The U.S. in the World Race for Clean Electric Generating Capacity

IER, March 15, 2010

China has already made its choice.  China is spending about $9 billion a month on clean energy.  It is also investing $44 billion by 2012 and $88 billion by 2020 in Ultra High Voltage transmission lines.  These lines will allow China to transmit power from huge wind and solar farms far from its cities.  While every country’s transmission needs are different, this is a clear sign of China’s commitment to developing renewable energy.

The United States, meanwhile, has fallen behind.
– U.S. Secretary of Energy, Steven Chu

In an attempt to generate support for implementing a cap on carbon dioxide, Energy Secretary Steven Chu and others paint a very dire picture of the U.S.-vs.-China race for clean energy, implying that China is quickly outstripping us in that race.[i] However, all the facts are not on the table. In both 2008 and 2009, the U.S. added more non-hydroelectric renewable capacity than it added traditional capacity (natural gas, coal, oil, and nuclear).[ii] At the end of 2009, the U.S. ranked first in wind capacity in the world with China’s wind capacity about 30 percent less than the U.S. level. At the end of 2008 (the most recent data available), the U.S. ranked fourth in solar capacity, with only Germany, Spain, and Japan having a larger amount. Where China is outstripping us in domestic construction is in coal-fired, nuclear, and hydroelectric generating technologies. Because of U.S. legal and regulatory red tape, it is much harder to build these energy technologies in the U.S. than in China.

What Does the Capacity Data Show for Wind and Solar Power?

According to the Solar Energy Industries Association, the U.S. ranks fourth in the world in solar capacity with 8,800 megawatts at the end of 2008.[iii] Germany, Spain, and Japan, in that order, had larger amounts of solar power at the end of 2008 than the U.S.[iv] China had just 0.3 megawatts of installed solar PV capacity at the end of 2009[v] or 0.003 percent of the solar capacity of the U.S.

According to the Global Wind Energy Council, the U.S. leads the world in wind generating capacity, with 35.2 gigawatts at the end of 2009; Germany is second with 25.8 gigawatts, and China is third with 25.1 gigawatts.[vi] In 2009, the U.S. installed almost 10 gigawatts of wind capacity, a record,[vii] and China installed 13 gigawatts.[viii]

Why is China Building Wind and Solar Capacity?

China builds wind and solar because ratepayers in other countries are paying them to do so. China has been taking advantage of the Clean Development Mechanism (CDM) under the Kyoto Protocol to obtain funding for its solar and wind power.[ix] Under this program, administered by the United Nations, wealthy countries can contribute funds and get credit for “clean technology” built elsewhere as long as it is additional, that is, as long as that technology would not have been built otherwise. China is the world’s largest beneficiary of the program and has benefited to the point where 30 percent of its wind capacity is not operable because it is not connected to the grid.[x] However, in mid 2009, the U.N. started questioning whether the Chinese CDM program was in fact “additional,” because the U.N. found that China was lowering its subsidies to qualify for the program.[xi] That is, China was reducing its own government’s support in order to get international subsidies.

How Do the U.S. and China Electric Construction Programs Compare?

While China is building non-hydro renewable slightly faster than the United States, overall it is building new electrical generation much, much faster than the United States. The most comparable international database on electric generating capacity is found on the Energy Information Administration (EIA) website.[xii] Comparing the electric generating capacity data by technology type for the two countries, at the end of 2007 (the last year of comparable data), the Chinese had a total of 716 gigawatts of generating capacity, about 280 gigawatts less than the 995 gigawatts of capacity in the U.S.

The U.S. has been building generating capacity at a very slow rate, adding between 8 and 15 gigawatts a year since 2004. The Chinese in contrast, to fuel their bulging economy, have added between 75 and 106 gigawatts a year, from 2004 to 2007. Based on Secretary Chu’s comments, one might think that the additional capacity that China was adding was all non-hydroelectric renewable and nuclear capacity. However, that has not been the case. Between 2004 and 2007, the Chinese have added 226 gigawatts of fossil fuel generating capacity, 40 gigawatts of hydroelectric capacity, 2 gigawatts of nuclear capacity, and only 6 gigawatts of non-hydro renewable capacity.

What are China’s Electric Construction Plans?

Both China’s generating sector and its industrial sector rely heavily on coal, with 79 percent of its electric generation being coal-fired.[xiii] According to the National Energy Technology Laboratory (NETL), from 2004 through 2007, China has been building 30 to 70 gigawatts of coal-fired power a year, and has about 70 gigawatts more under construction. NETL sees China building over 185 gigawatts of coal-fired plants in the future.[xiv] (See figure below.)

According to Australia, China is planning to build 500 coal-fired plants over the next ten years.[xv] That means: every week or so, for the next decade, China will open another large coal-fired power plant.[xvi] Australia has just signed a $60 billion deal with China to build a coal mine in Queensland and a 311-mile rail way for transporting the coal to the coast for export to China’s power plants.[xvii]

While China has been slow in adding nuclear power plants, it currently has 20 nuclear reactors under construction and more starting construction this year.[xviii] Four AP 1000 reactors are under construction at 2 different sites: Haiyang and Sanmen.[xix] These are the same reactors that the U.S. Nuclear Regulatory Commission (NRC) has ruled need additional analysis, testing, or design modifications of the shield building to ensure compliance with NRC requirements before they can be constructed in the U.S.[xx] China expects to achieve a total nuclear capacity of 60 gigawatts by 2020, and 120 to 160 gigawatts by 2030,[xxi] surpassing the total nuclear capacity of the United States.

China has a goal to produce 15 percent of its energy from renewables by 2020.[xxii] To help meet this goal, China is planning to build the world’s largest wind farm in the northwest part of the country. The plan is for 5 gigawatts in 2010, expanding to 20 gigawatts in 2020, at a cost of $1 million per megawatt,[xxiii] or $1,000 per kilowatt, about half the cost of an onshore wind unit in the U.S., according to the Energy Information Administration.[xxiv]

What about the U.S.?

The U.S. has made it difficult to build generating plants in this country, particularly coal-fired and nuclear power plants. According to NETL, only eight coal-fired plants totaling 3,218 megawatts became operational in the U.S. in 2009, the largest increase in coal-fired capacity additions in one year since 1991.[xxv] Prospects of cap-and-trade legislation, reviews and re-reviews by the Environmental Protection Agency, direct action protests, petition drives, renewable portfolio standards in many states, competition from wind power, and lawsuits have slowed the construction of new coal-fired plants.[xxvi] As of late February, activists had derailed 97 of the 151 new plants that were in the pipeline in May 2007. According to the Sierra Club, 126 coal plants have been stopped since 2001.  And, for the first time in more than 6 years, not one new coal plant broke ground in 2009. The graph above compares the coal-plant additions in the U.S. to that of China, showing only a handful of coal plants under construction in the U.S.  With new coal-fired plants extremely limited by the above, some are purporting that the current direction for activists may be to phase out the existing fleet of coal-fired power plants.[xxvii] Because the capital cost of most of our coal-fired plants has been paid, that fleet produces almost 50 percent of our electricity at very little cost. Average production costs for coal-fired generators in 2008 were only 2.75 cents per kilowatt hour, second to our nuclear plants at 1.87 cents per kilowatt hour.[xxviii]

No nuclear plant has started up in the U.S. since 1996,[xxix] and no construction permits have been issued since 1979.[xxx]NRC requirements, financing difficulties, and slow fulfillment of the nuclear provisions of the Energy Policy Act of 2005 have slowed the construction of new nuclear power reactors. However, as part of the 2005 Energy Policy Act, President Obama announced last month that his administration is offering conditional commitments for $8.33 billion in loan guarantees for nuclear power construction and operation. Two new 1,100 megawatt Westinghouse AP1000 nuclear reactors are to be constructed at the Alvin W. Vogtle Electric Generating Plant in Burke, Georgia, supplementing the two reactors already at the site. The two new nuclear generating units are expected to begin commercial operation in 2016 and 2017 at a cost of $14 billion. As part of the conditional loan guarantee deal, the U.S. Nuclear Regulatory Commission must determine if the AP1000 fulfills the regulatory requirements for a construction and operating license.[xxxi] (These are the same units permitted, licensed, and being constructed in China right now.) But, as a recent Wall Street Journal energy conference noted, loan guarantees are “meaningless in the absence of regulatory certainty.” Further, Obama’s budget cutbacks for Yucca Mountain, the proposed nuclear waste repository, are yet another signal that President Obama may not “walk the talk.”[xxxii]

