Russia and Georgia

The cost for Russia

An isolationist ideology triumphs in Russia, but the war in Georgia brings reverberations at home

AFTER barely 100 days in office, the soft-spoken Dmitry Medvedev, Russia’s president, has been cast in the unlikely role of war leader. His initial job appeared to be as Vladimir Putin’s spokesman. But he quickly got a taste for war. On Tuesday August 26th he stood beneath the two-headed Russian eagle and solemnly announced the Kremlin’s decision to recognise the independence of Abkhazia and South Ossetia.

The decision, Mr Medvedev argued, was forced on him by Georgia’s “genocide” against South Ossetia. But the argument is spurious. It is true that, in the early 1990s, when Georgia was barely a state, its nationalistic leaders committed atrocities in South Ossetia and Abkhazia. But it is also true that more than 200,000 Georgians were driven out of Abkhazia, and that Russia backed Abkhazia militarily.

Abkhazia had the trappings of a nascent state, but South Ossetia was a chessboard of villages (Georgian and Ossetian) which suffered under a Moscow-sponsored, thuggish and corrupt regime whose main job seemed to be to provoke Georgia. Mikheil Saakashvili, Georgia's president, made mistakes: he was in too much of a rush to take back the enclaves and did too little to disown Georgia’s nationalist past. His worst mistake was to order the shelling of Tskhinvali, South Ossetia’s capital, on August 7th. But this was not, as Russia claimed, genocide; the death toll was under 200. Moreover, the ethnic cleansing of Georgians in South Ossetia is all too evident: Georgian villages have been destroyed and thousands of Georgians displaced by South Ossetian militia.

And although the latest conflict was triggered by Georgia, the deeper roots of Russia’s invasion lie in events that go back to 2003-04: the destruction of the Yukos oil company, and Russia’s perception of the colour revolutions in Georgia and Ukraine as a Western plot to undermine its sovereignty. Mr Saakashvili’s support for Ukraine’s orange revolution particularly irked Mr Putin.

Lilia Shevtsova of the Carnegie Moscow Centre argues that the political system built by Mr Putin requires the images of an enemy and a besieged fortress. “This war is not about South Ossetia, Abkhazia or Georgia,” she says. “It is about the matrix of the Russian state and its survival. The beast needs feeding.” Konstantin Zatulin, a Duma deputy handling relations with former Soviet republics, is more belligerent. “The time when we needed Western applause is over,” he says.

After years of cultivating xenophobic sentiment and persuading Russians that they face an enemy, the Kremlin had prepared the population psychologically for war. That, says Boris Dubin, a sociologist, is why Russia’s propaganda fell on fertile ground. In the public mind, he claims, the cause of the war is to be found in “America’s expansionist plans and desire to establish control over Russia’s neighbours.”

With its troops still in Georgia, Russia has also made a mockery of the French-negotiated ceasefire. The war has cemented the victory of isolationist ideology in Russia, which will shape both domestic politics and foreign relations for years to come.

The partition of Georgia may cause a long-term confrontation between Russia and the West. Too bad, Mr Medvedev said this week: “Nothing scares us, including the prospect of a cold war”. (“If it’s only cold, that’s not a problem,” Bernard Kouchner, the French foreign minister retorted.) Russia’s elite is convinced that the West is weak and will swallow Russia’s decision. “When you cross the road you have to check for dangers,” declares Mr Zatulin. “The West can apply psychological pressure. But Europe cannot afford to turn down our gas and America needs our help with Afghanistan and Iran.”

The fallout may be felt most inside Russia itself. Hopes for liberalisation and modernisation under Mr Medvedev have evaporated. In the past few days the Kremlin has rejected Mikhail Khodorkovsky’s parole application and briefly detained protesters in Red Square who held a banner “For Your Freedom and Ours” in a repeat of a protest against the invasion of Czechoslovakia staged by dissidents 40 years ago.

Mr Medvedev’s recognition of Abkhazia and South Ossetia may also have unpredictable consequences for Russia’s north Caucasus. Russia has bolstered separatism in Georgia but crushed it brutally in Chechnya.

Indeed, Russia’s recognition of South Ossetia and Abkhazia could easily reignite separatist sentiment in the north Caucasus. Chechnya may be too exhausted to fight another war with Russia at present, but in ten years’ time “the question of independence of Chechnya will arise again,” says Ekaterina Sokiryanskaya of Memorial, a human-rights group. Russia maintains stability in the Caucasus by military force and fear. Even as Russia was “liberating” South Ossetia, its security services were intimidating human-rights activists in Ingushetia and Dagestan. The methods they use differ little from those of the separatists and terrorists they are fighting. Inevitably, this leads to further radicalisation of the population, says Magomet Mutsolgov, a human-rights activist in Ingushetia.

U.S. Stocks Rally as Economic Growth Tops Estimates; Banks Gain

Aug. 28 (Bloomberg) -- U.S. stocks climbed for a third day, led by manufacturers and financial companies, after growth in exports helped the economy expand faster than estimated in the second quarter.

American International Group Inc., Caterpillar Inc. and AT&T Inc. climbed 2 percent each and helped lead gains in nine of ten industry groups in the Standard & Poor's 500 Index after the Commerce Department said gross domestic product grew at a 3.3 percent annual rate. Tiffany & Co., the world's second-largest luxury jewelry retailer, jumped the most in three years on profit that topped analysts' estimates. Energy shares erased an earlier advance as oil prices slipped following three days of gains spurred by concern Tropical Storm Gustav will disrupt production.

