Financial crisis

"Wait a minute..."

Those were allegedly the final words of Pope Alexander VI back in August of 1503. I was thinking of fat, old, syphilitic, corrupt, murdering, adulterous Alexander just this morning. This particular Pope, known before his papacy as Rodrigo Borgia, who had so many mistresses he makes modern America's politicians and talk show hosts look chaste by comparison, is also distinguished by the fact that he was the father of, among many others, Cesare and the notorious Lucrezia Borgia. (To give you a taste for the man, upon becoming Pope he annulled his daughter's previous marriage so he could marry her off in a lavish Vatican ceremony to a relative of one of the cardinals who supported his papacy even as rumors circled of her incestuous relationship with one of her brothers. And the Heene family thought they had what it takes to make a good reality show...)

I thought of old Rodrigo as I flipped through a pile of clippings that I had set aside during the past couple of days. I started collecting the stories last week. The first were clippings about the record round of financial community bonuses in the U.S. and in the U.K. Then, as all this was happening, was Goldman Sachs' CEO Lloyd Blankfein's FT op-ed calling for financial reform. As I mentioned before I found the juxtaposition uncomfortably calculated.

A couple days later, there was the story announcing that former Goldman Sachs' VP Adam Storch was being named Chief Operating Officer of the "new and improved" SEC enforcement division. I have no doubt that Mr. Storch is an excellent fellow and a perfect choice ... other than the fact that he worked at Goldman. Does anyone think about the optics of these things? Or more than the optics, do they ever consider just how genuinely inappropriate such a hiring might be?

Of course, that's a rhetorical question. Some people do think about it. Just not people doing the hiring in the administration. Hence the articles in my pile of clips about the big bonuses that senior advisors to Tim Geithner got from big Wall Street houses prior to signing up to help devise the plans to "fix" Wall Street. I know some of these guys very well, consider them friends, consider them eminently qualified to be doing their jobs ... and yet, something gnaws at me about all this, an insensitivity on the part of the people who were putting together the administration team about what was really at stake in the financial crisis. It seems they felt the issue was more fixing the immediate problem than it was fixing the enduring problems in a system that once again has Wall Street executives lighting cigars with hundred dollar bills while unemployment hits record levels (see Mort Zuckerman's strong piece on this in today's FT) and home foreclosure are forcing former homeowners to live on the streets as never before. In any event it seems like they were really stopping to ask whether something big had changed ... or needed to.

Paul Krugman gets it, has all along and has written about it again in today's Times. Frank Rich, in yesterday's Times wrote a column capturing some of the anger that people feel about the power of Goldman and the other big banks and the utter unwillingness of Washington to do anything other than offer the occasional talk show tsk-tsk in response to the current return to profligacy (or the return of big lenders like Citi and Bank of America to losses after a momentary, bailout induced spate of profits). 

Meanwhile, John Harwood in the Times writes about Larry Summers' wise silence on sensitive economic questions while failing to go further and ask why it was that this week's tsk-tsking assignments went to Rahm Emanuel, David Axelrod, and Valerie Jarrett -- successors in function to the troika that once ran Ronald Reagan's White House (James Baker, Michael Deaver and Ed Meese). On the one hand the question is interesting because it leads one to other questions, like why the folks from the president's morning economic briefing who are being most prominently rolled out are not actually the ones who are the economic professionals? Could it be that the administration political brain trust feels the economic team has lost too much credibility by their minimalist, go-slow approach to reform? I think that would be a miscalculation because the future effectiveness of Geithner and Summers will depend on their being seen as the architects of substantially (and accelerating) reforms.

(Of course another question raised by the appearance of the Big Three on the Sunday shows is whether or not the administration really is being some so Office-of-the-President centric that it is all head and no arms and legs, kind of like one of those big-brained creatures from outer space or our future that we were led to believe would evolve from societies that didn't require physical exercise. The critique, provided to me this weekend by a prominent diplomat who has lived in Washington a long time, is that the administration has no trouble coming up with ideas or giving speeches but it has yet to put an effective implementation apparatus in place. It is kind of the Marvin the Martian model of governance.)

That particular aside aside, the pile of clippings grew this morning with the Wall Street Journal noting in its particularly "fair and balanced" way that the criticism of Wall Street from Emanuel and Axelrod was more tempered than in the recent past, suggesting that at least as far as the newspaper of record of the financial community was concerned, the White House wasn't too het up about all these fat pay checks. Apparently swine flu worries us but an epidemic of swinishness does not. At least the Journal seems to hope so.