Natural gas and wind power are the technologies that seem best able to surmount the financial, regulatory, and legal hurdles of getting plants permitted and operational. In 2008, the U.S. added over 15,000 megawatts of electric generating capacity, of which 4,556 megawatts was natural gas-fired and 8,136 megawatts was wind power.[xxxiii] However, organized local opposition has halted even some renewable energy projects by using “not in my back yard” (NIMBY) issues, changing zoning laws, opposing permits, filing lawsuits, and bleeding projects of their financing.[xxxiv]

The Energy information Administration projects that the U.S. will need 200 gigawatts of additional generating capacity by 2035 to replace capacity that will be retired and to meet new electricity demand.[xxxv] Of that amount, EIA expects that 13 percent will be coal-fired, 53 percent natural gas-fired, 4 percent will be from nuclear power, and 29 percent from renewable power (23 percent is expected to be wind power), assuming that no changes would be made to current laws and regulations.[xxxvi]

Conclusion

China realizes that it needs affordable energy to fuel its economic growth, and is building all forms of generating technologies at breakneck speed. By contrast, the electric generating construction program in the United States has slowed tremendously, owing to regulatory, financial, and legal problems. Without reasonably priced energy, it will be difficult to achieve high levels of economic growth in the U.S., and industry will move offshore where energy is more affordable. Will Secretary Chu’s policies get us to affordable energy, or will the administration’s policies divert us from obtaining the energy that we need to fuel our economy?

---

[i] Climate Wire, Energy policy: U.S. clean tech outpaced by China—Chu, March 9, 2010, http://www.eenews.net/climatewire/2010/03/09/3 [ii] Renewable Energy Policy Network for the 21^st Century, Renewables Global Status Report 2009 Update, May 13, 2009, http://www.ren21.net/pdf/RE_GSR_2009_Update.pdf
[iii] http://www.seia.org/cs/about_solar_energy/industry_data
[iv] Ibid.
[v] Center for American Progress, Out of the Running, March 2010, http://www.eenews.net/public/25/14571/features/documents/2010/03/04/document_cw_01.pdf
[vi] Global Wind Energy Council, http://www.gwec.net/index.php?id=13, and Global Wind Energy Council, Global wind power boom continues amid economic woes, March 2, 2010, http://www.gwec.net/index.php?id=30&no_cache=1&tx_ttnews[tt_news]=247&tx_ttnews[backPid]=4&cHash=1196e940a0
[vii] American Wind Energy Association, U.S. Wind Energy breaks all records, January 26, 2010, http://www.awea.org/newsroom/releases/01-26-10_AWEA_Q4_and_Year-End_Report_Release.html
[viii] Global Wind Energy Council, Global wind power boom continues amid economic woes, March 2, 2010, http://www.gwec.net/index.php?id=30&no_cache=1&tx_ttnews[tt_news]=247&tx_ttnews[backPid]=4&cHash=1196e940a0
[ix] CNN, U.N. halts funds to China wind farms, December 1, 2010, http://edition.cnn.com/2009/BUSINESS/12/01/un.china.wind.ft/index.html
[x] The Wall Street Journal, “China’s Wind Farms Come with a Catch: Coal Plants”, September 28, 2009, http://online.wsj.com/article/SB125409730711245037.html
[xi] CNN, U.N. halts funds to China wind farms, December 1, 2010, http://edition.cnn.com/2009/BUSINESS/12/01/un.china.wind.ft/index.html
[xii]http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm?tid=2&pid=34&aid=7&cid=r1,&syid=2004&eyid=2008&unit=MK
[xiii] Energy information Administration, International Energy Outlook 2009,  http://www.eia.doe.gov/oiaf/ieo/index.html
[xiv] National Energy Technology Laboratory, Tracking New Coal-fired Power Plants, January 8, 2010,  http://www.netl.doe.gov/coal/refshelf/ncp.pdf
[xv] http://windfarms.wordpress.com/2009/01/29/china-building-500-coal-plants/
[xvi] The New York Times, “Pollution From Chinese Coal Casts a Global Shadow”, http://www.nytimes.com/2006/06/11/business/worldbusiness/11chinacoal.html?_r=1
[xvii] Australia Signs Huge China Coal Deal, http://windfarms.wordpress.com/2010/02/06/australia-signs-huge-china-coal-deal/
[xviii] Nuclear Power in China”, World Nuclear Association, November 6, 2009, www.world-nuclear.org/info/inf63.html
[xix] Westinghouse News Releases, “Westinghouse and the Shaw Group Celebrate First Concrete Pour at Haiyang Nuclear Site in China”, September 29, 2009, http://westinghousenuclear.mediaroom.com/index.php?s=43&item=200
[xx] Westinghouse Statement Regarding NRC News Release on AP1000 Shield Building, http://westinghousenuclear.mediaroom.com/index.php?s=43&item=203
[xxi] Nuclear Power in China, World Nuclear Association, November 6, 2009, www.world-nuclear.org/info/inf63.html
[xxii] USA Today, “China Pushes Solar, Wind Power Development”, http://www.usatoday.com/money/industries/energy/environment/2009-11-17-chinasolar17_CV_N.htm
[xxiii] The Wall Street Journal, “Wind Power: China’s Massive and Cheap Bet on Wind Farms”, July 6, 2009, http://blogs.wsj.com/environmentalcapital/2009/07/06/wind-power-chinas-massive-and-cheap-bet-on-wind-farms/
[xxiv] Energy information Administration, Assumptions to the Annual Energy Outlook 2009, Table 8.2, Electricity Market Module, http://www.eia.doe.gov/oiaf/aeo/assumption/index.html
[xxv] National Energy Technology Laboratory, Tracking New Coal-fired Power Plants, January 8, 2010,  http://www.netl.doe.gov/coal/refshelf/ncp.pdf
[xxvi] A messy but practical strategy for phasing out the U.S. coal fleet, http://www.grist.org/article/death-of-a-thousand-cuts/
[xxvii]Ibid.
[xxviii]http://www.nei.org/resourcesandstats/documentlibrary/reliableandaffordableenergy/graphicsandcharts/uselectricityproductioncosts
[xxix] “Nuclear Power: Outlook for new U.S. Reactors”, Congressional Research Service, March 9, 2007, www.fas.org/sgp/crs/misc/RL33442.pdf
[xxx] Energy Information Administration, Annual Energy Review 2008, Table 9.1, http://www.eia.doe.gov/emeu/aer/pdf/pages/sec9_3.pdf
[xxxi] Environment News Service, Obama Backs First New U.S. Nuclear Plant with $8.3 Billion, February 16, 2010, http://www.ens-newswire.com/ens/feb2010/2010-02-16-091.html
[xxxii] The Wall Street Journal, An Energy Head Fake, March 11,2010, http://online.wsj.com/article/SB10001424052748704784904575112144130306052.html?mod=WSJ_Opinion_AboveLEFTTop
[xxxiii] Energy Information Administration, Electric Power Annual, Tables 1.1 and 1.1.A, http://www.eia.doe.gov/cneaf/electricity/epa/epa_sum.html
[xxxiv] For a repository of stalled and stopped energy projects, see U.S. Chamber of Commerce, “Project No Project Energy-Back On Track”, http://pnp.uschamber.com/
[xxxv] Energy Information Administration, Annual Energy Outlook 2010 Early Release, Table A9, http://www.eia.doe.gov/oiaf/aeo/pdf/appa.pdf
[xxxvi] Ibid.

