There is a lot going in both domestically and abroad that requires the attention of patriotic Americans.  The Western world finds itself in a fragile state, economically, politically, and dare I suggest spiritually.  The trangressions against what is good and right are legion.  We live in a world in which good is often characterized as evil and dangerous while evil doers are often characterized as victims or as people who are merely misunderstood.

One the pleasures of reading redstate.com is that many of the writers here are conservative, and there is an inclination to defend conservatism unabashedly, rather than apologetically.  The many postings on this site range from the latest legislative news pertaining to Obamination-care to philosophical musings regarding the writings of profound thinkers like Kirk and Burke.

I enjoy it all, and have recently been planning to post about about the differences between conservatism and classical liberalism, acknowledging the very real possibility that I may be more of Lockean classical liberal than a Burkean conservative.  In modern political thought, the two groups are definitely close cousins, but that is a story for another day.

While many here and elsewhere have tried to define conservatism as a three-legged stool, I have always resisted that characterization.  To me conservatism may manifest itself in different stools, but conservatism is a unified whole.  In the famous allegory of the blind mend and the elephant (http://www.sacred-texts.com/isl/egt/egt15.htm) six men come into contact with a unitary elephant but each comes away with a different conclusion as to what an elephant is.  I think conservatism and other worthy philosophies are difficult to fully comprehend, particularlly in a single instance of time.

Yes, conservatism is a philosophy, and it is broader than a merely political philosophy.  When asked to explain conservatism to someone who is not well read on the subject, I usualy emphasize the humility of conservatism, the anti-utopian acknowledgment that man is flawed and limited.  Conservatism means that when someone proposes to reorganize 1/6 of a nation’s economy, at the very least you try to slow things down and be very very skeptical that the plan makes any sense.  A conservative is someone who appreciates the laws of unintended consequences, and acknowledges that mankind, while clever in its own way, is unlikely to ever get a batting average close to 0.500 when it comes to making good public policy decisions.  A conservative understands that the physician creed of first do no harm should apply to politicians in the practice of public policy as well as to physicians in the practice of medicine.  No government program will ever look out for the well being of a child as effectively as loving parents. 

So where am I going with any of this?

This story (http://www.breitbart.com/article.php?id=D9C5DTGO3&show_article=1) raises some issues worth considering for those who otherwise embrace conservatisim:

During the Terri Schiavo matter, there were some commentators on this site who professed 100% certainty that she was in a “persistent vegetative state” from which no recovery was possible.  Although many of those same individuals were shrewd enough not to buy into global warming, socialized medicine, and other such nonesense, I did find it interesting how those on the opposite side of the issue were so unwilling to look behind the medical conclusion of persistent vegetative state.

Medicine, while a noble and knowledgeable calling, is still subject to the general skepticism that is conservatism.  For a while, butter was bad and margarine was good.  Then, the conclusions were switched.  Same for nutra sweet and sugar.  Bottled water was chic in the 90s, but gauche in an era of global warming . . . er cooling . . er change.  Is caffeine good for you now, or something to be avoided?  I forget, but as a conservative, I know that the assessments may change over time, and that inevitably such assessments are based on other parameters.  Water can kill you if you don’t imbibe in moderation. 

According to the article (which could simply be the latest version of oops, forget what we said yesterday), 4 in 10 patients with consciousness disorders are wrongly diagnosed as being in a persistent vegetative state.  This guys parents, like Schiavo’s, were convinced that he was still there.  Good thing he didn’t have an ex-spouse trying to pull the feeding tube.

You can’t sell a piece of land in Florida without a written contract because an oral statement is considered to unreliable and would through the entire system of private property into too much chaos.  Thus, as a matter of public policy, real estate sales must be in writing. 

In contrast, you can pull the plug on a former spouse based on an uncorroborated testimony that is self-serving to the person putting forh the testimony.

Being conservative means a healthy skepticism of the certainty found on the pull out the feeding tube side of the Schiavo debate.  We don’t really understand all of the holes in our understanding.

We keep hearing about how this is a democrat year and that the Republicans face an incredibly strong (and many say insurmountable head wind) this November.

I am not a pollster, and I know that it can be challenging to differentiate what I want to happen from a pure analytical analysis of what will ultimately happen or what is likely happen.