And so, reflecting on all these clips, I started thinking to myself, is it capitalism? Could Michael Moore be right? (That seems so unlikely...) It's troubling to me, a dyed-in-the-wool practicing capitalist. And I'll have to admit I am still a long way from coming to a good answer about just how we have gone wrong and what needs to be done to fix a system that is producing greater inequality than ever and that is so apparently corrupt that even those from whom you expect big reform have either been co-opted or, alternatively, are simply reluctant to toss these particular money changers out of our particular temple (the small "d" democratic one). 

But my first instincts are what brought me back to good old Pope Rodrigo the Base and Repulsive. Because it strikes me that the issue isn't capitalism per se. Because 21st Century Wall Street is to capitalism as Pope Alexander VI was to the teachings of Jesus Christ. There was a connection but it was remote and observed more in the breach than in the honoring of the essentially good underlying ideas.

And that's where I take some comfort. It's not that we need a new economic ideology. We're just in dire need of a Reformation. (Although I for one could do without some of the wars, inquisitions, and public executions of the last one.)

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World Bank President Bob Zoellick has done an important service with remarks he delivered Monday in which he said, "The United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency. Looking forward, there will increasingly be other options." In fact, the only issue I take with his statement, delivered at the Johns Hopkins School of Advanced International Studies, is that it does not go far enough.

It has thus far been easy for most Americans to shrug off discussions of coming competition for the dollar as a reserve currency. First, of course, most Americans aren't even aware that the discussion is taking place and of those that are aware, most haven't the slightest clue how the international monetary system works -- which at least gives them something in common with most members of Congress and central bankers everywhere. (Zoellick is rightly pretty tough on the central banking community in his remarks, as well.)

Also, when Europeans or Russians starting talking about needing another currency so there is an alternative to the greenback, Americans tend to shrug it off as dollar-envy. It was not, of course, so easy to dismiss such suggestions when it came from the Chinese given their role as our principal creditor and the fact that they had more reserves than any other country in the history of mankind. But we put our hands over our ears and made "la, la" noises to drown out the discussion anyway.

Thus, whenever the issue arose, as it did again in discussions last week at the G-20 meeting, it has not had much resonance even among most members of the policy community in Washington. Many view the dollar as an immutable, unchanging fixture of the financial world ... even though recent experience has demonstrated that other than greed, there are few immutable, unchanging features of the financial world. This made it easy for the U.S. Treasury to simply mouth reassurances -- as Tim Geithner did last week -- that the dollar should remain the reserve currency without getting much questioning here at home. 

But Bob Zoellick is not a whacky, Gitane-smoking, eurocommunist with an anti-American agenda.    

He is a Republican, a Bush appointee, one of only a couple of dozen senior current or former U.S. government officials who can say they worked at Goldman Sachs, the true power center of international finance. So when he says don't take the dollar's place for granted, perhaps others in Washington will listen and start to focus more on the increasing likelihood that the growing chorus of those seeking change may well gain traction and as may the alternative currencies themselves -- be they Special Drawing Rights, the simulated money produced by the IMF for use with its members, or Chinese yuan.

Of course, Zoellick, whose remarks (which I read in "prepared for delivery" form) are typically thoughtful and also address the importance of the ascension of the G-20 and how this newly central group should take into consideration the broader rise of emerging economies, stops short of actually joining those calling for an alternative currency. It's easy to understand why, given his position.

But since none of the rest of us are president of the World Bank, we should not feel so constrained. There are plenty of good reasons why there should be one or more better alternatives to the dollar as a reserve currency than currently exist. Further, by not taking the discussion seriously we are less likely to play an effective role in the discussion about the future architecture of the system, consigning ourselves to a more reactive, sideline role.

First, there is no reason why one country should be given the responsibility or the right to play such a central role in determining international economic policies and outcomes. This is unlikely to be very persuasive here at home where most Americans first reaction is going to be, "Why the heck not? If not us, who? Don't we deserve it as the world's number one economy?" 

Given that the call for equity is not likely to be persuasive, what about basic American values like our belief in the benefits of competition. Look what has happened during this era in which we have not believed there was a real alternative to the dollar: We have behaved extraordinarily recklessly, piling on debt and practically taunting the world to find other options. It is clear, we don't have the discipline to manage the dollar properly as it is. We need the competition as much as anyone else.

