 13 March 2005 (reprinted with jubilation on various Minuteman websites).
[49] Nurith Aizenman, ‘In Northern Virginia, a Latino Community Unravels’, Washington Post, 27 March 2008.
[50] Julia Preston, ‘Immigration Cools as Campaign Issue’, NYT, 29 October 2008.
[51] Jeffrey Sachs, ‘The Tarp is a fiscal straitjacket’, Financial Times, 28 January 2009.
[52] The presidential debates can be viewed at www.youdecide2008.com.
[53] Bai, The Argument, p. 177.
[54] Journalist David Leonhardt spent a year interviewing Obama and his original economic advisors from the University of Chicago, trying to decipher their economic philosophy. He was struck by the modesty of their approach to economic inequality and fiscal reform as contrasted to their bold proposals about rationalizing healthcare, rebuilding infrastructure and carrying out a transition to renewable energy. ‘As ambitious as Obama’s proposals might be, they would still leave the gap between the rich and everyone else far wider than it was 15 or 30 years ago. It just wouldn’t be quite as wide as it is now’. See ‘A Free-Market Loving, Big-Spending, Fiscally Conservative, Wealth Redistributionist’, NYTMagazine, 24 August 2008.
[55] Even the New York Times editorialized on the dangers inherent in Obama’s reliance upon investment bankers for economic wisdom: ‘Another question clouding the labour agenda is whether Mr Obama will give equal weight to worker concerns—from reforming health care to raising the minimum wage—while the financial crisis is still playing out. Most members of his economic team are veterans of the Clinton Administration who tilt toward Wall Street. In the Clinton era, financial issues routinely trumped labour concerns. If Mr Obama’s campaign promises are to be kept, that mindset cannot prevail again.’ NYT, 29 December 2008.
[56] Walter Dean Burnham, The Current Crisis in American Politics, New York 1982, p. 101.
[57] Hilda Solis, Obama’s new Labour Secretary, is already compared to her great predecessor in Roosevelt’s cabinet, Frances Perkins. But Perkins has been endowed in most liberal hagiographies with powers she did not possess. If at critical moments in the class war of the 1930s, she was a superb advocate for unions inside the administration, her ordinary vocation was as pacifier: charged with keeping labour insurgents in line behind FDR’s slow-moving and piecemeal reforms. Robert Reich’s frustrated experiences as Clinton’s Labour Secretary are cautionary in the same respects.
[58] Obama has also left the light on in the White House for wayward neo-conservatives. No modern Democratic candidate has had so many admirers on the right, to name just a few: columnist David Brooks, Senator Chuck Hagel, former UN ambassador Ken Adelman, and William F. Buckley’s son Christopher.
[59] Clinton had a legitimate basis for making a fight. If the results in Florida and Michigan (disqualified by the Democratic National Committee for violating its scheduling rules) are counted, she won the popular primary vote by more than 100,000.
[60] Steven Greenhouse, ‘After Push for Obama, Unions Seek New Rules’, NYT, 9 November 2008.
[61] I apologize to supporters of Dennis Kucinich and Ralph Nader, but the congressperson from Cleveland had no chance of winning a major primary and Nader, however admirable, has never been an effective populist. Only the Edwards campaign, in my opinion, had the potential of forcing Clinton and Obama programmatically to the left.
[62] Quoted in Ronald Brownstein, ‘Style & Substance Among The Dems’ Big Three’, NationalJournal.com, 2 January 2008.
[63] Harold Meyerson, ‘For Labour, Armageddon’, Dissent, Fall 2008, p. 40.
[64] Consideration of Obama’s foreign policy lies beyond the scope of this essay, although his appointments clearly signal continuity.
[65] For a fascinating reflection on New Deal-era economic theory, including a possible synthesis of the ideas of Keynes, Hansen, Means and Schumpeter, see Theodore Rosenof, Economics in the Long Run, Chapel Hill, NC 1997.
[66] Charles Beard’s An Economic Interpretation of the Constitution (1913), which argued that the Founding Fathers’ politics were approximately the sum of their material interests, is still worth a visit, even if modern political and economic historians tar him as a vulgarian economic determinist.
[67] Thomas Ferguson, Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems, Chicago 1995, pp. 22–3. Ferguson, of course, acknowledges that voters also become more active: ‘only if the electorate’s degree of effective organization significantly increases, however, does it receive more than crumbs.’
[68] The Republican share of Silicon Valley’s presidential contributions dropped from 43 per cent in 2000 to barely 4 per cent in 2006, simultaneously as the Democrats endorsed an ‘Innovation Agenda’ supporting R&D tax credits, a doubling of funding for the National Science Foundation, and so on. See the August 2006 beltwayblogroll at nationaljournal.com; and Jim Puzzanghera, ‘Pelosi likely to speak up for tech industry’, LA Times, 13 November 2006. The earlier history of the Democratic courtship of Silicon Valley is chronicled by Sara Miles in How to Hack a Party Line, New York 2001.
[69] Steve Hamm, ‘Whatever Happened to Silicon Valley Innovation?’, Business Week, 31 December 2008.
[70] The major exception to declining federal support for innovation, of course, has been the war on terrorism’s huge investments in surveillance and advanced war-fighting technologies—a sector that Obama is unlikely to neglect.
On election eve last November, the little city of Manassas, Virginia became the improbable Woodstock of Generation Obama as thousands gathered to hear their candidate close his almost two-year-long campaign with a final appeal for ‘Change in America’. It was a grand finale orchestrated with considerable self-confidence and irony. Although Manassas (population, 37,000) retains blue-collar grit, the rest of Prince William County (380,000) epitomizes the greedy sprawl of the Bush era: a disorganized landscape of older townhouses, newer McMansions, faux-historical shopping centres, high-tech business parks, evangelical mega-churches, pariah islands of apartment housing, and melancholy vestiges of a graceful Virginia countryside. Assuring the County a prominent footnote in Tom Clancy novels, its southeastern corner is annexed by Marine Corps Base Quantico and the FBI national training centre.
As the Dixie edge of ‘Los Angeles on the Potomac’ and the seventh richest large county in the United States, Prince William is precisely the kind of ‘outer’ or ‘emergent’ suburb which Karl Rove famously mobilized to re-elect George W. Bush in 2004. [1] Indeed, since Nixon’s victory over Hubert Humphrey in 1968, the Republican Party has counted on Sunbelt suburbs like Prince William County to generate winning margins in national elections. Reaganomics, of course, was incubated in the famous tax revolts that shook suburban California in the late 1970s, while Newt Gingrich’s 1994 ‘Contract with America’ was primarily a magna carta for affluent voters in Western exurbs and New South edge cities. Even as the suburbs aged and densified, the Republicans drew power from the contradiction that ‘post-suburban Americans remained resolutely anti-urban even as their world has become increasingly urbanized.’ [2]
Obama, in effect, signalled the beginning of a new epoch when he chose to climax his campaign on what has been the wrong side of the suburban Mason–Dixon Line for most national Democrats since the 1960s (Jimmy Carter and Bill Clinton only partly excepted). Although the rally was not scheduled to begin until 9pm, crowds were already streaming into the Prince William County Fairgrounds by sunset, and southbound Interstate 66 was jammed half way back to Washington DC, 26 miles to the northeast. A WashingtonPost blogger marvelled at the numerous Redskins fans, bedecked in team gear, who had chosen to hear Obama over attending Monday night’s classic game against the Pittsburgh Steelers. The state police estimated the multitude in excess of 80,000, but the Obama camp was certain that their candidate spoke to more than 100,000—perhaps the largest audience for an election-eve speech in American history.
The last time a throng this vast had converged on Manassas was in late August 1862, when Robert E. Lee’s Army of Northern Virginia collided with the larger Union Army led by the incompetent John Pope. Twenty thousand soldiers, dead and wounded, spilt their blood on soil already stained red from the opening major battle of the Civil War a year earlier. (Southern custom, which named battles after the nearest town, enshrined this slaughter as the ‘Second Battle of Manassas’, while in the North, where battles were baptized with the name of the nearest river or stream, it was ‘Second Bull Run’.) Obama, who had launched his general election campaign in Prince William, was well aware that he spoke on symbolic ground, hallowed by an ancient war yet incompletely redeemed from the legacy of slavery.
When, after a long delay in traffic outside Dulles Airport, he finally strode on stage about 10.30, he was weary but exultant. As he had done scores of times before, he promised his supporters that their ordinary ‘hard-working sense of responsibility’ would define his new government, not the ‘greed and incompetence’ that had characterized the age of Bush. Younger supporters repeatedly took up the signature campaign chant, borrowed from the struggle of California farmworkers in the 1960s, of ‘Yes we can!’ (‘¡Sí se puede!’ in the original). Almost as tall as Lincoln, and sometimes nearly as eloquent, Obama roused a final, immense cheer with the reassurance: ‘Virginia you can change the world’. [3]
Obama beats Lee
In 2004, George W. Bush won Virginia by 54 per cent and Prince William by 52.8 per cent. Since 1948 only Lyndon Johnson had managed to carry the Old Dominion for the Democrats, and John McCain was favoured to preserve Republican tradition in a state with famously large numbers of military and Christian conservative voters. Republican-controlled Prince William County, notorious for its right-wing delegation in the Richmond legislature, as well as its recent persecution of undocumented Latino immigrants, ‘prided itself as being the last Republican redoubt in northern Virginia’. [4]
In the event, Virginia’s voters, including the good burghers of Prince William, gave Barack Obama a 52.7 per cent victory in the state, and a 57.6 per cent margin in the county—a whopping 12-point improvement over 2004. Whereas Kerry won only one of Virginia’s four major regions (northern Virginia), Obama easily took three, adding the Capital region and Hampton Roads/eastern Virginia; while McCain eked poor consolation in the Appalachian southwest. [5] It was a stunning result. A Black Democrat with a Muslim name had come to Manassas and, in effect, beaten the ghosts of Robert E. Lee and Jim Crow. Is the world, as a result, changing? Have the gridlocked tectonic plates of American electoral politics finally lurched to the left?