All I know is this. Despite Obama’s many personal strengths and the purported strengths of the democrat party this November, Obama has been spending 90% of his time in recent weeks talking about cutting taxes.

He has probably spent more time talking about cutting taxes in the last three weeks than Reagan did in the run up to the 1980 election (Reagan consistently included foreign policy stuff in his speeches and touched on a wide variety of issues).

Obama is sounding like one trick pony at this point, and if you didn’t realize what his record is, he could easily be construed as a middle of the road Republican (but for a certain “spreading of the wealth” comment).

This is similar to when Bill Clinton declared the end of the era of Big Government.

Despite everything, Obama feels compelled to try and sound like Reagan–to sound as conservative as he can without turning off his base.

This says a lot of good things about where the country is.

Lets just help people connect some dots.

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These debates are downers. Its not that I think McCain will lose, because I think McCain ultimately will prevail. Barack Obama would rather be President of France than the US, and I think a lot of blue collar types get that.

These debates are wasted opportunities for the conservative movement, and from our perspective, the best interests of America.

All of the ongoing narratives on the economy are left wing narratives, and none of those memes are being challenged. Being unable to challenge the narrative, McCain is like an injured boxer on the ropes.

• The financial crisis is the result of deregulation
• Trickle down economics leads to job losses
• Tax cuts for the rich somehow reduce the real wages of workers
• $350 Million in CEO pay is a big part of the problem, but $20B in earmarks is nothing, and the IOUs for Social Security aren’t even worth mentioning
• Tax cuts are really just another form of government spending

A principled free-market person could knock these things out of the park. I’ve even heard Huckabee talk about some of these things on his show. For whatever reason, McCain just can’t articulate arguments contrary to these narratives. Probably because capitalism is not high on his list of principles. He is an honorable man, a hero and a man of personal character. He is not however a business person, and he like Obama, has never really worked in the free market. In other words, capitalism is merely a theory to McCain, while global warming is a threat requiring a hero to come save the day.

You campaign with the candidate you have, and the candidate strengths that you have. I predict (hope) that McCain will at least repeat an infinitum over the next couple of weeks the following:

Obama SAYS he wants to cut your taxes, but has never even tried to do so . . . NOT EVEN ONCE. He has repeatedly tried to raise taxes and he has repeatedly voted to increase spending. Barack’s record shows his true commitment to tax policy–he is a tax and spend democrat who believes that any money you retain after taxes is the result of the generosity of the government

I hope McCain posits at least a couple of these questions in the debate tonight (or alternatively, in some tv ads):

If you want to cut taxes for middle class Americans, why haven’t you authored legislation to do just that?

Can you point to any tax cut legislation that you supported in your career as a legislator?

Can you think of one example where the fundamental goodness of American was being challenged/attacked, and you argued with that person?

Should people in the Russian government care about what the American people think of them?

Please identify uses of military force by the U.S. that you supported.

Do you think tax rates influence the behavior of individuals and businesses?

What is your most significant professional accomplishment?

Can you think of one country in the world that became more prosperous by increasing taxes on the wealthy?

Can you identify one aspect of the French public policy that you find inferior to current American policy?

What do you say to critics who say you want to make American more like Europe?

What has been your most significant mistake as an elected official?

If McCain had a friend who was a former member of the KKK and was unrepentent, would you consider that a character flaw?

When have you ever tried to eliminate tax loopholes?

I encourage everyone to add questions of their own in the comments. The McCain campaign obviously needs some help.

Ultimately, I agree with Dick Morris’s analysis yesterday–push the tax cut issue, and point out how unlikely it is that Obama would ever reduce taxes. If McCain drives home this single point, I think he can close the economy gap.

The following myths and misconceptions seem about the core aspects of the Paulson plan are being widely disseminated. I think it makes sense to dispel those myths in one place.

Myth #1: A credit crunch only impacts “Wall Street”. I don’t think most people believe this myth. However, I put it out there in the interest of fairness and objectivity. I am a self-employed attorney. My clients are predominantly small businesses. A credit cruch impacts everyone. Job creation will be negatively impacted. Here in the midwest, many of the automotive companies are cash strapped and dependent upon the availability of credit. A full-board credit crunch will do considerable damage to Michigan’s unemployment numbers, which are already close to Western European levels. Not sure if the entire nation would be put into a depression, but I do think Michigan’s unemployment numbers good get close to 20% if there is a large crash.