Ma’s Puzzling Midterm Malaise

Ma’s Puzzling Midterm Malaise. By Shelley Rigger, Brown Professor of East Asian Politics, Davidson College
The Brookings Institution, March 2010

It is two years this month since Ma Ying-jeou was elected president of Taiwan. As he approaches the mid-term milestone, President Ma’s record is puzzling. On the one hand, he has made significant progress toward his most important goals. First, he’s stabilized cross-Strait relations. The tension that gripped Taiwan and China during the Chen years has abated, high-level visits have become routine and the two sides are engaged in energetic negotiations on a wide range of issues. Also, after taking a hard hit in the global economic downturn of 2008, Taiwan’s economy is bouncing back. Exports in December 2009 were almost 50 percent greater than December 2008 (admittedly a very low baseline), and economic forecasters predict a 2010 economic growth rate between 4 and 5 percent, although unemployment remains high. Ma has also rebuilt the all-important Taipei-Washington relationship, culminating in the Obama administration’s recent announcement that it would complete a long-awaited arms sale to Taiwan.

What is puzzling is that these successes have failed to endear President Ma to his constituents. On the contrary, his popularity has plummeted since the election, and today his personal approval ratings hover below 30 percent. The dissatisfaction extends to his party as well, and it’s been manifested concretely in elections. Ma’s party, the Kuomintang (KMT), won a far smaller share of the vote in December’s local elections than it captured in the previous round, and it lost 6 out of 7 legislative by-elections in January and February. Municipal elections at the end of this year already are being touted as a bellwether for the 2012 presidential race, when Ma is expected to seek a second term, and the trends do not look good. Hence the conundrum: Why are Ma’s successes in areas believed to be important to voters – reducing cross-Strait tension and reviving the economy – not boosting his approval ratings or his party’s political fortunes?

When Ma Ying-jeou was elected president two years ago, there was a widespread feeling that Taiwan would “get back to normal.” From 2000 to 2008, relations between Taipei and Beijing stagnated, mainly because PRC leaders refused contact with Taiwan’s Sino-skeptical president, the Democratic Progressive Party (DPP) leader Chen Shui-bian. For eight years, neither Taipei nor Beijing was interested in taking the political risks that reaching out to the other side would have entailed, and in the absence of progress, tensions increased. Thus, the return to power of the KMT, Taiwan’s long-time ruling party, was a welcome development in Washington and Beijing – and in Taiwan, where voters gave Ma 58 percent of the presidential vote as well as a legislature in which his party controlled almost 75 percent of the seats.

If Ma’s election meant things were “getting back to normal,” two years into his presidency we have a clear picture of what “normal” really means in the Taiwan Strait. In Taiwan’s domestic politics, “normal” is a highly-competitive democracy in which the executive is forced to accommodate an active and activist legislature while defending its positions from an energetic – and politically viable – opposition. In cross-Strait relations, “normal” means little overt tension, but no great breakthroughs to permanently resolve the conflict between Taiwan and the People’s Republic of China.

To understand the state of play in the Taiwan Strait it is helpful to keep in mind Robert Putnam’s “two-level game” metaphor for international negotiations. Beijing and Taipei are working together to design a framework for relations that allows for mutually-beneficial economic and people-to-people interactions while balancing the two sides’ long-term goals regarding international status and potential unification. Some of this work is conducted by representatives of the two governments in high-level, formal negotiations. The content of those negotiations is shaped and constrained by what Putnam calls “level two” interactions – more commonly known as domestic politics. In Taiwan’s case, Ma’s domestic weakness constrains the pace and content of cross-Strait rapprochement.

Under President Ma, elite-level interactions have been smoother than ever before, but that only accentuates the ways domestic politics limit Taiwan leaders’ options.  Those limitations are more evident today in part because the game was suspended for most of the Chen era. When Chen took office, PRC leaders paused the game because they perceived little benefit in negotiating with Chen, whom they believed was irreversibly committed to a pro-independence line. In their view, a small group of “stubborn independence elements” had wrested political control from the pro-China mainstream. They hoped that refusing to deal with Chen would help to restore the mainstream to power.

When Ma was elected, Beijing was happy to resume play. In the view of Chinese leaders, Ma was an improvement, not only over his immediate predecessor, but over the previous president, Lee Teng-hui, too. To give Ma a solid start, Beijing was prepared to concede important points. Rather than repeating their demand that Taiwan agree to their One China Principle as the basis for reopening negotiations, PRC leaders accepted Ma’s endorsement of the 1992 Consensus (a bit of verbal hand-waving in which the two sides agreed to set aside the problem of defining the “one China” they both claimed to believe in) as “close enough.”

Once it restarted the game, Beijing quickly discovered that having the right elite-level interlocutor was only the beginning. Many Taiwanese found Chen’s Sino-phobic policies unnecessarily provocative, but that did not mean they were ready to support blindly whatever policy the next administration proposed. As the pace of elite-level interactions accelerated, the focus of the domestic political debated shifted from restraining Chen’s provocations to scrutinizing Ma’s performance. At first, voters gave Ma (and, to a lesser extent, the KMT-controlled legislature) the benefit of the doubt, but new government’s record was disappointing, and voters began to lose confidence.

A number of factors contributed to the public’s waning trust in Ma. The lack of transparency in decision-making has been a particular concern. DPP leaders suggest high-ranking KMT cross-Strait specialists might be willing to compromise Taiwan’s autonomy in order to reach an agreement with Beijing. They argue that the government’s closed cross-Strait decision-making – including on the proposed Economic Cooperation Framework Agreement (ECFA) – is dangerous, because these specialists, whether out of perfidy or naïveté, might fail to protect Taiwan’s interests. (For example, the proximate cause of National Security Advisor Su Chi’s resignation in February was his mishandling of beef import negotiations with the U.S., but as Bruce Jacobs wrote in the Taipei Times, many Taiwanese found his resignation “long overdue” because they doubted Su’s commitment to Taiwan.)

To protect Taiwan from a badly-negotiated deal, Ma’s critics are demanding ECFA be subjected to formal ratification, either by popular referendum or in the legislature. Legislative speaker Wang Jin-pyng, a KMT member, has said the legislature might overrule the ECFA deal if it does not meet lawmakers’ standards. President Ma chairs the KMT, so the lack of support for his policies within the party reinforces the sense that he and his inner circle lack a firm hand for dealing with opponents – and a firm hand is exactly what they need to deal effectively with the ever-tough negotiators from Beijing. Several of the KMT’s recent electoral set-backs resulted from local politicians rebelling against Ma’s attempts to clean up local politics, a development that further reinforces this impression.

Declining confidence in the Ma government also reflects the public’s sense that their leaders have not responded well to domestic crises. The government’s reaction to the disastrous typhoon last summer attracted enormous criticism, much of it focused on the perception that Ma had failed to register the impact of the disaster and react swiftly and proportionately. The government also has been hammered for dismissing popular fears about H1N1 vaccine and beef imported from the U.S. A DPP official suggested, “Ma just doesn’t seem to speak the people’s language.”

Paradoxically, Ma’s political weakness at home may help him protect Taiwan’s interests in negotiations with Beijing. Taiwan’s economic, political and military power all are declining relative to the PRC, so the negotiations are in danger of becoming perilously uneven. The practical difficulty of ratifying a cross-Strait deal in Taiwan’s nervous domestic climate helps balance that asymmetry. In his discussion of two-level games, Putnam argues that authoritarian states are at a disadvantage in international bargaining for precisely that reason: they cannot plausibly claim that certain agreements will fail the test of domestic ratification. Leaders from democratic states can make that case, and they can extract concessions from the other side on those grounds. The dynamic that Putnam describes may benefit Taiwan, but it is no fun for the man caught in the middle: President Ma Ying-jeou.

