Libertarians

The right flank

Bob Barr and the Libertarian challenge to John McCain

JOHN MCCAIN likes to style himself as a successor to a Republican president from a century ago: Teddy Roosevelt. Like Mr Roosevelt, Mr McCain presents himself as a tough type not afraid to wield American power abroad. He is also ready to use the presidency at home as a “bully pulpit”—a term coined by Mr Roosevelt—even against big business when needed. Roosevelt built the Wildlife Refuge system and created huge national parks and forests; Mr McCain fancies himself green and wants to cap greenhouse-gas emissions.

But whereas Roosevelt is widely considered to have been one of the great presidents, many modern conservative types are troubled by Mr McCain. The anti-government wing of the party that was launched to its forefront by Barry Goldwater in 1964, championed by Ronald Reagan, and then dispirited by eight years of George Bush is worried by Mr McCain. Could some of these voters defect to the Libertarian Party this year?

The question is less fanciful than usual. The Libertarians, now deciding who should be their presidential nominee, are usually a sideshow. Their last candidate, Michael Badnarik, took a third of a percentage point in 2004. The hopefuls this year include one who wants to move the United Nations headquarters to Somalia, one known mostly for a book about the spirituality of John Denver, a country singer, and a near-obsessive marijuana-legalisation advocate.

But this year the Libertarian nomination may be a bigger prize. Ron Paul ran a lower-case libertarian campaign for the Republican nomination, generating surprising levels of enthusiasm, votes and money. Paulites continue showing up and voting for him in primaries, despite the fact that Mr McCain has locked up the nomination. The word “libertarian” has, in the wake of that run, gained more currency and respectability.

And now Bob Barr, a prominent former Republican Congressman, is campaigning for the nomination. Mr Barr, a former anti-drug warrior and leader of the impeachment against Bill Clinton, has converted to a rightish branch of Libertarianism. His biggest worry is the expansion of federal powers since September 11th, 2001. He wants to abolish the Justice Department. He would defer to states on gay marriage and drug legalisation.

Could this be bad news for Mr McCain? Mr Barr may not get the nomination—many Libertarians may prefer someone with more years in the party—but if he does, Mr McCain should be wary. Even worse would be if Mr Paul endorsed Mr Barr (Mr Paul himself sought the Libertarian nomination in the past). As in previous elections, 2008 will be decided by close votes in a few swing states. Orthodox Republicans are dispirited by Mr McCain’s heterodoxies on immigration, global warming, taxes and other issues. They are reluctantly coalescing around him, on the basis that he is more appealing than Barack Obama.

But just enough demoralised Republicans might pull the lever for Mr Barr in states with an ornery, independent streak to give Mr McCain some heartburn. Mr Barr explicitly says that he is not running as a spoiler and would take votes from Mr Obama (from those worried, for example, about civil liberties). But the general wisdom is that he would take far more from Mr McCain. Some are already calling him Mr McCain’s Ralph Nader, the man who took enough votes from Al Gore to let Mr Bush become president in 2000.

Even if Mr Barr is not nominated, the fact that people are even speculating about a libertarian spoiler is a reflection of the challenges faced by Mr McCain. He has a vaunted personal story and a likeable personality, but he is hemmed in ideologically. On his signature issue, Iraq, he is a hostage to fortune. At home the more he shows his independence from Republican orthodoxy, the more traditional Republicans might stay away from the polling booth. The more he courts the Republican base, the more he risks being associated with Mr Bush. The last thing he needs is an irksome Libertarian stealing his small-government credibility too.

China's Katrina Shows Post-Communism No Big Easy

Commentary by Amity Shlaes

-- The picture of the angry parents protesting the collapse of the school in Wufu is so sad that you get the impression there could be nothing like it. But then you remember something like it in, of all places, Louisiana.

Writing about the corruption in that state in the 1920s, the author Robert Penn Warren described a man's shock ``when the first brick schoolhouse ever built in his county collapsed because it was built of politics-rotten brick and it killed and mangled a dozen poor little scholars.''

``Tofu construction,'' is what some are saying after a massive earthquake struck central China last week. But that's just Chinese for ``politics-rotten brick.''

The Chinese disaster is occurring on a magnitude several times greater than anything in Louisiana, including of course, Hurricane Katrina.

Yet what is going on in China recalls what Louisiana was demonstrating well before World War II: Preparation for and reaction to floods, earthquakes or hurricanes reveals much about government and growth. A government can cause economic growth to happen, though it's not always the best growth.