To my fellow opponents of the Paulson plan, I say don’t use the “Wall Street isn’t Main Street” lines in an attempt to divide up parts of the country that actually depend on each other. I understand that politicians use such lines as crutches, but were are mere bloggers, so lets be honest about that aspect.

Myth #2: Opponents of the Paulson plan favor doing nothing. This is a weak straw man argument. While there may be some proponents of simply doing nothing, I am not aware of a single official in Washington DC or any voice in the public debate supporting the position of doing nothing.

Myth #3: Its either the Paulson plan or nothing. For a partial list of alternative ideas, check out the following links. Maybe we can’t get these through Congress, but they seem a lot less extreme than the Paulson plan, so who knows. Besides, some things can be done by executive order and regulatory rule making. Suspending the Mark-To-Market Accounting rule for a couple of weeks would be a great start.

http://www.forbes.com/forbes/2008/1006/017.html

http://www.ftportfolios.com/Commentary/EconomicResearch/2008/9/22/heresaplantoavoidanew_rtc

http://online.wsj.com/article_email/SB122178603685354943-lMyQjAxMDI4MjIxMjcyODI2Wj.html

Myth #4: This problem is caused solely or even primarily by bad loans. 91% of mortgages are in full compliance. 9% are in some state of deliquency. Lets assume for the sake of argument that 9% of mortgages are in 100% default and that the home values of those mortgatges is actually $0. Neither assumption is valid, but assume that negative outcome for the purpose of this analysis. GM’s losses in the last full quarter of 2008 far exceeded 9%. It has been losing money for years, and yet is still able to operate. In contrast, the Wall Street banks have been raking it in until recently. There is clearly more at play here than merely bad loans.

The equation is some bad loans + mark-to-market rule + debt to equity rule = Current Crisis. Bad loans are just the initial spark for this crisis. The other two rules are the causes of the severe spreading of that fire.

9% losses are not enough to bring a Wall Street firm to its knees. However, under Mark-To-Market accounting rules, 9% mortgage delinquency has resulted in an aggregate decrease in value of mortgage-based securities that far exceeds the 9% deliqyuency rate. The bubble popped–and many good mortgage paper is just as distressed as the bad paper.

Under the Mark-To-Market rule, an asset can only be valued as high as an immediately available sales price. Combined with a fixed debt to equity ratio, the MTM rule forces firesales of distressed assets, further reducing the temporary market value of those assets.

In other words, the MTM rule plus the DtoE rule means spiraling distress sales of relatively illiquid assets. The purpose of the Paulson plan is actually to address this by purchasing paper at “above market rates” (e.g. above teh MTM value).

Myth #5: Any deviation from the Mark-To-Market Rule is fraudulent accounting. MTM was optional in this context until as recently as October 2007. I believe it was originally introducted for these types of securities in 1997. I don’t see how the temporary use of 1996 accounting rules for illiquid assets is more fraudulent than Paulson deciding the “true value” of the paper.

As a compromise, I propose we adopt the Paulson Valustion Rule–let Paulson substitute his “fair value” for each distressed asset (he would have to do this anyway under the Paulson plan, so I say evaluate away Mr. Paulson) and let companies use that valuation in their balance sheets, which will expand the debt they can take on, etc. and generally unravel the problem.

Anyway, I hope this helps. This “debate” is very frustrating as we are all talking past each other. Of course, it would be nice to have actual policy makers address some of the Paulson alternatives . . .

I am 100% against the original rescue plan set forth by President Bush. Moreover, I like each new proposed wrinkle to the plan even less than the original. Is listening to Republicans discuss the U.S. government buying shares of private companies and characterizing that as a good and necessary thing a sign of the apocolypse?

Unfortunately, we are being held hostage. I mean that both as conservatives and as Americans. If we do not take corrective action, credit will completely dry up and the economy will go into a death spiral in a way that it hasn’t since the great depression. Think 5% unemployment is too high, well it won’t be less than 15% if small businesses can’t get loans.

Principled conservatices are basically being threatened with the following choice: (1) embrace unprecedented government intrusion in the economy such that it will take decades to roll back on a bite, scratch, and brawl basis; or (2) destroy the country as we know it.