Psephology—the statistical analysis of elections—is an inscrutably American obsession, like chewing tobacco or varmint hunting. Although Margaret Thatcher, Tony Blair and Ehud Barak have all toyed with the dark art, and a Brit originally coined the Greek-cognate term in the 1950s, only those native-born in a Louisiana bayou or a Washington law firm are likely to possess the consummate instinct for extracting winning strategies from a few shavings of an electoral vote. Some have compared voting analysis to the subtle skill of a sommelier, but it is actually more akin (to extend the French analogy) to the acute attentiveness of Louis XIV’s physicians to the contents of the royal chamber pot. With recent national elections decided by ‘hanging chads’ in Florida and a few absentee ballots in Ohio, the slightest statistical deviation from an established trend attracts intense scrutiny from the epigones of Lee Atwater and James Carville. In their quest for a few decisive votes, campaign ‘boiler rooms’ have become monastically dedicated to the tracking of obscure fads on YouTube and the micro-targeting of vegetarians in Nebraska.
From this perspective, Obama’s victories in Virginia and other ‘swing states’ like Colorado, Florida and North Carolina constitute the gold ring: a once-in-a-generation acceleration of attitudinal change in the electorate. Conservative analysts, especially, worry that the election may augur a political transformation comparable to Roosevelt’s epochal victory in 1932 or Reagan’s in 1980. Indeed, with Wall Street and Detroit suddenly in ruins, and fear eating the soul of the suburban middle class, the Republican Party seems to be dissolving into an endless acrimony of sectarian factions and cult leaders with limited national appeal, such as Sarah Palin. In contrast, Obama has generously opened the White House doors to Clintonites and Republicans, reinforcing his image as a pragmatic centrist focused on competent government and national unity.
Political pundits and party strategists in their majority weigh the meaning of this election upon the balance-scale of the theory of electoral realignment first proposed in 1955 by the legendary Harvard political scientist V. O. Key, Jr. and later developed in detail by his MIT protégé, Walter Dean Burnham. In order to explain the rise and fall of successive party systems from Andrew Jackson to Ronald Reagan, they postulated a causality analogous to Eldredge and Gould’s ‘punctuated equilibrium’ paradigm in paleontology, where electoral evolution is compressed into episodic reorganizations that are synchronized with major economic crises (1896, 1932 and 1980). Although many academics remain sceptical, Key and Burnham’s thesis of the ‘critical election’ that durably realigns interest blocs and partisan loyalties remains the holy grail of every actual presidential campaign. [6]
In his Critical Elections and the Mainsprings of American Politics, Burnham provides a reasonably canonical definition:
The critical realignment is characteristically associated with short-lived but very intense disruptions of traditional patterns of voting behaviour. Majority parties become minorities; politics which was once competitive becomes noncompetitive or, alternatively, hitherto one-party areas now become arenas of intense partisan competition; and large blocks of the active electorate—minorities, to be sure, but perhaps involving as much as a fifth to a third of the voters—shift their partisan allegiance. [7]
Although Obama’s 53 per cent majority of the popular vote is not the definitive landslide of FDR’s 1932 election (57 per cent), it improves upon Reagan’s 1980 performance (51 per cent) and, of course, overshadows Clinton’s first fortuitous plurality (43 per cent in a three-way race). [8] Excepting FDR’s four victories and Lyndon Johnson’s annihilation of Barry Goldwater in 1964, Obama did better than any Democratic candidate since the Civil War, and his campaign met Burnham’s criteria of opening enemy terrain to intense competition while galvanizing new voters and interest groups on behalf of the insurgent party.
His victory, moreover, was wrought by a novel strategy of political communications, operating inside web-based social networks that hardly existed in 2000 and are still poorly understood by older politicos. Although both the 1932 and 1960 presidential campaigns also introduced major innovations in political technology (radio and television, respectively), the 2008 Democratic campaign was a Marshall McLuhan-like leap from one media universe to another.
Building upon the template of Howard Dean’s Internet ‘shock and awe’ in the 2004 primary (and retaining Dean’s shrewd skills as Democratic national chair), the Obama campaign used Silicon Valley expertise to mine an El Dorado of small donations through social networking and campaign websites. [9] As Joshua Green pointed out admiringly in the Atlantic, ‘During the month of February . . . his campaign raised $55 million—$45 million of it over the Internet—without the candidate himself hosting a single fundraiser.’ [10] While trying to compete with this digital juggernaut, the Clinton campaign was driven into bankruptcy during the summer, and McCain was outspent by $154 million in the fall—a dramatic reversal of the usual Republican financial advantage in presidential elections. [11]
A flush war chest allowed the campaign to intensify voter-registration efforts across the country and mount media blitzkriegs in an unprecedented number of states. The Democrats also made brilliant use of early and absentee ballots (almost one-third of the total vote) to ensure the suffrage of blue-collar workers, elderly homebound people and inner-city residents—all of whom traditionally have trouble getting time off to vote or face unusually long waits at polls. New weapons, such as the candidate blog—a digital version of the fireside chat—and viral political messaging were deployed to support a huge army of volunteers (5,000 in Prince William County alone), while saturation television advertising, automated phone calls, and regiments of rock stars softened up enemy positions.
The Obama camp exploited every opportunity to portray the election as an epochal techno-generational conflict, pitting the youthful many-hued netroots against obese AM-hate-radio fans and robotic evangelical congregations. Multi-tasking on his beloved Blackberry or plugged into his MP3 player during his morning workout, Obama was easily cast as an epitome of those 21st-century competencies that some psychologists claim may represent a human evolutionary leap, while McCain, with his self-confessed computer phobia and archaic elocutions (‘My friends . . .’), was prone to caricature as an escaped Alzheimer’s patient.
But revolutions in political communications do not automatically make realignments, and widely hailed new eras in American political history have sometimes turned out to be short-lived mirages. In Burnham’s cautious construction, a ‘realigning election’ can only be ratified as a watershed after the political system has unambiguously begun to consolidate its results. Thus Carter’s 1976 victory, which some contemporaries hailed as a Democratic rebirth in the South, led a divided party straight into a hopeless cul desac, while Clinton’s defeat of George Bush senior in 1992 was an achievement shared with maverick billionaire Ross Perot, who hijacked 19 per cent of the vote, mainly from Bush, and soon checked by the Republican sweep of the House of Representatives in 1994. (As Matt Bai reminds us, ‘the booming nineties had, in fact, been the party’s worst decade since the roaring twenties.’) [12]
Obama, who will be the first president ever to face the dual challenges of foreign war and economic depression, undoubtedly risks the possibility of a Republican resurgence in 2010 or 2012. Moreover his popularity like Bill Clinton’s exceeds that of his party, and a less-than-stunning contingent of new Democrats rode his coattails to victory in November. (Democrats had hoped to win 10 new Senate seats and 30 or more new House seats; in the event, they had to settle for 7 and 21, respectively.) But psephologists are likely to give Obama better odds for leading a partisan realignment than they gave to Carter or Clinton. Even the most preliminary analysis of the 2008 presidential vote reveals new alliances and shifting loyalties that a deepening economic crisis may cement as a durable Democratic if not liberal majority.
These potentially realigning trends include the disappearance of ‘inverted 1896’ on the national election map; the probable peaking of the evangelical vote and the Republican ‘culture war’ strategy; Obama’s victories in Karl Rove’s bellwether suburban counties; the reappearance of a rainbow coalition in the electorate; a Latino backlash against nativism; and the political triumph of the New Economy over the Old.
Breakup of red America
In the famous ‘critical election’ of 1896, Ohio’s William McKinley, a Gold Standard Republican, won the White House with an overwhelming electoral mandate from the states of the Northeast and Great Lakes, plus the votes of California and Oregon. Conversely, his opponent, the Nebraska Democrat and ‘Silverite’ William Jennings Bryan, commanded the sparser electoral votes of the Intermountain West, the Great Plains and the former Confederacy. Pro-tariff Republicans, in other words, ruled the industrial heartlands while cheap-money Democrats voiced the discontent of miners and farmers in the Western and Southern peripheries.
