TRICKSTER!

Obama and Clinton--The Feel-Good Hit of the Summer

Note: This is a special joint post from me, Obama supporter Jason Chervokas, and Clinton blogger Tom Watson.

From the time we met, as reporters and editors covering Bronx politics almost 15 years ago -  to this spring - Tom and I have spent countless elections bickering, bantering, observing, predicting, and generally arguing. It's been no different this election, with me backing Obama and Tom prominently blogging for Clinton.

But for once in this cycle we agree about something: the Democratic party needs a fusion ticket and it needs to move towards one now.

Yeah, we know people are angry and bruised, but here's the simple truth: an enormous latent Democratic mandate is lurking in the electorate and a fusion ticket is the best way for the Democratic party to unlock it - putting aside the issue of who is at the top of the ticket for a moment.

Want evidence? The Republicans are talking about it, per right-winger William Kristol today in The New York Times:

Another McCain staffer called my attention to this finding in the latest Fox News poll: McCain led Obama in the straight match-up, 46 to 43. Voters were then asked to choose between two tickets, McCain-Romney vs. Obama-Clinton. Obama-Clinton won 47 to 41.

It's simple really. The last few weeks of campaigning have hardened hearts on both sides of the Democratic divide: 40% of Clinton's voters in Pennsylvania said they would be dissatisfied with Obama, and 33% of Obama supporters said they would be dissatisfied with Clinton. If even a fraction of those angry, disaffected Dems lick their wounds and return to the pack  in November - and we suspect well more than a fraction of them will be back - there will be a big numbers advantage for whomever the Democrats nominate.  If both candidates are on the ticket then it's “everybody in the pool!” time.

More than that, the state-by-state campaigning by two strong candidates has left an entire ecosystem of new Democrats in its wake (Bucks County has gone blue for goodness' sake). And thanks to the quirky, proportional nature of the race,  the campaigns have built vast, nuts and bolt organizations across the country, congressional district by congressional district. Combining these operations would give Democrats an enormous tactical advantage on the ground, where the GOP has for years outsourced its organizing to the evangelical wing.

Further, the Clintons have been a Democratic fundraising machine for a generation, their supremacy challenged only by the young upstart from Chicago. Together: Ka-ching.

And only hardened partisans on each side can make the case with straight faces that an Obama/Sebelius ticket or a Clinton/Bayh ticket would be just as potent as Obama/Clinton or Clinton/Obama.

But a fusion ticket isn't just the best answer for the Dems, it may be the only answer to overturning a generation of near-hegemony for the GOP in presidential politics.

Obama needs Clinton. No other VP short-lister (with the possible exception of Senator James Webb, we both believe) strengthens Senator Obama more in the areas where he needs strengthening all in one feisty, battle-tested package - with seniors, with Hispanics, with Catholics, with Jews, with party regulars, with defense hawks, with labor union members. Perhaps no other short-lister gives him the backstopping experience he needs. Sure, some might suggest that she would be Dick Cheney to his George Bush, an ugly comparison morally, but perhaps electorally apt. And, as Andrew Sullivan wrote in yesterday's London Times, Clinton is the perfect street tough Jimmy Cagney to Obama's priestly Pat O'Brien:

By picking Clinton as a vice-president, he would be pulling a classic American manoeuvre — getting a surrogate to do the dirty pugilism of the campaign, while using his own extraordinary skills to provide a unifying and uplifting overall theme.

Clinton needs Obama. No other VP short-lister (again, with the possible exception of Jim Webb) stregthens her more with African-Americans, new Democrats, with independents, with young voters, and yes, with Republicans. Further, Obama clearly represents the future of the Democratic Party – one that changes the electoral map forver, opening the party to young evangelicals, moderates, and the formerly political dissaffected.

Each candidate would most likely become the other’s de facto successor – Obama would be only 55 in eight years; Hillary would by 69, still young enough by McCain-Reagan standards to seek the highest office. That built-in desire for the top spot usually keeps presidents and vice-presidents in the same camp. Further, a VP of the caliber of a Clinton or Obama would require a serious brief to handle, domestic or international.