Of course some of us think (1) also destroys the country as we know it, but that is for another day.

I have identified a modificed version of the White House/Treasury/Fed plan that make sense to me, costs virtually nothing, and involves no steps not currently planned for (i.e. my plan is a subset of the government plan).

The Sobieski Plan:

STEP 1: Set up a committee of people whose job it will be to determine the proper value of the distressed mortgage-based securities that are causing the crises. Everybody arguing about the rescue plan pretty much agrees on this, they just disagree on exactly who sits on the committee and what type of oversight there will be. Given step 2, I don’t think there will be as much fuss about Step 1 and I suspect it will be easy to reach agreement on the “valuation board” of my proposal.

STEP 2: Instead of having the government purchase the distressed security at a fair value price determined by the “Valuation Committee” which is what Bush/Paulson/Bernacke/et al want, we instead allow the current owner of the security to assign that same value to the asset. In other words, we allow the owner to adjust their balance sheet in accordance with the “fair value” as determined by the committee that would otherwise be chartered with spending the $700B… only the committee won’t be entitled to spend the money.

STEP 3: Celebrate the $700B in cost savings

STEP 4: If necessary, the Valuation Committee could continue to meet, providing updated “fair value” determinations as the various bonds age, updating the values accordingly. This can be done until the crisis is past.

If you think about it, its hard to argue against this plan. the core approach of the rescue plan is to help clean up the balance sheets of these beaten down bond holders so that the can loan money again.

In terms of impact to their various balance sheets, the impact of the Bush plan is the same as the impact of the Sobieski plan. My plan just happens to be $700B less expensive.

I admit to not being a Wall Street guy, but I have always had a pretty good understanding of economics and a practical sense for business.

I understand that there is an incredible snowball effect resulting from the fact that there is currently no demand in the market for mortgage-based securities. None. Who wants to buy this stuff today? Only people anticipating a government bailout or those looking to take advantage of truly distressed sellers and distressed prices.

I am open to being convinced that the proposed $700B bailout is necessary. However, until alternative approaches are addressed, I am affirmatively against a last minute government authorization for tremendous power and a $700B spending authorization based on an implicit calculus that we either acquiesce or the economy goes into the toilet.

Before we all just jump on board with a plan that had it been proposed by a Clinton Admnistration would have no chance of having broad conservative support, I would suggest taking a loot at the following articles:

http://www.ftportfolios.com/Commentary/EconomicResearch/2008/9/22/heresaplantoavoidanew_rtc

http://online.wsj.com/article_email/SB122178603685354943-lMyQjAxMDI4MjIxMjcyODI2Wj.html

The current crisis is based on the convergence of two primary factors:

(1) There is little demand for mortgage based securities in the current time, resulting in bonds currently “worth” 70-80% less (see Merrill Lynch) of their par value even though only 9% of mortgages are in default and home values are only down 20-30% (i.e. mortgage-based securities are temporarily undervalued and if an individual had any in their portfolio, they would rationally ride out the storm to avoid selling in hyper-distressed conditions).

(2) The ability of financial institutions to issue debt is limited by balance sheet considerations, which means that Merrill Lynch and other financial institutions cannot do what your or I would do, which is simply ride out the storm. They can’t issue new debt without first clearing off their balance sheets. Thus, the bad paper is a hot potato they need to get off their balance sheet if the economy is to avoid a liquidity crisis.

Bottom Line: Financial institutions need to get the distressed bonds out of their debt/equity ratios in order to make loans.

There are at least a couple of alternative ways to approach this problem:
(1) Have government buy the distressed paper at a valuation above the distressed price but below the true price so that tax payers get some profit in the end

(2) Temporarily relax the mark-to-market rules so that instead of centralizing the distressed paper into a centralized Bad Bank of the US, the paper can be held in a decentralized manner by their current owners.

(3) Temporarily raise the permitted debt/equity ratio so that distressed debt paper doesn’t preclude new activities

Until someone can tell me why (2) and/or (3) are deficient, I am firmly against (1).

I vote for Plan B. Until proponents of Plan A actually address other proposed solutions, I am not going to jump on the $700B bailout package that will involve more than $1T in spending before the democrats get through with it.

I admit to not being a Wall Street guy, but I have always had a pretty good understanding of economics and a practical sense for business.

