Tuesday, January 27, 2009

Economic Sorrows and Solutions

January 27, 2009, 7:45 a.m.

How Best to Stimulate an Economy
(brought to you by FromDC2Iowa.blogspot.com*)

As the American people, their elected representatives, and the mainstream media focus on the deteriorating economy and the President's "America's Recovery and Reinvestment Plan" (President-Elect Barack Obama, "American Recovery and Reinvestment," January 8, 2009, Whitehouse.gov/The Agenda/Economy/The President's American Recovery and Reinvestment Plan) most of the commentary comes in the form of numbers rather than names -- the stock markets' percentage changes, the number of bank failures, the unemployment percentages, the number of mortgage foreclosures, and the corporate earnings (or losses) reports.

[And see, "Senate Appropriations Committee Releases Highlights of American Recovery and Reinvestment Plan; Committee Announces $365 Billion Investment Package," U.S. Senate Appropriations Committee, Press Release, January 23, 2009; and "Summary: American Recovery and Reinvestment As Passed by the Full Committee," U.S. House of Representatives Committee on Appropriations, January 21, 2009. For additional related material see the House Committee on Appropriations main Web page, "News." See especially, "Economic Analysis," January 15, 2009.]

CBS tried to improve on that last Sunday night (January 25) with a segment of "60 Minutes" CBS called "A Town In Crisis" ("The town of Wilmington, Ohio has been devastated by the economic crisis and, as Scott Pelley reports, DHL, the town's largest employer, is shutting its domestic operation."). CBS urges you to Watch CBS Videos Online -- as do I. But it also enables me to embed a video of its segment here, where I also urge you to watch it.

Watch the tears, some suppressed and some flowing. Feel the despair, the pain, the sense of hopelessness among decent folks who've known no life except for going to work every day for decades, supporting their families, and dreaming of better lives for their children. See the faces. Recall those of your friends and neighbors, family members -- or yourself -- going through similar stress and confusion.

Then think about the uncaring, irresponsible bankers and corporate executives whose greed and ignorance brought on this pain; men and women who, instead of attempting to alleviate it with jobs, loans and restructured mortgages, are handing out pink slips to their loyal workers and handing out taxpayers' money, our money, as bonuses to their fellow executives and dividends to their wealthy investors, arranging for company retreats and parties, flying the world in their private jets (Citi just used our money to buy its executives a new $50 million-dollar plane), and doing million-dollar makeovers of their offices with extravagant furniture.

[E.g., Jennifer Gould Keil and Chuck Bennett, "Just Plane Despicable; 'Rescued' Citi Buying $50M Jet," New York Post, January 26, 2009 ("Beleaguered Citigroup is upgrading its mile-high club with a brand-new $50 million corporate jet -- only this time, it's the taxpayers who are getting screwed -- even though the bank's stock is as cheap as a gallon of gas and it's burning through a $45 billion taxpayer-funded rescue . . ..");

Andrew Ross Sorkin, "The Titans Take It on the Chin," New York Times, January 26, 2009 ("[That] John A. Thain, the fallen boss of Merrill Lynch, spent $1.2 million redecorating his office as Merrill hurtled toward its end seemed only to confirm people’s worst suspicions about money and the hubris it can breed. His $35,000 “commode” might strike some as a bit over the top.");

Dave Krasne, "Money for Nothing," New York Times, January 26, 2009 ("Merrill Lynch lost $27 billion last year, and yet still managed to rush through $4 billion worth of year-end bonuses in the days before it was taken over by Bank of America. . . . Merrill Lynch is not the only irresponsible institution out there. Despite a year of record losses, despite all the taxpayer money being injected into our financial institutions, bonuses for 2008 were, in some cases, down less than 50 percent from those the previous year. . . . [S]ome institutions that begged for taxpayer aid to stave off bankruptcy — simply to stay alive — made 2008 compensation packages their first order of business after receiving their bailouts. . . . [I]t’s one thing to reap great rewards when creditors are being repaid and shareholders are earning a return; it’s quite another to reward failure almost as well.");

Andrew Ross Sorkin, ed., "Cuomo Subpoenas Thain Over Merrill Bonuses," New York Times/Deal Book, January 27, 2009 ("Andrew Cuomo, New York’s attorney general, said Tuesday that he has subpoenaed John A. Thain, the former Merrill Lynch chief executive, over bonuses paid out by the firm just before it was taken over by Bank of America. . . . 'The fact that Merrill Lynch appears to have moved up the timetable to pay bonuses before its merger with Bank of America is troubling to say the least and warrants further investigation,' Mr. Cuomo said in a statement.");

Brian Knowlton, "Geithner Cracks Down on Bailout Lobbying," New York Times/The Caucus, January 27, 2009 ("The New York Times reported that some big banks receiving government bailout money were still lobbying the government — giving the appearance, at least, of using taxpayer money to lobby for more taxpayer money . . ..").]

Given these attitudes and behavior, this fraud and sense of entitlement, it would be unconscionable to simply hand over more taxpayer money to this crowd -- not just because they have now demonstrated that "they don't deserve it" (though they don't), not just because they should be punished with prison sentences rather than rewarded financially (though they should), but because we're now into a "fool me once, shame on you; fool me twice, shame on me" scenario in which it should be abundantly clear to all that this approach hasn't, and won't, work.

Does this mean that more banks will fail? Yes. Just like more auto dealerships and retail stores will fail. But any company that's "too big to fail" is simply too big. Capitalism, "the market," contemplates failure as well as success. It will take time to calculate, but require the banks to put a marketplace value on those "toxic assets." They're worth something. And at that point offer those assets -- or the entire bank itself -- for sale in the marketplace. It will fetch something. And once it's fairly valued there will be buyers, there will be investors, there will be capital, there will be loans -- and it will all have been done with market forces and without additional taxpayer dollars.

Watch this "60 Minutes" piece and then ask yourself, "Just what would be the best way to 'stimulate our economy' if one were to focus not only on the most efficient economic tools but also on the human misery of the poor rather than the worries of the wealthy?"

In an economy in which two-thirds to 70% of the fuel in our economic engine comes from consumer spending, when that engine starts sputtering might it not be a good idea to provide it more of that fuel? [See, e.g., Michael Barbaro and Louis Uchitelle, "Americans Cut Back Sharply on Spending," New York Times, January 14, 2008 ("There are mounting anecdotal signs that beginning in December [2007] Americans cut back significantly on personal consumption, which accounts for 70 percent of the economy.")]

In 2007 the median income for men working full time was $45,000; for women it was $35,000. "Median" means that half the working men and women earned less than that; half earned more. The income of the bottom 20% of "households" (meaning the combined income from all sources for all household members aged 15 or over) was less than $19,000 -- and a half of such households had no wage earner as such at all. See, e.g., "Household Income in the United States," Wikipedia.

Thus, intuitively it would seem the best way to stimulate the economy -- humane considerations aside -- would be to put money in the hands of those most likely to spend it: those below the median among wage earners. Food Stamps and Unemployment Compensation programs come immediately to mind.

Given the economic plight of the folks featured in CBS' "A Town in Crisis" it's just highly unlikely that they would use the money to buy failing banks, pay bonuses to wealthy corporate executives, buy corporate jets, or hoard it in an effort to increase their "reserves." They'd probably spend it -- promptly, and entirely.

And it turns out this is one time when intuition is confirmed by economic analysis. Economist Mark Zandy, Senator John McCain's economic adviser, has calculated how much economic stimulus bang we get for every taxpayer buck with various programs. "New Zandi Analysis Finds Rebates More Effective As Stimulus If They Include Lower-Income Workers: Food Stamps and Unemployment Benefits Get the Highest Ratings," Center on Budget & Policy Priorities, January 22, 2008.

It turns out that food stamps are at the top of his list, providing $1.73 worth of economic activity for every dollar spent.

Next are unemployment benefits, with a $1.64 impact from every dollar we spend.

(By contrast, the tax-cutters' favorite current proposal, an acceleration in businesses' depreciation write-offs, produces only 27-cents worth of economic activity for every taxpayer dollar lost.)

Not only do food stamps and unemployment benefits return the most per taxpayer dollar, they also do it faster than any other approach.

(Temporarily funding states, enabling them to avoid deep budget cuts, produces $1.36 of activity for each federal dollar.)

Triage: First Stop the Bleeding

"Triage" is a useful concept for thinking about what we need to produce an economic recovery. ("Triage is a process of prioritizing patients based on the severity of their condition. This facilitates the ability to treat as many patients as possible when resources are insufficient for all to be treated immediately." "Triage," Wikipedia.)

Food stamps and unemployment compensation are something that is needed immediately, can be provided immediately (the programs are already in place and operating), will help the greatest number of people, and will have the greatest positive impact on the country's economy.

They need to be fully funded with whatever it takes -- and "whatever it takes" will be far less than what we've already squandered on corporate CEOs and bankers. Both food stamp and unemployment compensation programs need to be expanded in both reach and amount until they provide some assistance to everyone reasonably eligible.