``You're getting stronger growth, and that is conceivably good for equities,'' said Alan Gayle, the Richmond, Virginia- based senior investment strategist at Ridgeworth Capital Management, which oversees about $70 billion. ``A number like this above 3 percent suggests that the economy is not as bad as a lot of the recent commentary has suggested.''

The S&P 500 gained 9.19 points, or 0.7 percent, to 1,290.85 at 11:05 a.m. in New York. The Dow Jones Industrial Average increased 130.52, or 1.1 percent, to 11,633.03. The Nasdaq Composite Index added 18.17 to 2,400.63. Five stocks rose for every two that fell on the New York Stock Exchange.

August Advance

The S&P 500 extended its August gain to 1.9 percent as the GDP report showed businesses are weathering rising inflation and more than $500 billion in subprime-related bank losses. The government's initial estimate of economic growth was 1.9 percent last month and economists in a Bloomberg survey on average projected 2.7 percent. The data follows an unexpected advance in durable goods orders that helped boost stocks yesterday.

The Dow average's 2.3 percent gain in August makes it the third-best-performing stock measure in the world this month, in dollar terms, and the S&P 500's advance is No. 4., according to data compiled by Bloomberg.

Three of the biggest gains in the S&P 500 today were MBIA Inc., Fannie Mae and Freddie Mac, which have all lost at least 22 percent this year.

AIG, the largest U.S. insurer, climbed 47 cents to $20.47. Caterpillar, the biggest maker of bulldozers, increased $1.84 to $71.40. AT&T, the top U.S. phone company, added 97 cents to $32.17.

Fannie Mae, the biggest U.S. mortgage-finance company, gained 6.9 percent to $6.93. Chief Executive Officer Daniel Mudd replaced three top deputies in an effort to restore investor confidence after record losses and a 90 percent drop in the shares.

Financial stocks in the S&P 500 climbed 1.9 percent, capping their first three-day advance since the middle of July.

Bond Insurers Gain

MBIA, the largest bond insurer, jumped 29 percent for the top gain in the S&P 500 after agreeing to reinsure municipal bonds for Financial Guaranty Insurance Co. MBIA led bond insurers posting record losses after straying from the business of backing municipal bonds to guaranteeing collateralized debt obligations that have tumbled in value.

Ambac Financial Group Inc., the bond insurer that lost about three-fourths of its market value this year, gained 84 cents to $6.08.

Tiffany had the steepest gain since 2005, rising as much as 12 percent to $44.45. The retailer posted profit that exceeded analysts' estimates on better-than-expected sales and predicted higher annual earnings than previously estimated.

Coca-Cola, Brown-Forman

Coca-Cola Co. lost 0.9 percent to $53.32 for the bigger of only two declines in the 30-stock Dow average. The world's biggest sodamaker was cut to ``neutral'' from ``outperform'' at Credit Suisse Group AG, which said rival PepsiCo Inc. is a better bet because it's further along with a restructuring.

Chevron Corp. posted the other drop in the Dow, losing 10 cents to $86.52, as crude erased an earlier gain of as much as $1.99.

Brown-Forman Corp. fell the most in the S&P 500, with the company's Class B shares losing 5.7 percent to $72.60. The maker of Jack Daniel's and Southern Comfort whiskey reported a profit decline and trailed analysts' estimates after writing down the value of dead agave plants used for making tequila.

The S&P 500 is poised to complete only its third monthly advance since reaching a record in October. It is still down more than 13 percent this year.

The S&P 500's August gain has been led by so-called consumer discretionary companies, which include retailers and hotel and restaurant chains. The S&P 500 Consumer Discretionary Index rallied 5.7 percent this month through for the best gain among 10 industries as of the close of trading yesterday.

Energy Concern

The group was helped by an 18 percent retreat in oil prices from a July record. Limited Brands Inc., owner of the Victoria's Secret lingerie chain, has led the advance with a 23 percent gain after posting profit that topped analysts' estimates and predicting full-year earnings will exceed its earlier projections.

An index of technology shares in the S&P 500 has had the second-best return in August with a 3.7 percent gain through yesterday, led by a 44 percent jump in Advanced Micro Devices Inc.

Banks, brokerages and insurers have fared the worst in August, with the S&P 500 Financials Index down 5 percent in August through yesterday on concern a government bailout of Fannie Mae and Freddie Mac will wipe out shareholders. The two largest U.S. mortgage-finance companies fell more than 40 percent each in August through yesterday.

U.S. Economy: GDP Exceeds Initial Estimate on Exports (Update1)

Aug. 28 (Bloomberg) -- The U.S. economy expanded faster than previously estimated in the second quarter, helped by a surge in exports that will probably wane as Europe and Japan head toward recessions.

Gross domestic product increased at a 3.3 percent annual pace, compared with the initial estimate of 1.9 percent, the Commerce Department said today in Washington. Trade contributed the most to U.S. growth in almost three decades.

The expansion is likely to weaken in the second half as consumers burdened with falling home values and dwindling job prospects rein in spending. Separate figures today showed the number of Americans collecting unemployment benefits reached a five-year high last week.