Beijing is unlikely to find any Taiwanese leader easier to deal with than Ma, so it is in China’s interest to keep the relationship on a positive track – even if that means accepting slower progress than it would like. That logic helps to explain why, even as Chinese leaders fulminated against the U.S. for its decision to follow through on arms sales to Taiwan, they chose not to direct their venom at Taipei. Likewise, the PRC continues to send high-level representatives and delegations to Taiwan despite large protests, including one in November 2008 that trapped PRC representative Chen Yunlin in a hotel for hours. And in December 2009 the two sides signed three technical agreements, even after Taipei nixed a fourth proposal.

Beijing has even made limited concessions on Taiwan’s demand for international space, which Ma stated last year: “There is a clear link between cross-strait relations and our international space. We’re not asking for recognition; we only want room to breathe.” The two sides are conforming to a tacit “diplomatic truce” proposed by Ma shortly after his inauguration; neither has poached a diplomatic partner from the other since that time. In 2009, Beijing even withdrew its opposition to Taiwan’s efforts to secure observer status at the UN World Health Assembly. The Ma administration touted that development as a breakthrough, but his political opponents took him to task for the opacity of the process and for overstating the benefits Taiwan derived from the deal. In fact, the WHA decision was less a precedent-setting breakthrough than a one-off deal that could be revoked in the future – but the alternative was continued exclusion and isolation.

In sum, Beijing is so far tolerating the measured pace of cross-Strait engagement imposed by Taiwan’s domestic politics. PRC leaders seem confident that over time, their position will strengthen, so there is no need to push for faster progress now. The slow pace works well for Taiwan, too, where even baby steps make many people nervous. Still, there is a sobering side to this picture. If the process slows too much, PRC leaders may determine that no Taiwan leader, including Ma, is capable of delivering any of what Beijing is seeking and so lose patience. That would mean game over for the Ma Ying-jeou approach to cross-Strait rapprochement.

The notion of objective truth has been abandoned and the peer review process gives scholars ample opportunity to reward friends and punish enemies

Climategate Was an Academic Disaster Waiting to Happen. By PETER BERKOWITZ
The notion of objective truth has been abandoned and the peer review process gives scholars ample opportunity to reward friends and punish enemies.WSJ, Mar 13, 2010

Last fall, emails revealed that scientists at the Climatic Research Unit at the University of East Anglia in England and colleagues in the U.S. and around the globe deliberately distorted data to support dire global warming scenarios and sought to block scholars with a different view from getting published. What does this scandal say generally about the intellectual habits and norms at our universities?

This is a legitimate question, because our universities, which above all should be cultivating intellectual virtue, are in their day-to-day operations fostering the opposite. Fashionable ideas, the convenience of professors, and the bureaucratic structures of academic life combine to encourage students and faculty alike to defend arguments for which they lack vital information. They pretend to knowledge they don't possess and invoke the authority of rank and status instead of reasoned debate.

Consider the undergraduate curriculum. Over the last several decades, departments have watered down the requirements needed to complete a major, while core curricula have been hollowed out or abandoned. Only a handful of the nation's leading universities—Columbia and the University of Chicago at the forefront—insist that all undergraduates must read a common set of books and become conversant with the main ideas and events that shaped Western history and the larger world.

There are no good pedagogical reasons for abandoning the core. Professors and administrators argue that students need and deserve the freedom to shape their own course of study. But how can students who do not know the basics make intelligent decisions about the books they should read and the perspectives they should master?

The real reasons for releasing students from rigorous departmental requirements and fixed core courses are quite different. One is that professors prefer to teach boutique classes focusing on their narrow areas of specialization. In addition, they believe that dropping requirements will lure more students to their departments, which translates into more faculty slots for like-minded colleagues. By far, though, the most important reason is that faculty generally reject the common sense idea that there is a basic body of knowledge that all students should learn. This is consistent with the popular campus dogma that all morals and cultures are relative and that objective knowledge is impossible.

The deplorable but predictable result is that professors constantly call upon students to engage in discussions and write papers in the absence of fundamental background knowledge. Good students quickly absorb the curriculum's unwritten lesson—cutting corners and vigorously pressing strong but unsubstantiated opinions is the path to intellectual achievement.

The production of scholarship also fosters intellectual vice. Take the peer review process, which because of its supposed impartiality and objectivity is intended to distinguish the work of scholars from that of journalists and commercial authors.

Academic journals typically adopt a double blind system, concealing the names of both authors and reviewers. But any competent scholar can determine an article's approach or analytical framework within the first few paragraphs. Scholars are likely to have colleagues and graduate students they support and whose careers they wish to advance. A few may even have colleagues whose careers, along with those of their graduate students, they would like to tarnish or destroy. There is no check to prevent them from benefiting their friends by providing preferential treatment for their orientation and similarly punishing their enemies.

That's because the peer review process violates a fundamental principle of fairness. We don't allow judges to be parties to a controversy they are adjudicating, and don't permit athletes to umpire games in which they are playing. In both cases the concern is that their interest in the outcome will bias their judgment and corrupt their integrity. So why should we expect scholars, especially operating under the cloak of anonymity, to fairly and honorably evaluate the work of allies and rivals?

Some university presses exacerbate the problem. Harvard University Press tells a reviewer the name of a book manuscript's author but withholds the reviewer's identity from the author. It would be hard to design a system that provided reviewers more opportunity to reward friends and punish enemies.

Harvard Press assumes that its editors will detect and avoid conflicts of interest. But if reviewers are in the same scholarly field as, or in a field related to that of, the author—and why would they be asked for an evaluation if they weren't?—then the reviewer will always have a conflict of interest.

Then there is the abuse of confidentiality and the overreliance on arguments from authority in hiring, promotion and tenure decisions. Owing to the premium the academy places on specialization, most university departments today contain several fields, and within them several subfields. Thus departmental colleagues are regularly asked to evaluate scholarly work in which they have little more expertise than the man or woman on the street.

Often unable to form independent professional judgments—but unwilling to recuse themselves from important personnel decisions—faculty members routinely rely on confidential letters of evaluation from scholars at other universities. Once again, these letters are written—and solicited—by scholars who are irreducibly interested parties.

There are no easy fixes to this state of affairs. Worse, our universities don't recognize they have a problem. Instead, professors and university administrators are inclined to indignantly dismiss concerns about the curriculum, peer review, and hiring, promotion and tenure decisions as cynically calling into question their good character. But these concerns are actually rooted in the democratic conviction that professors and university administrators are not cut from finer cloth than their fellow citizens.

Our universities shape young men's and women's sensibilities, and our professors are supposed to serve as guardians of authoritative knowledge and exemplars of serious and systematic inquiry. Yet our campuses are home today to a toxic confluence of fashionable ideas that undermine the very notion of intellectual virtue, and to flawed educational practices and procedures that give intellectual vice ample room to flourish.

Just look at Climategate.

Mr. Berkowitz is a senior fellow at Stanford University's Hoover Institution.

The IMF's Inflation Illusion - Central banks would sacrifice hard-won credibility by aiming at a 4% annual cost-of-living target

The IMF's Inflation Illusion. By AXEL A. WEBER AND PHILIPP HILDEBRAND
Central banks would sacrifice hard-won credibility by aiming at a 4% annual cost-of-living target.WSJ, Mar 04, 2010

The International Monetary Fund's chief economist, Olivier Blanchard, recently published a paper ("Rethinking Macroeconomic Policy") that attempts to distill preliminary lessons from the financial crisis. The paper contains much that is useful and worthy of further consideration—but it also suggests that central banks should aim for higher inflation during normal times, say 4%.

Such an inflation target, the argument goes, would lead to higher nominal interest rates and therefore give more room for monetary policy to be eased during times of crisis. This argument is severely flawed and its timing highly unfortunate, if not imprudent.