With news of layoffs by the thousands coming every week, this needs to be our first priority, our primary focus, until it's running smoothly, doing what needs to be done.

[See, e.g., Catherine Rampell, "Layoffs Spread to More Sectors of the Economy," New York Times, January 26, 2009 ("Home Depot, Caterpillar, Sprint Nextel and at least eight other companies announced on Monday they would cut more than 75,000 jobs in the United States and around the world — a gloomy start to the workweek for employees anxious about holding their own as the economy sinks.")]

Second, Provide Health Care

Why should health care be second? Not because it's less important -- from either an economic or a humane perspective -- but because it will take somewhat longer to create the administrative procedure to provide. With 40 million Americans left uninsured in the best of times, laid off workers often losing what health insurance they had along with their wages, and health care costs a major factor in bankruptcies, temporary funding of health care for all -- by whatever means -- is an essential next step. This need is not met with a little extra funding for SCHIP, COBRA and Medicaid, requiring some amount of co-pay from those who can't even afford food. It must be fully funded to provide basic medical care to everyone who is unemployed or otherwise unable to pay hospital and doctor bills -- and with as little administrative paperwork for patients and doctors as possible.

Third, A Jobs Program -- for Workers Not Owners

How can I make jobs third? Isn't it better that people be paid for their work than that they get unemployment compensation for doing nothing? Absolutely; of course. Indeed, some months ago I urged the creation of a federal jobs program, in place, ready to roll out on short notice, when needed. Well, now it's needed and it's not in place. And so, like health care, that's the only reason it's third rather than first.

The reason I emphasize "workers not owners" is because a program designed to put Americans back to work needs to prioritize, needs to employ the maximum number of persons per dollar possible. And that may mean federal jobs programs that make worthwhile contributions to our infrastructure, or whatever, but would not necessarily be the projects, and jobs, that "the marketplace" would choose.

Frankly, I don't know how many jobs per dollar are created by highway projects these days. But what I guess is that a "shovel-ready" project that would have employed 200 workers with shovels in the early 1930s may very well, today, primarily enrich the owner of the construction company and employ one person who is operating an extremely large shovel and other earth moving equipment.

Fourth, Mortgage Refinancing -- For Owners, Not Bankers

Would I like to see more people able to continue living in their homes? Of course. But the details of how we do that are not easy. At least I don't have any quick solution that keeps in proper balance the remedies for those who knowingly got in over their heads, those who were taken advantage of by bankers, those who have struggled to make every mortgage payment, and those who have been profligate with other expenses. But clearly, it seems to me, no one gains -- not the home "owners," the bankers, or the real estate agents -- by throwing the occupants out on the street in a down market when a resale will result in more losses for all. Nor, as we've now seen to our multi-hundred-billion-dollar regret, can the problem be solved by giving billions to bankers who simply squirrel it away, or use it to buy other banks, enrich CEOs, and pay dividends.

Infrastructure Projects and Tax Cuts

Any project can be said to be an "economic stimulus" and that seems to be a lot of what's going into the President's, Senate's, and House's proposals: pet projects of elected officials' major campaign contributors. That looks to me more like "same old, same old" than "Change We Can Believe In."

Some of these are worthy projects. Certainly I'd prefer that Interstate Highway bridges not collapse.

But what we need now, first, is economic recovery, as quickly and wisely and efficiently as we can get it done. Diverting attention -- and more important, dollars -- from that goal to other purposes, however worthy, both takes our eye off the ball and seriously (and perhaps disasterously) weakens our ability to do the job at hand.

Tax breaks I've discussed above. They do little to produce economic recovery according to the economists. And worse, they violate the principle that "when you find yourself in a hole the first thing to do is to stop digging." It is "credit" and debt that got us into this fix. It's not clear that we can borrow our way out of a problem of excessive debt.

What this country needs right now is not more credit, more borrowing by its citizens and federal government. What it needs is more cash -- in the hands of consumers, not CEOs. Indeed, consumers are the only ones who can turn this economy around. And that's what the steps I've outlined here can do.

Finally, there are benefits and there are costs. Our public and corporate officials, and the mass media, have explained to us the benefits of massive expenditures. What they have not explained are the costs -- such as the potential of a "morning after" rampant, uncontrollable inflation, the likes of a Third World country. I'm not saying that will happen, or that it's the only possible scenario. What I do believe is that someone, sometime, somewhere needs to talk candidly about the "business plan" behind this massive spending, the "exit strategy," the projected mileposts and stages along the way -- and the serious, possible, risks we are taking.

“The cost of our debt is one of the fastest growing expenses in the federal budget. This rising debt is a hidden domestic enemy, robbing our cities and states of critical investments in infrastructure like bridges, ports, and levees; robbing our families and our children of critical investments in education and health care reform; robbing our seniors of the retirement and health security they have counted on. . . . If Washington were serious about honest tax relief in this country, we'd see an effort to reduce our national debt by returning to responsible fiscal policies."
Who said that?

Barack Obama, Speech in the U.S. Senate, March 13, 2006, Whitehouse.gov/Agenda/Fiscal.


Related Blog Entries on Global Economy and Bailouts

Nicholas Johnson, "Who's The Reason?" September 5, 2008

Nicholas Johnson, "How Much Do You Owe the Chinese?" September 6, 2008

Nicholas Johnson, "Taxpayer Rescue," September 15, 2008

Nicholas Johnson, "Global Finance: The Great Fountain Pen Robbery," September 21, 2008

Nicholas Johnson, "Alternatives to 'The Plan,'" September 28, 2008

Nicholas Johnson, "Better Alternatives to Congress' Bailout Plan," October 2, 2008

Nicholas Johnson, "Can We Trust Our Bankers?" October 29, 2008

Nicholas Johnson, "It's the Economy," November 7, 2008

Nicholas Johnson, "Jobs, Not Unemployment, Key to Recovery," November 8, 2008

Nicholas Johnson, "Trust Your Instincts, Auto Bailout's Terrible Idea," November 14, 2008

Nicholas Johnson, "Auto Bailout: An Open Letter to Congress," November 19, 2008

Nicholas Johnson, "A Trillion Here, a Trillion There," November 20, 2008

Nicholas Johnson, "FromDC2Iowa's Weekend Edition," November 21, 2008 ("The Answer to Global Economic Collapse" and "Auto Bailout: 'Show Me the . . . Plan'")

Nicholas Johnson, "Citigroup Deal Stinks," November 25, 2008

Nicholas Johnson, "Only Select Few Are Thankful for Trillions," November 27, 2008

Nicholas Johnson, "Auto Loan Makes Too Few Dollars Even Less Sense," December 4, 2008

Nicholas Johnson,"Quick Fix for the Economy," December 12, 2008

Nicholas Johnson, "You Know It's Serious When We Start Laughing," December 15, 2008

Nicholas Johnson, "A Car in Every Garage," December 16, 2008

Nicholas Johnson, "Forget Madoff, Focus on Bernanke," December 17, 2008

Nicholas Johnson, "Of Theaters and Automobiles," December 20, 2008

Nicholas Johnson, "There's Bad News and . . . and . . .," December 21, 2008

Nicholas Johnson, "Et Tu, Toyota?" December 22, 2008

Nicholas Johnson, "Revolting Developments," December 23, 2008

Nicholas Johnson, "First Things First," January 8, 2009

Nicholas Johnson, "Why We Should 'Point Fingers' and 'Look Backwards,'" January 13, 2009

Nicholas Johnson, "Fool Me Twice," January 14, 2009

Nicholas Johnson, "Economic Sorrows and Solutions," January 27, 2009

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

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Wednesday, January 21, 2009

New Days, Pete Seeger, Constitutional Questions

January 21, 2009, 8:00 a.m.

The Dawn
(Brought to you by FromDC2Iowa.blogspot.com*)

As the sun slowly rose this morning it truly was "a new day."

My time in a segregated South during the 1950s -- Austin, Houston, and then traveling through Louisiana, Mississippi, Alabama, Georgia and Florida with the U.S. Court of Appeals, 5th Circuit, Judge John R. Brown for whom I was clerking -- with "Whites Only" signs in restaurants, "white" and "colored" water fountains, a racially administered poll-tax system to keep African-American citizens from voting, and the KKK's crosses burned in Fifth Circuit judges' lawns, meant that I, too, had a dream that yesterday would someday come to America. And now it has. Surely it was a much more special day for those whose ancestors were slaves, but it was a day that all Americans could celebrate with pride -- and did.

Beyond that, there is little unique that I could add to the millions of words and pictures from millions of Americans about January 20 -- in emails, blogs, conversations between themselves, and the mainstream media -- so I won't spoil it by trying.