``Outside of trade, the economy is considerably weaker,'' said Carl Riccadonna, an economist at Deutsche Bank Securities Inc. in New York. ``When you look at the spending, it looks terrible for the second half of the year.''

The increase in GDP last quarter was bigger than the median estimate of a 2.7 percent gain in a Bloomberg News survey of 78 forecasters. The expansion was the fastest since the third quarter of 2007 and followed growth of 1.9 percent in the first three months of the year.

Treasuries dropped after today's reports, sending benchmark 10-year note yields up to 3.80 percent at 10:18 a.m. in New York, from 3.77 percent late yesterday. The Standard & Poor's 500 Stock Index rose 0.7 percent to 1,290.95.

Jobless Claims

The Labor Department said initial jobless claims dropped to 425,000 last week, matching economists' forecasts, from 435,000 the previous week. The level remains well above the 321,000 average of last year. The number of people staying on unemployment rolls rose to 3.423 million, the highest since November 2003.

``The labor market may continue to weaken,'' said Russell Price, a senior economist at H&R Block Financial Advisors Inc. in Detroit. ``It's become clear that second-half growth isn't going to be as strong as the first half, so businesses are going to finally start to trim payrolls a little more.''

The smallest trade deficit in eight years was the biggest contributor to growth last quarter. The trade gap narrowed to a $376.6 billion annual pace and added 3.1 percentage points to growth, the most since 1980. Excluding trade, the economy would have expanded at a 0.2 percent pace after growing 0.1 percent in the first three months of the year.

Tiffany's Sales Gains

Tiffany & Co., the world's second-largest luxury-jewelry retailer, today posted profit and sales gains that exceeded analysts' forecast, helped by strength in Europe. The company has accelerated its international expansion, planning to increase worldwide locations by 13 percent through early 2009. It had 196 stores and boutiques, including 72 in the U.S., 95 in Asia Pacific and 19 in Europe, as of July 31.

Total sales were ``strong'' in Europe and Asia-Pacific, Tiffany said in a statement.

Other companies are looking to Asia, Europe and the Middle East to offset slowing demand in North America. Caterpillar Inc.'s order books for large machines are full through the end of next year, and its factories in Asia are running at full capacity to meet demand in China, Chief Executive Officer Jim Owens said today at a press briefing in Beijing.

Caterpillar Investment

Caterpillar, the world's biggest maker of earthmoving equipment, will invest more than $100 million to triple capacity at its Shandong SEM Machinery Co. unit in northern China, Owens said. It will put another $20 million in the first of three building phases of a new research and development center in the eastern Chinese city of Wuxi to test engines, materials and electronics for manufacturing operations in the Asia-Pacific region.

The boost from trade may wane in the rest of the year as growth among some of the U.S.'s biggest trading partners slows. Europe and Japan both shrank last quarter.

Today's GDP report is ``kind of the last hurrah'' for the U.S. economy, Martin Regalia, chief economist for the U.S. Chamber of Commerce, said at a press conference today. ``We've begun the process of slipping into a good old-fashioned recession.''

Private economists aren't the only ones taking a dimmer view. Federal Reserve staff also ``marked down'' the central bank's forecast for growth in the second half of 2008, according to minutes of the Federal Open Market Committee's Aug. 5 meeting released this week.

Softer Export Demand

Fed policy makers also said recent reports pointed to ``softer export demand,'' according to the minutes.

Consumer spending, which accounts for more than two-thirds of the economy, grew at a revised 1.7 percent annual rate in the second quarter, compared with the 1.5 percent estimated last month and 0.9 percent for the first three months of the year.

The longest expansion in consumer spending on record will probably end this year, according to economists surveyed by Bloomberg earlier this month. Retail sales fell in July for the first time in five months, led by a slump in auto purchases, according to Commerce data.

`In a Recession'

``We are in a recession,'' Farooq Kathwari, chief executive officer at Ethan Allen Interiors Inc., said in an interview with Bloomberg Television this week. ``Our industry has been impacted. Conditions are still tough.''

The Danbury, Connecticut-based home-furnishings retailer said last month that sales fell 8.7 percent in the second quarter compared with the same period last year.

A weakening labor market is one reason consumer spending is likely to slow after the government sent out about $92 billion in tax rebate checks. The U.S. has lost 463,000 jobs so far this year and wages haven't kept up with inflation, according to Labor Department data.

``We don't have a lot of demand out there on the part of consumers, so there is a worry,'' Joel Naroff, chief economist at Commerce Bancorp Inc. in Holland, New Jersey, said in a Bloomberg Radio interview. ``What we're looking at is an economy that's bouncing around, but when you really average it out we're just muddling along -- still some growth but nothing special.''

Weaker Salaries

Smaller increases in paychecks are another reason Americans are likely to cut back. Wages and salaries increased by $52.5 billion in the first three months of the year, $20.2 billion less than previously estimated, according to today's revised estimates.

The reduction caused total personal income to grow at a 3 percent annual pace in the first quarter, compared with a previous estimate of 3.7 percent.

Today's revisions showed housing continued to slump and companies invested less in new equipment. Residential construction decreased at a 15.7 percent pace, more than previously estimated.