Would a rapid selloff of dollars be potentially disastrous for America?  Absolutely. But, we are deluding ourselves if we don't think such alternatives already exist. Why is gold at such absurd heights and going higher? Further, there is plenty of evidence to suggest that oil and other commodities are regularly used as alternatives to currencies in what amount to forex trading strategies. In other words, markets demand such alternatives already. And any movement toward acceptance of new alternatives is likely to take a long time as investors cautiously adjust. So, we have to ask ourselves is the greater downside in embracing change or in clinging to a viewpoint that is both out of touch with emerging realities and promoting bad behaviors on our own part?

The international economic system will evolve with our cooperation or without it. Currently the biggest threat to the dollar is not those who seek alternatives but the U.S. policies that are pushing them in that direction.   It's time we engaged in this debate in a serious way, and Zoellick's remarks are a very constructive first step in that direction.

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In a world of self-help addicts who "just feel too much," the ultimate hero was Watergate burglar G. Gordon Liddy. Never mind that the guy was a few rounds short of a full clip of ammo. He is the man who held his hand over a flickering candle flame while his flesh appeared to roast and then, when asked how he did it, responded, "The trick is not caring."

I'm reminded of this because as we contemplate this week's G20 Summit in Pittsburgh and reflect back on the breathlessness with which the entire world viewed the last two such summits, it is clear that the trick they've seemed to accomplish is that this time around we all don't seem to care so much.

That could, of course, be partially due to the fact that this event is in Pittsburgh and that not that much really exciting has happened there since Franco Harris' "immaculate reception" during an AFC Playoff Game in 1972. At least for me, even recent Super Bowl victories have lacked the gritty drama of those by-gone days as the town has become spiffier and blander. (Have you been to Pittsburgh Airport recently? It's a shopping mall where they happen to land planes.) It's not that the city isn't grittier than say, Santa Monica. It's just that I feel some of that special Pittsburgh "let's have a beer and then punch each other in the faces until we fall down" kind of charm is gradually being lost. We're not too far from the day when a little kid asks, "Why do they call the team the Steelers, Daddy?" and the father then has to explain that once upon a time the steel that went into American cars and buildings was made right here in America. (More on this last point shortly.)

Of course, the reason the meeting is in Pittsburgh has to do with at least one respect in which the region is still seen as pretty exciting to certain types of folks -- like professional politicians, for example. Obama needed Pennsylvania to defeat John McCain. And the people of Pittsburgh like our current Ambassador to Ireland Dan Rooney helped deliver for the president and the president is therefore regularly looking for ways to deliver right back. (This is not to suggest that Rooney might possibly have gotten his job as a form of political payback. His years of experience as the principal owner of the Steelers made him an obvious choice for an important diplomatic position. After all, what riddles could dealing with the Irish pose that would be more complex or challenging than say, former Steeler quarterback Terry Bradshaw's break-up with ice-skater JoJo Starbuck back in 1983.)

Rooney wasn't the only one who helped Obama, however. Which, not surprisingly, brings us back to steel again ... and in particular to the United Steelworkers. Because it is clear that it is not an accident that Obama will be using this meeting to call for new initiatives against global trade imbalances in the hometown of one of his favorite unions. Just like it's not an accident that he primed the pump for his efforts with the recent decision to impose duties on Chinese tires, an issue that was pushed most vigorously by the steelworkers. Just like it's not an accident that Obama's new manufacturing czar is Ron Bloom, who was most recently the special assistant to the president of the United Steelworkers.

Which is all by way of saying, the G20 is not in Pittsburgh either because it's beautiful (and it has its charms) or because it's boring. The G20 is in Pittsburgh because of the domestic politics of U.S. international economics. Just as Marshall McLuhan once said "the medium is the message," in this case the location is the message.

And so we return to the "trick" of this meeting. It is no small feat that while last November's G20 meeting and the one that followed it in London in April were hot topics as the world careened through the worst economic crisis since the Great Depression, that this meeting is viewed in a more relaxed matter. There is an emerging consensus that things are slowly getting better, that we are probably even out of recession even you read this. (Feeling better yet?) No doubt this is largely due to the market working through its fears and repricing accordingly, but the speed and scope of interventions in the United States and China and even some parts of Europe undoubtedly had some positive effect. To the extent we are not still "falling off the table" in the words of Larry Summers, the G20 leaders deserve some of the credit.