The result can be disasters that are not only natural but also ``man-made,'' as grieving Chinese parents now put it. This is so even when the government has set impeccable goals -- sound federalism, political reform and better infrastructure for the locals.

Walking the Walk?

A clue to the dynamic emerges in several papers written years before the recent quake by Li-An Zhou of the Guanghua School of Management at Peking University. Beijing talks all the time about rewarding economic performance. But Zhou and colleagues wanted to know if Beijing was also walking the walk, rewarding local officials for focusing on their province's growth rate instead of practicing old-style patronage.

Like corporate managers hopping from company to company, Chinese regional politicians hop from regional post to regional post in their careers. The scholars therefore followed the careers of 344 provincial leaders in 28 provinces from 1979 to 2002, trying to determine what caused demotion or promotion.

Because party officials along with governors hold the power in such provinces, the authors included 187 party secretaries in the mix. A correlation between the economic performance of a region and promotion of its leader would suggest that China had indeed moved away from the old boss system.

Growth `Tournament'

That presumption proved correct. Beijing was sticking to its promises. Leaders in provinces where there was more new economic activity won promotions. Provincial leaders whose gross domestic product didn't grow as fast were demoted or chose retirement.

What's more, provincial leaders were marked by Beijing not on how much growth they achieved in their province relative to governors of other provinces, but rather by how their GDP performed against the growth delivered by their provincial predecessor.

Since some regions grow faster than others, this seemed fair, and that appearance, the authors point out, ``strengthens the incentive effect.'' Confident of the terms, the politicians played the growth game harder. The authors used the word ``tournament'' to describe the competition.

Some observers are blaming some of the Chinese catastrophe on the absence of good construction codes. But even that wasn't a problem, says Ashley Howlett, who leads the construction practice of the law firm Jones Day in China and wrote a book, ``PRC Construction Law: A Guide for Foreign Companies.''

On the contrary, notes Howlett, ``the building codes are equivalent to those of the United States and other developed countries in their scope. The law is there.'' Multiple levels of subcontracting are also illegal, Howlett says.

No Magic

Still, there were problems in China, as in Louisiana. Whether you mix your cement well or shoddily, what you do shows up as economic activity on paper. Howlett notes that under the current system, local officials know they have to complete their assignment. And often that does involve subcontractors hiring subcontractors. And builders cutting corners.

What all this suggests is that there's nothing magical about any financial datum, not even GDP.

``There's GDP, there's Green GDP, and there's Garbage GDP -- China's own version of the road that leads to nowhere,'' says Gordon Chang, an author who wrote about the vulnerability of the Chinese political house in a 2001 book, ``The Coming Collapse of China.''

Popularity Through Government

In China as elsewhere, it turns out that competition wasn't always harnessed to good end. The pursuit of GDP through government is too similar to the pursuit of political popularity through government. China intentionally rotates its governors to ensure they don't build up personal machines. Perversely, that freed officials from living with the consequences of shoddy construction. Soon after the ribbon is cut on the new school, they move on to the next post.

So China today isn't like the China of Mao. But it is something like the old Louisiana. There, collapsing schools didn't lead to greater openness, political revolution or an upgrading that made Louisiana like the North.

Such tragic demonstrations of the consequences of corruption merely brought to power a colorful demagogue, Huey Long. As in China, the interplay between the central government and the locals -- Washington and Baton Rouge, in this case -- also was problematic. Flawed logic at the center clashed with flawed policy at the local level.

The earthquake tragedy suggests that for China, too, finding a way to be a successful society will be no Big Easy.

U.S. Economy: Home Resales Decline, Inventories Jump (Update3)

May 23 (Bloomberg) -- Sales of previously owned homes in the U.S. fell in April and the supply of unsold properties reached a record, signaling no let-up in the 27-month housing slump.

Purchases declined 1 percent to an annual rate of 4.89 million, higher than forecast, the National Association of Realtors said today in Washington. The median price fell 8 percent from April last year, the second-biggest drop.

``There is no indication that things are improving,'' said Christopher Low, chief economist at FTN Financial in New York, who forecast sales would drop to a 4.9 million pace. ``Inventories will stay out of balance at least until the end of 2009 and prices will keep falling.''

Defaults on subprime mortgages have prompted lenders to restrict credit, while falling property values have given buyers who are still able to get financing reason to delay purchases. The slide in home values may hurt consumer spending, which accounts for more than two-thirds of the economy.