The slide in residential construction has continued this quarter. Housing starts last month fell 11 percent and building permits also declined, the government said Aug. 19.

A smaller decline in stockpiles contributed to the larger- than-forecast gain in growth. Inventories fell at a $49.4 billion annual rate from April through June, down from a $62.2 billion first estimate. Still, the draw-down subtracted 1.44 percentage points from growth.

Today's report also included a first look at corporate profits for the second quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, decreased 2.4 percent to an annual rate of $1.56 trillion. Earnings were down 7 percent from the same time last year, the biggest decrease since the 2001 recession.

Rendell Sounds Off

It was an uncomfortable moment for the hosts of three network Sunday morning news shows.

Tom Brokaw of NBC News, Bob Schieffer of CBS News and George Stephanopoulos of ABC News had just finished a panel discussion at Denver's Brown Palace Hotel during which they had concluded that the media's coverage of the campaign so far had been largely fair. Then Pennsylvania Governor Ed Rendell took the podium to deliver "closing remarks."

Mr. Rendell, a Hillary Clinton backer, came to bury the Big Three, not to praise them. He told the crowd of 300 political luminaries that the media's coverage of the Democratic primaries had elevated personalities over substance and he complained of sexism in its treatment of Senator Clinton. He called the media's kid-gloves handling of Barack Obama "absolutely embarrassing," and suggested that the media had essentially given the presumptive Democratic nominee, whom he now supports, "a free pass." Journalists, he said, had allowed themselves unprofessionally to be "caught up with emotion and excitement" in the historic nature of the Obama candidacy. He even called MSNBC "the official network of Obama's campaign."

Tom Brokaw jumped to his network's defense, saying he and others had expressed dissatisfaction with on-air comments by NBC reporters like Lee Cowan. He also agreed that MSNBC's Keith Olbermann and Chris Matthews had "gone over the line" at times in comments about Mrs. Clinton but emphasized they were "commentators" and not reporters.

Mr. Rendell wasn't mollified. "Chris Matthews loses his impartiality when he talks about the Clintons," he told the audience. At that point, moderator Judy Woodruff moved to wind up the proceedings before they could become even more heated.

Many in the audience were surprised at the extent to which Mr. Rendell was still carrying a torch for Hillary Clinton and criticizing media coverage of Barack Obama. "I thought he was a Democrat," one person next to me commented. "Here, he is a Hillarista first," her companion commented. "Her campaign for the next presidential election begins at this convention."

How the Georgian Conflict Really Started

By MELIK KAYLAN

Tbilisi

'Anybody who thinks that Moscow didn't plan this invasion, that we in Georgia caused it gratuitously, is severely mistaken," President Mikheil Saakashvili told me during a late night chat in Georgia's presidential palace this weekend.

"Our decision to engage was made in the last second as the Russian tanks were rolling -- we had no choice," Mr. Saakashvili explained. "We took the initiative just to buy some time. We knew we were not going to win against the Russian army, but we had to do something to defend ourselves."

I had just returned from Gori, which was still under the shadow of Russian occupation. I'd learned there on the ground how Russia has deployed a highly deliberate propaganda strategy in this war. Some Georgian friends sneaked me into town unnoticed past the Russian armored checkpoints via a little used tractor path. We noted that, during the day, the tanks on Gori's streets withdrew from the streets to the hills. Apparently, the Russians thought this gave the impression, to any foreign eyewitnesses they chose to let through, of a town not so much occupied as stabilized and made peaceful.

However, if you stayed overnight after observers left, as I did with various locals, you could hear and glimpse the tanks in the dark growling back into town and roaming around. A serious curfew kicked in at sundown, and the streets turned instantly lethal, not least because the tanks allowed in marauding irregulars -- Cossacks, South Ossetians, Chechens and the like -- to do the looting in a town that the Russians had effectively emptied. Now that the Russians have made a big show of moving out in force -- but only to a point some miles to the other side of Gori toward South Ossetia -- they've left behind a resonating threat in the population's memory, a feeling they could return at any moment.

The damage in Gori's civilian areas, like the Stalin-era neighborhood of Combinaty, give the lie to claims made by Russia's Foreign Minister Sergei Lavrov in these pages that Russian forces "acted efficiently and professionally" to achieve "clear and legitimate objectives." Either that, or they fully intended -- as a "legitimate" objective -- to flatten civilian streets in order to sow fear, drive out innocents and create massive refugee outflows.

Gori's refugees are now flooding back. Many have returned also to Poti, a port city near Abkhazia, and far more strategic than Gori because it serves as a trading lifeline for Georgia and potentially offers future access to NATO ships. The Russians are digging in around the town and in the port area itself, and refusing to budge as the world looks on.

"I got a call from the minister of defense that Russian tanks, some 200, were massing to enter Tskhinvali from North Ossetia," Mr. Saakashvili told me. "I ignored it at first, but reports kept coming in that they had begun to move forward. In fact, they had mobilized reserves several days ahead of time."

This was precisely the kind of information that the Russians have suppressed and the world press continues to ignore, despite decades of familiarity with Kremlin disinformation methods. "We subsequently found out from pilots we shot down," said Mr. Saakashvili, "that they'd been called up three days before from places like Moscow. We had intelligence coming in ahead of time but we just couldn't believe it. Also, in recent weeks, the separatists had intensified artillery barrages and were shooting our soldiers. I'd kept telling our guys to stay calm. Actually we had most of our troops down near Abkhazia where we expected the real trouble to start. I can tell you that if we'd intended to attack, we'd have withdrawn our best-trained forces from Iraq up front."