Below, however, is another of what was a moving inaugural moment for me. Pete Seeger who has been giving of himself to movements and progress since I suppose the 1930s; Pete Seeger, with whom I appeared in rallies in the 1960s and '70s, and in whose home we've visited; Pete Seeger, at 92 or 93, beaming at the thousands before him at the Lincoln Memorial who had helped make this inauguration possible; Pete Seeger, who had done it probably thousands of times before, leading a crowd in a very triumphant group singing of "This Land is Your Land."

What would you do?

There was a constitutional law professor's moment yesterday during the swearing in. I'm sure you caught it, but you may not have thought about its possible significance.

The Chief Justice, John Roberts, "administers the oath of office" that turns a "president-elect" into a president.

Article II, Section 1, Paragraph 8 of the Constitution provides:

"Before he enter on the execution of his office, he shall take the following oath or affirmation: - "I do solemnly swear (or affirm) that I will faithfully execute the office of President of the United States, and will to the best of my ability, preserve, protect and defend the Constitution of the United States."

The need for this oath would seem to have been modified by the 22nd Amendment, which provides simply, "The term of the President and Vice President shall end at noon on the 20th day of January . . . and the terms of their successors shall then begin."

Without that interpretation, the United States would have been without a president from noon until about 12:05 p.m. yesterday -- since the terms of Bush and Cheney "shall end at noon" and President Obama could not "enter on the execution of his office" until "he shall take the following oath." Thus, Obama became president at "noon on the 20th day of January" with or without an oath.

If that is not the proper constitutional interpretation there is then a remaining reasonable question as to whether President Obama did, in fact, take the oath required by Article II, Section 1.

The Chief Justice recited "I do solemnly swear that I will execute the office of President to the United States faithfully . . .." Obama, a former constitutional law professor and newly elected president, presumably knew the Chief Justice had misspoken. He paused. What to do? With all the planning, every detail attended to, two or three days of celebration without a hitch, what President-elect could be expected to have prepared for the possibility the Chief Justice would screw up the oath of office in this unanticipated moment? The Chief Justice attempted to recover. Obama, confronted with the choice of reciting the oath as written, thereby embarrassing the Chief Justice of the United States, or reciting the oath as presented to him by the Chief Justice, chose the latter -- thereby failing to take the oath contained in the Constitution.

One would have thought the Chief Justice would either have previously known the oath; or if not, read and memorized it ahead of time; or if not, had an accurate copy from which to read, and -- if he feared nervousness on such an occasion -- practiced reading it correctly ahead of time.

But judges, even Chief Justices, aren't consistently perfect. I recall an occasion when clerking for Justice Black that I walked into his office and found Chief Justice Warren and Justices Black and Harlan staring at the bound Supreme Court opinions on Black's shelves, unable between them to think of the case they were trying to remember. Justice Black was known for the little dog-eared copy of the Constitution he always carried in his coat pocket. When Eric Sevareid and Martin Agronsky interviewed him for a CBS documentary, Martin asked him, "Mr. Justice, why do you carry that Constitution with you? I would think by now you'd know it by heart." Justice Black replied, with his famous smile, "Because I don't know it by heart." Apparently neither does Chief Justice Roberts.

(The error is easily remedied, if thought necessary, as it has been in the past -- if one doesn't wish to rely on the 22nd Amendment interpretation -- by President Obama's simply taking the oath, correctly, a second time, which could be in a small private ceremony if adequately documented. [That is what they ended up doing later on Wednesday: Jeff Zeleny, "I Really Do Swear, Faithfully: Obama and Roberts Try Again," New York Times, January 22, 2008.])

What would you have done in that situation?

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

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Sunday, January 18, 2009

Whither Newspapers?

January 18, 2009, 3:30 p.m.

Newspapers' Challenges Outrun Choices
(Brought to you by FromDC2Iowa.blogspot.com*)

As Iowans continue to mourn the firing of the likes of the Register's Brian Duffy and the Press-Citizen's Bob Patton, along with dozens of their colleagues at those papers and the 15,000 laid off nationwide, things are looking pretty bleak for the newspaper industry generally all across the country.

The Tribune (which means the Los Angeles Times and Baltimore Sun as well as the Chicago Tribune) is bankrupt, the New York Times has mortgaged its headquarters building, the Seattle Post-Intelligencer will close in 60 days if it can't find a buyer, the Detroit News and the Detroit Free Press (a joint publishing operation) limits home delivery to Thursdays, Fridays and Sundays, and the Christian Science Monitor has stopped printing (while retaining an online presence) -- among a great many similar stories from around the country. E.g., Richard Perez-Pena, "Times Co. to Borrow Against Building," New York Times, December 8, 2008; Whitney M. Keyes, "Bye bye Seattle PI: Six survival tips for struggling newspapers,", The Biz Bite: A Blog to Boost Business, Seattle Post-Intelligencer, January 17, 2009;
David Cook, "Monitor shifts from print to Web-based strategy; In 2009, the Monitor will become the first nationally circulated newspaper to replace its daily print edition with its website; the 100 year-old news organization will also offer subscribers weekly print and daily e-mail editions," Christian Science Monitor, October 28, 2008.

Meanwhile, Stephen Buttry of the locally-owned Gazette describes this morning what that paper has been doing recently, rethinking its mission, goals and response to what I've characterized as the "broadside blows" that can hit any company in a fast-paced, technologically innovative information age. Stephen Buttry, "Gazette Working on Transformation," The Gazette, January 18, 2009, p. A2 (use drop-down menus to go to "Su 01/18/2008" and "Page A2").

In 2007 there were about 110 million housing units occupied year round. From 2000-2008 the number of U.S. daily papers has declined from 1492 to 1447 (that's morning (833) and evening (614) editions, so greater than the number of local newspaper companies). During this time the total circulation has declined from 55,772,000 to 52,329,000. "Newspapers and News Organizations Marketing Research," Research Wikis. I have no idea (and can find no data) on how many of those 52 million papers go to households (as distinguished from those delivered to news stands, businesses, or are distributed free to students or travelers on trains, planes and in hotels) -- and how many of those subscriber households account for more than one newspaper (in my case there are four, plus of course a variable additional number of online papers). But it seems clear that far fewer than 50% of American households subscribe to even one paper.

(Richard Perez-Pena, "Newspaper Circulation Continues to Decline Rapidly" New York Times, October 27, 2008: "The long decline in newspaper circulation over the years continues to accelerate, with sales in the spring and summer falling almost 5 percent from the previous year, figures released on Monday show, deepening the financial strain on the industry -- from 1.9 percent for The Washington Post, to 13.6 percent for The Atlanta Journal-Constitution . . . circulation at The Houston Chronicle, The Boston Globe, The Star-Ledger of Newark, The Philadelphia Inquirer, The Orange County Register and The Detroit News fell 10 percent or more. The exceptions . . . were USA Today and The Wall Street Journal, . . . virtually unchanged, at 2.3 million for USA Today and 2 million for The Journal on weekdays.")

Couple the decline in readership with the even greater decline in advertising revenue, the rising costs for printing and distribution, the loss of the classified advertising revenue to the likes of Craig's List, the seeming need to give it all away for free on the Internet, and Wall Street's demand not only for beter-than-average-Fortune-500 rates of return, but ever-increasing rates of return, and it's a wonder there are still any newspapers out there. Mark Fitzgerald, "'Several Cities' Could Have No Daily Paper As Soon As 2010, Credit Rater Says," Editor & Publisher, December 3, 2008 ("Newspaper and newspaper groups are likely to default on their debt and go out of business next year -- leaving "several cities" with no daily newspaper at all, Fitch Ratings says in a report on media released Wednesday.") Bill Boyarsky, "The Newspaper Industry Is Dying Before Our Very Eyes," Truthdig, AlterNet Media & Technology, December 18, 2008.

All of this raises a number of issues.

First off, as a law school colleague is occasionally driven to ask a classroom of silent students, "Is anybody listening? Does anybody care?"

Few today miss the disappearance from the marketplace of the horse-drawn buggy industry -- aside from the Amish, and they make their own. Automobiles, and public transportation, filled the transportation gap and took their place.

Are there any reasons to believe the disappearance of the newspaper industry would be of any greater significance, or any less likely to be replaced by something else?

The answer turns, in part, on how one defines "newspaper."

I once sat next to a sliderule salesman on an airplane at a time when transistors and hand held calculators were beginning to come on the market. Needless to say, he had a warehouse full of some really beautiful sliderules with which he was willing to part at a discount. I had been brought up on calculation by sliderule, but passed by his offer.

It was not sliderules that were essential to American science, engineering and business; it was the ability to do calculations.

So it is with newspapers. It is not necessarily still essential that we chop down trees, grind them into wood pulp, create multi-ton rolls of newsprint, ship them by truck, rail, ship, and truck again, to gigantic printing presses, where it is inked, folded, bundled and put on trucks, dropped off for delivery persons, who in turn drive around town dropping individual newspapers on subscribers' doorsteps.

What is even more essential that the ability to do calculations, however, at least in my view, is the citizens' ability to get access to information, opinion and what we call "investigative reporting" in a self-governing democracy.