For the last decade, the exact inverse of the 1896 vote has defined the distribution of so-called Red and Blue states. Thus, Bush’s Machiavelli, Karl Rove, squarely based presidential campaign strategies in 2000 and 2004 upon impregnable Republican majorities in the once Bryanite interior West and the South, while Gore and Kerry counted on solid Democracy in the former McKinleyite heartlands. The great swing states of the 1960s–80s era, California and Texas, had been captured, respectively, by liberal Democrats and conservative Republicans in the 1990s, so what remained in play in an era of extremely close popular votes was a handful of ‘purple states’: most importantly, electoral-vote-rich Colorado, Missouri, Ohio and Florida.
Although (as we shall see) a simple change in analytic magnification renders a different view of this reheated war between the states, as a complex struggle between electorates in the cores and peripheries of metropolitan systems and urban corridors, the concept of a primal regional divide in presidential politics was etched anew in the social imaginary of the Bush era. Indeed, the larger part of Sarah Palin’s role as McCain’s running mate was to incessantly and obnoxiously remind voters of the ‘real America’—apotheosized by her dreary Anchorage suburb—and its alien Other.
In theory, however, a candidate for president does not need to command a Red or Blue nation or even sweep a majority of states: the electoral votes of the eleven most populous states will suffice. Obama won nine, losing only Texas and Georgia. By subtracting three of the largest Southern states and three of the most populous Intermountain states from the inverted 1896 map, he destroyed the Rovian myths of the (new) Solid South and Red State America.
In the former Confederacy, containing about one-third of the American population, McCain lost Virginia, North Carolina and Florida: large states with advanced economies and well-educated, rapidly growing electorates. In both Virginia and North Carolina, Obama’s victory was built upon an alliance of African-Americans and white professionals, reinforced by immigrants and college students. [13] In Georgia, meanwhile, Obama earned a larger share of the vote (47 per cent) than any Democrat since Jimmy Carter, putting the Peach State back into the swing category. Republican strategists should be especially worried by his strong showing (45 per cent) in Atlanta’s outer-suburban belt—Cobb and Gwinnett counties with a population of nearly 1.5 million—where a growing Black middle class, along with a significant Latino migration, is eroding one of the most important conservative voting blocs in the country. Although McCain won Texas by almost one million votes, he lost both Dallas and Harris (metro Houston) counties, thereby boosting Democratic hopes of ending Republican supremacy in the next election cycle. [14]
In the West, the senator from Illinois ran away with the crucial electoral votes of Colorado, Nevada and New Mexico. For the first time, the Democrats became a majority, if only by a sliver, in the aggregate presidential vote of the five ‘megas’ of the Intermountain West, the fastest growing region in the country. These new Los Angeleses (heavily populated by fugitive Californians) have become first-division electoral battlegrounds and will gain at least three more congressional seats in the next Census reapportionment. [15] Accordingly, they figure large in Democratic hopes for an enduring realignment.
Elsewhere in the West, Obama made impressive progress over Kerry in Montana, gave the Democrats a reason for living in Idaho, increased their majority in Tucson, took Omaha (winning the first Democratic electoral vote in Nebraska since 1964), and conquered Salt Lake County (which Bush had carried by 80,000 in 2004). [16] The Republicans, on their side, retained millions of acres of uninhabited real estate in Alaska, Wyoming and the Plains states, and with the aid of their two most important Western constituencies—Mormons and retirees—avoided what some polls were predicting as a possible upset in John McCain’s home state of Arizona.
Throughout the Sunbelt, moreover, Obama was particularly successful in the all-important ‘tech corridors’ that drive regional growth: the northern Virginia suburbs of DC as well as the so-called ‘Chesapeake Crescent’: the Research Triangle of North Carolina, the Space Coast of Florida, the Front Range cities of Colorado, the Albuquerque–Santa Fe corridor in New Mexico, and Silicon Valley plus all of its outliers on the West Coast. Whereas Kerry in 2004 had lost 97 out of the 100 fastest-growing counties, Obama won 15, including the three largest, and added at least 8 points to the Democratic cause in 29 others.
Nor did the GOP find solace in the patriotism and family values of the old industrial heartlands. McCain originally had high hopes of stealing the largely Catholic, white working-class voters who had rallied during the primaries to Hillary Clinton’s impersonation of Rosie the Riveter. But in the shadow of a collapsing auto industry, falling home values, and shrunken retirement accounts, the vast majority of Clinton supporters disdained McCain’s ‘Joe the Plumber’ ads in favour of Obama’s oft-repeated if vague promise to save American manufacturing jobs. [17]
The most unexpected Democratic victory in the region was Indiana, a heavily blue-collar but culturally conservative state that gave Bush a larger share of its vote in 2004 (60 per cent) than Mississippi, and thus was scarcely considered competitive terrain. Over the last generation of plant closure and economic retrenchment, Hoosiers have probably offered an even better example than Kansans for Thomas Frank’s famous argument in What’s the Matter withKansas? (2004) that cultural rage has misled large segments of the white working class into voting against their economic self-interest. In Indiana, at least, class consciousness has undergone a revival.
Indeed Obama’s victory was mostly due to a dramatic increase in white support (45 per cent versus 34 per cent for Kerry), especially in smaller stricken industrial centres like Evansville, Kokomo and Muncie—the original ‘Middletown’ of the Lynds’ famous studies in the 1920s and 1930s—that had been solidly Bush in 2004. As James Barnes explained in the NationalJournal, ‘This is part of the state’s once-vibrant auto manufacturing patch, but much of that industry is gone, and voters who in past elections voted on social issues (Anderson is home to the Church of God) or national security can be won over with a strong economic pitch.’ [18]
This was exactly the pitch that the well-heeled Obama campaign made, sending out thousands of impassioned volunteers to talk about jobs and economic pain, while McCain relied on an underwhelming effort by ranting evangelical churches and dispirited chambers of commerce. [19] The Democratic success in Indiana was replicated in neighbouring northwestern Ohio, where highly energized Obama forces from rusted but still union-proud Toledo canvassed former Bush strongholds in adjacent exurbs and factory towns. As a result the Democrats now own the entire Great Lakes waterfront for the first time since Lyndon Johnson.
Obama also did surprisingly well in Lake Wobegone country: the Lutheran tier of the upper Midwest, historic crucible of political insurgency, where 50 rural white counties in Wisconsin, Minnesota and Iowa that had voted for Bush in 2004 switched in his favour. Although he lost North Dakota, he narrowed the 2004 Republican margin by a whopping 19 points. In Missouri, where Obama scored victories in several traditionally conservative St. Louis suburbs, the election produced a virtual dead heat, with McCain ultimately winning by less than 4,000 rural votes. [20]
In the Northeast, meanwhile, the election was an extinction-level event for the Republican Party, which lost its last House member from New England. Duchess County in New York—notorious in the 1930s and 1940s as a poison swamp of Roosevelt haters—quietly joined the Obama landslide, as did one of the suburban last stands of the Republican Party in greater New York City: Suffolk County on eastern Long Island.
McCain’s meagre improvements over Bush in 2004 were confined to the Cajun parishes of Louisiana and the upland South, a 400-mile long belt of majority white-evangelical counties stretching from the hills of eastern Oklahoma through the mountains of West Virginia. Here, apparently, race and/or fundamentalist religion decisively shaped the outcomes. Homespun, wisecracking Bill Clinton had been popular in this largely poor region, but it was small consolation for ‘William Jennings’ McCain to win Jonesboro and Hazard when he was losing key demographics in Charlotte and Orlando. [21]
Republicans lose their edge
If the shrewdest gambit of the Obama team during primary season was to outflank the Clinton juggernaut by wooing oft-ignored Democrats in largely Republican ‘caucus states’, their boldest move after the convention was to concentrate unprecedented resources to swing big suburban counties that had hitherto been considered unalterably Republican. Gore and Kerry, with fewer bucks and less audacity, had eschewed big raids into the Rovian heartland in favour of mobilizing more votes in reliably Democratic metropolitan cores and inner suburbs. But the Obama campaign embraced the ‘we-can-swing-the-suburbs’ strategy successfully tested in recent Virginia elections by Democratic master gamer Mike Henry. They therefore defiantly planted the flag in dynamic demographics such as Prince William County where they calculated that franchise managers, accountants and civil servants were more concerned about plunging 401-K retirement accounts and negative home equity than the spectre of gay monogamy. Although race remains a formidable obstacle to wholesale conversion of voters in former suburban bastions of white flight, the campaign believed that it no longer precludes the possibility of Democratic victories. [22]
This suburban strategy, however, came at a price: a campaign rhetoric that obsessively flattered the needs of the ‘middle class’, but seldom focused on structural unemployment or equity issues affecting millions of urban and non-white Obama voters. Moreover, most Democrats running in the outer suburbs (like the previous cohort in 2006) were competing on conservative platforms—often pro-gun, anti-tax and anti-immigrant—that demanded minimal ideological shift from voters. As Chris Cillizza, the Washington Post’s chief political analyst, warned liberals after the election: ‘The fact that roughly a third of the Democratic House majority sits in seats with Republican underpinnings (at least at the presidential level) is almost certain to keep a liberal dream agenda from moving through Congress. The first rule of politics is survival, and if these new arrivals to Washington want to stick around, they are likely to build centrist voting records between now and 2010.’ [23]
But most liberal Democrats were blinded by the light of Obama’s big victories in suburban counties that had been crucial to Bush’s in 2004: Jefferson and Arapahoe (metro Denver) in Colorado, Hillsborough (Tampa) in Florida, Wake (Raleigh) in North Carolina, Washoe (Reno) in Nevada, Berks and Chester (Philadelphia) in Pennsylvania, Hamilton (Cincinnati) in Ohio, Macomb (Detroit) in Michigan, and Riverside in southern California. [24] Indeed, he won 9 of 12 swing suburbs in twelve swing states monitored by the Metropolitan Institute (Kerry had eked narrow victories in only three). [25] He also conquered 2 of the 3 iconic Republican counties named Orange (Florida and New York), and gave the McCain camp a bad scare in the third (California).