According to the Georgian president, the Russians had been planning an invasion of his country for weeks -- even months -- ahead of time: "Some months ago, I was warned by Western leaders in Dubrovnik to expect an attack this summer," he explained. "Mr. Putin had already threatened me in February, saying we would become a protectorate of Russia. When I met Mr. Medvedev in June, he was very friendly. I saw him again in July and he was a changed man, spooked, evasive. He tried to avoid me. He knew something by then. I ask everyone to consider, what does it mean when hundreds of tanks can mobilize and occupy a country within two days? Just the fuelling takes that long. They were on their way. Would we provoke a war while all our Western friends are away on vacation? Be sensible."

I put it to Mr. Saakashvili that there was also the question of why now? Why did the Russians not act before or later? It was a matter, he said, of several factors coming together: the useful distractions of the Beijing Olympics and the U.S. elections, the fact that it took Mr. Putin this long to consolidate power, the danger that tanks would bog down in the winter.

But two factors above all sealed Georgia's fate this summer, it seems. In April, NATO postponed the decision to admit Georgia into the organization until its next summit in October. Mr. Saakashvili believes Moscow felt it had one last chance to pre-empt Georgia's joining NATO.

Finally, he says, the invasion had to be done before the situation in Iraq got any better and freed up U.S. forces to act elsewhere -- a matter not simply of U.S. weakness but of increasing U.S. strength. "If America thinks it is too weak to do anything about Georgia," said Mr. Saakashvili, "you should understand how the Russians see it, how much Moscow respects a strong United States -- or at least a U.S. that believes in its own strength."

Mr. Kaylan is a New York-based writer who has reported often from Georgia.

Calling Hank Paulson

The good news about the year-old credit crunch is that we are finally getting to the main event, which is the condition of the banking system. The bad news is that federal regulators are still trailing events, and prolonging financial trouble and uncertainty in the bargain.

Exhibit A is the revelation by Federal Deposit Insurance Corp. Chairman Sheila Bair that her $45 billion deposit insurance fund may not be adequate to pay off account holders as banks continue to fail. This has been inevitable for months, but neither Ms. Bair nor Treasury wanted to admit the truth in public for obvious political reasons. Yet now we learn that the insurance fund shrank by $7.6 billion in the second quarter, bringing its reserve ratio well below the minimum required by Congress.

Banks are supposed to pay premiums into that fund, with riskier banks paying higher premiums. But for most of the past decade most banks were paying no premiums at all, as bank failures were few and the living was easy. Last year the FDIC started charging again, but bank failures -- and insurance payouts -- are up sharply.

This has Ms. Bair talking about sharp increases in premiums, with the steepest being levied against the banks that are most in danger -- and so most in need of conserving their capital. Ms. Bair cannot be held entirely accountable for this bizarre state of affairs. "Reforms" of the deposit insurance fund in 1996 and again in 2005 required the FDIC to charge banks nothing, or close to it, when they're flush with cash, and to dun them hardest when the tough times hit. The banks themselves also lobbied hard to keep their contributions low in the fat years. Now they're screaming about having to pay more amid a nearly 20% increase in problem loans.

In its quarterly report released Tuesday, the FDIC said bank profits are down nearly 90% and loan-loss reserves are soaring -- but delinquencies are rising even faster than reserves. The number of banks on the FDIC's trouble list is up to 117 from 90, while the assets represented by those banks tripled to $78.3 billion between March and June. IndyMac wasn't on that list before it failed, and that could cost the FDIC as much as $9 billion more.

Ms. Bair also disclosed that she might need to tap the Treasury for short-term financing to maintain "liquidity." But she added that she didn't see any need for longer-term help from the Treasury or taxpayers, despite her growing list of problems and a shrinking pool of potential buyers for the assets the FDIC keeps collecting.

This is not the way to reassure depositors and anyone else amid a credit crunch. As long as we have federal deposit insurance, by all means let the banks pay for it themselves. But the perverse way that premiums are collected needs to be fixed by Congress -- and regulators like Ms. Bair and Treasury Secretary Hank Paulson ought to be saying so.

In the meantime, Ms. Bair could do the country a favor by making it clear that the FDIC is prepared to meet its obligations to depositors no matter what -- and asking Congress for an appropriation to do so. The longer we have to wait for that day, the more jittery people will become watching the insurance fund's balance decline quarter after quarter. Taking more money from the most troubled banks only makes more bank failures likely. And taking money from banks that are going to fail anyway, only to pay it back to depositors after the fact -- and still coming up short -- is merely dumb.

Mr. Paulson could also help if he used some of his own political capital to run interference for Ms. Bair, rather than making her plead poverty in public. One thing we've learned about Mr. Paulson is that for all of his reputation as a tough Wall Street guy, he's not a general who leads his troops up San Juan, er, Capitol Hill. No doubt having to ask Congress for more money for the FDIC is unpleasant, but if he doesn't do it, his successor will have to.