Our nation's founders, led by Thomas Jefferson and James Madison, recognized this central necessity -- and not just in the First Amendment ("Congress shall make no law abridging the freedom of speech, or of the press"). They saw the need for an educated citizenry, which ultimately led to a system of free public schools, and public libraries. (Jefferson helped create both the University of Virginia and the Library of Congress.) The postal system, with reduced rates for books, magazines and newspapers, was a part of this philosophical package, as was the ultimate licensing of broadcast stations to serve "the public interest." They knew that expanding the franchise (at first limited to white, male, landowners, over 21 -- ultimately expanded to include African-Americans, then women, then everyone over 18) would count for little without an informed electorate.

Given today's policy challenges, I continue to believe that the information gathering, processing, editing and distribution function continues to be, if anything, even more essential than it was 200 years ago.

And in addition to newspapers' role as newspapers, they also play a major role in the functioning of all media. I used to say of the evening news programs on ABC, CBS and NBC that their content was determined by morning editorial conferences at which all the participants had read the New York Times and then sat around deciding which stories they'd take pictures of that afternoon and put on the air that evening. Obviously, it's not quite that bad. But the Times is a kind of "newspaper of record" not only for our country but for the world (along with other great world newspapers); it is a repository of history as well as a serving plate of current happenings. Look at your local paper; how many of its stories come from this guy whose initials are "AP"? Who is he? He's hundreds or thousands of reporters working -- or at least who used to be working -- at newspapers all across this country that belong to the Associated Press and offer up their stories for other members' papers to use. Few if any local radio or television stations, or even networks, have journalistic resources remotely approaching those of the nation's large, urban papers -- or at least the resources they used to have. So to the extent we lose our papers we have also lost the network of journalists that supports all media (and individuals) that need or want the information newspapers provide.

But while I'm part of that small group who loves the feel of a newspaper in my hands in the morning, I also recognize that the "newspaper manufacturing industry" of my youth is not the only way our society can perform that informing function.

What do we mean by "the newspaper business"? The executives of every for profit enterprise need to ask themselves, in bad economic times as well as good, "What business are we really in, or do we want to be in?" Are we in "the steel business" or the "building materials business"? Are we just in the "department store business" or should we also be offering groceries for sale?

Stephen Buttry is clearly doing some of this kind of thinking for Eastern Iowa's paper, The Gazette. He and his staff have identified, and begun focusing on three or four separate businesses. Their response to newspapers' hard times is a willingness to "fundamentally transform" their company.

Of these four businesses, or functions, the first is information gathering; the input of others' information and opinion (news releases, statements at news conferences, online reporting), interviewing, observing, researching reports and other documents (primarily on the Internet, but elsewhere as well) -- and then writing it up as journalists and editors do, or simply present it raw.

The second is the multiple packaging of this information and reporting: much of it would simply be made available online as reference/research material; but there could also be a hard copy newspaper, a less-than-daily "magazine," supplements, advertisers (such as their "Penny Saver"), books, or sports publications. (One of the most potentially profitable things to think about are the multiples more "packaging" possibilities.)

The third is production: the creation and updating of Web pages and blog services, maintenance of the servers; the printing presses operation and maintenance; delivery services, whether by computer, truck, sidewalk boxes, or home delivery.

The fourth (as I break it down, but a part of the third in Buttry's conception) is the financial side of the business: sales of product, subscriptions, and advertising; the advertising and marketing of the various products; customer service; and collections.

This kind of thinking is not enough to make a "newspaper" profitable -- as Buttry seems to be the first to acknowledge. There are a lot of details to deal with between point "A" and point "B."

But it is an essential first step for which I think The Gazette is entitled to a lot of credit. Any corporate enterprise that continues to think of itself as being in the "newspaper business" in 2009 is probably in for tough economic times. Thinking of itself as being in the information gathering, packaging, production, and marketing businesses is not the only possible conceptual scheme, but it is a good one (in my opinion).

The survival of print. Hard copy papers have not yet totally disappeared, even if they've laid off reporters, lost circulation and advertisers. It's interesting, as noted above, that the Wall Street Journal is more than surviving. In part that's because at least a hard core of its readers can probably afford whatever the owners might like to charge subscribers, and advertisers are willing to pay handsomely to reach them. But it's also because the WSJ serves a niche, albeit one that is evolving. Visiting with Jim Hightower a couple days ago (here in town for an Iowa Corngrowers' gathering) we talked about his newsletter, which is doing quite well. I suspect there will continue to be a market for specialized, hardcopy newsletters. And some are suggesting that, however small the readership might be, it may be -- at least for a long time -- economically feasible for today's conventional newspapers to continue to publish and deliver hardcopy papers to the market that wants them, and is willing to pay for them the full cost of production, distribution and some profit.

Special interest publications. Some newspapers even today continue to have the words "Democrat" or "Republican" in their names. And there are thousands of other organizations, such as churches, and trade unions -- that will continue, or start, providing their members (and any subscribers) with hard copy reporting. About 30% of households get their television off the air. (These are the folks for whom the conversion to digital TV presents a challenge.) Something like half American homes don't have broadband Internet access. These folks will continue to be a market for hardcopy delivery of news and information, either from whatever future "newspapers" may look like, or from an organization to which these readers belong.

Blending print and online. Another model is to retain some home delivery (just not seven days a week) along with online distribution, like the Detroit papers are doing. The New York Times now offers a "special" on a Friday, Saturday, Sunday only package of delivery, thereby cutting the production and distribution costs by more than half (while possibly picking up some new subscribers who would not have wanted the paper every day, but welcome having three papers over the weekend -- and at a much reduced cost).

All online all the time. Finally, there is the Christian Science Monitor model: abandon hardcopy altogether, offering nothing but online content -- while updating it 24/7.

Home printing. I have a law school colleague, with expertise in the newspaper business, who has been urging papers for years to consider the possibility of putting printers in the homes of subscribers. Editorial (news) only accounts for about 15% of the cost of producing a newspaper. I don't know what percentage goes into producing and transporting newsprint, the printing presses, the printers' ink, and the transportation and delivery of the individual papers -- but it has to be enormous. And think about it: to receive television programs you must invest in a TV set (and these days a monthly payment for the entirety of your life to a cable company); householders have a significant portion of the capital investment in the television industry. All you need contribute to get a newspaper is a front step. The cost savings for the industry could be significant If those who want or need a hard copy of their newspaper would assume the cost of printing it in their homes. The New York Times now offers to deliver the entire paper, as each page is made up and appears in hard copy, to your home, everyday, for $175 a year (a substantial reduction from the hard copy price, if indeed the paper is even available for home delivery in your town). Admittedly, this is not the same as a printed copy, but it gives you an idea of what large, printer-ready copy might look like.

The blogosphere. Whether blogs cause you to sneer, or you view them as a form of "journalism," the fact is that they are already playing a role in the newspaper industry.

Most papers have online blogs created by their reporters and editorial writers, to which many add the blogs of ordinary citizens as well. Many papers provide readers access to the online reproduction of reporters' stories as a form of blog, to which readers may add their own "comments" about the story (and increasingly about each others' comments as well).

Blogs, including this one, certainly look to the mainstream media for information, quotes, and stimulation of ideas to write about. And there is a least some contribution the other direction -- as when bloggers got after Dan Rather for CBS' acceptance, and reporting, of what turned out to be a faked document regarding President George W. Bush's "war record," or as John Neff notes in his comment, below, when the mainstream media made use of the "here comes everybody" still and moving pictures of the recent Airbus "water landing" on the Hudson River.

The blogosphere is an example of Clay Shirky's Here Comes Everybody (2008). It does not require a hierarchial organization to be created or to survive; anyone can contribute and almost no one makes money from doing so. "On the Media" reported this weekend on Josh Karp's "The Printed Blog," an effort to pick from blog entries and offer them in printed form. Of course, "Google" in general, and "Google Alerts" in particular, enable anyone to create the equivalent as an online service -- and this is already being done; see e.g., BlogNetNews.com and Blog for Iowa.

The blogospher may not be to newspapers what the automobile is to the horse and buggy (that is, not only a replacement, but an improvement) but with enough participants, including the laid-off professional journalists (who will now need other sources of income to survive, but will still have some spare time and a desire to write), and more packaging/editing services, the blogosphere could fill at least some of the hole left with the disappearance of papers.

Make Google pay. For a mini debate about the wisdom, propriety and effectiveness of newspapers insisting on payment from Google for its ability to list their content, see Eric Etheridge, "Virtual Face-Off: What Does Google Owe Newspapers?" New York Times, February 4, 2009.