‘Suburban’, however, is an obsolete, almost obscurantist characterization of the socio-spatial location of these swing voters. Urban geographers and political scientists have proposed competing typologies to describe the ‘post-suburban’ metropolis, but there has been little consensus about how to define or what to call the brave new world beyond Levittown. [26] Recent election analysis, however, has favoured the county-code schema developed by Robert Lang and Thomas Sanchez at the Metropolitan Institute at Virginia Tech:
Core Counties are densely populated central cities. Inner Suburbs are close-in suburbs that are densely built (90 per cent of residents live in an urban area) and at least half of workers commute in to the central city. Mature Suburbs are dense (75 per cent of residents live in an urban area), well-established counties whose populations are no longer booming. In Emerging Suburbs, at least 25 per cent of the population lives in an urban area, and at least 5 per cent commute back in to the central area. Most of their growth has occurred recently. In Exurban Counties, large-scale suburbanization is just beginning to take hold and they are most distant from the centre. [27]
The large-scale electoral trend over the last generation has been a growing Democratic majority in the ageing inner suburbs (the first, often disappointing rungs in non-white geographical and social mobility), political stalemate in the demographically more stable and segregated mature suburbs, and large, reliable harvests of Republican votes in outer suburbs and exurbs. ‘In either Red or Blue states’, write Lang and Sanchez,
the pattern remained the same. There is a metropolitan political gradient in the big US metro areas: the centre tilts to Democrats and the fringe to Republicans. In between these extremes, the vote slides along a continuum, coming to a midpoint mostly in the mature suburbs. [28]
But the housing bubble and suburban construction frenzy of the 2000s, coinciding with the maturation of job markets in now 20 and 30-year-old ‘edge cities’ (high-density clusters of office and shopping space, usually located at the intersection of radial and circumferential freeways), changed both the calculus of household locational decisions and the financing of mortgages, inducing more minority and immigrant families to leap-frog into emerging suburbs, often with the help of non-traditional loans. As a result, non-white households for the first time became the fastest-growing segment of suburban peripheries in many metropolitan areas. The challenge to the Obama campaign was to use this new demographics as an Archimedean lever to shift the suburbs, even in the South, toward the Democrats.
Prince William County again is a bellwether. A study last year by the Northern Virginia Regional Commission revealed that minorities, especially Latinos and Asians, have contributed a stunning 94 per cent of Prince William’s population growth from 2000. Since Bill Clinton became president, the County’s non-white population has burgeoned from less than one fifth to almost one half, and Prince William will soon become northern Virginia’s first ‘minority-majority’ county. ‘A seismic population shift’, wrote the report’s author, ‘has been sweeping across the entire southern rim of northern Virginia where more affordable housing prices, like a powerful magnet, have been pulling households [to the outer suburbs]—predominantly immigrant and minority families who are either finding it too expensive to live closer in or are looking further out for a place they can afford to buy.’ [29]
But ‘affordable’ mortgages turned abruptly into negative equity and then foreclosure during the course of the long presidential campaign. What Goldman Sachs back in 2006 had predicted would be a ‘happy slowdown’, turned into a general annihilation of popular wealth and home values. [30] By the eve of the Manassas finale, Prince William County had become the epicentre of the mortgage crisis in metropolitan Washington DC with nearly 8,000 foreclosures. Single-family homes had lost more than 30 per cent of their value; townhouses, at least 40 per cent. Between Obama’s first and last rally, dozens of businesses had been boarded up in downtown Manassas, tech companies had made deep cuts in their workforces, and a new website emerged to gleefully document the growing number of derelict McMansions in the region. [31]
Although no stratum of Prince William society was exempt from the subprime massacre, it was most lethal to minority new homeowners. In a series of articles, the Washington Independent chronicled the fate of Georgetown South, a subdivision of several hundred townhouses in Manassas where sheriff’s deputies have been working overtime to evict blue-collar residents, many of them Central American immigrants, caught in a vise between the exploding costs of their mortgages and the collapse of local job markets. A typical sad case was a Salvadorean housepainter earning $500 per week, who had been offered a no-down-payment ‘Alt-A’ loan from a subsidiary of (now defunct) Lehman Brothers in 2005 to finance a $280,000 home. In recent months, his townhouse lost more than $50,000 in value, monthly payments on his adjustable-rate mortgage jumped from $1,4000 to $2,600, his tenants were forced to flee a county crackdown on undocumented Latinos, and work in the construction industry evaporated. [32]
Projected upon a national canvas, such stories explain how McCain’s comfortable 48 per cent to 42 per cent lead in the suburbs following the Republican convention was eroded during the bleakest autumn in generations. [33] Polling showed that a significantly higher proportion of Obama’s suburban supporters had recently lost home equity, a job or both. The Obama campaign, in effect, became the party of suburban pain as well as ethnic diversity. [34] The general election as a result consolidated a Democratic majority in inner and mature suburbs, while closing the partisan gap on the periphery and mobilizing enough white voters to win many emergent suburbs.
The rainbow fulcrum
This electoral shift in the suburbs, of course, mirrors even more fundamental changes in the American voting universe. In 1976 when Jimmy Carter beat Gerald Ford, the active electorate was 90 per cent white non-Hispanic. Last November, the white share was down to 74 per cent; a transition toward voter diversity whose future is assured by demographic momentum. Nearly half the babies, for instance, born in the United States during the last few years had Spanish surnames, and American ‘minorities’ separately counted would constitute the twelfth most populous nation on earth (100.7 million). [35] Over the course of the Bush administration, the Latino voting-age population in Virginia increased 5 times faster than the population as a whole, 11 times faster in Ohio, and almost 15 times faster in Pennsylvania. [36] As Karl Rove and other nervous Republican strategists well understand, the GOP has probably already harvested its maximum crop of white evangelical votes and will be culturally and politically marginalized unless it sinks new roots amongst immigrants and the coming ‘minority-majority’.
Indeed the real drama last November was not the relative size of the vote (only a smidgen larger than in 2004), but its prophetic demographics. [37] Electoral soothsayers paid particular attention to ‘Millennial generation’ voters (18–29 year olds)—supposedly weaned on the Web, comfortable with diversity, but angry over declining economic opportunity—as a potent force for realignment. [38] In the first instance, the Millennium did punctually arrive, with Obama winning two-thirds of the youth vote (with a turnout of about 53 per cent). But internal trends within this electoral sub-universe (58–60 million individuals) reflect dramatic variation over region and social class.
The generation gap amongst white voters, for example, was large in states like California, New York and Massachusetts where Millennials gave Obama 10 to 15 per cent more of their vote than did older cohorts, but the white age differential was negligible or even negative (South Carolina) in some Southern and Plains states. Class, meanwhile, remains a huge determinant of whether Millennials vote or not: in 2000 and 2004, more than two thirds of those who had finished college cast votes, while roughly one third of those with only high-school degrees entered a voting booth. But of those non-college Millennials who did vote in 2008, the difference was stunning, especially amongst whites. [39] Compared to the Kerry vote in 2004, Obama’s support in the young white working class increased 30 points amongst women, 14 points amongst men. A recent briefing to the Democratic Party emphasizes the strategic urgency of consolidating this partisan shift of young white Burger King workers and nurses-aides: ‘it could derail any Republican attempt to rebuild a Reagan coalition and eventually ensure a stable long-term Democratic majority’. [40]
But the ultimate fulcrum of the election was not so much the Millennial factor as the voting-day unity of Blacks and Latinos in a renewal of the ‘Rainbow Coalition’. [41] Nationally, whites cast 700,000 fewer votes than in 2004, but African-Americans almost three million more, thus providing Obama with a third of his winning margin. Considering the initial hostility of Civil Rights era leaders toward Obama and his ‘lack of roots’, the mobilization of African-American voters in battleground states was exceptional and nowhere more than in Missouri and Nevada, where turnout increased by 74 per cent and 67 per cent. [42]
But the African-American proportion of the national vote, like that of evangelical whites, will grow very slowly, if at all, over the coming decades. From the standpoint of a durable electoral majority, the Democrats’ most important gain in 2008 was the massive support that Obama received from the rapidly growing and much younger Latino electorate, now 12 per cent of total registrants. [43] Mexican-origin voters, for example, clinched his important victories in Colorado and Nevada, while Central Americans reinforced his majority in northern Virginia. In Texas, the Tejano (or, especially, the Tejana) vote was critical to sweeping the big cities and the Rio Grande Valley, despite the usual anti-Democrat anathemas from pro-life Catholic bishops. Obama won Florida thanks especially to a spectacular turnout of Puerto Ricans and Latino immigrants in central Florida, bolstered by the rebellion of a majority of younger Cuban-American voters against the geriatric exile leadership who have for so long been the authoritarian gatekeepers of Republican power in southern Florida. [44]
As in analyses of the causes of immigration, it is useful to distinguish between the ‘pull’ and ‘push’ factors in the Latino turnout. Despite much concern in recent years about the fraught state of minority inter-group relations, Obama’s sensational popularity amongst young Latino voters (76 per cent in Florida and 84 per cent in California) testifies to the growing importance of non-white or mixed identity as a cultural norm—as has long been the case in Obama’s home state of Hawaii—as well as the increased cultural and social integration of African-Americans, Latinos, Asians and immigrants of all kinds in big-city neighbourhoods and older suburbs. [45] Obama was clearly seen as opening the gates of opportunity to the larger Hip-Hop nation, including the possibility of a future Latino or Asian president.