We wouldn't rule out something like the Resolution Trust Corp. that was designed to acquire and dispose of financial assets during the savings and loan meltdown of the early 1990s. That's normally the FDIC's job. But if the losses get too big, that bureaucracy can get overwhelmed. It can also succumb to political pressure not to sell assets quickly, which can prolong the crisis. A case in point is Ms. Bair's attempt to use IndyMac as a kind of social experiment, rewriting most of its delinquent loans to test her theories about how widespread loan modification could make the housing crisis vanish. With the right leader and a mandate to go out of business, a new RTC could contribute to a faster end to the mortgage and banking woes.

The same goes for pulling the trigger on Treasury's new authority to stabilize Fannie Mae and Freddie Mac. Mr. Paulson keeps saying he doesn't want to use that power, hoping that private investors will give the mortgage giants enough cash to spare him from having to make some hard decisions. This may be considered canny politics at Goldman Sachs, but it's a terrible way to govern in a financial mess. Letting Fan and Fred twist in the marketplace has only added to the stress in the credit markets and increased borrowing costs for nearly everyone.

* * *

Mr. Paulson gives the impression of wanting desperately to pass these problems along to someone else. If that's true, he should have stayed on Wall Street. His labyrinthine proposal earlier this year to redesign the entire financial bureaucracy was a nice thought experiment for the future. But it does nothing to address the immediate task at hand: stabilizing the current financial system.

Obama Needs to Take a Stand on Race and Other Issues

By JUAN WILLIAMS

Denver

There is a powerful, often painful, thread of memory in the American mind with regard to race. It is a flowing narrative from the time of slavery to the Civil War and on to the nation's struggle for racial equality. That story includes Martin Luther King's life and death as a martyr. Today the story continues in a nation where one-third of the population is made up of racial minorities. There is also an unprecedented number of immigrants and record levels of prosperity among the black and Hispanic middle-class.

Now we have Barack Obama's astonishing political rise, advancing the story to the point where a majority white nation might possibly select him as its first president of color.

Associated Press

Aug. 28, 1963.

For Sen. Obama's supporters and much of the American media, the message of this neatly packaged story is that the Illinois senator is the man who fulfills King's dream. "Had it not been for that speech," Mr. Obama told the Rocky Mountain News last week, "I very likely wouldn't be standing in Invesco [field] to accept the nomination from my party." He told USA Today he plans to pay tribute to King tonight, and use the speech to express "pride in how much this country has transformed itself in my lifetime . . . I don't think we can shy away from the significance of that."

More than 90% of black Americans are now on board with that story line, and according to polls, more than a third of black voters say his race is either the most important factor or one key factor in explaining their support for Mr. Obama. His race is at least a key issue for about a quarter of white voters as well, and that percentage is going up. Many white voters -- especially young people -- appreciate Mr. Obama as the biracial candidate capable of moving America to a new day, and past its legacy of endless racial tensions.

Yet given this central racial dynamic, it is incredible that on any issue of racial consequence Mr. Obama has become a stealth candidate. It is arguably smart politics not to focus on potentially controversial racial issues when you are a black man running in an election with an electorate that is more than 75% white. But how is it possible that Mr. Obama, as he rises to claim the mantle of Dr. King before 75,000 people and a national TV audience of millions here tonight, remains a mystery on the most important civil rights issues of our day?

Mr. Obama is nowhere man when it comes time to speak out on reforming big city public schools, with their criminally high dropout rates for minority children. He apparently refuses to do it for fear that supporting vouchers or doing anything to strengthen charter schools will alienate vote-rich unions. His rare references to the critical argument over affirmative action -- an issue that is on several state ballots this fall -- give both opponents and supporters reason to think he might be on their side. He has had little if anything to say about the persistent 25% poverty rate in black America.

The only speech Mr. Obama has given on race came after his minister's racist rants became public. In that celebrated talk he defended Rev. Jeremiah Wright, while at the same time distancing himself from the rants. That quick escape did not work, because Rev. Wright continued to spew vitriol -- threatening the campaign with questions about whether Mr. Obama subscribed to the same angry, anti-American views. It was only rational for voters to ask how he could have kept silent in the face of the minister's sermons over 20 years.

Time and again, the man who draws so openly on King's legacy refuses to sacrifice an iota of possible political support by taking a principled stand on matters of racial justice that King said are matters of right and wrong. Instead, Obama makes cryptic or general comments that leave his position on important racial issues ambiguous or unknown.

All of this can be written off as a politician in search of votes moving to the ideological middle, to accommodate public opinion as he focuses on winning. It might be said he is not a captive of any set ideology. John McCain has had his own flaws and changes of heart on a few issues in this election season.

But this is not a game in which all the players and issues are the same and everyone has dirty hands. Racial justice is beyond bargaining. And a special responsibility falls on Mr. Obama, because he has come to represent not just another presidential candidate, but a reflection of the nation's desire to heal its racial wounds.

The uneasy truth may be that Mr. Obama is not worried about alienating white voters with his stands on race. It is more likely that he fears having to speak the truth about the poor -- who are disproportionately black and Latino -- needing to take more responsibility for family breakdown, bad schools, thug-life culture and high poverty rates.

A 2007 Pew poll found that nearly 40% of blacks said the poor have become so divorced from middle-class values that they are a separate race. Mr. Obama has to know this tension exists. When he spoke in a black church about the need for black men to be good fathers it may have angered the Jesse Jacksons of the world. But it was a rare moment when he was willing to reveal himself and speak on an important racial issue. It did him no political harm; it may have helped him.