I understand that there is an incredible snowball effect resulting from the fact that there is currently no demand in the market for mortgage-based securities. None. Who wants to buy this stuff today? Only people anticipating a government bailout or those looking to take advantage of truly distressed sellers and distressed prices.

I am open to being convinced that the proposed $700B bailout is necessary. However, until alternative approaches are addressed, I am affirmatively against a last minute government authorization for tremendous power and a $700B spending authorization based on an implicit calculus that we either acquiesce or the economy goes into the toilet.

Before we all just jump on board with a plan that had it been proposed by a Clinton Admnistration would have no chance of having broad conservative support, I would suggest taking a loot at the following articles:

http://www.ftportfolios.com/Commentary/EconomicResearch/2008/9/22/heresaplantoavoidanew_rtc

http://online.wsj.com/article_email/SB122178603685354943-lMyQjAxMDI4MjIxMjcyODI2Wj.html

The current crisis is based on the convergence of two primary factors:

(1) There is little demand for mortgage based securities in the current time, resulting in bonds currently “worth” 70-80% less (see Merrill Lynch) of their par value even though only 9% of mortgages are in default and home values are only down 20-30% (i.e. mortgage-based securities are temporarily undervalued and if an individual had any in their portfolio, they would rationally ride out the storm to avoid selling in hyper-distressed conditions).

(2) The ability of financial institutions to issue debt is limited by balance sheet considerations, which means that Merrill Lynch and other financial institutions cannot do what your or I would do, which is simply ride out the storm. They can’t issue new debt without first clearing off their balance sheets. Thus, the bad paper is a hot potato they need to get off their balance sheet if the economy is to avoid a liquidity crisis.

Bottom Line: Financial institutions need to get the distressed bonds out of their debt/equity ratios in order to make loans.

There are at least a couple of alternative ways to approach this problem:
(1) Have government buy the distressed paper at a valuation above the distressed price but below the true price so that tax payers get some profit in the end

(2) Temporarily relax the mark-to-market rules so that instead of centralizing the distressed paper into a centralized Bad Bank of the US, the paper can be held in a decentralized manner by their current owners.

(3) Temporarily raise the permitted debt/equity ratio so that distressed debt paper doesn’t preclude new activities

Until someone can tell me why (2) and/or (3) are deficient, I am firmly against (1).

I vote for Plan B. Until proponents of Plan A actually address other proposed solutions, I am not going to jump on the $700B bailout package that will involve more than $1T in spending before the democrats get through with it.

As an inhouse lawyer for a Fortune 500 company in the 90s, I can definitively say that many corporate mistakes are based on a desire to get the accounting to “work out” in accordance with the goals of corporate executives.

In one instance, I was asked to convert a relatively simple 2-way transaction into an incredibly complex 3-way agreement so that the transaction could be structured as a lease. Leasing was considered to have certain tax advantages for the customer, and the structure of this particular lease was to lead to accelerated revenue recognition for my company.

It was clear as crystal that all three parties were taking significant risks to engage in the transaction. The fact that the two-way relationship was already getting clouded up with performance issues did not cause either of the two parties to hesitate in bringing in a third party to finance the new lease-based transaction.

I’ll never know how the thing turned out, but to me it seemed like juggling flaming battons on an oil freighter, so I left corporate life for private practice.

I bring up the dark underbelly of accounting rules because the financial crisis occuring before our very eyes makes no sense to me. The vast majority of mortgages are not in default.

9 in 100 mortgages is in default. http://www.freerepublic.com/focus/f-news/2086579/posts. This is up from merely 1 in 100 mortgages back in 2007. However, even if absolutely no payments are received by any mortgage in default, one would expect the mortgage holders to be incurring at most a 9% loss. Here in Detroit, a 9% operating loss is not something that causes talk of bankruptcies or bailout. The 9% loss would of course be off-set by the profitable mortgages and other profitable non-mortgage operations.

So what in the heck explains the magnitude of the financial crisis? Why are taxpayers being saddled with hundreds of billions of loan guarantees and other bailout activities?

How can this crises be so deep, broad, and dangerous if only 9 in 100 mortgages is in default?

Accounting rules. Or more specifically, accounting rules accentuating the temporary lack of a debt marketplace for mortgage-backed securities.

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