And if this turns into a sustainable recovery, none of us should begrudge them the credit they get. But the problem with tricks is that they often involve some form of well, trickery. In the case of Liddy, the (not very well kept) secret was that he was bonkers. But in the case of most sleight of hand the secret is misdirection. We look in one direction while what is important is happening someplace else.

I hope that's not what is happening with the global economy. I hope we are moving toward both a sustainable recovery and toward enacting regulatory reforms that ensure we don't make the same mistakes that led to last year's market debacle. I hope we are not looking at one set of indicators while ignoring another. But there are warning signs.

One is that while the G20 will agree on an expanded role for the IMF, national governments including our own are moving too slowly to address root causes of the recent crisis from opaque, often-illiquid but massive global derivatives markets to effectively controlling the risk appetites and exposures of large financial institutions whose failures carry with them a large risk of damage to the public at large. That's not to say some measures aren't being considered or implemented. It's saying that many of the steps-like creating more transparent markets in some derivatives -- don't go far enough. The biggest banks are bigger. New risky behaviors are being embraced. Old ones are creeping back into vogue.

In fact, I can't help but wonder if the biggest problem with the recent crisis was that it wasn't painful enough. Or that perhaps it ended too quickly to deliver effectively the lessons we ought to have learned.

Further, on the macro level there's still plenty to worry about. First, recovery will be slow. Second, those who are depending on Asia to lead us out don't realize how limited their capability is to do that. Chinese consumers are many decades away from being able to make up for any substantial fall-off in demand from Americans. And there are risk factors out there ... relating to dollar or commercial real estate markets or simply a panic induced by an exogenous event ... that could lead to serious trouble...the dreaded "W."

And finally, there's Pittsburgh. Or rather the reason we are in Pittsburgh.  I'm not sure the Obama team has irreversibly set a protectionist course. In fact, I'm pretty sure that the issue is still something of an open question. Summers and Geithner are certainly not protectionists by instinct and USTR Ron Kirk is still getting his legs under him. But many of these decisions are getting made on the political side. So it might be that we will add to the cocktail of inadequate reforms and questionable macro trends policies that can only make things worse: like getting a series of trade scrapes and scuffles that will impede recovery and make key relationships much more complicated.

Which is why, just as with Liddy's little trick, this one creeps me out a bit. The world is letting out a sigh of relief at a moment that has me holding my breath. 

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There was for a long time been a widespread belief that the guys who were cashing in on Wall Street were the best and the brightest. Now, as we mark the anniversary of the collapse of Lehman Brothers we have yet another form of proof it just ain't so. 

But the deus ex machina arrival of new U.S. ambassador to Germany Philip D. Murphy really is in a class by itself -- stupid, thoughtless and arrogant on so many levels it deserves some kind of an award. 

Perhaps State ought to consider some kinds of guidelines for the fat cats who are being plunked down in important embassies around the world. Like: "Don't be a pig with your money." Or: "Try to remember you represent the United States of America and not the sovereign principality of Goldman Sachs anymore."

But you do have to give the White House credit. Getting someone from Goldman to serve in the government is a real coup. Who thought of that? They also deserve a medal.   

It used to be that the Chairman of the Fed was regularly referred to as the most powerful man in the world. This was back in the day of Alan Greenspan and, at the time, it seemed it was in spite of the fact that people seldom understood what he was saying. Subsequently, we learned it was precisely because of the fact that we didn't understand what he was saying. And then, subsequent to that, we also learned ... largely because he had the good grace to admit it ... that he himself didn't understand what he was talking about.

The downward spiral of Greenspan from philosopher king of the global economy to mere mortal caught his successor, Ben Bernanke, in its vortex. He was handed an economy in which the doors and wheels were coming off as we drove and nothing like the power he needed to deal with it. Indeed, as the current crisis unfolded we saw that the Fed chair was not the most powerful job in the world, that title was reserved for current or former ceos of Goldman Sachs. This must be so because for a while people wanted to fire Bernanke after one term in office primarily because he had inherited a mess whereas when you screw up the global economy as the current or former ceo of Goldman Sachs, people want to help bail you out or make you Treasury Secretary or both. 

I kid. It is highly unlikely any ceo of Goldman Sachs is Treasury Secretary again for quite some time. Possibly years. 