Sell online access to content. Since advertising revenue from newspapers' online content hasn't been the equivalent of what the hard copy ads once produced, one option is to try to move today's online freeloaders into the category of paying subscribers. This has not been easy. I at one point suggested the idea of an ASCAP model -- that is, for an annual flat fee one could examine any newspaper's online content, with a proportion of that fee (based on the proportion of hits on that newspaper's Web site to the total hits on all newspapers' Web sites) going to the papers you access. On reflection, that idea may be even more difficult to sell than the pay-per-paper approach. A more viable, and easily established, approach -- that is already being used -- is to give away most of the content while holding back some for which pay is required (for example, some of the New York Times' archives).

Sell the features, not the content. Another approach is to offer the content for free, as now, but sell the value-added features such as archives, special search tools, email alerts, delivery to cell phones and handheld devices -- while trying to think up and offer more such features.

Governmental subsidy. Finally, there is the occasional suggestion that if the government can provide a significant share of the funding for public broadcasting, and can provide bailouts for "essential" industries like investment bankers and automobile executives, it ought to be able to provide some subsidy to a truly essential industry: newspapers. My guess is that this is a non-starter, not the least of the reasons why being what I predict would be the opposition of the newspaper industry itself.

Endowments. [Jan. 29, 2009] After this blog entry was written I came upon another proposal: endowment funds to support newspapers. The authors estimate this would require something on the order of a $5 billion-dollar endowment for the New York Times alone which, in today's economy, might be a little difficult to raise on short notice from wealthy Times fans. But I thought the proposal worthy of inclusion here. David Swensen and Michael Schmidt, "News You Can Endow," New York Times, January 27, 2009.

For a thoughtful discussion of these issues from a couple years ago by some of the industry's leaders, not inconsistent with the kind of approach I've explored here, see "Challenges to the Newspaper Industry: A PEJ Roundtable," Pew Research Center's Project for Excellence in Journalism, July 24, 2006.

At this point in time there's no way of predicting for sure which route the failing newspaper industry will go. Many of the major players may have disappeared entirely. Others will be transformed into something barely recognizable. Other new start ups will have evolved -- not unlike Apple's emerging competition with the behemoth IBM nearly 30 years ago.

Whatever the path, we self-governing American citizens will continue to need diverse, independent and impartial gathering of data and reporting of information and access to wise opinion. Of that I am sure.

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

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Thursday, January 15, 2009

Podolak's Photo

January 15, 2009, 9:30 a.m.

Here Comes Everybody

Eddie Podolak, a one-time outstanding University of Iowa Hawkeye and NFL football player and Learfield Sports commentator, has resigned, following the blog posting of photos of him with a young woman at a party in Tampa, where the Iowa football team played (and won) in the Outback Bowl on New Year's Day. See Tom Witosky, "Photos of Podolak partying upset Iowa AD Barta," Des Moines Register, January 10, 2009, and Randy Peterson, "Iowa football: Podolak retires from radio duties," Des Moines Register, January 14, 2009; Andy Hamilton, "Ed Podolak to Retire From Broadcasting," Iowa City Press-Citizen, January 15, 2009.

The blogs posting the pictures appear to be associated with fans of the Hawkeyes' rival, the Cyclones of Iowa State. See, e.g., "Cyclone Fanatic" and "Ball Hype."

As of this morning (January 15) the Register's January 14 story about the resignation had some 75 comments from readers. The focus of most-to-all of them was on Podolak's behavior, whether it was utterly unacceptable or within bounds, Podolak's abilities as a football player and popularity as a commentator, whether he had in fact been fired by UI Athletic Director Gary Barta and, if so, whether that was an over reaction -- along with the usual ad hominum comments about Barta and by those making comments about each other.

Those issues, at least some of which are quite significant, are not the subject of this blog entry. Its focus is, rather, (1) journalistic ethics, (2) defamation and privacy, (3) the impact of digitization, and (4) what Clay Shirky characterizes as, in the title of his book, Here Comes Everybody: The Power of Organizing Without Organizations (Penguin Press, 2008).

1. Journalistic Ethics: Learfield, the University of Iowa, and the selection of sports announcers. Blaming the media for one's misfortunes is commonplace -- especially among losing politicians. But contrary to media critics' assertions "journalistic ethics" is not an oxymoron. The Society of Professional Journalists has a Code of Ethics. It provides, among many other things, that "Journalists should,"
— Distinguish between advocacy and news reporting. Analysis and commentary should be labeled and not misrepresent fact or context.
— Distinguish news from advertising and shun hybrids that blur the lines between the two. . . .
— Avoid conflicts of interest, real or perceived.
— Remain free of associations and activities that may compromise integrity or damage credibility.
— Refuse gifts, favors, fees, free travel and special treatment, and shun secondary employment, political involvement, public office and service in community organizations if they compromise journalistic integrity.
— Disclose unavoidable conflicts.
— Be vigilant and courageous about holding those with power accountable.
— Deny favored treatment to advertisers and special interests and resist their pressure to influence news coverage.
— Be wary of sources offering information for favors or money; avoid bidding for news.
In other words, if Podolak isn't paid by the University of Iowa -- and at least he doesn't seem to appear on the UI's salaries list -- how does it come to pass that whether he continues to work, or not, for Learfield Sports is a matter of concern to the University's Athletic Director? Sure, just like Sarah Palin has her opinions about Katie Couric, Gary Barta might very well have opinions about various sports reporters, print and broadcast. But this is being talked about as an issue of whether Barta "fired" Podolak or whether he just resigned. Andy Hamilton, whose Press-Citizen story is linked from the top of this entry, reports Barta as saying, "We’re going to be looking for somebody, frankly, that does what Ed was able to do." Doesn't that kind of sound like Barta will be hiring a Learfield employee?

If Podolak is in fact a journalist, of sorts, on the payroll of a broadcaster, isn't it an ethical issue if the broadcaster and reporter permit the subject being covered to dictate the terms of that coverage?

Now I would be the first to concede that I am unfamiliar with whatever the terms of the Learfield Sports-University of Iowa relationship may be (presumably contained in a contract of some sort). And I am equally uninformed about how sports reporters think of themselves; maybe they, their editors and publishers, don't consider them "reporters" or "journalists" at all, and thus the SPJ Ethics standards are inapplicable. Or maybe print sports reporters are journalists, but on-air radio and TV sports reporters are not journalists. Maybe it's considered expected and appropriate that they be paid by -- or otherwise have an affiliation of some sort, or be capable of being fired by -- one or another team. Maybe they are supposed to be a part of the cheer leading squad.

But somehow I can't imagine the Press-Citizen accepting an arrangement in which the University could dictate which print reporters would cover the athletic program -- but then I'm occasionally naive.

Not knowing those things, I'm not criticizing anybody. But I was perplexed by the involvement of the University's Athletic Director in the hiring and potentially firing -- indeed having anything to say about -- who does and does not report on (or cheer lead on the radio for) Hawkeye football games covered by an independent broadcaster, Learfield Sports. The Learfield Sports Web site has this to say about "Hawkeye Sports Properties":
Hawkeye Sports Properties (HSP), a property of Learfield Sports, is the official multi-media rights holder for the University of Iowa Athletics. HSP presents the excitement, color and pageantry of college athletics through advertising, marketing and promotional opportunities aimed at making an impact on your business by reaching the loyal Hawkeye fans and alumni throughout the state of Iowa.
I would assume that the Wall Street Journal would not let the Bank of America CEO pick which reporter covers their acquisition of Merrill Lynch, or the Washington Post let Congressman Barney Frank pick which reporter covers his role in promoting Bailout II.

So why should the Iowa football team be able to pick which on-air personalities describe their prowess on the football field?

I guess this is one I'll have to leave to my colleagues in the UI's School of Journalism and Mass Communication. Comments anyone?

2. Defamation and privacy. No lengthy essay from me this morning on these subjects, except to note that the Register chose not to show the picture/s in question because the young woman was unidentified and the paper couldn't be confident she was a "public figure." Podalak presumably would be. Note also, as did some of the comments on the Register's story, that public figures need to be more circumspect about their behavior, and are more likely to be photographed, because there is both more legitimate and illegitimate public curiosity about their lives and behavior.

3. Impact of digitization. The impact of a digital photograph on Podolak -- loss of job, major media coverage, embarrassment -- is reminiscent of former Secretary of Defense Don Rumsfeld's reponse to the photos from Abu Ghraib in his U.S. Senate testimony: "There are people running around with digital cameras, taking these unbelievable pictures, sending them out . . .." Wolf Blitzer Reports staff, "Rumsfeld testifies before Senate Armed Services Committee," CNN, May 7, 2004.

In other words, the problem was not what was done at Abu Ghraib, the problem was the online distribution of pictures of what was done at Abu Ghraib. Similarly, one suspects that, without the party pictures of Prodolak, the events themselves would not have been reported -- or, if they were, would have had much less impact.

Not only are there single-purpose digital "cameras" as such, now with the convergence of digital devices and technologies of all kinds there are also "digital cameras" in everything from cell phones to laptop and hand held computers (PDAs) -- millions of them.