Two ‘push’ factors were also decisive. First, Latinos/Hispanics in the aggregate lost ground in the Bush bubble economy. As the Economy Policy Institute recently reported,
the most significant economic change [since 2000] was a 2.2 per cent drop in the real Hispanic family income. This economic stagnation for Hispanics occurred during a period when the gross domestic product grew by 18 per cent and worker productivity by 19 per cent. Yet despite these gains, the Hispanic population did not benefit from the wealth that it helped create in the US economy over the 2000s. [46]
The situation for foreign-born Hispanic households has been more calamitous. According to the same EPI report, between 2000 and 2007 their median incomes fell by 9.1 per cent, and they now find themselves in the front rank of the unemployment being created by the construction industry collapse.
Second, the immigrant Latino community (and therefore anyone with brown skin) has been terrorized by the nativist insurgency in the Republican party—a reign of prejudice which has been mimicked or accommodated by many Democrats outside of the majority-minority core cities (such as Kirsten Gillibrand, the appointed replacement for Hillary Clinton in the Senate). Although the ‘Minutemen’ vigilantes who originally ignited the conservative grassroots are little more than a few fractious groupuscules, their core agenda—the construction of a literal Iron Curtain along the Mexican border, the local adoption of anti-immigrant laws, and their enforcement by local police—has become national Republican policy in hard repudiation of the Bush–Rove strategy of immigration reform and cultivation of the Latino vote. In some suburban counties and small cities, hometown experiments in immigration control have become de facto campaigns of ethnic cleansing.
Again, Prince William County is a paradigm. As the Latino population exploded with the building boom of the early 2000s, groups like ‘Help Save Manassas’ (which described Latinos as a ‘scourge that’s plaguing the neighbourhoods’) mobilized to drive undocumented immigrants out of the county. [47] In the summer of 2007, as the housing market soured and the demand for construction labour decreased, the county supervisors unanimously voted to cut off public services to undocumented workers. They also mandated the police, working with the federal immigration service (ICE), to check the status of every detainee. The schools, for their part, added the requirement that a parent must show proof of legal residency in order to pick up their child after school. ‘The message that we are sending’, bragged the chairman of the supervisors to the applause of Minutemen and their supporters nationwide, ‘is: “If you are an illegal alien, you are not welcome in Prince William County.”’ [48]
While the Help Save Manassas crowd debated ‘whether or not illegal aliens have a preferred breeding season’, the Washington Post reported that:
the vibrant Latino subculture built in Prince William County over more than a decade [has started] to come undone in a matter of months . . . With Latinos feeling the combined effects of the construction downturn, the mortgage crisis and new local laws aimed at catching illegal immigrants, Latino shops are on the brink of bankruptcy, church groups are hemorrhaging members, neighbourhoods are dotted with for-sale signs, and once busy strip malls have been transformed into ghost towns. [49]
Rules of avoidance
But immigrants, if omnipresent in the local combustion of the campaign, were missing persons in the national presidential debate. By what was surely negotiated agreement, the candidates avoided the mutual embarrassment of discussing each other’s opportunistic concessions on immigrant rights. McCain, incredibly, had disavowed his own major immigration reform bill, co-authored in 2006 with Teddy Kennedy, while Obama, as the New York Times observed, had ‘hardened his tone on how to deal with illegal immigrants’ in accord with the ‘new law-and-order language adopted in the Democratic Party platform at the convention’. [50] Since both candidates were also competing in the Spanish-language media as the best friend of immigrants, they had no reason to expose so much mutual hypocrisy.
A similar polemical balance of terror ruled the debate about the financial crisis and the federal bank bailout. As the debt pyramid collapsed, both candidates vied to denounce the vandals on Wall Street, but then voted meekly for the catastrophic class politics of the Paulson plan which (as even Jeffrey Sachs acknowledges) has ensured ‘a massive transfer of taxpayer wealth to the management and owners of well-connected financial institutions.’ [51] Polls at the beginning of October showed an overwhelming majority of Americans were fiercely opposed to Congress’s unprecedented abdication of power to friends of Wall Street, and an improbable coalition of conservative rural Republicans and progressive urban Democrats (including many members of the Black Caucus) made a brief attempt to build a legislative barricade across Pennsylvania Avenue. They received no encouragement from either campaign.
Indeed, the second town-hall-format presidential debate in Nashville, a few days after the passage of the bailout, was remarkable for its evasion of the audience’s anguished questions about unemployment and home foreclosures. [52] Neither candidate was ready to pick up a pike and lead the sans-culottes; instead, both clung doggedly to their old talking points as if the sky had not fallen. The exchange magnified differences in policy that rarely transcended the ordinary range of debate between the centre-right and centre-left, while both camps scrupulously avoided the nuclear red buttons marked ‘mortgage moratorium’, ‘immigration’, ‘nationalization’, ‘NAFTA’, and so on. Few presidential campaigns in American history have fled so completely from engagement with their actual moment.
Bush’s profound unpopularity, of course, required the senator from Arizona to act like a quantum particle, occupying several ideological spaces simultaneously. Although he claimed Teddy Roosevelt, the Progressive imperialist, as his hero, McCain veered unpredictably between ecumenical centrism and snake-wrestling fundamentalism, with meek forays into economic populism that were quickly followed by sermons on the priority of tax breaks for the rich people, like himself, who don’t know how many cars they own. His rants about the suffering of plumbers and small-business people were belied by his own dependence upon the largesse of Lower Manhattan, with Merrill Lynch CEO John Thain as the biggest ‘bundler’ of his corporate campaign contributions. Plus McCain had too many opponents—in addition to Obama and Bush, he was also running against himself (as in the case of immigration policy). In the end, the bomber of Hanoi had nothing left to spend but prison stories, racist innuendo and the spectre of Bill Ayers.
Obama, in contrast, was untroubled by zealotry in his grassroots and thus could rely upon hypnotic platitudes and steadiness of character rather than desperate impersonations and publicity stunts. The specification of ideas and policies was not a common practice in a campaign that was principally geared to the production of charisma, with a storyline that seldom strayed very far from the feel-good slogans that have characterized most Democratic campaigns in recent years. Despite his resumé, Obama had no plan for tackling urban poverty; although pro-worker he made only weak promises to the unions, and was deliberately vague on trade, urban policy, housing, education, and the one million prisoners of the War on Drugs.
Hillary Clinton’s ‘turn to the working class’ in the Pennsylvania primary (actually, a more subtle essay than McCain’s in racial text-messaging) threw Obama’s campaign seriously off track for a month or two, but he regained course with only a modest tacking of his sails to the enormity of the crisis. Like Roosevelt in 1932, Obama used eloquence and compassion, along with thick frostings of Founding Fathers and We Are One, to forge an emotional bond with stricken blue-collar voters, while offering few new ideas or concrete plans.