Maybe 1+1 doesn't always equal 2. Even with Clinton below him on the ticket it's uncertain to us that Obama can win Florida. But with Clinton on his ticket he can certainly win Ohio, Pennsylvania and maybe still steal a state like Colorado or Nevada. Even with Obama below her on the ticket, Clinton may not be able to steal a real red state, but together they certainly can win Ohio and Pennsylvania and make a good run at Florida. And with both of them on the ticket, the prospect of a real landslide becomes far more than fantasy; and nothing could be better for every down-ticket race in the nation.

And for Democrats, a fusion ticket would be the feel good hit of the summer, a superstar tour bigger than a Led Zeppelin reunion. Can you imagine that convention? Sure feels better than the one featuring half the Democratic Party plus one lording it over the despondent other half of the Democratic Party minus one.

The problem for Dems, of course, is how to get to a fusion ticket. There's only one "elder statesman" in the Democratic party with the weight to broker a deal, and he happens to be married to one of the candidates. With both candidates so close to victory, there's no incentive for either to fold. That means another month of tough political warfare, driving up the negatives on both candidates. It may well mean a floor fight over Michigan and Florida.

Frankly, our hope for a fusion ticket probably requires the full run of the primaries and the last accounting before many prominent Democrats realize – all at once, perhaps – that there’s a happy and obvious solution to a potentially disastrous split. Both candidates have proven themselves to be realists, despite that many of their followers shout at each other. We think they’d take the deal, in order to guarantee victory. We also don’t buy two rampant themes among the bloggers – one, that Hillary is somehow posturing for 2012 by taking Obama down now, and secondly, that Barack would never accept “the Clintons” as partners in his presidency.

These are two extraordinary, big-time politicians with complementary talents and networks of supporters. Both have displayed determination, stamina, and guts. Beating John McCain in November is the primary goal of this primary season. A single path offers the greatest chance for victory.

So sign on for the fusion ticket – and please pass it on.

Hank Paulson, Treasury Stooge

Monday, in the face of the gravest American banking crisis since the Great Depression, Secretary of the Treasury Henry Paulson will give a speech about a new Bush administration banking regulation proposal.

The speech will introduce the latest legislative Trojan horse of the conservative right--a proposal which would nominally increase financial market regulation but which would, in fact, decrease regulatory oversight over things like new financial instruments.

In the speech, according to The New York Times which was provided with an advance copy, Paulson will say: "I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil."

That statement will mark Paulson as either a lying hack or utter idiot. I'll give Paulson--a former CEO of Goldman Sachs--the benefit of the doubt and kindly accuse him of lying hackery, since everyone with a thorough and sophisticated knowledge of the current banking crisis understands that it was precisely a failure of our regulatory structure that led the US banking system over the past few weeks to the brink of system wide insolvency. And make no mistake, system wide insolvency was exactly what was at stake as Bear Stearns teetered on the brink of failure (its failure would have touched off a domino of defaults that would have swallowed nearly every other major commercial and investment bank).

How did deregulation get us into a the situation where a handful of defaults on a few billion dollars in mortgage loans threatened (and still threatens) to collapse the multi-trillion dollar US banking system?

Here's my oversimplified version of the story. In 1999 Bill Clinton signed a law repealing Glass-Steagall, the law which, since the Depression, had separated the activities of investment banks which dealt certain kinds of securities from those of commercial banks that dealt with mortgage loans and consumer deposits. This act of deregulation placed commercial banks--with their tighter regulatory oversight, significant capital set aside requirements, and limits on their leverage--in direct competition for investment dollars with securities firms like Bear which faced few of the same restrictions. (Investment banks could borrow money to invest without limit, piling on leverage--in Bear's case reportedly as much as 30-to-1--while commercial banks were stuck with regulated leverage limits and the requirement to set aside enough capital to keep them solvent in the face of investment losses.)

At the same time the business of lending, the core business of banks, was changing dramatically, moving away from the practice of institutions extending loans directly to borrowers, towards the practice of institutions investing in asset backed securities which represented an interest in the future stream of income generated by a pool of loans of all sorts: mortgage loans, construction loans, loans to finance leveraged buyouts, just about any kind of loan you can imagine. This kind of securitization, it was proposed, would created greater stability in the credit markets, and wider access to cheaper money, by spreading the risk of lending over the entire system. To a certain degree that worked.

But the system carried with it new risks that were easily identifiable.