In the bad old days of legal segregation many white politicians would not take a stand, either. Men like Orval Faubus and Strom Thurmond used to make a political show of opposing what they called "race mixing" and equal rights for all. Later in life they said they had not been racists, but didn't want to risk losing elections to segregationist candidates who made outright racial appeals. Faubus and Thurmond did win elections. But sadly for them, there is no bargaining with history about accommodating injustice and particularly racism.

Whatever good they did in their political careers is a footnote compared to the corruption they advanced with their public accommodation of racism. Their failure to stand on principle prolonged segregation, damaging people and the nation.

If Mr. Obama is really to remind the nation of Martin Luther King, he might follow King's example of taking a moral stand. King did not vacillate on his call for civil rights laws, voting rights laws or fair housing laws. He took a stand even with his own supporters. In his historic speech on Aug. 28, 1963, King declared "there is something that I must say to my people," and then spoke against bitterness, hatred and violence even in the name of "gaining our rightful place" and freedom.

Now it is Mr. Obama's turn to speak as a moral conscience on race -- if only because it is the only truly effective way he can put the race issue behind him. Then he can begin filling in the specifics of his plans for the economy, dealing with terrorists and the war in Iraq. That will give voters a chance to realize the nation's dream of judging people on the content of their character and leadership, not their race.

Mr. Williams, a political analyst for National Public Radio and Fox News, is author of several books, including "Eyes on the Prize: America's Civil Rights Years, 1954-1965" (Penguin, 1988).

Congress Is a Perfect Target for McCain

By KARL ROVE

Democrats and Republicans have scripted their conventions as tightly as possible. But after delegates return home with buttons, badges and banners, the curtain will rise on a more unruly drama: the fall session of Congress. And it could affect the November election more than the conventions.

The House and Senate return to Washington Monday, Sept. 8. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid hope it will be a short session, ending on Sept. 26. That will allow members to go home and campaign, not to return until after Election Day. Good luck.

Congress hasn't yet passed any one of the 12 appropriations bills needed to fund the government when the new fiscal year begins Oct. 1. And Congress isn't likely to pass them through both houses and get them to the president before leaving town.

The goal here for Mr. Reid and Mrs. Pelosi is to delay passing a budget until the next president is inaugurated. If the Democrats get their wish and sweep the November elections, Barack Obama's swearing-in ceremony will mark the opening of the spending floodgates.

Before they get there, however, this Congress must first pass stopgap legislation that will pay the federal government's bills for the next few months. Usually, that is done with a "continuing resolution," a bill that simply funds the government at its current level for a short period of time.

But a continuing resolution is fraught with political problems for Democrats. Members, desperate for their election-year pork-barrel spending, could band together and threaten to withhold support if their earmarks are not inserted into spending bills. If that happens, say goodbye to Democratic claims of fiscal responsibility.

Another problem is oil. There is a congressional ban on drilling on the outer continental shelf that will expire on Oct. 1, if it isn't first reauthorized. Typically, the ban is reauthorized as part of the Interior Department appropriations bill. But this year the president says he will veto that bill if the House and Senate don't allow an up-or-down vote on drilling there.

That sets up a political showdown. Mrs. Pelosi and Mr. Reid could try stuffing the ban into the continuing resolution. But that runs the risk of a government shutdown over spending and increasing domestic energy supplies -- a fight that is sure to focus public attention just weeks before the election.

Adding fuel to this fire is Sen. Charles Schumer, the Democrat in charge of increasing his party's majority in the Senate. He said recently that "the drilling issue has peaked," and is therefore less inclined to support a compromise to open the outer continental shelf. Normally politically acute, Mr. Schumer is either bluffing or out of touch with public opinion, which seems to favor Republicans on the issue nearly everywhere.

Mrs. Pelosi and Mr. Reid could offer a drilling expansion bill that doesn't do much to open new territory, but which would include billions in new spending and would impose a "windfall profits" tax. But voters would sniff out such a phony ploy to do something about $4 gas.

Democrats will be eager to discuss a second stimulus package in the coming session. But will highlighting the economy's trouble and attacking the president do them any good if they can't pass something while running Congress?

There's also widespread disagreement about what a second stimulus package might include. The small pack of centrists in the party, the "Blue Dog" Democrats, could insist on spending offsets or tax increases for any additional stimulus.

Not everything about the economy can be counted on to break for Democrats. Markets clearly believe that Treasury Secretary Hank Paulson will use his new authority to bail out Fannie Mae and Freddie Mac. If he does, it will raise thorny questions of whether management should step aside, and whether shareholders should lose their investment. That debate will force Congress to decide how to balance the needs of the 2.47% of homeowners in foreclosure with those of everyone else.

If Fannie and Freddie are bailed out, expect the auto companies to muscle Congress for money. Michigan is up for grabs this year, so they intend to push for as much as $40 billion in loans to cover their losses.

The end result of all of these messy fights is that a Congress -- which hit a record low 14% approval rating in a July Gallup Poll before its members left on summer vacation -- may become even more unpopular.