The basic assumption behind the suggestion of a higher target inflation rate is simply wrong. As the recent crisis has vividly illustrated, monetary policy is not powerless once the short-term interest rate is close to zero. The Bundesbank and the Swiss National Bank have argued for some time that short-term interest rates are not the only means by which monetary policy effect the economy. "Unconventional" measures, such as longer-term refinancing opportunities, liquidity facilities and asset purchases have been effective in further stimulating the economy.

There is little reason to believe that having a few additional percentage points to cut short-term interest rates would have been more effective. In short, an interest rate of zero is less of a problem for monetary policy making than Mr. Blanchard and his co-authors assume. The alleged potential benefit of higher inflation for macroeconomic stability is therefore grossly overstated.

More importantly, a higher inflation target comes with severe macroeconomic costs. First and foremost, it would greatly undermine macroeconomic stability by raising inflation expectations.

It is an illusion to believe that central banks could engineer the transition to a substantially higher level of inflation without risking the credibility they have built up over the past decades. Assume central banks were to aim for 4% inflation rather than 2% after this crisis. Why should the public not fear further slippage after the next crisis? Both the Swiss and the German central banks have been front-runners in promoting credible policies geared at maintaining price stability. These experiences must not be sacrificed for ill-founded, short-term considerations.

There is a strong case for central banks to commit to price stability rather than aiming for higher inflation as proposed by Mr. Blanchard. Price stability is a crucial public good—crucial for economic growth and prosperity, and also for social stability. This is a lesson from history the citizens of our respective countries of which the citizens of our respective countries are deeply aware. Moreover, the weakest members of society typically suffer the most from inflation because they have only limited possibilities to protect themselves against it.

In the current environment of high fiscal deficits and rising public debt, it is particularly important that central banks make a credible commitment o maintain price stability. Adding to public concerns about inflation risks in the current environment is dangerous. Suggestions from the IMF chief economist that central banks should aim for higher inflation could be misinterpreted as a signal that central banks are being roped into devaluing government debt through inflation.

The public's understanding of, and trust in, central banks and their commitment to price stability is essential for the ongoing effectiveness of monetary policy. Eroding central bank credibility through higher inflation targets does not contribute to improving macroeconomic stability. Nor does it equip policy makers against future shocks. Quite the contrary.

Mr. Weber is president of the Deutsche Bundesbank. Mr. Hildebrand is chairman of the governing board of the Swiss National Bank.

Why Financial Reform Is Stalled - Partisan gridlock is not the reason. The administration's plans are flawed, and they're encountering resistance from both sides of the aisle in Congress

Why Financial Reform Is Stalled. BY PETER J. WALLISON
Partisan gridlock is not the reason. The administration's plans are flawed, and they're encountering resistance from both sides of the aisle in Congress.WSJ, Mar 01, 2010

According to the media's narrative about Washington, the Obama administration's financial regulation proposals have not gotten through Congress because the town is gridlocked by partisan warfare. It's a simplistic story that does not require much thought to generate or accept.

Here's a better explanation: The proposals are not grounded in a valid explanation of what caused the financial crisis, reflect the same impulse to control a sector of the economy that underlies its health-care and cap-and-trade proposals, and more than anything else reflect Rahm Emanuel's iconic motto for all statists that a good crisis should never go to waste.

The administration appears to have begun its regulatory reform effort with the idea propagated by candidate Barack Obama that the financial crisis was caused by deregulation. There was never any evidence for this. The banks, which were in the most trouble, are the most heavily regulated sector of the economy and their regulation has only gotten tighter since the 1930s.

Since its proposals first met with congressional opposition, the administration has been impervious to contrary evidence, and to this day it continues to lunge for ideas that will further government control of the financial system without giving them serious thought. So we have the spectacle of Paul Volcker, having recently persuaded Mr. Obama to back the idea of restricting proprietary trading by banks or bank holding companies, telling a puzzled Senate Banking Committee he can't really define proprietary trading but knows it when he sees it. Didn't anyone in the White House ask him what it was before the president moved to restrict it?

So it goes with the rest of the administration's plan. More power to Washington, but neither a persuasive analysis of why that additional control was necessary nor a recognition of the fairly obvious consequences.

For example, the central element of the administration's reforms was to give more power to the Federal Reserve. That agency was to become the regulator of all large nonbank financial companies deemed likely to cause a systemic breakdown if they fail. These companies—securities firms, hedge funds, finance companies, insurers, bank holding companies and even the financing arms of operating companies—were to be regulated like banks.

It didn't take long for both Democrats and Republicans in Congress to see the flaws in this scheme. The Fed had been regulating the largest banks and bank holding companies for over 50 years—among the very companies that would be considered systemically important—yet it failed to see the risks they were taking or the impending danger.

How, then, did it make sense to give the Fed the vast additional power to regulate all the largest nonbank financial companies? Wouldn't designating particular companies as "systemically important," and subjecting them to special Fed regulation, signal to the markets that these companies were too big to fail? How was that a solution to the too-big-to-fail problem? And wouldn't these big companies—designated as too big to fail—then have the same preferred access to credit that enabled government-sponsored enterprises Fannie Mae and Freddie Mac to drive all competition from their market?

Then there is the proposal to give a government agency the authority to take over and "resolve" failing financial firms. Here, the administration has pointed to the chaos that followed the bankruptcy of Lehman Brothers in September 2008. To prevent that kind of breakdown, the administration says all large and "interconnected" financial firms in crisis should be dealt with by a government agency, rather than by a judge in bankruptcy proceedings.

The term "interconnected" is important here. It implies that when one large firm fails it will carry others down with it, causing a systemic crisis. But that is clearly not the lesson of Lehman. Although the company went suddenly and shockingly into bankruptcy, none of its large financial counterparties failed. The systemic significance of "interconnectedness" proved to be a myth.

To be sure, there was a freeze-up in lending after Lehman. But that episode demonstrated the power of moral hazard—the tendency of government action to distort private decision-making. After Bear Stearns was rescued by the Fed in March 2008, market participants assumed that all companies larger than Bear would be rescued in the future. As a result, they did not take the steps to protect themselves against counterparty failure that would have been prudent in a panicky market. When Lehman was not rescued, all market participants immediately had to review the credit standing of their counterparties. No wonder lending temporarily froze.

The same failure to understand the power of moral hazard is what makes the administration's call for a resolution authority most inapt and troubling. Although the administration has argued, and some in Congress believe, that moral hazard and too-big-to-fail would be curbed by a resolution authority, the opposite is true. Both would be enhanced.

This is because the principal danger of moral hazard—the key to its adverse effects on private decision-making—is its impact on creditors and counterparties. The fact that shareholders and managements will lose everything in a government resolution is largely irrelevant. What really matters are the lessons creditors draw about how they will be treated. And it is clear creditors will be treated far more favorably in a government resolution process than in a bankruptcy.

To understand why this is true, consider the administration's reasons for preferring a government resolution process. The claim is that large, interconnected firms will drag down others when they fail. The remedy for this is to make sure their creditors and counterparties are fully paid when the takeover occurs. That's why the Fed made Goldman Sachs and others whole when it rescued the insurance giant AIG. It's also what distinguishes a government resolution process from a bankruptcy, where a stay is imposed on most payments to creditors when the bankruptcy petition is filed.

Creditors will realize that by lending to large companies that might be taken over and resolved by the government, their chances of being fully paid are better than if they lend to others that might not. Thus a resolution authority will enhance moral hazard not reduce it—and as creditors increasingly assume that large firms will be rescued, the too-big-to-fail phenomenon will grow, not decline. In the end, a resolution authority becomes, in effect, a permanent Troubled Asset Relief Program.

The image of partisan gridlock standing in the way of sensible financial regulation is wildly misleading. Twenty-seven Democrats in the House voted against the Barney Frank bill that mostly mirrored the administration plan. Democrats and Republicans in the Senate Banking Committee revolted against the first bill offered by Chairman Chris Dodd. That bill adopted most of the administration's flawed ideas.