Just one more example of the way digitization (along with the 99.9%-off sale) is changing our lives, social relations, and what the law calls a "reasonable expectation of privacy."

4. Here Comes Everybody. Clay Shirky's new book, Here Comes Everybody: The Power of Organizing Without Organizations (Penguin Press, 2008), is a must-read for anyone in the academic community, business, government or politics who needs to understand and function within an Internet-driven Information Age.

This is not about to become a book review, or summary of his thesis and dozens of examples. It will suffice for our purposes to note the sub-title: "The Power of Organizing Without Organizations." The Internet (and its "architecture" that enables all kinds of software to run on it) makes it possible for single individuals to organize, share information, and take action -- to have an impact -- without being directed as participants in a hierarchical organization. "Meet-Up" is just software, used by whoever wants to use it; there's no Meet-Up, Inc., CEO, with a staff of screeners to seek and select those who will and will not be permitted to have groups. Ditto for Yahoo! Groups. Wikipedia is also just software that has evolved into a popular encyclopedia created by a number of otherwise disconnected individuals who write, and revise, its content. Individuals' Web sites, blogs, Facebook and My Space pages, online photo albums and YouTube have proliferated the number of still and moving images that can be uploaded by, and potentially available to, anyone with Internet access and curiosity.

Podolak's problem -- or at least its photographic element -- is but one of the more recent and dramatic local examples of the consequences of letting everyone into the game in a digital, Internet Age.

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

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Wednesday, January 14, 2009

Fool Me Twice

January 14, 2009, 8:10 a.m.

"Fool Me Twice, Shame on Me"
(Brought to you by FromDC2Iowa.blogspot.com*)

We're going to look back on the current rush to provide the second $350 billion to the banking industry as a tragic, tragic, mistake. Mark my words.

And not just my words, but those of the World Economic Forum -- an organization of some of the, as the name suggests, world's most influential economists and corporate CEOs -- the very folks you'd expect to be enthusiastic about gifts of billions from grateful taxpayers.

Don't get me wrong. I'm not going to delight in saying "I told you so" sometime on down the road. My most fervent wish is that I'll be saying "well, I sure got that one backwards." But I fear I'm right.

The following assertions are those of someone who is neither ideologue nor academic economist. I'm just an ordinary citizen taxpayer, hopefully with some common sense and a small dollop of cynicism, who tries to learn from experience. Like Will Rogers, "all I know is what I read in the papers;" it's just that my newspaper reading isn't limited to American papers.

This is not an argument for the proposition that a trillion-plus bailout of the banking, financial, investment and real estate mortgage industries would never be beneficial at some time, under some circumstances, for some individuals and businesses -- only that it is very, very wrong to do it at this time, under these circumstances, for these individuals and businesses.


1. They caused the problem. It seems fairly clear that our dire economic circumstances are the result of individuals' decisions -- whether the consequence of abysmal ignorance or cynical and selfish greed. They are not the result of "acts of God," only the acts of executives who thought themselves to be God. That makes them undeserving of bailouts. But who cares about that if by giving these undeserving millionaires hundreds of billions of dollars our economy turns around, the currently unemployed get jobs, and evicted former homeowners are back in their houses?

2. It didn't work. Many, including this blog, predicted that the $700 billion bailout wouldn't produce jobs, put folks back in their homes, and boost the economy. Those were just guesses, even if those who offered those warnings turned out to be right. Now there are more than guesses. There is data; the results of the first $350 billion are known. Unemployment is up; the economy has continued to spiral down. Knowing that it didn't work the first time, why would we try it a second.

3. The recipients have proven they aren't trustworthy. Sure, the Congress and Treasury Secretary Henry Paulson screwed up big time. But the recipients knew what the money was for, and it wasn't for squirreling away to increase reserves, buying other banks, dividends, and executive bonuses. Having created the problem by putting their own selfish greed ahead of the public interest, we should not be surprised that, given the opportunity, they would be inclined to keep the money rather than let those billions of dollars slip through their fingers and "trickle down" to their desperate neighbors. But OK, so they fooled us once. Now why are we setting ourselves up to be fooled again? Are these really the best guys to trust with another addition to a national debt we're leaving to our grandchildren?

(For details regarding how banks are using taxpayers' money in fact, as distinguished from theory and intention -- along with criticisms similar to my own and those of the World Economic Forum
regarding the bailout approach -- see the excerpts from a story in today's [January 14] New York Times at the bottom of this blog entry: "In Michigan, Bank Lends Little of Its Bailout Funds.")

4. Stop digging. "When you find yourself in a hole the first thing to do is to stop digging." Our economic problem is, in large measure, irresponsible levels of debt -- multi-trillion-dollar national debt, mortgages, student loans and credit card balances beyond our means. And just why is it that additional debt is the solution to our debt problem?

5. Conditions first, money second. Even if this were a wise and warranted strategy, and the recipients who let us down in the past were now paragons of virtue, what's the rush? "If you don't give me $350 billion by tomorrow the economy will collapse." We fell for that once. "Show me the money?" -- No, not until you show me the details, the business plan. What is it about economists and financiers and their three-page proposals for near-trillion-dollar expenditures? (Yes, like Henry Paulson, Larry Summers is also offering a three-page letter of explanation.) Who's getting this money? What are they required to do with it? What oversight will be provided? What if (again) they violate the conditions? What is a reasonable prediction, scenario, as to what is going to happen as a result of this additional national debt?

6. Exit strategy. President-elect Obama "intends to agree to Pentagon plans to send up to 30,000 more US troops to Afghanistan in order to gain time to review the conflict" -- rather than learning from the Russian experience there, and focus on designing an exit strategy. AFP, "Obama to review Afghan strategy, approve troop increase," January 13, 2009. Unfortunately, his current approach to the coming economic depression also lacks an "exit strategy" -- that is to say, a long term plan, reasonably rational on its face, that takes us beyond the current one more bailout at a time approach. Where are we headed? What are we doing and why? What is our long term strategy and how reasonable are we in thinking it will work? I don't get this from Obama, his team, or our congressional leaders.

Now here's the news, along with the World Economic Forum's concerns:

President-elect Barack Obama worked Capitol Hill, trying to persuade Democratic senators not to block a request for the last $350 billion of the bailout funds and assuring them that he is willing to use his veto power if they do so. . . . "[T]he bulk" of the remaining TARP rescue funds would be used to invest in banks and other financial institutions . . .. Many Senate Republicans, meanwhile, continued to insist that Obama's team has provided too few details about how they would use the money. Many said they are seeking a written statement detailing Obama's intentions that goes beyond the three-page letter submitted to congressional leaders Monday by Obama economic adviser Lawrence H. Summers. . . . "Members need to know how the Obama administration is going to carry out this bill -- and we need to know not just statements of principle, but what they are willing to bind themselves morally to do," said Brad Sherman (D-Calif.).

Obama is making personal calls to Democrats and Republicans to urge them to release the money, and Democratic leaders were confident that he would prevail on a matter he told them he considers the "first vote" of his administration.
Neil Irwin and David Cho, "Fed Backs Obama's Bailout Request," Washington Post, January 14, 2009, p. A1.

To the extent there are any details, they are not encouraging. The AP reports, "Frank's bill would require $40 billion to $100 billion of the bailout money to be spent on mitigating foreclosures [$40 billion is scarcely 10% of the funds] and . . . require the Treasury Department to use nonbailout resources to increase demand for home purchases [even though, while appealing to realtors and bankers, purchasing a home now is the furthest thing from the minds of those who've just been thrown out of the home they thought they had]." (comments added) AP, "Highlights of New Bailout Proposals," January 13, 2009.

And, "Bank executives will get to fly their company jets after all. Financial institutions that get assistance through the $700-billion Troubled Asset Relief Program had faced a provision that recipients of the money would be prohibited from owning or leasing private aircraft. But Kansas is one of the nation's centers of aircraft manufacturing, and state lawmakers complained . . .. So yesterday, Barney Frank (D-Mass.), head of the House Financial Services Committee and the author of the bill, lifted the jet ban." AP, "Ban on Private Jets Lifted from Bailout Program," Newsday, January 14, 2009.

Meanwhile, the prestigious World Economic Forum is warning that government spending, and lack of long range planning, not only contains the possibility of doing little or no good, it may even "backfire" and end up doing considerable harm:

The World Economic Forum took a grim view of prospects for the world economy this year in a report released Tuesday, warning that government spending to counter the financial crisis could backfire. . . .

But the crux of the report was a prediction that "massive" government spending to support ailing financial institutions hit by the credit crisis could sow the seeds of more problems in the future.

Although it has been widely advocated, such spending is set to fuel big deficits in several major economies including Australia, Britain, France and the United States, WEF's "Global Risks 2009" report said.

"One of the biggest risks is that short-term crisis fighting may induce businesses and governments to lose the long term perspective on risk," said one of the contributors, Daniel Hofmann, chief economist for insurer Zurich Financial Services.
Agence France-Presse, "World Economic Forum Warns Government Bailouts Could Backfire," ABS CBN News, January 13, 2008.