In this respect, however, he was sticking close to the larger team plan. Matt Bai, a New York Times reporter who has chronicled the role of dot.com millionaires, liberal foundations and bloggers in reshaping the party’s image, argues that Democratic leaders like Harry Reid and Nancy Pelosi have deliberately fostered ‘vapid slogans’ in order to present a smaller target to the Right. ‘By the fall of 2005’, Bai writes,
Bush’s approval ratings had slipped below 40 per cent, so party leaders decided it was better to let the Republicans collapse of their own weight than to offer an actual agenda and risk the possibility that some voters might not like it . . . ‘Tell us what you want to hear’, the party seemed to say, ‘and we’ll be sure to put it in our pamphlet’. [53]
Obama’s agenda, however, became less opaque in June 2008 when he chagrined labour supporters by appointing Jason Furman, the director of the Brookings-affiliated Hamilton Project, as the head of his economic policy unit. [54] The Project, founded by ex-Treasury secretary Robert Rubin in 2006, has been part of the institutional network that elaborates the legacy of the Clinton Administration: in this case as a megaphone for centrist economic policies that meld fiscal conservatism and financial deregulation with smarter public investment. Furman’s appointment was followed by the arrival in the inner circle of Rubin’s successor in the Clinton Treasury, Lawrence Summers, a devotee of Milton Friedman (‘any honest Democrat will admit that we are now all Friedmanites’), who with Rubin, Alan Greenspan and Phil Gramm had dismantled the last New Deal firewall, the Glass–Steagall Act, between traditional banks and derivative Ponzi schemes. By making the Hamilton Project his economic shadow cabinet, and later elevating the radioactive Summers to the directorship of the National Economic Council, Obama restored to power the auteurs of the catastrophe, and willingly entangled himself in the seedy history of ‘Rubinomics’ and the notorious back door between the Clinton White House and big investment banks and money funds. [55]
The counterfactual election
It would be difficult, then, to characterize the 2008 campaign as an epochal ideological confrontation, except in the limited sense that both candidates—McCain sometimes more pointedly than Obama—repudiated the horrors of the Bush White House and advocated a return to Arthur Schlesinger’s ‘vital centre’. It therefore falls short of a key Burnham criterion for a ‘critical election’:
In the campaign or campaigns which follow this breakthrough, the insurgents’ political style is exceptionally ideological by American standards; this in turn produces a sense of grave threat among defenders of the established order who in turn develop opposing ideological positions. [56]
The new Administration, in fact, seems determined at all cost to prevent such an ideological polarization by bringing on board as many temperate defenders of the ‘established order’ as possible. With economic crisis-management firmly in the hands of Citigroup and Goldman Sachs alumni, foreign policy delegated to the sub-presidency of Hillary Clinton and her spouse, and the ‘surge’ doctrine of Gates and Petraeus preserved in the Pentagon, Obama has built a dream team that delights The Economist and Foreign Affairs to the same degree that it disconcerts The Nation. As in the Clinton era, labour and environment have been seated at a second table, with important but secondary posts that lack leverage over the Administration’s line of march. [57]
Certainly the new President and his congressional majority are committed to humane relief policies that distinguish Democratic centrism from the Spencerian barbarism of Southern Republicans, but by itself this is hardly a cause for celebrating a new age. Whether or not his heart belongs to the left as many admirers believe, Obama’s appointments affirm stunning continuity with the Clinton era as well as bipartisan ‘realism’ in foreign affairs. Few political observers anticipated that a mandate for ‘change’ would immediately lead to a comprehensive merger of the Clinton and Obama camps, with the personnel of the former consistently awarded seniority. [58] It smacks of a pre-convention deal that gave Obama an uncontested nomination in exchange for a huge sharing out of power to the Clintons and their friends. [59]
This triumph of veteran centrism in the face of a bottomless crisis of unimaginable complexity attests to the failure of the Democratic Party’s progressive constituencies, especially the divided US labour movement, to exercise an influence commensurate with their immense financial and rank-and-file contributions to the party’s victory. (The New York Times estimated that labour spent $450 million backing Democrats and mobilized 250,000 volunteers. [60]) Labour would have had more sway over the shape of the final campaign—especially Obama’s response to the mortgage meltdown and the bank and auto industry bailouts—if it had been able to broker its vote better or control the balance of power in a contested convention. Neither scenario, in my opinion, would have been implausible if broad union support had sustained the initially impressive momentum of John Edwards’s unusual campaign.
However one now feels about Edwards’s character (as exposed in yet another bedroom scandal uncovered by right-wing bloggers), he was the only major primary candidate to meet Burnham’s critical-realignment standard of an insurgent with an ideologically distinctive platform—in his case, angry economic populism. The former senator from North Carolina (the son of a Piedmont millworker turned into millionaire lawyer) staked out a programmatic space that had been vacant since Jesse Jackson’s mobilization in the 1980s: the priority of economic justice for poor people and workers. [61] Discarding the banal euphemisms of his 2004 vice-presidential campaign, he spoke directly of exploitation and the urgency of unionization, proposed a new war on poverty, denounced ‘Benedict Arnold CEOs’ who exported jobs, and, in debate with Obama and Clinton in Iowa, argued that it was a ‘complete fantasy’ to believe that a progressive agenda could be advanced by negotiation with Republicans and corporate lobbies. Only an ‘epic fight’ could ensure healthcare reform and living wages. (Obama’s response was typical eloquent evasion: ‘We don’t need more heat. We need more light.’) [62]
In the event, Edwards won full-hearted support only from the progressive shards of the old CIO (mineworkers and steelworkers), the carpenters, and some independent-minded state councils of the service employees and the hotel workers. His campaign was doomed by the refusal of the two union confederations (the AFL–CIO and Change to Win) and their largest constituent internationals to endorse what otherwise was the most chemically pure pro-labour candidacy in a generation. The big unions instead fought each other (and sometimes their memberships) in a chaotic scramble to place a last-minute bet on the candidate they believed would be the sure winner. In some states, the rank and file defied their leadership to vote for Hillary (culinary workers in Nevada), and in others, for Barack (public-sector workers in California).
By the time of the convention in Denver, veteran columnist Harold Meyerson was warning Democratic progressives: ‘What’s disturbing is how poorly America’s unions performed in the Democratic primaries and how divided they are as they go into the fall.’ [63] Although union volunteers ultimately did epic work defeating McCain, especially in states like Indiana and Wisconsin, the labour movement, which is engaged in a truly life-and-death struggle in the private sector, lost its best chance to impose healthcare, labour law and trade reforms as the central planks of a White House recovery plan.
The Silicon Presidency and its limits
At the end of the day, the Crisis itself, not the Election, did the ideological heavy lifting, sending elite opinion back in panic to the protective apron of Old Mother Keynes. (Not perhaps the real Keynes who wrestled with the paradoxes of liquidity traps and perverse market signals, but the Keynes who supposedly smiles whenever governments print money to save banks.) Ironically none of the currently prominent Keynesians or post-Keynesians, such as Paul Krugman, Joseph Stiglitz or James Galbraith, have passed the qualifying exam for the new administration. In contrast to FDR’s One Hundred Days, when the President’s closest advisors included such trenchant critics of corporate power and managerial prerogative as Guy Rexford Tugwell, Gardiner Means and Adolf Berle, Obama’s economic-policy brains trust shares a defining conceit of the Hoover Administration: the architects of the crisis (Andrew Mellon then; Timothy Geithner and Larry Summers now) consider themselves its most competent doctors. [64]
But if the central bankers and financial morticians are still ceded reign over the ruins of Wall Street, Obama has allied with technology icons to lay the cornerstones of an economic renaissance based on massive public investment in ‘Green Infrastructure’. So far this is the flagship idea of the new Administration, the one that owes least to Clinton precedents and most closely resonates with the idealism of the campaign’s volunteers and the expectations of supporters in the big tech centres. The near constant presence of Google CEO Eric Schmidt at Obama’s side (and inside his transition team) has been a carefully chosen symbol of the knot that has been tied between Silicon Valley and the presidency. The dowry included the overwhelming majority of presidential campaign contributions from executives and employees of Cisco, Apple, Oracle, Hewlett-Packard, Yahoo and Ebay.
But the promise of Green Keynesianism may turn out differently than imagined by radical economists and environmental activists. A fundamental power-shift seems to be taking place in the business infrastructure of Washington, with ‘New Economy’ corporations rapidly gaining clout through Obama and the Democrats while Old Economy leviathans like General Motors grapple with destitution and welfare, and energy giants temporarily hide in caves. The unprecedented unity of tech firms behind Obama both helped to define and was defined by his campaign. Through his victory, they have acquired the credit balance to ensure that any green infrastructure will also be good industrial policy for their dynamic but ageing and cash-short corporations.
There is an obvious historical analogy. Just as General Electric’s Gerard Swope (the Steve Jobs of his day) and a bloc of advanced, capital-intensive corporations, supported by investment banks, enthusiastically partnered with Roosevelt to create the ill-fated National Recovery Administration (NRA) in 1933, so too have Schmidt and his wired peers, together with the ever-more-powerful congressional delegation from California, become the principal stakeholders in Obama’s promise to launch an Apollo programme for renewable energy and new technology. [65]
We should note that this realignment of politics by economics fits awkwardly within the Keys–Burnham paradigm, which asserts the primacy of public opinion and the durability of voter blocs. A ‘silicon presidency’, on the other hand, is perfectly accommodated by Thomas Ferguson’s ‘investment’ theory of political change which privileges political economy and class struggle within capital as modes of explanation. Analysing New Deal case-studies in his 1995 book, Ferguson—an intellectually supercharged descendant of Charles Beard—concluded that business elites, not voters, usually determine both the nature and course of electoral realignments. [66]
The fundamental market for political parties usually is not voters. As a number of recent analysts have documented, most of these possess desperately limited resources and—especially in the United States—exiguous information and interest in politics. The real market for political parties is defined by major investors, who generally have good and clear reasons for investing to control the state . . . During realignments . . . basic changes take place in the core investment blocs which constitute parties. More specifically, realignments occur when cumulative long-run changes in industrial structures (commonly interacting with a variety of short-run factors, notably steep economic downturns) polarize the business community, thus bringing together a new and powerful bloc of investors with durable interests. As this process begins, party competition heats up and at least some differences between parties emerge more clearly. [67]
But what has suddenly mobilized the self-identified New Economy as an ‘investor bloc’ in Ferguson’s sense? And why Obama?