First, since the risk was so widely shared the potential for widespread catastrophe, should catastrophe strike, was also greater than before.

Second, since commercial banks were now in competition for returns with less regulated investment vehicles (like hedge funds), the market now contained an incentive for commercial banks--who were barred from piling on the kind of leverage i-banks and hedge funds could--to move more and more of their investments off balance sheet through the use of special purpose entities. By investing through special purpose entities, commercial banks could evade the additional capital set asides that would have been required if those investments had been on balance sheet, providing more competitive returns to investors. But this practice heightened liquidity risk in the market as a whole--there was less money than ever in the system to cover investors if loans went bad--and decreased market transparency--looking at a bank's balance sheet gave investors a very limited sense of that bank's true risk profile.

Third, the securitization system was allowed to "self-regulate" relying on private bond ratings agencies to certify the risk profiles of asset backed securities. But the system had few hard rules or guidelines, and, since ratings agencies were paid by the issuers of securities when those securities were rated for the market, there was, built into the system, a financial incentive for ratings agencies to give securities the highest possible risk ratings with the least friction (as a result, for example, during the height of the structured finance boom, ratings agencies routinely rated subprime piggyback loans--in which first and second mortgage loans are extended at the same time to a low-credit borrowers--as equally safe from default as prime first mortgage loans, an assertion that is absurd on its face).

Fourth, since securitization mean that loan originators were not going to carry loans on their books, but instead sell them into asset pools owned by off balance sheet SPEs, lenders no longer had a market incentive to thoroughly vet the credit risk of the loans they were making--since they would not be at risk if the loans, once sold into pools, failed. Instead, loan originators now had a market incentive to generate as many new loans as possible at the highest possible rates of interest--an environment which led directly to the subprime mortgage boom and bust.

The bank crisis we are currently living through came about when suddenly declining real estate values froze the market for asset backed securities, forcing banks, i-banks and hedge funds to sell other assets to raise cash to replace the money that they were otherwise churning through a system of investment by which they sold short term asset backed securities at a given interest rate and used the proceeds of that sale to invest in longer term asset backed securities at higher interest rates. That system of selling short term debt to invest in long term debt represented nearly all the liquidity that ran the American banking system, and the unregulated investors had become the biggest part of the market.

There is no doubt that the inflation of the structured finance bubble, and the scope of damage from its collapse, was created by deregulation--not only the repeal of Glass-Steagall but also accounting changes that made off balance sheet investing easier and more attractive as well as the lack of firm guidelines for and oversight off private bond rating agencies.

Had the fiscal innovation of structured finance been accompanied by prudent new regulation to address these predictable outcomes, there's no doubt that the damage from declining home values and increasing mortgage foreclosures could have been contained long before the need for the kind of emergency measure the Fed has lately undertaking (like taking bad asset backed securities onto the tax payer's books in exchanged for treasury notes).

Here are just some of the kinds of regulations that might have helped: limiting the amount of leverage allowable for investors in asset backed securities, particularly in areas where the assets in question are crucial to the social good and national economic stability (like mortgage loans); limiting the total value of off balance sheet assets that could be held by investors in those same sorts of loans; providing bond ratings agencies with stricter risk guidelines for defining what constitutes AAA and other ratings levels; setting stricter guidelines for subprime loan eligibility evaluations (at the height of the boom lenders were offering no-income-verification, no-money-down mortgage loans like Halloween candy to trick or treaters).

Yes, these kinds of regulations would have limited the growth of the recent boom and limited the wealth of investment bankers, but they also would have improved the stability of the markets to the benefit of the greater number of Americans perhaps insuring that the economy would still be growing today instead of teetering on the brink of disaster.

In the absence of prudent regulation, all that institutions like the Federal Reserve, Federal Housing Authority, and Treasury Department can do is bale water after the economy starts sinking. In the end bail outs are more socially disruptive and much more expensive to the federal government than prudent regulation.

Sophisticated financial minds understand all this and now favor tighter regulation over the so-called "shadow banking system." Even Larry Kudlow, former Fed and Reagan administration economist and as loud a public voice for laissez faire economics as this nation has, told New York Times columnist Joe Nocera on Friday “I think investment banks need to be regulated.”