Inevitably, John McCain and Barack Obama will be drawn into these fights. And, although both are sitting senators, the advantage may go to Mr. McCain. Democrats control Congress, so they are accountable. Mr. Reid and Mrs. Pelosi are two of the worst advertisements for Congress imaginable. And Mr. McCain has an impressive record of political reform he can invoke, whereas Mr. Obama, who has yet to complete his first term in the Senate, has no accomplishments to point to that demonstrate that he is an agent of change.

The 110th Congress is an excellent target for Mr. McCain. He ought to take careful aim at it and commence firing.

Mr. Rove is a former senior adviser and deputy chief of staff to President George W. Bush.

Wednesday, August 27, 2008

The Master Has Arrived

Denver

Peggy Nonnan

In the time-honored tradition of the notebook dump, some thoughts and observations on the Democratic convention so far:

As for Bill Clinton's speech, halfway through I thought: The Master has arrived. Crazy Bill, the red-faced Rageaholic, was somewhere else. This was Deft Political Pro Bill doing what no one had been able to do up to this point at the convention, and that is make the case for Barack Obama. He lambasted the foe, asserted Obama's growth on the trail, argued that he was the right man for the job and did that as a man who once held that job and is remembered, at least in terms of domestic policy and at least by half the country, as having done it pretty darn well. He gave his full imprimatur to a crowd that believes he has an imprimatur to give. As Clinton spoke a friend IM'd, "What is this, the Clinton convention?" The fact is, until both Clintons spoke, it was. Now oddly enough it isn't. Now eyes turn, and finally, to Obama. This was one of the great tee-ups.

The Hillary speech was the best of her career. Toward Obama she was exactly as gracious as she is capable of being. Mrs. Clinton's speeches are rarely notable for great lines but this one had a number of them. "It makes sense that George Bush and John McCain will be together next week in the Twin Cities, because these days they're awfully hard to tell apart." KAPOW. We'll be hearing more of that one. "Sisterhood of the travelling pantsuits" – funny and self aware. She normally doesn't use the teleprompter – actually it's rare for her to use one -- but last night she did, and she proved herself the most gifted pol on the prompter in current political history. Her statement from the floor during the rollcall? Fabulous. The decision to put Obama over the top and ask for acclamation? Masterly. Mrs. Clinton's actions this week have been pivotal not only for Obama, but for her. She showed herself capable of appearing to put party first. I also believe she has come to appreciate both emotionally and intellectually The Importance of Being Teddy. She will not be the president of the United States the next four years, but she can ease herself into the role of Teddy Kennedy-esque fighter for her issues in the Senate. And that I think is exactly where she means to go, and what she means to be. And that, for her, is a brilliant move. Really: brilliant. Here's one reason: Teddy is, throughout his party, beloved. Beloved would be something very new for Hillary.

* * *

The general thinking among thinking journalists, as opposed to journalists who merely follow the journalistic line of the day, is that the change of venue Thursday night to Invesco Field, and the huge, open air Obama acceptance speech is…one of the biggest and possibly craziest gambles of this or any other presidential campaign of the modern era. Everyone can define what can go wrong, and no one can quite define what "great move" would look like. It has every possibility of looking like a Nuremberg rally; it has too many variables to guarantee a good tv picture; the set, the Athenian columns, looks hokey; big crowds can get in the way of subtle oratory. My own added thought is that speeches are delicate; they're words in the air, and when you've got a ceiling the words can sort of go up to that ceiling and come back down again. But words said into an open air stadium…can just get lost in echoes, and misheard phrases. People working the technical end of the event are talking about poor coordination, unclear planning, and a Democratic National Committee that just doesn't seem capable of decisive and sophisticated thinking. So: this all does seem very much a gamble. At a Time magazine event Wednesday afternoon, Obama campaign manager David Plouffe suggested the power of the stadium event is in this: it's meant to be a metaphor for the openness and inclusiveness that has marked the Obama campaign. Open stadium, 60,000 people – "we're opening this up to average Americans." We'll see. In my experience when political professionals start talking metaphors there's usually good reason to get nervous. (Questions: how many of the 60,000 will be Coloradans? Are a lot of the tickets going to out of staters? Are they paying for tickets? Is the Mile High event actually a fundraiser? What's the top ticket going for?)

***

More on Plouffe. Here are things he said. "It's gonna be a close election. If anything breaks it will break late." "There are 18 states we're focusing on." McCain has a woman problem because "if he's elected, Roe versus Wade will be outlawed." McCain's campaign has an "intensity deficit." "One thing we never run into out there is a John McCain field organization." If McCain's vice presidential nominee is Mitt Romney, "They're doubling down on out-of-touch." Plouffe talked a lot about increasing the turnout of registered voters who did not vote in 2004. He spoke a lot about winning or losing various states on the margins. This elicited a rather piercing question from Mike Murphy. He said that in his experience as a political strategist, when the talk turns to things like winning states by upping the share of registered voters who missed the last election, that talk is usually indicative of a message deficit. Plouffe didn't really have an answer.

***

We all tend to see this campaign as the endless campaign. It started right after the '06 election, was in full gear in '07, has reached party resolutions the past few months, and now the general election is off and going. But Plouffe said something that reminded me the endless campaign is nearing its ending. A lot of people start voting in 40 days, with absentee ballots. Forty days! This thing really is going to end.

***

Michelle Obama's speech was solid,