And Bernanke did earn some of the flack he got initially, largely because he was swept along in the groupthink of Washington economic honchos, buying into the "leave it to the markets" regulatory philosophy that got us into the mess we faced for far too long. But when it became clear that approach not only did not work but that real change was needed, the quiet academic stepped up and became perhaps the leading dependable voice of reasonable change. That's why there is a consensus emerging today that Bernanke, who against all odds seems to be restoring the notion of Fed Chairman as Washington's most trusted economic oracle, should be reappointed when his term in office ends. Steven Pearlstein, in a typically thoughtful piece in today's Washington Post, gets on this bandwagon and adds a few suggestions as to how to modify the Fed (as well as an absolutely justified endorsement of David Wessel's terrific new book on the economic crisis called, "In Fed We Trust.")

The growing momentum of this bandwagon has put in doubt the once conventional wisdom that Larry Summers had accepted the reins of the National Economic Council as an interim step on his way to the Fed chairmanship. But Summers has done such a good job elevating the National Economic Council to unprecedented prominence in the day-to-day operations of the White House and has so effectively earned the president's trust, that it is now almost certainly better for all concerned (including those of us out here in tax-payer land) that he stay right where he is. If there was ever a situation that called for the president to have a strong economic quarterback at his immediate side in the White House, it is this one and in Summers, Bernanke, and Geithner, Obama has got a first-rate team that has the number one criteria you need for success in each of their respective jobs -- the trust of the president.

Now, as readers of this blog know, I don't think every move they have made is perfect. I am disappointed by the speed of regulatory reform here in the United States and internationally. I think they have not done enough to address some of the underlying causes of the crisis such as the creation of massive pockets of risk in the global economy related to the development of opaque derivatives markets. I think they have cut deals with Wall Street that are too sweet for the bankers. I think they have spent too much, bought into ideas (like tax cuts) in the stimulus that amounted to political pandering and they sure haven't given the president the kind of clear guidance he needs on how to sell the health reforms that are perhaps the economic reforms we most urgently require.

That said, their job was first to stop the bleeding and to stabilize the patient. It was no easy task and what they did in terms of swift and sweeping intervention, while imperfect ... almost necessarily imperfect given the speed at which they were operating ... has seemed to work. I still fear a second dip of the recession ... the "W" rather than the "V" shaped recovery. But today's papers show Germany and France creeping out of recession. Japan may too. Economists (a group with limited credibility at the moment, I must admit) seem to think we are at least plateauing here in the United States too. So I think it is fair that this team get credit for their efforts. 

Frankly, I hope that the initial success they seem to have achieved emboldens them. If anything they have seemed too deferential to the Congress and to Wall Street and once stability seems assured aggressive measures to rein in the budget deficit, further strengthen regulatory oversight and strengthen international regulatory mechanisms will be called for with the same urgency that stimulus measures were called for earlier this year. 

We have seen the dangers of too much deference to the markets, of regulatory indifference, of not believing that government could or should play a significant role in protecting our national interests by identifying and mitigating market risks with broader macro or social consequences. I hope the president makes the early decision to keep everyone where they are so that they can focus on the next wave of reforms that are so urgently needed.

(And to be clear, does the above actually suggest that I want a bigger role for governments in market regulation, stronger global governance mechanisms, tax increases if we need them in addition to substantial spending cuts and that I am a fundamental believer that government also needs to play a much expanded role in ensuring sustainable health care...which optimally would be through a single-payer system that is not even on the table at the moment ... and preserving the environment ... ideally through a simple, straightforward and substantial carbon tax? Yes, it does. Start rolling out your labels if you would like, but if the recent crisis has taught us anything it is that we can't afford the reflexive rejection of government solutions where they are needed ... rather we need to rise to the challenge of figuring out how to make governments more effective in these critical roles that only they can play.)

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Senator Charles Grassley, one of the six power brokers featured in the New York Times story today on the inner circle of senators who are shaping health care legislation, may not be one of the three Blue Dog Democrats on the group, but that doesn't stop the Iowa Republican from being pretty dogged when it comes to his own pet issues.

According to today's Congress Daily, the Finance Committee's ranking member has slammed the brakes on the confirmation of Thomas Shannon to be ambassador to Brazil. His reason? He seeks what is euphemistically called a "clarification" of Shannon's confirmation hearing statement that eliminating the tariff on ethanol imports would be "beneficial." Of course, by "clarification" the Senator means a complete reversal slammed down Shannon's gullet by administration higher ups.