But that's not what Hank Paulson will propose tomorrow. Paulson will propose the consolidation of regulating agencies (probably a good thing) but also oversight without teeth over hedge funds and investment banks. Worse, he will propose giving the Federal Reserve more power to intervene in markets but only after markets have collapsed--giving it power to act only after "overall market stability is threatened" instead of proposing the kind of legislative regulatory solutions that could prevent threats to market stability in the first place. The plan would also reportedly call for the industry wide self-approval of trading in new financial instruments without vetting by the Fed or Congress.

For a Secretary of the Treasury to address one of the gravest crises in US banking history by proposing more industry self-regulation and limiting the power of government involvement to after the horses are out of the barn is the height of irresponsibility, a pure, venal effort by one of Wall Street's own to keep the gravy train flowing at any expense to the American people. Paulson ought to be ashamed.

One final note, in this political season, last week all three of the major presidential contenders delivered speeches on economic matters but Barack Obama--confirming again why I support his candidacy--was the only one who displayed a sophisticated understanding of the nature of the current crisis. Where John McCain sounded clueless--arguing that the cause of the problem was reckless speculation by American families buying homes--and Hillary Clinton sounded like someone pandering to her demographic--offering only talk about bailing out mortgage borrowers but no talk about how to address the systemic banking industry problems--Obama offered a six point plan for revamping the regulation of the US banking system. Although the speech, being political, was not a detailed fiscal proposal, it was more detailed and focused than those of the other candidates offering provisions on banking regulation--prepared with advice from Columbia University economist Joseph Stiglitz, former chairman of Bill Clinton's Council of Economic Advisers--that are real solutions that cut to the heart of the actual crisis. You can watch the video or read the text of the speech here.

The Clinton Electability Fallacy

It's time to put to rest this silly and fallacious argument being relentlessly advanced by Mark Penn and the Clinton camp that HRC is more electable than Barack Obama because she has beaten him in large, blue states like CA and New York.

What we encounter in this argument is a classical fallacy based on the presumption that a contest between two democrats in reliably democratic states is equal to a contest between a democrat and a republican in the same states.

You don't need to plumb the depths of that argument to see that A does not equal B. There's a 0% chance that Obama, were he the nominee, would loose, say, New York, Clinton's home state and one of the nation's most reliably Democratic. The Clintonites, without explicitly explaining the scenario, are suggesting that blue collar white Democrats and Democratic women would abandon Obama in these states come November instead staying home or turning out to vote for a GOP candidate who is running on a Reaganomics redux economic platform and a staunch anti-abortion voting record. It's a scenario about as plausible as Billy Crystal being added to the Yankees 40-man roster.

The simple truth is that there's no correlation between Clinton's margin of victory in those states and her relative ability to win an election there in November. Take Ohio, for example, the state that the Clintonites offer as being the perfect case study for this argument.

Clinton beat Obama in Ohio by 10 points in the primary. But in state-by-state head-to-head polls, both Obama and Clinton are polling almost identically against McCain, and none too well at that. Obama leads McCain in the Real Clear Politics average by 0.2 %, Clinton by 0.5%. Since polls are snapshots capturing a moment in time, averages aren't that meaningful. Looking at the most recent head-to-head poll in Ohio (a month old Ohio Poll/University of Cincinnati tally), Obama leads McCain by 1% with 4% undecided while Clinton trails McCain by 4% with only 1% undecided and McCain above 50%. So much for the argument that her primary victory in Ohio is a measure of greater general election electability.

A more credible corollary argument also being advanced by the Clintonites seeks to discount Obama's victories in small, red states, saying that those are states no Democrat will win in November. This is almost certainly true of a state like Utah. But I'm less convinced that it's true of, say, Colorado, Iowa, New Mexico, Missouri or Virginia--a state in which Obama stitched together a remarkable coalition in riding to a convincing primary victory. These are all states in which Bush defeated Kerry, and they're states from which Democrats are going to have to snatch some victories because neither Clinton nor Obama is going to defeat McCain in Florida.

Clearly Obama has a better chance at winning in some of these states than does Clinton. For example, according to the average results of polls reported by Real Clear Politics, Obama bests McCain in Iowa by 10 points while McCain bests Clinton in the state by the same margin.