Now Mr. Dodd is trying to negotiate a Plan B. But the longer he channels the White House, the longer it will take to get a bill that both Democrats and Republicans can support.

Mr. Wallison is a senior fellow at the American Enterprise Institute.

Europeans' worship of the state and corresponding suspicion of free markets doom their countries to economic stagnation

Europe's Crisis of Ideas. By BRET STEPHENS
Europeans' worship of the state and corresponding suspicion of free markets doom their countries to economic stagnation.WSJ, Feb 23, 2010

Europe is in a crisis. Superficially, the crisis is about money: the Greek budget, a German-led bailout, the risk of contagion, moral hazard, the fragility of the euro. Fundamentally, it's a crisis of ideas.

At last month's meeting of the World Economic Forum in Davos, Greek Prime Minister George Papandreou offered a view on the source of Europe's woes. "This is an attack on the euro zone by certain other interests, political or financial," he said, without specifying who or what those interests might be. In Madrid, the government has reportedly ordered its intelligence service to investigate "collusion" between U.S. investors and the media to bring Spain's economy low.

Maybe the paladins of Spanish and Greek politics seriously imagine that hedge-fund managers sit around dimly lit conference rooms like so many Lex Luthors and—cue the sinister cackles—decide on a whim to sink this or that economy. Or maybe they think there are political dividends to reap by playing to peanut galleries already inclined toward these kinds of fantasies.

Whichever way, the recrudescence of conspiracy-theory politics, among governments that supposedly belong to the First World, is just one symptom of Europe's intellectual malaise. On the other end of the spectrum is the view that the Greek crisis is the perfect opportunity to expand the regulatory reach and taxing authority of Brussels. Never mind that Greece's economic woes are transparently the result of a government spending beyond its means while failing to promote growth. In this reading of events, the ideal resolution is to extend the prerogatives of a bureaucracy to an even higher level of unaccountability. This is a bit like saying that if your toenail appears to be seriously infected, consider having brain surgery.

Why do Europeans so often find themselves trapped in this sterile dialectic of populist obscurantism and technocratic irrelevancy? Largely because those are the options that remain when other modes of analysis and prescription have been ruled out of bounds. "All European economic policies are the cultural derivatives of one dominant, nearly totalitarian statist ideology: the state is good, the market is bad," says French economist Guy Sorman. The free market, he adds, is "perceived as fundamentally American, while statism is the ultimate form of patriotism."

In the U.S., faith in the general efficacy of markets isn't simply a cultural inheritance. It is sustained by the work of serious university economics departments; think tanks like the Hoover Institution and grant-makers like the Kauffman Foundation, plus a few editorial pages here and there. It's also the default position of the Republican Party, at least rhetorically.

By contrast, in continental Europe the dominant mode of conservative politics is sometimes pro-business but rarely pro-market: During his 12-year presidency of France, Jacques Chirac railed against "Anglo-Saxon ultraliberalism," a phrase that became so ubiquitous as to almost obscure its crassly xenophobic appeal. There are think tanks, but they are almost invariably funded by political parties and hew to the party line. Not a single economics faculty in Europe is remotely competitive with a Chicago or a George Mason: Since 1990, only three of the 36 winners of the Nobel Prize in Economics were then affiliated with a European university.

Then there is the media. Last week, German Foreign Minister Guido Westerwelle, who leads the country's market-friendly Free Democrats, took to the pages of Die Welt to lament that Germany's working poor make less than welfare recipients. "For too long," he wrote, "we have perfected in Germany the redistribution [of wealth], forgetting where prosperity comes from."

For his banal observations, Mr. Westerwelle was roundly accused of "[defaming] millions of welfare recipients" and urged to apologize to them. It takes a remarkably stultified intellectual climate for an op-ed to spark this kind of brouhaha: It is the empire of the Emperor's New Clothes, adapted to the 21st century welfare state.

This is all the more remarkable given that Europe's economic travails aren't exactly difficult to grasp. Greece in a nutshell? It costs $10,218 to obtain all the permitting needed to start a new business there, according to Harvard economist Alberto Alesina. In the U.S., it takes $166. But tyrannies of thought are hard to break, especially when the beneficiaries of state largess—from college students to government workers to captains of subsidized industries—become a political majority. The U.S. may now be approaching just such a point itself.

Is there a way out? "I am deeply convinced," says Mr. Sorman, "that I belong to a continuous tradition of liberty against the state, with a fine pedigree: Montesquieu, Tocqueville, Jean Baptiste Say, Jacques Rueff, Raymond Aron, Jean-Francois Revel." Not an Anglo-Saxon name among them. Europe's recovery—and the recovery of Europe—will come only when they are no longer prophets without honor in their own lands.

It would be better for our economy to enforce anti-manipulation laws, and require that speculators have enough capital to cover their risks, than to attempt to squash speculation

In Defense of Financial Speculation. By DARRELL DUFFIE
It is not the same thing as market manipulation.WSJ, Feb 24, 2010

George Soros, Washington Democratic Sen. Maria Cantwell and others are proposing to curb speculative trading and even outlaw it in credit default swap (CDS) markets. Their proposals appear to be based on a misconception of speculation and could harm financial markets.

Speculators earn a profit by absorbing risk that others don't want. Without speculators, investors would find it difficult to quickly hedge or sell their positions.

Speculators also provide us with information about the fundamental values of investments. When the fundamentals appear favorable, they buy. Otherwise, they sell. If their forecasts are correct, they profit. This causes prices to more accurately forecast an investment's value, spreading useful information. For example, the clearest evidence that Greece has a serious debt problem was the run-up of the price for buying CDS protection against the country's default.

Is this sort of speculation wrong? I have not heard why.

Those who call for stamping out speculation may be confused between speculation and market manipulation. Manipulation occurs when investors "attack'' a financial market in order to profit by changing the value of an investment. Profitable speculation occurs when investors accurately forecast an investment's fundamental strength or weakness.

An example of manipulation is an attack on a currency with a fixed exchange rate in an attempt to cause a devaluation of that currency. Mr. Soros allegedly attacked the British pound in 1992 and the Malaysian ringgit in 1997. An attack on the equity or CDS of a bank could create fears of insolvency, leading to a bank run and allowing the manipulator to profit from his attack.

In the week of Lehman Brothers' bankruptcy in September 2008, John Mack, then CEO of Morgan Stanley, suggested that the difficulties facing his firm stemmed from such an attack. But firms complaining of unfounded short-selling often had real problems beforehand.

A market manipulator can also attempt to profit by "cornering" a market. This is done by holding such a large fraction of the supply of an asset that anyone who wants to buy that asset is at the mercy of the corner holder when negotiating a price.

The market for silver was temporarily cornered in 1979-80, when Nelson Bunker Hunt and his brother William Herbert Hunt held silver derivatives representing approximately half of annual global silver production. In the end, the Hunt brothers were unable to maintain a corner. As they sold, silver prices fell, causing them calamitous losses.

Market manipulation for profit is not easily done. If the fundamentals of supply and demand suggest that the value of something is $100, then a manipulator must buy at prices above $100 in order to drive the price up or to accumulate a monopolistic position. He then owns an asset that on paper could be worth more than what he paid for it. However, he must sell his asset in order to cash in on his profit. This spurs the price of that asset to fall, as the Hunt brothers learned.

Simply driving up the price, as speculators are alleged to have done in the oil market in 2008, is not enough. To make a profit, a manipulator needs to obtain monopolistic control of the supply. Given the size of the oil market, that seems implausible, absent a major and sustained conspiracy.

In the United States, trade with an intent to manipulate financial markets is generally illegal. Regulators should keep anti-manipulation laws up to date and aggressively monitor potential violators.

Speculation is not necessarily harmless. If a large speculator does not have enough capital to cover potential losses, he could destabilize financial markets if his position collapses. The Over-the-Counter Derivatives Markets Act, which could come up for a vote in the Senate soon, will hopefully reduce such risks.