In letters to Secretary Clinton and USTR Kirk Grassley wrote:

A clear signal of the President's stance on this issue would decrease the possibility of confusion in America's heartland and in Brazil regarding the ethanol tariff if Mr. Shannon were confirmed as Ambassador to that country."

Since Shannon, most recently U.S. assistant secretary of state for Western Hemisphere Affairs and by consensus the most talented and successful individual to hold that office in at least two decades, is one of America's very best diplomats he will of course, be far too circumspect to offer Grassley the "clarification" he deserves.

Let me try however. U.S. ethanol tariffs are indefensible on any level, yet another example of the system of agricultural welfare that has burgeoned in the United States thanks to that good old fashioned combination of backroom and checkbook politics that make America great. There is not a single credible analyst of biofuels (which is to say one that is not paid for by or affiliated with American agriculture) who thinks that corn ethanol makes a hint of sense. It is hopelessly inefficient and with every new development regarding next generation biofuels only grows more so. Brazilian sugar cane ethanol, the main target of the tariffs, is produced as much as eight times more efficiently. As such, it offers a cheaper, more abundant, more environmentally friendly alternative to American consumers at a time when one would have thought that concerns about reducing dependence on foreign oil and combating climate change would be at the forefront of our concerns.

But once again, America's electoral system rears its ugly head. So long as presidential campaigns begin in Iowa, Iowans like Grassley will use the system to put the interest of their state's three million citizens and the most vocal special interests within their midst like the corn lobby, ahead of the three hundred million or so of the rest of us. Further, in so doing, Grassley seeks to preserve yet another dimension of America's system of farm protection and subsidies that costs tax payers tens of billions each year, forces food prices higher (according to the likes of Nobel Prize winner Joe Stiglitz) and is the single biggest distortionary factor in the world trading system. I understand why he is doing it. It's just a shame he can. The system allowing individual senators to hold up presidential nominations is regularly abused and needs to be reconsidered.

It is now July and the Obama administration does not have its own ambassador in Brasilia, capital of one the rising powers that is most important to us in the world. The guy who is there now, Bush's appointee Cliff Sobel, is widely regarded by Brazilians (and anyone else who is paying attention) as a joke whereas Shannon is seen as the crème de la crème of the U.S. diplomatic service and is a nominee viewed with great enthusiasm by the Lula administration. The Shannon pick said "Brazil is important."  Grassley's move says "all politics is local." 

It will be interesting to see how this plays out given that Grassley is so important to the prospects for health care reform. Grassley, who is as canny as they come in the Senate, knows the hand he holds and is betting he can get the Obama team to commit to keeping the tariffs as part of the wheeling and dealing associated with health care. I wouldn't bet against him.

As they say around state fair time in Des Moines, "ain't nothing like a corn dog."

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In its obituary of the famed and beloved Columbia philosopher Sidney Morgenbesser back in 2004, the New York Times wrote:

In the 1950's, the British philosopher J. L. Austin came to Columbia to present a paper about the close analysis of language. He pointed out that although two negatives make a positive, nowhere is it the case that two positives make a negative. 'Yeah, yeah,' Dr. Morgenbesser said.

Austin was clearly unprepared for Morgenbesser. But he was also clearly unfamiliar with diplomacy in which the double positive can be deadly. 

For example, on one level, if you are an ally like Israel, you might think that the only thing better than being visited by one senior U.S. official (say, Secretary Gates) would be another visit in the very same week from another senior official (say, National Security Advisor Jim Jones). Even better would be adding yet another bit or two of senior level attention, say that of Mideast Negotiator George Mitchell or NSC Mideast guru Dennis Ross. But four times the high-level visitors are hardly four times the fun, or to put it another way, one high level visit is an honor but four in a week is a serious sign of trouble.

While all the visits to date have produced upbeat official statements at their conclusion, behind the scenes it is clear that concerns about the Israeli stance on Iran and the Netanyahu stance on settlements has pushed this relationship to what may be one of its lowest ebbs in modern memory. As one Israeli said to me, "We spent half the Bush administration complaining our issues weren't getting any attention. Now, we're starting to look back on being neglected as the good old days..."