I and many Democrats continue to believe that Obama will be a significantly more electable candidate come November. Unlike Clinton who, whether fairly or not, polarizes voters and motivates Republicans, Obama offers the kind of crossover appeal that wins elections. The Democrats need Obama's coalition of new voters, black voters, and independents in addition to Clinton's bloc of traditional Dems. By throwing a kitchen sink of negative campaigning at Obama in the closing months of the primary campaign, Clinton may yet pull out the nomination (though it remains unlikely), but her victory may well be Pyhrric: while there's a high likelihood that rank and file Dems will turn out to vote for the party's nominee no matter who it is, the bad blood engendered in recent weeks by the Clinton campaign will make it all but impossible for her to reach out to his voters, particularly those independents who were never likely Clinton voters in the first place.

It seems to me that at this moment Clinton's only path to the White House is to take a popular vote lead over the next few months (she won't catch Obama on pledged delegates) and somehow convince him to join her ticket. But if it comes to that Obama may feel like he has a better chance at the presidency by waiting and running against an aging McCain in 2012.

Voting Obama

After remaining undecided in a presidential race for the longest time since 1992, I have decided in the end to pull a lever for Barack Obama in the New York Democratic primary on Tuesday.

Discount my vote if you will, I'm always the guy who votes Adlai Stevenson and there's more than a little of Stevenson's brainy detachment and Ivy League deportment in Barack Obama. But Obama is a vastly more complex candidate than Stevenson was (or any of his successors, like Bill Bradley, might have been).

Parsing his candidacy means trying to unpack all sorts of American contradictions--black AND white, liberal AND conservative, ambition AND risk aversion. (It's strange to watch a far left group like MoveOn endorse Obama, a candidate who is well to the right of the group's constituency on things like gay marriage and economic policy.) That he's able to embody all this contradictory mess, and thrive because of that morphology, is Obama's greatest strength as a candidate (that and his soaring oratory).

I don't see myself as part of a movement, though my friend Tom, an ardent Clinton supporter, has continually disparaged Obama's supporters as starry-eyed Kool-Aid drinkers. Maybe. Obama certainly is more seductive than Clinton. And Obama and those closest to him may actually believe that he IS the black, Democratic Ronald Regan. Perhaps I'm willing to pull a lever on the chance that he just might be. He is, after all, the candidate who has white Republican men interested in voting for the black Democrat with the Arab-sounding name, a development that I never thought I would live to see.

But those are all things that the sports talk show hosts call "the intangibles." The intangibles may actually be more important to winning an election than anything else, but they're not what motivates the confirmed Stevenson voter.

My swing to Obama rests on more prosaic ground.

First there's economic policy, one of the few policy areas that actually separate Obama from Clinton. Obama, and his chief economic adviser Austan Goolsbee--a left-center economist at the University of Chicago and frequent guest on the great radio show Bloomberg on the Economy--offer an economic approach much closer to Bill Clinton's than to Hillary's--free-trade friendly, not hostile to markets, but relying on the kind of real oversight and regulation that has been sorely lacking over the past 8 years. Nowhere was the contrasting approach made more clear than in the candidates' response to the subprime mortgage crisis, with Obama basically cleaving to the path laid out by Henry Paulson--pushing private refi under federal cover for debtors who can actually afford their houses--and joining with Senate Democrats in a bill to re-write bankruptcy laws to make it possible for debtors to restructure mortgages on their primary residences. Clinton, on the other hand, proposed a moratorium on foreclosures and a federally mandated 5-year freeze on interest rates, policies that not only sound like pandering but also that would prolong the crisis and deepen the housing downturn by raising the cost of borrowing for those seeking new loans.

Second, although it borders on insane to suggest that a black man is the Democrat's most electable candidate, I think in this case it may be true. In a race versus McCain in November, Democratic victory will depend on our candidate's ability to lure white male Regan Dems and independents away from McCain. Many in those demographic slices today will tell you: "If it's Hillary v. McCain, I'm voting for McCain." Not all of them will do that in the end, of course, especially since a vote for McCain is a vote for an open-ended military commitment in Iraq and a federal bench full of Sam Alitos.  But enough might, even after a long campaign in which Clinton is sure to win over some of them. Obama's campaign has deliberately targeted Regan Dems, and successfully too. In the end he may be the Dem best able to draw potential McCain voters way.