One answer is straightforwardly cultural: Obama ‘gets’ and likes tech and entrepreneurs. As Joshua Green pointed out in the Atlantic, the young candidate exemplifies the legendary outsider who reinvents American politics in his own garage and then launches a history-changing IPO with the help of visionary venture capitalists. In addition, Obama—unlike Hillary Clinton, who seemed more at ease in Hollywood—came to the mountain (or rather, Mountain View) and listened. He discovered a volcano on the verge of eruption. No sector of the corporate workforce, bosses as well as employees, has probably been more outraged by the endless carnage in Iraq, the wanton incendiarism of Rove’s culture wars, the attacks on immigrants, and the Republicans’ contempt for evolutionary and earth sciences. [68]
But there were obviously deeper, more selfish priorities. Even before the crash, revered seers like Andy Grove (ex-CEO of Intel) were expressing fear about declining investment and innovation in the technology heartlands. As Business Week later summarized in a special report: ‘Federal funding of advanced computer science and electrical engineering research has dropped off sharply since the late 1990s, as has the number of Americans pursuing computer science degrees. And large technology companies are putting less emphasis on basic research in favour of development work with quicker payoffs’. [69]
Pessimists worry that the Valley is locked into the first stages of the Detroit product-cycle syndrome: the heroic age of Henry Ford followed by tailfins and corporate sclerosis. (Thus Web 2.0 has been criticized as mere product development rather than technological innovation.) The Obama Presidency, from this perspective, can ride to the rescue with Kennedy-scale commitments to basic science as well as stable subsidies to markets like renewable energy, smart utilities and universal broadband that are otherwise whipsawed by volatile energy prices or abdicated by corporations. [70]
The New Economy, like the Old, also recognizes that survival in the current economic hurricane depends upon presence at court: in the short term at least, Obama and the Democratic leadership will have extraordinary influence over the selection of winners and losers. The contrasting fates of Lehman Brothers and AIG (one left to bleed to death, the other given a government IV) sent tremors down the spine of every CEO and large shareholder in the United States. Even more than in Ferguson’s case-study of the 1930s, the future of every corporation or sector depends upon wise investments to ‘control the state’; which is why K Street, the Wall Street of lobbyists formerly owned by the Republican Party, has turned so blue in the last year. But of all the new Democratic investors, only the tech industries, with their captive universities and vast internet fandoms, still retain enough public legitimacy (domestic and international) and internal self-confidence hypothetically to act as a constructive hegemonic bloc rather than as a mob of desperate lobbyists.
But, then again, the tech industries may simply be swallowed up, with everyone else, in the Götterdämmerung of Wall Street, while Larry Summers and Ben Bernanke fight on in the bunkers until the last taxpayer’s bullet is spent. (The euphoric national unity of Roosevelt and Swope’s NRA, it should be recalled, quickly dissolved into strikes, tear gas and bayonets.) Obama’s nearly trillion-dollar stimulus package provides urgently needed relief as well as a modest down payment on the green infrastructure, but few economists seem to believe that it can actually stop the domestic downturn, much less generate enough ‘leakage’ through imports to stimulate Asia and Europe. The American financial system, in recent years the generator of 40 per cent of corporate profits, is dead—a colossal corpse hidden from full public view by the screen debates of the fall presidential campaigns. The market-oriented centrists and reformed deregulators whom Obama has restored or maintained in power have about as much chance of bringing the banks back to life as his generals do of winning the war against the Pashtun in Afghanistan. And no contemporary Walter Rathenau or Guy Rexford Tugwell has yet emerged with a scheme for rebuilding the wreckage into some plausible form of state capitalism.
Meanwhile, the financial press warns that trillions will ultimately be required to make a ‘bad bank’ or bank nationalization work. But if Obama’s domestic spending fails to produce significant collateral benefits for America’s trading partners, they may think twice about buying Washington’s debt or decide to impose some conditionalities of their own. (Beware the dogma that the Chinese are slaves of their trade surplus and undervalued currency and have no alternative but to subsidize the US Treasury.) At Davos, Putin and Wen reminded the new President that he is no longer the master of his own house in the same way that Roosevelt or Reagan were. The dollar threatens to become the dog collar on the new New Deal. In any event, the bubble world of American consumerism, as it existed at the start of Obama’s formal candidacy in 2007, will never be restored, and protracted stagnation, not timely tech-led recovery, seems the most realistic scenario for the era that may someday bear his name.
[1] Befitting the capital of an empire, Washington DC has the nation’s most affluent suburban fringe. As Thomas Frank points out in The Wrecking Crew: How Conservatives Rule (New York 2008), five of the seven richest US counties with populations over 250,000 are DC suburbs in neighbouring Maryland and Virginia (pp. 11 and 277). On the strategic role of emergent suburbs in 2004, see Ronald Brownstein and Richard Rainey, ‘GOP Plants Flag on New Voting Frontier’, LA Times, 22 November 2004; and Gregory Giroux, ‘A Line in the Suburban Sand’, CQ Weekly, 27 June 2005.
[2] Jon Teaford, Post-Suburbia: Government and Politics in the Edge Cities, Baltimore 1997, p. 6.
[3] The Manassas rally can be viewed on YouTube. Unless otherwise attributed, exit poll data is from Edison Media Research and Mitofsky International, the pollsters for the National Election Pool (ABC, CBS, NBC, CNN, Fox and AP), and can be accessed from any of the sponsors’ sites. County-level presidential returns are from the New York Times’s updated map at elections.nytimes.com.
[4] Kristen Mack, ‘Prince William, the State’s Bellwether’, Washington Post, 12 November 2008.
[5] ‘Blue Virginia’, 2008 Election Brief, Metropolitan Institute, Virginia Tech.
[6] V. O. Key, ‘A Theory of Critical Elections’, Journal of Politics, vol. 17, no. 1, 1955; and Walter Dean Burnham, Critical Elections and the Mainsprings of American Politics, New York 1970. For an influential critique, see David Mayhew, Electoral Realignments, New Haven 2004.
[7] Burnham, Critical Elections, p. 6.
[8] The national turnout of 56.8 per cent (as a proportion of the universe of registered voters) did not break historical records, partly because of a relative decline in votes cast on the West Coast and in New York where Obama’s victory was assured. On the other hand, there was a dramatic increase in voter participation in the Deep South (by both whites and Blacks), the Intermountain West, Latino counties and smaller industrial cities of the Midwest. See ‘New Voters, New Power Bases’ with map, NYT, 6 November 2008.
[9] Internet politics’ moment of conception, however, was the creation of MoveOn.org in 1998. Carl Cannon, ‘Movin’ On’, National Journal, 2 December 2006.
[10] Joshua Green, ‘The Amazing Money Machine’, The Atlantic, June 2008.
[11] Federal Election Commission: www.fec.gov.
[12] Matt Bai, The Argument: Billionaires, Bloggers and the Battle to Remake Democratic Politics, New York 2007, p. 7.
[13] Obama won 39 per cent of the white vote in Virginia compared to Kerry’s 32 per cent; and 35 per cent in North Carolina, compared to 27 per cent. See Charles Franklin, ‘White Vote for Obama in the States, Part 2’, Pollster.com, 15 November 2008.
[14] Dave Mann, ‘Turning Houston Blue’, The Texas Observer, 17 October 2008.
[15] Michael Teitelbaum, ‘Census Estimates Show Clout Again Likely to Go West and South’, CQToday Online News, 23 December 2008.
[16] In addition to the slim Obama victory, Democrats—including two Japanese-Americans—took control of the Salt Lake County Council. The consequences are likely to include domestic-partner health benefits, collective bargaining for county employees and an independent redistricting commission. The capital of Brigham Young’s Deseret thus continues its recent evolution toward the left. See Jeremiah Stettler, ‘In Salt Lake County, election shifted power swings to Dems’, The Salt Lake Tribune, 6 November 2008.
[17] The major exception was the former steel region around Pittsburgh in western Pennsylvania, but Obama easily carried the state with the help of crossover voters in the formerly Republican suburbs of Philadelphia.
[18] James Barnes, ‘Obama Pulls Off a Hat Trick of Outreach’, National Journal, 8 November 2008. Rather unbelievably, exit polls in Indiana indicated a slight decline in Black voters’ preference for Obama vis-à-vis Kerry.
[19] ‘Exit polls show that nearly a quarter of voters questioned said they had been contacted by the Obama campaign about coming out to vote, compared with 8 per cent for the McCain campaign. Of those contacted as part of the Obama effort, almost three-quarters said they voted for him’. ‘State by State’, NYT, 6 November 2008.
[20] Although the Nader campaign was ignored in the national media this time around, his 17,000 votes in Missouri certainly vexed the hopes of local Democrats.
[21] National and state politics do not necessarily recapitulate each other in the United States. For example, five of the states comfortably won by Bush in 2004 and McCain in 2008 have solid Democratic majorities in their state houses (Arkansas, Alabama, Kentucky, Mississippi and West Virginia).
[22] Alec MacGillis and Jon Cohen, ‘Democrats Add Suburbs to Their Growing Coalition’, Washington Post, 6 November 2008.
[23] Chris Cillizza, ‘Five Myths About an Election of Mythic Proportions’, Washington Post, 16 November 2008. See also Richard Cohen and Brian Friel, ‘The New Centre’, National Journal, 7 March 2008.
[24] Alec MacGillis and Jon Cohen, ‘Democrats Add Suburbs’.
[25] Swing suburb list from Robert Lang, et al., ‘The New Suburban Swingers: How America’s Most Contested Suburban Counties Could Decide the Next President’, 2008 Election Brief, Metropolitan Institute, Virginia Tech, p. 5.