Treasury securities, which had risen before the report, stayed higher. Benchmark 10-year note yields fell to 3.84 percent at 4:20 p.m. in New York, from 3.92 percent late yesterday. The Standard & Poor's 500 stock index slid 1.2 percent to 1,375.93.

Resales were forecast to fall 1.6 percent to a 4.85 million annual rate, according to the median forecast of 67 economists in a Bloomberg News survey.

Sales were down 18 percent compared with April 2007.

Glut of Homes

The number of previously owned unsold homes on the market at the end of April jumped to 4.55 million from 4.12 million in March. The total represented 11.2 months' supply at the current sales pace, the highest on record and up from 10 months at the end of the prior month.

The median price of an existing home fell to $202,300 from $219,900 in April 2007.

``We had an unrealistic run-up of prices and the faster they come back down to the real world the better,'' William Cheney, chief economist at John Hancock Financial Services in Boston, said in an interview with Bloomberg Television. ``The faster prices come down, the quicker we can get back to an equilibrium where we actually have transactions.''

Property values may drop more than 30 percent from their peak in 2006, Robert Shiller, an economics professor at Yale University and co-creator of a housing-price index, said in an interview with the London-based Times last month.

Shiller Index

The S&P/Case-Shiller March home-price index covering 20 metropolitan regions is due May 27. Through February, the measure was down 15 percent from the record set in July 2006. Shiller was unavailable for comment today.

Existing home sales account for about 85 percent of the U.S. housing market while new home sales make up the rest. Monthly figures on resales are compiled from contract closings and may reflect sales agreed upon weeks or months earlier.

Purchases of new homes, which are recorded when a contract is signed, are considered a more timely barometer of the market. The Commerce Department's report is due next week.

Today's report showed resales of single-family homes dropped 0.5 percent to an annual rate of 4.34 million. Sales of condos and co-ops declined 5.2 percent to a 550,000 rate.

Purchases decreased in two of four regions, led by a 6 percent decline in the Midwest.

Fed View

Federal Reserve policy makers, who cut their 2008 growth estimate by almost 1 percentage point, said ``tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters,'' according to minutes of their April meeting released on May 21.

The economy will expand by 0.3 percent to 1.2 percent this year, policy makers estimated. Their efforts to support growth include 2.25 percentage points of reductions in the benchmark interest rate this year, the most in almost two decades.

Recent reports signal little relief for the housing market. The number of banks reporting tighter lending standards approached a record in April, a Fed survey showed. Builders broke ground on single-family homes last month at the slowest pace in 17 years, Commerce figures showed.

Residential construction, which has subtracted from economic growth since the first three months of 2006, will remain a drag through most of this year.

Less Credit

Restricted access to credit will continue to depress property values, eroding household wealth as home equity shrinks. The declines are likely to weaken consumer spending further.

Housing-related firms have faced the brunt of the economic slump. Home Depot Inc., the largest home-improvement retailer, this week said full-year earnings may be at the low end of its prior forecast. Rival Lowe's Cos. said 2008 sales won't meet its estimates. First-quarter profit plunged 66 percent at Home Depot and 18 percent at Lowe's as consumers cut back on remodeling.

``The housing and home-improvement markets remain very difficult,'' Home Depot Chief Executive Officer Frank Blake said on a May 20 conference call. There will be ``more risks than opportunities through the remainder of the year.''

The worsening housing market signals that the Bush administration's efforts to contain the slump aren't working.

The U.S. Senate Banking Committee this week approved housing legislation to stem foreclosures by insuring as much as $300 billion in mortgages. The plan, yet to be approved by the full Senate, also would create a new regulator for Fannie Mae and Freddie Mac, the two largest U.S. mortgage-finance companies.

Trichet Says Shocks Aren't Over for Europe's Economy, WSJ Says

May 24 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said the shocks to Europe's economy from financial market turmoil and rising food and commodity prices aren't over, the Wall Street Journal reported, citing an interview.

Europe is facing a protracted period of high inflation rates, the newspaper quoted Trichet as saying. Trichet also said the ECB would deliver price stability in the medium term, the newspaper said.

The ECB has refrained from following the U.S. Federal Reserve and Bank of England in lowering interest rates to shore up growth after an increase in borrowing costs. While euro-region inflation slowed to 3.3 percent in April from a 16-year high of 3.6 percent in March, it's still above the ECB's 2 percent limit.