It would be better for our economy to enforce anti-manipulation laws, and require that speculators have enough capital to cover their risks, than to attempt to squash speculation.

Mr. Duffie is a professor of finance at Stanford University's Graduate School of Business.

My Gift to the Obama Presidency - Bush lawyers were protecting the executive's power to fight a vigorous war on terror

My Gift to the Obama Presidency. By JOHN YOO
Though the White House won't want to admit it, Bush lawyers were protecting the executive's power to fight a vigorous war on terror.
WSJ, Feb 24, 2010

Barack Obama may not realize it, but I may have just helped save his presidency. How? By winning a drawn-out fight to protect his powers as commander in chief to wage war and keep Americans safe.

He sure didn't make it easy. When Mr. Obama took office a year ago, receiving help from one of the lawyers involved in the development of George W. Bush's counterterrorism policies was the furthest thing from his mind. Having won a great electoral victory, the new president promised a quick about-face. He rejected "as false the choice between our safety and our ideals" and moved to restore the law-enforcement system as the first line of defense against a hardened enemy devoted to killing Americans.

In office only one day, Mr. Obama ordered the shuttering of the detention facility at Guantanamo Bay, followed later by the announcement that he would bring terrorists to an Illinois prison. He terminated the Central Intelligence Agency's ability to use "enhanced interrogations techniques" to question al Qaeda operatives. He stayed the military trial, approved by Congress, of al Qaeda leaders. He ultimately decided to transfer Khalid Sheikh Mohammed, the planner of the 9/11 attacks, to a civilian court in New York City, and automatically treated Umar Farouk Abdulmutallab, who tried to blow up a Detroit-bound airliner on Christmas Day, as a criminal suspect (not an illegal enemy combatant). Nothing better could have symbolized the new president's determination to take us back to a Sept. 10, 2001, approach to terrorism.

Part of Mr. Obama's plan included hounding those who developed, approved or carried out Bush policies, despite the enormous pressures of time and circumstance in the months immediately after the September 11 attacks. Although career prosecutors had previously reviewed the evidence and determined that no charges are warranted, last year Attorney General Eric Holder appointed a new prosecutor to re-investigate the CIA's detention and interrogation of al Qaeda leaders.

In my case, he let loose the ethics investigators of the Justice Department's Office of Professional Responsibility (OPR) to smear my reputation and that of Jay Bybee, who now sits as a federal judge on the court of appeals in San Francisco. Our crime? While serving in the Justice Department's Office of Legal Counsel in the weeks and months after 9/11, we answered in the form of memoranda extremely difficult questions from the leaders of the CIA, the National Security Council and the White House on when interrogation methods crossed the line into prohibited acts of torture.

Rank bias and sheer incompetence infused OPR's investigation. OPR attorneys, for example, omitted a number of precedents that squarely supported the approach in the memoranda and undermined OPR's preferred outcome. They declared that no Americans have a right of self-defense against a criminal prosecution, not even when they or their government agents attempt to stop terrorist attacks on the United States. OPR claimed that Congress enjoyed full authority over wartime strategy and tactics, despite decades of Justice Department opinions and practice defending the president's commander-in-chief power. They accused us of violating ethical standards without ever defining them. They concocted bizarre conspiracy theories about which they never asked us, and for which they had no evidence, even though we both patiently—and with no legal obligation to do so—sat through days of questioning.

OPR's investigation was so biased, so flawed, and so beneath the Justice Department's own standards that last week the department's ranking civil servant and senior ethicist, David Margolis, completely rejected its recommendations.

Attorney General Holder could have stopped this sorry mess earlier, just as his predecessor had tried to do. OPR slow-rolled Attorney General Michael Mukasey by refusing to deliver a draft of its report until the 2008 Christmas and New Year holidays. OPR informed Mr. Mukasey of its intention to release the report on Jan. 12, 2009, without giving me or Judge Bybee the chance to see it—as was our right and as we'd been promised.

Mr. Mukasey and Deputy Attorney General Mark Filip found so many errors in the report that they told OPR that the entire enterprise should be abandoned. OPR decided to run out the clock and push the investigation into the lap of the Obama administration. It would have been easy for Mr. Holder to concur with his predecessors—in fact, it was critical that he do so to preserve the Justice Department's impartiality. Instead the new attorney general let OPR's investigators run wild. Only Mr. Margolis's rejection of the OPR report last week forced the Obama administration to drop its ethics charges against Bush legal advisers.

Why bother fighting off an administration hell-bent on finding scapegoats for its policy disagreements with the last president? I could have easily decided to hide out, as others have. Instead, I wrote numerous articles (several published in this newspaper) and three books explaining and defending presidential control of national security policy. I gave dozens of speeches and media appearances, where I confronted critics of the administration's terrorism policies. And, most importantly, I was lucky to receive the outstanding legal counsel of Miguel Estrada, one of the nation's finest defense attorneys, to attack head-on and without reservation, each and every one of OPR's mistakes, misdeeds and acts of malfeasance.

I did not do this to win any popularity contests, least of all those held in the faculty lounge. I did it to help our president—President Obama, not Bush. Mr. Obama is fighting three wars simultaneously in Iraq, Afghanistan, and against al Qaeda. He will call upon the men and women serving under his command to make choices as hard as the ones we faced. They cannot meet those challenges with clear minds if they believe that a bevy of prosecutors, congressional committees and media critics await them when they return from the battlefield.

This is no idle worry. In 2005, a Navy Seal team dropped into Afghanistan encountered goat herders who clearly intended to inform the Taliban of their whereabouts. The team leader ordered them released, against his better military judgment, because of his worries about the media and political attacks that would follow.

In less than an hour, more than 80 Taliban fighters attacked and killed all but one member of the Seal team and 16 Americans on a helicopter rescue mission. If a president cannot, or will not, protect the men and women who fight our nation's wars, they will follow the same risk-averse attitudes that invited the 9/11 attacks in the first place.

Without a vigorous commander-in-chief power at his disposal, Mr. Obama will struggle to win any of these victories. But that is where OPR, playing a junior varsity CIA, wanted to lead us. Ending the Justice Department's ethics witch hunt not only brought an unjust persecution to an end, but it protects the president's constitutional ability to fight the enemies that threaten our nation today.

Mr. Yoo, a law professor at the University of California, Berkeley and visiting scholar at the American Enterprise Institute, was a Justice Department official from 2001-03. He is the author, among other books, of "Crisis and Command: A History of Executive Power from George Washington to George W. Bush" (Kaplan, 2010).

Financial Amplification Mechanisms and the Federal Reserve’s Supply of Liquidity during the Crisis

Financial Amplification Mechanisms and the Federal Reserve’s Supply of Liquidity during the Crisis. By Asani Sarkar and Jeffrey Shrader
Federal Reserve Bank of NY, February 2010


The small decline in the value of mortgage-related assets relative to the large total losses associated with the financial crisis suggests the presence of financial amplification mechanisms, which allow relatively small shocks to propagate through the financial system. We review the literature on financial amplification mechanisms and discuss the Federal Reserve’s interventions during different stages of the crisis in light of this literature. We interpret the Fed’s early-stage liquidity programs as working to dampen balance sheet amplifications arising from the positive feedback between financial constraints and asset prices. By comparison, the Fed’s later-stage crisis programs take into account adverse-selection amplifications that operate via increases in credit risk and the externality imposed by risky borrowers on safe ones. Finally, we provide new empirical evidence that increases in the Federal Reserve’s liquidity supply reduce interest rates during periods of high liquidity risk. Our analysis has implications for the impact on market prices of a potential withdrawal of liquidity supply by the Fed.

"The President's Proposal" on health-care

ObamaCare at Ramming Speed. WSJ Editorial
The White House shows it has no interest in compromise.WSJ, Tuesday, February 23, 2010 As of 3:09 AM

A mere three days before President Obama's supposedly bipartisan health-care summit, the White House yesterday released a new blueprint that Democrats say they will ram through Congress with or without Republican support. So after election defeats in Virginia, New Jersey and even Massachusetts, and amid overwhelming public opposition, Democrats have decided to give the voters what they don't want anyway.