[26] Robert Lang and Patrick Simmons, ‘“Boomburbs”: The Emergence of Large, Fast-Growing Suburban Cities’, in Bruce Katz and Robert Lang, eds, Redefining Urban and Suburban America: Evidence from Census 2000, Brookings Institution, Washington DC 2003, p. 104.
[27] Lang, et al., ‘The New Suburban Swingers’, p. 2.
[28] Lang and Thomas Sanchez, ‘The New Metro Politics: Interpreting Recent Presidential Elections Using a County-Based Regional Typology’, 2006 Election Brief, Metropolitan Institute, Virginia Tech, p. 5.
[29] Ken Billingsley quoted in Nick Miroff, ‘Diversity Blooms in Outer Suburbs’, Washington Post, 3 November 2008.
[30] ‘A Happy Slowdown?’, CEO Confidential, Goldman Sachs, 8 September 2006.
[31] David Sherfinski, ‘Sick Suburb’, The Examiner, 10 December 2008; and Mary Kane, ‘At the Frontline of the Foreclosure Crisis, Counties Go It Alone’, Washington Independent, 24 November 2008.
[32] Mary Kane, ‘Foreclosure Machine Grinds On Through Holiday Season’, WashingtonIndependent, 4 December 2008.
[33] Poll statistic from Dallas News, 5 October 2008.
[34] Press release, ‘National Centre for Suburban Studies Releases Results of Only 2008 Presidential Poll to Focus Exclusively on Suburban Voters’, Hofstra University, 29 September 2008.
[35] US Census Bureau News, ‘Minority Population Tops 100 Million’, 17 May 2007.
[36] Kevin Pollard, ‘Swing, Bellwether, and Red and Blue States: Demographics and the 2008 US Presidential Election’, Population Reference Bureau website, October 2008.
[37] Indeed, voter participation in the United States remains extremely low by world standards. About 100 million eligible American citizens did not vote last year, despite $1.6 billion in political advertising by both parties.
[38] Scott Keeter, ‘The Aging of the Boomers and the Rise of the Millennials’, in Ruy Teixeira, Red,Blue and Purple America: The Future of Election Demographics, Brookings Institution, Washington DC 2008.
[39] Karlo Barrios Marcelo and Emily Hoban Kirby, ‘Quick Facts about US Young Voters: The Presidential Election Year 2008’, CIRCLE Fact Sheet, Tufts University, Boston.
[40] Andrew Levison, ‘How Democrats Can Keep and Expand the Support of the Younger White Working-Class Voters Who Voted for Obama in 2008’, The Democratic Strategist White Paper, 2008, pp. 1–2.
[41] Almost but not quite true was the assertion by Stephen Ansolabehere and Charles Stewart: ‘had Blacks and Hispanics voted Democratic in 2008 at the rates they had in 2004, McCain would have won’. See ‘Amazing Race: How post-racial was Obama’s victory?’, Boston Review, Jan–Feb 2009.
[42] Jody Herman and Lorraine Minnite, ‘The Demographics of Voters in America’s 2008 General Election’, Project Vote research memo, 18 November 2008.
[43] The median age of the Hispanic population in 2006 was 27.4, contrasted to 36.4 for the population as a whole. Census Bureau News, ‘Minority Population Tops 100 Million’, 17 May 2007.
[44] Barnes, ‘Obama Pulls Off a Hat Trick of Outreach’.
[45] See William Frey, ‘Melting Pot Suburbs’, in Katz and Lang, pp. 155–79.
[46] Algernon Austin and Marie Mora, ‘Hispanics and the Economy’, EPI Briefing Paper 225, Washington DC, 31 October 2008, p. 1.
[47] Kristen Mack, ‘Activists Want Answers on Panel Choice’, Washington Post, 23 September 2008.
[48] Nick Miroff, ‘Prince William Immigration, Housing Ills Seen as Linked’, Washington Post, 5 October 2007. Arlo Wagner, ‘Prince William Sees Exodus of Hispanics’, Washington Times, 13 March 2005 (reprinted with jubilation on various Minuteman websites).
[49] Nurith Aizenman, ‘In Northern Virginia, a Latino Community Unravels’, Washington Post, 27 March 2008.
[50] Julia Preston, ‘Immigration Cools as Campaign Issue’, NYT, 29 October 2008.
[51] Jeffrey Sachs, ‘The Tarp is a fiscal straitjacket’, Financial Times, 28 January 2009.
[52] The presidential debates can be viewed at www.youdecide2008.com.
[53] Bai, The Argument, p. 177.
[54] Journalist David Leonhardt spent a year interviewing Obama and his original economic advisors from the University of Chicago, trying to decipher their economic philosophy. He was struck by the modesty of their approach to economic inequality and fiscal reform as contrasted to their bold proposals about rationalizing healthcare, rebuilding infrastructure and carrying out a transition to renewable energy. ‘As ambitious as Obama’s proposals might be, they would still leave the gap between the rich and everyone else far wider than it was 15 or 30 years ago. It just wouldn’t be quite as wide as it is now’. See ‘A Free-Market Loving, Big-Spending, Fiscally Conservative, Wealth Redistributionist’, NYTMagazine, 24 August 2008.
[55] Even the New York Times editorialized on the dangers inherent in Obama’s reliance upon investment bankers for economic wisdom: ‘Another question clouding the labour agenda is whether Mr Obama will give equal weight to worker concerns—from reforming health care to raising the minimum wage—while the financial crisis is still playing out. Most members of his economic team are veterans of the Clinton Administration who tilt toward Wall Street. In the Clinton era, financial issues routinely trumped labour concerns. If Mr Obama’s campaign promises are to be kept, that mindset cannot prevail again.’ NYT, 29 December 2008.
[56] Walter Dean Burnham, The Current Crisis in American Politics, New York 1982, p. 101.
[57] Hilda Solis, Obama’s new Labour Secretary, is already compared to her great predecessor in Roosevelt’s cabinet, Frances Perkins. But Perkins has been endowed in most liberal hagiographies with powers she did not possess. If at critical moments in the class war of the 1930s, she was a superb advocate for unions inside the administration, her ordinary vocation was as pacifier: charged with keeping labour insurgents in line behind FDR’s slow-moving and piecemeal reforms. Robert Reich’s frustrated experiences as Clinton’s Labour Secretary are cautionary in the same respects.
[58] Obama has also left the light on in the White House for wayward neo-conservatives. No modern Democratic candidate has had so many admirers on the right, to name just a few: columnist David Brooks, Senator Chuck Hagel, former UN ambassador Ken Adelman, and William F. Buckley’s son Christopher.
[59] Clinton had a legitimate basis for making a fight. If the results in Florida and Michigan (disqualified by the Democratic National Committee for violating its scheduling rules) are counted, she won the popular primary vote by more than 100,000.
[60] Steven Greenhouse, ‘After Push for Obama, Unions Seek New Rules’, NYT, 9 November 2008.
[61] I apologize to supporters of Dennis Kucinich and Ralph Nader, but the congressperson from Cleveland had no chance of winning a major primary and Nader, however admirable, has never been an effective populist. Only the Edwards campaign, in my opinion, had the potential of forcing Clinton and Obama programmatically to the left.
[62] Quoted in Ronald Brownstein, ‘Style & Substance Among The Dems’ Big Three’, NationalJournal.com, 2 January 2008.
[63] Harold Meyerson, ‘For Labour, Armageddon’, Dissent, Fall 2008, p. 40.
[64] Consideration of Obama’s foreign policy lies beyond the scope of this essay, although his appointments clearly signal continuity.
[65] For a fascinating reflection on New Deal-era economic theory, including a possible synthesis of the ideas of Keynes, Hansen, Means and Schumpeter, see Theodore Rosenof, Economics in the Long Run, Chapel Hill, NC 1997.
[66] Charles Beard’s An Economic Interpretation of the Constitution (1913), which argued that the Founding Fathers’ politics were approximately the sum of their material interests, is still worth a visit, even if modern political and economic historians tar him as a vulgarian economic determinist.
[67] Thomas Ferguson, Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems, Chicago 1995, pp. 22–3. Ferguson, of course, acknowledges that voters also become more active: ‘only if the electorate’s degree of effective organization significantly increases, however, does it receive more than crumbs.’
[68] The Republican share of Silicon Valley’s presidential contributions dropped from 43 per cent in 2000 to barely 4 per cent in 2006, simultaneously as the Democrats endorsed an ‘Innovation Agenda’ supporting R&D tax credits, a doubling of funding for the National Science Foundation, and so on. See the August 2006 beltwayblogroll at nationaljournal.com; and Jim Puzzanghera, ‘Pelosi likely to speak up for tech industry’, LA Times, 13 November 2006. The earlier history of the Democratic courtship of Silicon Valley is chronicled by Sara Miles in How to Hack a Party Line, New York 2001.
[69] Steve Hamm, ‘Whatever Happened to Silicon Valley Innovation?’, Business Week, 31 December 2008.
[70] The major exception to declining federal support for innovation, of course, has been the war on terrorism’s huge investments in surveillance and advanced war-fighting technologies—a sector that Obama is unlikely to neglect.
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