Trichet also called for a single European market for financial services in order to optimize the central bank's policy instruments and to improve the cohesion of European monetary union, the newspaper reported.

Dollar Falls for a Third Week as Oil Increases, Home Sales Fall

May 24 (Bloomberg) -- The dollar declined for a third consecutive week against the euro, the longest losing streak in two months, as the U.S. housing slump and record crude oil prices slow growth in the world's largest economy.

The U.S. currency also dropped versus the yen and fell to a 25-year low against the Australian dollar. The Chinese yuan posted its biggest weekly increase this year on signs the country's officials are accelerating the currency's gains to curb rising prices.

``There's no turn in sight for the housing market,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York. ``Higher oil prices effectively become a tax. It takes away the spending power from consumers, and it's a drag on growth.''

The dollar fell 1.2 percent this week to $1.5762 per euro yesterday, from $1.5577 on May 16. It touched $1.5814 on May 22, the weakest level since April 24. The U.S. currency fell 0.7 percent to 103.38 yen, compared with 104.04 a week earlier. The euro gained 0.5 percent to 162.95 yen, from 162.27.

Futures traders reversed bets that the euro will decline against the dollar, figures yesterday from the Washington-based Commodity Futures Trading Commission showed. Traders had turned bullish on the dollar in the week ended April 29 for the first time since December 2005.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop, known as net longs, was 6,841 on May 20, compared with net shorts of 9,499 a week earlier.

`Weighing On The Dollar'

The greenback declined against 13 of the 16 most-traded currencies this week, including 2.4 percent against the Swiss franc and 1.7 percent versus the New Zealand dollar, as oil touched a record $135.09 a barrel on May 22. The U.S. is the world's biggest importer of oil. Oil closed at $132 yesterday.

The correlation coefficient between oil prices and the euro dollar exchange rate has been 0.95 for the past year, indicating they have moved in the same direction 95 percent of the time.

``The most important thing in the markets right now is the oil price and it's weighing on the dollar,'' said Jens Nordvig, a strategist with Goldman Sachs Group Inc. in New York.

The dollar fell to 96.54 cents against the Australian currency on May 21, the highest level since it was allowed to trade freely in 1983. The U.S. Dollar Index traded on the ICE futures in New York, which tracks the dollar against six major counterparts, fell 1.3 percent this week to 71.888.

Housing Recession

Sales of previously owned homes in the U.S. declined 1 percent to a 4.89 million annual rate in April, and were down 18 percent from a year earlier, the National Association of Realtors said yesterday. Reports next week will show new home sales dropped to a 17-year low, and consumer confidence, as measured by the New York-based Conference Board, was the weakest since 1993, according to the median forecasts in Bloomberg News surveys.

``If the economy disappoints, and oil prices remain high, then that's clearly a risk for the dollar,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York, in an interview on Bloomberg Television. ``It will delay even further the recovery of the greenback.''

The U.S. currency has lost 14 percent against the euro in the past 12 months as the Federal Reserve slashed its benchmark interest rate to 2 percent, from 5.25 percent in September. The European Central Bank has kept its target rate at 4 percent.

Yield Differentials

At 2.43 percent, two-year Treasury notes yielded 1.78 percentage points, or 178 basis points, less than the similar maturity German bunds. The yield gap widened 25 basis points this week, making the dollar-denominated assets less attractive.

Minutes from the Fed's April meeting released this week indicated the bank probably won't lower borrowing costs further. Officials voiced concern inflation may accelerate, and most thought the cut to 2 percent last month was a ``close call,'' the minutes showed.

Futures on the Chicago Board of Trade indicated a 40 percent chance the Fed will increase the target rate for overnight lending between banks by a quarter-percentage point in December. There's a 92 percent chance policy makers will hold the rate at 2 percent at their next meeting on June 25.

``Higher oil prices mean consumers will spend less on non- gas items, and that will weigh on the economy,'' said Adam Fazio, a currency strategist in New York at CIBC World Markets Inc., a unit of the fifth-largest Canadian bank.

Yuan Versus Euro

China's yuan climbed 0.7 percent this week to 6.9417 per dollar as money inflows from the trade surplus and increased fuel costs threaten to quicken inflation. At the same time, the Chinese currency has fallen 6 percent versus the euro in the past year, which European officials say makes their exports less competitive.