Although I cannot yet find a copy of the organization's Global Risks 2009 report online, it has been providing similar warnings for years. See Global Risks 2008: A Global Risk Network Report, World Economic Forum, January 2008, and the earlier reports from January 2007 and 2006.

I hold out little hope that the industries containing some of America's most generous campaign contributors will not get their $350 billion -- and even less that it will do much good for those 305 million Americans who have taken the losses, and are bearing the hardship of the consequences of their selfish, irresponsible greed.


Excerpts from "In Michigan, Bank Lends Little of Its Bailout Funds":

The Treasury Department has invested $72 million out of the $700 billion in federal bailout funds to help prop up this community bank [Independent Bank of Michigan] . . ..

But Independent . . . is not doing much lending these days. So far it is using all of the government’s money to shore up its own weak finances by repaying short-term loans from the Federal Reserve. . . .

This is not what the Treasury Department had in mind when it started this program, saying it would give the nation’s “healthy banks” enough money to start lending again, so that people could buy homes and businesses could invest and create jobs, thereby invigorating a disintegrating economy. . . .

As of Tuesday, 257 financial institutions in 42 states had received $192 billion in capital injections from the Treasury’s Troubled Asset Relief Program, or TARP, out of $250 billion set aside for this purpose. Seven giant banks — like JPMorgan Chase and Citigroup — have received more than 62 percent of the total so far, and have gotten most of the attention. . . .

Economists say the decision by banks like Independent to use the federal money for purposes other than lending, while perhaps disappointing, is not surprising, given that the Treasury Department did not honor its plan to give the money only to healthy banks.

“It’s a matter of logic — when you are in a perilous position, like many of them are, you try to bolster your balance sheet,” said Alan S. Blinder, a monetary policy economics professor at Princeton. “But this is a real flaw in the program.”

Some banking experts are even questioning if the bailout may be doing more harm than good, in some cases, by giving banks like Independent a cushion as they struggle to fix their problems, rather than forcing them to sink or swim on their own. It could also delay mergers of weaker banks with healthier ones.

“You are keeping a lot of troubled institutions in kind of a status quo state,” said Eric D. Hovde, the chief executive of a Washington-based hedge fund that invests in the banking industry. “They can continue on their merry ways.” In Congress, anger over the management of the TARP program runs deep. Many lawmakers say that there is little oversight, and that they can see no evidence that the taxpayer money is making its way from the coffers of banks to businesses and consumers. . . .

Some lawmakers have criticized the Treasury for allowing banks to use the government’s bailout money to acquire rival banks. . . .

“A lot of the money is already out there and the inspector general needs to get up to speed on how banks are using it,” said Senator Claire McCaskill, Democrat of Missouri. “We need to make sure we get this money back and the only way we can do that is with strong oversight on how this money is spent.” . . .

Mr. [Eric D. Hovde] Hovde, the hedge fund investor who says he believes the bailout program is putting off judgment day for many banks, said his fear was that many of the banks would burn through their federal money only to face a squeeze again. And they will never have made the extra loans that the Treasury had hoped would jump-start the economy.

Eric Lipton and Ron Nixon, "In Michigan, Bank Lends Little of Its Bailout Funds," New York Times, January 14, 2009.

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself.

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Tuesday, January 13, 2009

Why We Should 'Point Fingers' and 'Look Backwards'

January 13, 2009, 9:15 a.m.

Breaking news (1030 CT): New FCC Chair to be Julius Genachowski (a choice I would generally support). Stephen Labaton, "Obama to Select Genachowski to Lead F.C.C.," New York Times, January 13, 2009; Ira Teinowitz, "Genachowski at FCC: Advocacy Groups Applaud," TV Week, January 13, 2009. And for an earlier background piece, see Jodi Kantor, "Julius Genachowski," New York Times, November 13, 2008.

How Could We Have Seen Economic Disaster Coming?
Let Me Count the Ways

(Brought to you by FromDC2Iowa.blogspot.com*)

Curious as to how we got into this financial mess -- or, otherwise put, just how many signs there were that it was coming, signs that were ignored by our public officials and the MBA-educated CEOs who have left their crime scenes with millions in tow?

The University of Iowa's Jason Cox has compiled 87 pages of names, dates, places and details of our downward spiral. Jason Cox, "Credit Crisis Timeline," The University of Iowa Center for International Finance and Development (last updated December 3, 2008). It was brought to my attention by an editorial in the Iowa City Press-Citizen, and is well worth perusal by anyone seriously interested in "credit crisis" issues.

There is much to admire and be thankful for in our soon-to-be President Obama, but a willingness to prosecute -- even to investigate, and document -- the serious, even unconstitutional, wrongdoing of others is not among his virtues.

I haven't been enthusiastic about the prospect of bringing impeachment proceedings against President Bush -- though I think they would be justified. However, I do think at a minimum we need an itemization, and documentation, by some official body (presumably a congressional committee) of the Bush administration's mistakes, from the unwise to the unconstitutional, if we are to avoid leaving the impression that the American people and their congress find the Bushies' decisions and behavior over the past 8 years to have been either desirable or acceptable.

President-elect Obama seems to be of a different view, whether the offenses were those in the Bush administration or the financial community.

Last Sunday (January 11) he had this to say with regard to the former:
STEPHANOPOULOS: The most popular question on your own website is related to this. On change.gov it comes from Bob Fertik of New York City and he asks, "Will you appoint a special prosecutor ideally Patrick Fitzgerald to independently investigate the greatest crimes of the Bush administration, including torture and warrantless wiretapping."

OBAMA: We're still evaluating how we're going to approach the whole issue of interrogations, detentions, and so forth. And obviously we're going to be looking at past practices and I don't believe that anybody is above the law. On the other hand I also have a belief that we need to look forward as opposed to looking backwards. . . .
"This Week With George Stephanopoulos Transcript: Barack Obama," ABC News, January 11, 2009.

Three days earlier, in his George Mason University stimulus package address, he took a similar approach to financial community abuses with his reluctance to "point fingers": "[E]very day we wait or point fingers or drag our feet, more Americans will lose their jobs, more families will lose their savings, more dreams will be deferred and denied, and our nation will sink deeper into a crisis that at some point we may not be able to reverse." CQ Transcripts Wire, "Obama Delivers Remarks On Economy," Washington Post, January 8, 2009.

As Paul Krugman has observed:
I’m sorry, but if we don’t have an inquest into what happened during the Bush years — and nearly everyone has taken Mr. Obama’s remarks to mean that we won’t — this means that those who hold power are indeed above the law because they don’t face any consequences if they abuse their power. Let’s be clear what we’re talking about here. It’s not just torture and illegal wiretapping . . ..
Paul Krugman, "Forgive and Forget?" New York Times, January 15, 2009.

Now flash back with me to 2004, if you will.

As I often point out to my law students and others, there are really two legal systems (in addition to the two represented by one for the rich and one for the poor). There is the one that relates to those law violations of which most Americans are aware: you can't steal stuff from other people's houses, drive faster than the speed limit, and so forth. But in fact some of the most severe penalties are handed out for violations of the second legal system, the rules we impose regarding the operation of the first legal system: not showing up for a court date, lying to officials or on the witness stand (perjury).

Remember Martha Stewart? Her "crime" was not so much that she sold stock on the basis of "insider" information as that she lied about having done so. She said that the stock was sold by her broker at $60 a share because of a prior stop-loss order that it be sold if it dropped to that price.

So I am not about to come to Ms. Stewart's defense.

Nonetheless, I think the financial dimensions of what she did, and the penalty she received, can fairly be compared with those of bankers and Wall Street traders during the last couple of years.
[S]he and her former stockbroker, Mr. Bacanovic, were convicted of conspiring to hide the reasons behind her ImClone trade, which netted her about $227,000 [the difference between what she paid for the stock and what she sold it for]. . . . "To believe that I would sell, to avoid a loss of less than $45,000 [how much less she would have received had she sold it later], and thus jeopardize my life, my career and the well-being of hundreds of others, my cherished colleagues and partners, is very, very wrong" [she said at one point].
Constance L. Hays, "Martha Stewart's Sentence: The Overview," New York Times, July 24, 2004.

So what was her punishment for this $45,000 saving -- five months in prison (plus an additional five months of home confinement)!

Can you imagine her getting off scot free if she'd said to the judge, following Obama's logic, "Your honor, we need to look forward as opposed to looking backwards"?

Why is it appropriate for the law to be "looking backwards" at Stewart's $45,000 "crime" (presumably impacting only indirectly, and minimally, other investors), but that it should only "look forward" when it comes to a near-$10 trillion theft of taxpayers' money (as authorized by Congress, Bush, Paulson, Bernanke, and soon to be recommended by Obama)?