Also, of course, too many envoys raises another question, "if your government speaks with one voice, how come I am hearing so many voices?" This is related to another classic set of double-positives encountered in politics and diplomacy, the problem of too many chiefs. For example, having copresidents of an organization doesn't mean having twice as much leadership, it usually means half as much…or less. 

Which brings us to another instance this week in which the positives have been signs of the negatives: the U.S.-China Strategic Economic Dialogue, which is cochaired on the U.S. side by both the Secretary of State and the Secretary of the Treasury. As Glenn Kessler wrote in the Post today:

On Monday, about 200 senior Chinese officials traveled to Washington and heard soothing words of reassurance from U.S. officials: The dollar is still sound, your investments are safe and we are working really hard to restructure our economy.

Such is the nature of the U.S.-China relationship today. Behind all the reassuring language is a nervous sense that the fate of the world economy is increasingly dependent on the United States and China working together.

In other words, it's our turn to sing "Don't You Worry 'Bout a Thing" which, of course, means, in the best interpretation, that our partners the Chinese are worried and at worst means, "worry!" (How things have changed since we were beating them up about their economic management.) Certainly every reassurance we offer is more a sign of an underlying concern than it is a true positive statement about the economy. Thus, the more positives, the more worries. 

This, in turn, brings another Morgenbesser anecdote to mind, also recounted in his Times obit:

In the 1970's, a student of Maoist inclination asked him if he disagreed with Chairman Mao's saying that a proposition can be true or false at the same time. Dr. Morgenbesser replied, 'I do and I don't.'

Mark Wilson/Getty Images 

Sometime next year, probably a few months after the unemployment rate in the United States passes 10 percent, Goldman Sachs may well generate the $10 billionth dollar of profit that it has made since the American taxpayer helped bail it out at the nadir of the financial crisis. At least it will if keeps making $3 billion a quarter in profit as it did last quarter. 

With 2010 being an election year, the Republican Party will be vigorously hammering the Obama administration on record unemployment (it's quite possible real unemployment...including those who don't report, etc...will be approaching 20 percent, it's already 16.5 percent now). They will say the stimulus was wasteful and that new taxes on the wealthy are just the tip of the iceberg. And, if midterm elections hold true to form, the Obama administration will lose the big advantages the Democratic Party currently has in the Senate and the House. (Watch for Mitt Romney selling his business and management credentials to lead this charge and position himself successfully to be the Republican candidate in 2012.)

The Republicans won't actually win a majority in either house. But they won't have to. As we have already seen with health care and climate reform, even with current advantages the Obama team barely can force their own initiatives through given divisions within the Democratic Party. 

And those Democratic divisions should grow. Because in all likelihood...if the left has any hint of a spine left...they will be furious that Obama not only fumbled his lead but that he is copping out on health care and climate, seeking to be the Henry Clay of the modern era (and let's remember, the fates of the compromises engineered by "the Great Compromiser" were not so great.) Meanwhile, Obama will also be seen by many as the guy who Wall Street had dancing on a string. Because nothing says "you been played, suckah!" like reading stories such as those in today's Wall Street Journal or the FT of Goldman's bounties. The taxpayer couldn't get played in this instance without the willing shnookery of the Obama administration (and the historically clueless shnookery of the U.S. Congress not to mention that of the Bush administration...let's be fair, the nation's capital is shnook central).

In other words...if things play out as described....2009 could be the legislative high water mark of the Obama administration with the election paralyzing action next year and progress on the Hill much more difficult thereafter.

As for Goldman's record payday, I've asked this before and I will ask it again: Where is the outrage? I'm a dyed-in-the-wool capitalist. I love free markets. I hope a free market marries one of my daughters some day. But if some people have too many advantages and others simply can never catch up, the markets aren't free, regardless of law or intent. Even if the advantages are in part derived from talent and hard work, fairness can remain an issue if other components of the success are linked to access, influence, history and other intangibles.

Few companies in American history...perhaps Standard Oil, perhaps J.P. Morgan's bank, but probably not G.M. in its prime...have had more high-level influence on public policy than Goldman Sachs. This may have seemed fairly benign when markets appeared to be operating as they should and Goldman merely seemed a source of talent for the government. 