Policy makers should seek a stronger U.S. dollar and Chinese yuan against the euro, French Finance Minister Christine Lagarde said on May 22.

``I would arm twist whoever is holding these strings to pull the dollar up,'' Lagarde said in an interview in Chicago with Bloomberg News. ``I would like to do that for the yuan as well.''

U.S. Stocks Fall the Most in Four Months, Led by Financials

By Lynn Thomasson

May 24 (Bloomberg) -- U.S. stocks had the biggest weekly drop in almost four months on concern the economy will weaken as banks and brokerages face deeper losses and record energy costs depress consumer spending.

Lehman Brothers Holdings Inc., Morgan Stanley and Merrill Lynch & Co. led losses among financial companies after analysts lowered profit estimates and the Federal Reserve signaled it will stop cutting interest rates. Oil surpassed $130 a barrel and sales of previously owned homes matched a record low in April, sending consumer stocks to the second-biggest weekly drop this year.

``We keep getting little surprises in the financials that make people uneasy,'' said Jason Pride, who oversees $6 billion as director of research at Haverford Trust in Radnor, Pennsylvania. ``Market participants have to get away from the idea that everything is going to rebound immediately.''

The S&P 500 fell 3.5 percent, the steepest decline since the first week of February, to 1,375.93. The Dow Jones Industrial Average dropped 3.9 percent to 12,479.63. The Nasdaq Composite Index slid 3.3 percent to 2,444.67. The Russell 2000 Index of small-cap stocks lost 2.3 percent to 724.10.

All 10 industries in the S&P 500 declined, bringing the U.S. stock benchmark to lowest since the week ended April 11. The slump steepened the S&P 500's decline for 2008 to 6.3 percent.

``You basically don't want to be in this market,'' Quincy Krosby, chief investment strategist at the Hartford in Hartford, Connecticut, which manages $360 billion, said in a Bloomberg Radio interview. ``We'll probably pull back a bit more.''

Financials Slide

S&P 500 financial stocks dropped 6.1 percent, falling to the lowest level since the week of March 14. Citigroup Inc. analyst Prashant Bhatia said Goldman Sachs Group Inc., Lehman and Morgan Stanley are in a ``tough operating environment,'' while Oppenheimer & Co. analyst Meredith Whitney predicted more than $170 billion in writeoffs by the end of 2009. Financial companies worldwide have already recorded more than $380 billion of losses tied to mortgage-related assets.

Lehman lost 17 percent, the most since the week of March 28, to $36.11. Morgan Stanley dropped 11 percent to $41.83. Merrill Lynch declined 11 percent to $43.36. Citigroup fell 8.7 percent to $21.12.

Minutes from the Fed's April meeting suggested record energy costs and rising public expectations for inflation make it unlikely policymakers will continue rates. Fed officials also lowered economic growth projections for 2008 by almost a full percentage point and raised inflation forecasts amid curtailed bank lending and oil prices that have doubled over the past year.

Oil Surge

Crude oil increased 4.9 percent for the week, reaching as high as $135.09 a barrel. The S&P 500 Consumer Discretionary Index lost 5.3 percent, the second-steepest decline among industry groups in the equity benchmark, as oil's rise spurred concern that rising fuel bills will leave consumers with less money to spend elsewhere.

Ford Motor Co. lost 15 percent, the most since July 2002, to $6.87. The second-biggest U.S. automaker abandoned a target of returning to profit next year because of rising steel and gasoline costs. Larger rival General Motors Corp. fell 15 percent to $17.60.

Moody's Corp. tumbled the most in the S&P 500, losing 24 percent to $34.16. The second-largest credit-rating company started a probe into whether executives covered up a computer error that gave top rankings to securities that didn't deserve them.

KB Home and Centex Corp. led an S&P group of the five largest U.S. homebuilders to a 17 percent loss, the biggest decline since September 2001. The supply of unsold properties reached a record in April, the National Association of Realtors said. KB Home, the fifth-largest U.S. homebuilder by revenue, tumbled 20 percent to $20.52. Centex, the biggest U.S. homebuilder, dropped 19 percent to $19.05.

New-home sales in the U.S. probably fell to a 17-year low and consumer confidence sank, signs the housing slump is dragging down the economy, economists said before next week's reports.

Sears Holding Corp., Dell Inc. and Costco Wholesale Corp. are among the S&P 500 stocks scheduled to release quarterly earnings next week.