A President Obama need not be personally involved in the potential prosecution of former Bush administration officials or bankers who have violated the constitution or the law; that's what the Department of Justice and his new Attorney General are for. But for the former law professor that he is to say that "I don't believe that anybody is above the law" while simultaneously refusing to engage in "looking backward" at those who have behaved as if they were, is at best a little disingenuous.

Can officials and CEOs fairly claim they didn't see this tsunami of economic disaster coming? I don't think so.

Here then are but the first three pages -- 2003 through June 2007 -- of Jason Cox's 87-page itemization of all the events and reasons why their pleas of ignorance ring hollow.

· June 2003:
o Greenspan lowers Fed’s key rate to 1%, the lowest in 45 years

· 2006:
o Lenders make $640 billion in subprime loans
o 20% of all mortgage lending was subprime

· May 5, 2006:
o In possibly the first casualty of the looming subprime crisis, Kirkland, Washington based Merit Financial Inc. files for bankruptcy and closes its doors, firing all but 80 of its 410 employees, kept to wind down the business.
o Chief financial officer, Ryan Kidd, said that Merit’s marketplace had declined about 40% and sales were not bringing in enough revenue to support the overhead of running the company.

· August 26, 2006:
o Defaults on subprime mortgages start to occur much earlier in the mortgage process.
o Investors and analysts believe this trend could be the result of lax underwriting quality or a sign of a weakening mortgage credit market.

· January 3, 2007:
o Ownit Mortgage Solutions Inc. files for Chapter 11.
o Owed Merrill Lynch around $93 million when filing.

· February 5, 2007:
o Mortgage Lenders Network USA Inc. files for Chapter 11.
o 15th largest subprime lender with $3.3 billion in loans funded in third quarter 2006.

· February 7, 2007:
o HSBC, a large London based bank, issues a warning that an earlier statement about its Mortgage Services operations will be much worse than current market estimates.
o HSBS blames this drop on the increased delinquencies of US subprime mortgages and the inability to refinance because of falling equity prices.
o The release said that the aggregate loan impairment charges and credit risk provisions could be 20% higher than the earlier statement.

· February 10, 2007:
o The Group of Seven Finance Ministers meet in Essen, Germany to discuss worldwide financial problems.
o One of the main concerns is the lack of regulation of hedge funds. Germany says this could be a source of systematic risk for the financial system where the US believed market discipline is the best way to address the issue.
o Henry Paulson noted that the US residential housing market had been cooling over the last year but appears to have stabilized.

· February 13, 2007:
o ResMae Mortgage Corp. files for Chapter 11.
o Credit Suisse Group buys $19.1 million in assets in auction.
o ResMae made $7.7 billion in subprime loans in 2006 making it 26th in subprime lending.

· March 2007:
o New Century Financial announces it will stop making loans and needs emergency financing to survive.
o Stock price goes from $15 at the beginning of March to $3.21 when announcement is

· March 20, 2007:
o People’s Choice Home Loan files for Chapter 11.

· April 3, 2007:
o New Century Financial files for Chapter 11.
o Cuts 54% of its workforce or 3,200 jobs
o Largest subprime lender in US.
o Delisted from the NYSE
o Defaults on $8.4 billion in loan repayments
o New Century made $51.6 billion in subprime loans in 2006 making it 2nd in subprime lending

· April 12, 2007:
o SouthStar Funding LLC files for Chapter 7.
o Another subprime lender

· June 7, 2007:
o In a letter to investors, Bear Stearns suspends redemption rights for a hedge fund heavily invested in the subprime debt market because of liquidity problems.
o The fund had lost 23% of its value since January 2007 including almost 19% in April alone.

· June 22, 2007:
o Bear Stearns agrees to a plan to loan $3.2 billion to one of its hedge funds.
o The lack of liquidity at the hedge fund is blamed on the bad bets that were placed on the US subprime mortgage market.

· June 27, 2007:
o SEC Chairman, Christopher Cox, testifies to Congress that the SEC has opened 12 enforcement investigations into collateralized debt obligation (CDO) practices.
o This was in response to questions from Congress about the transparency of CDOs
Jason Cox, "Credit Crisis Timeline," The University of Iowa Center for International Finance and Development (last updated December 3, 2008).

Of course, if this history merely moves you to sympathy for those who've made off with your share of the taxpayers' money, you can always "Sponsor An Executive":


* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself.

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Friday, January 09, 2009

Sexual Assaults, Athletics and the Academy

January 9, 2009, 7:15 a.m.

The Academy and Football:
Rape and Risk Management

(Brought to you by FromDC2Iowa.blogspot.com*)

I have a number of email addresses, as you probably do, and all of them seem to attract at least some messages that are of little interest.

But the other day, into my official University of Iowa account, came the following offer of a one-hour audio program I could listen to for only $199.

The title of the presentation is "University Sports Scandals & Disasters: Keys to Minimize Liability," including "Tools for managing adverse publicity & negative PR."

I have no idea who thoughtfully included me on this email list, knowing of my interest in "Sports Scandals & Disasters" and that I would be blogging about the audio conference.

If you are new to this blog I should mention that we had a little "sports scandal" of our own at the University of Iowa in 2007 that ended up involving the governor, legislators, the Board of Regents, two investigations, the peremptory firing of two UI vice presidents, lots of media attention, and a criminal prosecution -- the current status of which, quite frankly, I don't know.

Maybe that's why this announcement was sent to -- who? The entire UI faculty and staff mailing list?

Anyhow, I thought, this has the aura of a program that's being pitched to a large number of colleges and universities.

Can it be that Iowa is not the only university with football players who team up to -- it is alleged -- rape unconscious young women?

Well, it turns out that is the good news and the bad news. The good news is that Iowa is not the only school. The bad news is that Iowa is not the only school.

Below you'll find the "agenda" for the one-hour training course -- one in which, you'll note, there is no mention of care for the alleged victims of these crimes, nor the alleged perpetrators for that matter, only the public relations inconvenience (and possible legal liability) they pose for the universities and the "strategies," "tools" and "keys" for dealing with them. (For the record, one consequence of the UI experience is a revised policy for supporting alleged victims.)

Following that is a recent story out of California that also involved two football players and an unconscious young woman. It is my practice not to refer to the names of either the accused or the alleged victims -- or in this instance, the promoters of the audio program, for it is not my purpose to add to the personal problems of any given individual. But in the California case the football players have eased the task of the prosecution somewhat by providing a videotape of their alleged crime.

The primary difference between the two cases, aside from the videotaping, is that the California football players are in jail on $100,000 bond, the former Iowa players (although charged) were permitted to transfer to other schools where they are continuing to play football.

Dear Nicholas Johnson,

Last week you were invited to join us for our industry leading 60-minute conference. I am pleased to now send for your review the conference agenda detailing this informative program:

"University Sports Scandals & Disasters: Keys to Minimize Liability"

Wednesday, January 14, 2009 1:00 - 2:00 PM ET


Risk Awareness Essentials for Your University Athletics Department

** What are the early warning signs for potential legal liability?
** Top ten athletics risks & how your university can prevent them
** Student athlete background checks: Do's & Don'ts for your college

Risk Management Strategies for Dealing with Difficult Situations

** Best practices for effectively handling high-risk student behavior
** Strategies for disciplining university athletes
** Keys to getting management buy-in from faculty & staff

Keys for Managing Crisis within Your Athletics Department

** Tools for managing adverse publicity & negative PR
** Communication essentials during a high-risk situation
** Strategies for reporting crime & crisis at your university

Live Question and answer session-Have your Risk Management questions answered!
Just how widespread are these problems? Apparently widespread enough to warrant the sale of a national audio program on how to deal with them -- as perhaps illustrated by this January 3 story from the Los Angeles Times:

Two Santa Ana College football players . . . charged with raping and sexually assaulting a drunk or unconscious woman last summer and videotaping the crime . . . were arrested and arraigned this week in the July 2008 assault. . . . If convicted, they each face a maximum of 18 years in prison.

[One] is a running back for the Santa Ana College team, and [the other] is a wide receiver, according to the school's website.

Authorities say the men were drinking at the Key Inn hotel in the 1600 block of El Camino Real in Tustin. The 18-year-old victim, who knew the defendants through her boyfriend, came to the hotel after Lewis called her, police said.

She later passed out. Foster allegedly videotaped Clemmons and Lewis undressing the woman, positioning her body on the floor and assaulting her multiple times. . . .

Police are still investigating whether the woman was drinking and what caused her to pass out. . . .

Santa Ana College officials are "reviewing the details of the charges," college spokeswoman Nikita Flynn said. . . .
Susannah Rosenblatt, "Three men arrested in videotaped rape of unconscious woman in Orange County," Los Angeles Times, January 3, 2009.

Ah, yes, "reviewing the details." Perhaps Ms. Flynn will want to listen to the audio presentation and accept the promoters' offer to "have your risk management questions answered" while her college officials are "reviewing those details."

Golf and baseball have their seasons. Football, it seems, is always with us.

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself.

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