Finally, as a tactical matter, the Dems strongest ticket this fall would be Clinton at the top, Obama in the number 2 slot. That would be a huge winner, a happening drawing crowds bigger than those drawn by the Led Zeppelin reunion. I dunno if Clinton would offer the two slot to Obama, and I don't know if he'd take it. But if he can win enough delegates to deny Clinton an easy path to the nomination, then getting himself on the ticket would be his choice. I hope my vote in New York will help put that option on the table.

Sure, Obama's green. In contrast with Clinton, who I'm certain could govern competently and expertly, Obama represents risk. But Obama is like a top prospect in baseball. I'm going with the high ceiling prospect.

Is he up to the job? It's true we don't know, but I also see no evidence that he's not. Just look at his campaign--a brilliant operation for which Obama has not received enough credit. As a national level neophyte Obama has gone toe to toe with the Clintons, raising as much money, staying focused on message,  building a coalition across party factions, kicking ass with the kind of ground game you develop coming up in Chicago politics and avoiding the kind of Willie Horton knock-down campaign that a candidate usually needs when running from behind. I'm flat-out impressed. During my brief, lamented career as a venture capitalist I interviewed a lot of entrepreneurs. One of the things I was looking for was strategic vision, but even more importantly I was looking for the ability to execute tactically on that vision. Obama looks to me like a guy who can execute.

Hillary Clinton: Sotto Voce

Clinton supporters are already overselling Hillary Clinton's 2 point win in NH. It's only an enormous win if you believe the polls which showed a 30 point swing in NH in a week. Not likely. Hillary had a double digit lead in NH a week ago and hung on to a 2 point victory in the face of an Obama bounce.

But Clinton's hold in NH is important not just because it gets a win under her belt and not just because it slows the Obama train but mostly because it was a win achieved by a new Hillary, one who threw over Mark Penn's focus group-tested bullshit message about "change,"  chucking her stump speech, getting choked up for all to see, and most of all, speaking with a new, quiet, intimate voice, her indoor voice if you will. The new, soft-spoken intimacy seemingly borrowed from Mike Huckabee (who coos and purrs on the stump) is fantastic, especially for a woman who's outdoor voice can sound so harsh, pushed, and hard in sound-bytes.

If Hillary won thanks to a new message and sound, she also won thanks to old tactics, winning big among women and union members, although conspicuous by their absence on the podium during her victory speech was Bill and the Clinton era apparatchiks who surrounded her in Iowa (replaced by scrubbed young kids in a bit of stage craft borrowed from Obama). Her next challenge, closing the gender gap.

If America is not ready for a female president, it's not ready for the same reason that little girls will watch an action cartoon with a male hero, but little boys won't watch an action cartoon with a female hero. Hillary needs to be a female hero that little boys will cheer for, especially if she's going to try to win a general election against John McCain. If it's Clinton v. McCain, white male Regan Dem's could be decisive in swing states like Ohio and Florida. Can she turn 'em? Not at the moment.

Meanwhile Obama's still very much in it. with 93,000 votes, he out polled John McCain by more than 10,000 votes in NH. But he's going to need to start speaking to economic issues. The labor report this week showed that a recession is all but inevitable now and bad times are about to move front and center in the presidential campaign. Clinton's moving towards the kind of economic populism that is turning out to be the zeitgeist theme of 2008. Obama will need a counter answer, especially with Hillary's strength among blue collar rank and file Dems.

On the GOP side, Romney's done. He'll hang on until Michigan, but if he loses there there will be no reason for him to throw good money after bad in a race he has no shot at winning. The big question now is can McCain get a bounce and make headway, consolidating his NH win with a win in Nevada and becoming competitive in CA and FL. I don't think Rudy's a real contender. It never seemed likely that the GOP would nominate a pro-abortion, pro-gay rights NYer, never mind one whose own kids hate him. I think it's Huckabee v. McCain from this point forward in the GOP. I still don't think Huck has enough time or money to expand beyond his evangelical base, even with his appealing messages of anti-neo con foreign policy and economic populism, and my money's on a McCain/Huckabee ticket emerging (which would be a very strong one for the GOP). Let's watch McCain's poll numbers in CA and OH and Huck's poll numbers in FL and PA to see.