But now we have a different perspective. In a story from the front page of today's Wall Street Journal: "With competitors such as Lehman Brothers Holdings Inc. and Bear Sterns Cos. Gone and others like Citigroup Inc. flailing, Goldman appears to be pulling off one of the biggest market grabs in Wall Street history." And so we must ask, how did we get here? Is it purely a coincidence that former Goldman CEO Hank Paulson oversaw the management of a financial crisis that allowed several of Goldman's biggest competitors to be destroyed but included goodies like the $12 billion passed through AIG to its prime counterparty Goldman, why aren't there more questions?

Goldman over-leveraged. Goldman advocated for the system that produced the crash...self-regulation by banks, proliferation of risky vehicles, a trading culture that passed risk along and left tidy profits for the traders. When the system blew up, Goldman, its advocate (including a busload of former execs who helped write the rules in the USG), and one of its prime beneficiaries, went to the government and asked for help. It got it. It used it. And then, apparently not as badly off as it once had seemed, it paid off the government cash when it seemed there would be too many strings attached.

Now it is using the new-found freedom and vitality to gain an edge on its remaining competitors, many of them still struggling. (In fact another banking crunch is possible due to margin issues, consumer credit issues and commercial real estate issues among others.) Throughout, it was a Goldman guy at Treasury in the Bush administration, a Goldman guy at White House chief of staff at the end of the Bush administration, a Goldman guy in charge of TARP, and when Tim Geithner left the NY Fed to replace Hank Paulson, it was a Goldman guy who replaced him. 

And now, when the rest of the economy is in ruins, who is it that is striding about announcing record profits and record bonuses? And why is there no talk of any commensurate return on investment to the taxpayers who, they argued at one point, were needed to save their hides? (If you ever wanted proof of the premise behind my book Superclass, look no further. These guys operate as ultra-citizens in our society, virtually able to tell the government to heel and fetch in ways the rest of us can only fantasize about.)

Some will surely argue this is the American way, that Goldman has earned every penny. No. While Goldman has legitimately earned much of it, and there are many great and good folks working hard at Goldman who have made important contributions through government service. (In particular I applaud the pending appointment of the vice chairman of Goldman International Bob Hormats as Under Secretary of State for Economics, a great and talented guy.) Fair-minded individuals must also conclude they played the system, their huge profits came at the expense of others who could have used the government bailout money who had no access to it, no clout, no Treasury Secretaries hailing from their failing auto parts dealership or struggling stationery store. Further, Goldman's profits are simply not the broad-based benefit for America, they are a benefit for Goldman employees and shareholders.

Goldman is the most influential financial institution in a community of banks that sucked the system within an inch of its life with greed and to whom the U.S. government seemed to feel a prime responsibility was to rescue them..."to mitigate systemic risk." Crap. What about the risk to the system caused by the inequities created here? These ultra-citizens -- Goldman is one, think of Exxon registering record profits while the country squirmed in the midst of an energy crisis...and then demanded tax breaks along the way -- are operating apart from  and above our system, using it for their benefit, putting people at risk, exacerbating inequality. While they may help America in some respects...we need to wise up and recognize when we are being used and abused.

And sooner or later, with deficits mounting (Happy Trillion Dollar Deficit Day everyone!) and the government in need of revenue in some form other than loans from abroad, there will be more tax hikes. And companies that operate with sense of entitlement and moral blankness that distinguishes their counterparts in modern fiction...in the Twilight movies say, or "True Blood"...will be the ones who will find that they are increasingly the targets. And what's more, I think they should be. 

My sense is that it is going to take the next wave of crisis...the growing unemployment...the very very slow growth of the recovery whenever it happens...perhaps the next downspike...to mobilize the left and to paralyze the traditional defenders of these folks. (Admittedly a big shift to the right in next year's elections could protect the ultra-citizens in our society, the organizations that have trumped the people in American democracy. And thus watch who supports that shift.)

Obama can still avoid these outcomes...a shrunken edge in Congress, an even more fragmented party, this year's watered-down programs being the high point of a one term administration...but not if he doesn't realize that at the moment his "let's get Wall Street back to the way it was" approach could be the death knell for his popularity with much of his base, much as it was for his Republican opponents last fall. It's time to recognize something not working as planned with this recovery in which the top enjoys record rebounds while the bottom still plummets. 

In the old time TV and radio series "The Life of Riley," William Bendix's character would regularly say what I thought this morning while reading about the Goldman bonanza: "What a revoltin' development this is." The question on my mind is: When does the revoltin' in response begin?

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