Ah, the glory of "progressive" governance and democratic consent.

"The President's Proposal," as the 11-page White House document is headlined, is in one sense a notable achievement: It manages to take the worst of both the House and Senate bills and combine them into something more destructive. It includes more taxes, more subsidies and even less cost control than the Senate bill. And it purports to fix the special-interest favors in the Senate bill not by eliminating them—but by expanding them to everyone.

The bill's one new inspiration is a powerful federal board that would regulate premiums in the individual insurance market. In all 50 states, insurers are already required to justify premium increases to insurance commissioners, who generally have the power to give a regulatory go-ahead, or not. But their primary concern is actuarial soundness and capital standards, making sure that companies have enough cash to pay claims.

The White House wants to create another layer of review that will be able to reject any rate increase that is "unreasonable or unjustified." Any insurer deemed guilty of such an infraction by this new bureaucracy "must lower premiums, provide rebates, or take other actions to make premiums affordable." In other words, de facto price controls.

Insurance premiums are rising too fast; therefore, premium increases should be illegal. Q.E.D. The result of this rate-setting board will be less competition in the individual market, as insurers flee expensive states or regions, or even a cascade of bankruptcies if premiums are frozen and the cost of the care they are expected to cover continues to rise. For all the Dickensian outrage about profiteering by WellPoint and other companies, insurance is a low-margin business even for health care, and at least 85 cents of the average premium dollar, usually more, is devoted to actual health services.

Price controls are always the first resort of national health care—i.e., Medicare's administered prices for doctors and hospitals. This new White House gambit is merely a preview of ObamaCare's inevitable planned medical economy, which will reduce choice and quality.

The coercive flavor that animates this exercise is best captured in the section that purports to accept the Senate's "grandfather clause" allowing people who like their current health plan to keep it. Except that "The President's Proposal adds certain consumer protections to these 'grandfathered' plans. Within months of legislation being enacted, it requires plans . . . prohibits . . . mandates . . . requires . . . the President's Proposal adds new protections that prohibit . . . ban . . . and prohibit . . . The President's Proposal requires . . ." After all of these dictates, no "grandfathered" plan will exist.

Meanwhile, the new White House plan further vitiates the remnants of cost-control that remained in the House and Senate bills. Now the highly vaunted excise tax on high-cost insurance plans won't kick in until 2018, whereas it would have started in 2013 in the Senate bill, and this tax will only apply to coverage that costs more than $27,500.

Very few plans ever reach that threshold, and sure enough, this is the same $60 billion deal the White House cut in December with union leaders who have negotiated very costly benefits. Now it is extended to all to avoid the taint of political favoritism.

While the White House claims to eliminate the "Cornhusker Kickback," the Medicaid bribe that bought Nebraska Senator Ben Nelson's vote, political appearances are deceiving. As with the union payoff, what the White House really does is broaden the same to all states, with all new Medicaid spending through 2017 and 90% after 2020 transferred to the federal balance sheet. Governors will love this ruse, but national taxpayers will pay more.

And more again, because the White House has adopted the House's firehose insurance subsidies. People earning up to 400% of the poverty line—or about $96,000 for a family of four in 2016—will qualify for government help, and, naturally, this new entitlement is designed to expand over time.

The Administration also claims to have discarded the House's 5.4-percentage-point surtax on joint-filers earning more than $1 million a year, but it sneaks it back in by expanding the Senate's expansion of the 2.9% Medicare payroll tax to joint income about $250,000. The White House would now apply that tax for the first time to income from "interest, dividends, annuities, royalties and rents," details to come.
***

The larger political message of this new proposal is that Mr. Obama and Democrats have no intention of compromising on an incremental reform, or of listening to Republican, or any other, ideas on health care. They want what they want, and they're going to play by Chicago Rules and try to dragoon it into law on a narrow partisan vote via Congressional rules that have never been used for such a major change in national policy. If you want to know why Democratic Washington is "ungovernable," this is it.

Risk and Discipline in the Financial Markets: New resolution authority can help convince banks they're not too big to fail

Risk and Discipline in the Financial Markets. By ARTHUR LEVITT
New resolution authority can help convince banks they're not too big to fail.WSJ, Feb 22, 2010

There is now a high probability that the greatest financial crisis in three generations will yield not one piece of meaningful financial regulatory reform. Perhaps the last best chance to rescue the situation rests with Sens. Christopher Dodd (D., Conn.) and Robert Corker (R., Tenn.), who are at work on a compromise bill.

Their goal should not be just any bill, but one that addresses the corrosive effects of a system in which massive institutional failure and total loss are impossible. The policy bias against letting failure occur was regrettable but excusable in the fall of 2008. Now there is no reason for it.

Too many regulators, politicians, bankers, credit rating agencies and others have believed failure was not an option. In financial markets, when people take risks and don't anticipate failure, they take greater risks and the resulting failure becomes far more damaging.

There is still time for the White House and Congress to re-institute the principle of failure in our financial marketplace. It may not be as sexy as the creation of a consumer protection agency or a reorganization of the federal regulatory landscape. But it is essential.

It can be done in two ways. First we should address the problem of "too big to fail," in which large financial institutions are not allowed to fail because of the impact their failure would have on the rest of the market. Second is the problem of "too interconnected to fail," which is a variation on the same theme: when a financial institution's positions in the unregulated and non-transparent derivatives markets are so complex, so secretive, and so leveraged that to unwind them quickly is either impossible or dangerous.

The problem of "too big to fail" is behind President Obama's support of the so-called Volcker rule, which would prevent banks from getting too big by limiting their ability to engage in proprietary trading or run their own hedge funds or private equity funds. But this would not end the de facto government backing of big banks. Indeed, it is premised on the idea that because these banks will be protected from failure, they should not be permitted to engage in these activities. Far from ending the problem of "too big to fail," the Volcker rule practically institutionalizes it.

The only reasonable solution to "too big to fail" is the creation of a resolution authority that makes the failure of any financial institution possible and orderly—something I am glad to say Paul Volcker has supported as well. The rights and responsibilities of equity holders, bond holders, other creditors and management would be spelled out—in advance. If a bank or financial institution should require the direction of a resolution authority, failure might not be the only option, but it would remain the first one. That prospect alone would reintroduce the risk of failure in our financial markets.

The problem of "too interconnected to fail" is just as critical. The unregulated and fast-growing market for derivative products helped cause the financial crisis.

There were—and are—several features to this market that make it a petri dish for systemic risk. There is no transparency around volumes, pricing and outstanding positions. These derivatives often do not go through central clearing houses, which validate and guarantee counterparty trades. Traders often rely on collateral positions and favorable but disruptive unwinding practices to protect themselves from the significant risks associated with derivative instruments.

Even now, there is no reason for traders to be more focused on credit discipline because these derivatives enjoy a special bankruptcy court protection normally extended only to certain government securities and foreign exchange transactions. Such protections were put in place so that government repos, which are vital to the funding of government operations, are not frozen by bankruptcy court actions. But the cost of these protections when extended to OTC derivatives is paid for by other creditors—as Lehman's creditors are now discovering.

All of these features make derivatives a source of "too interconnected to fail" and invite regulatory action. Several steps should follow:

First, we must officially end the unregulated status of these markets going forward—something that has been proposed before, but to no avail.

Second, rather than determining in advance which new derivatives need to be cleared, we should create incentives for that process by setting higher capital requirements on noncleared contracts. Not all derivatives will go to clearing houses—but a great majority of them will.

Third, to meet the greater volume, we need to invest in the institutional capacity of the clearing houses.

And finally, Congress should set a date certain—two years from now—at which point the special bankruptcy status of noncentrally cleared derivatives will be eliminated. This rule would only apply to new contracts.

These steps would re-introduce real credit discipline, while improving market transparency at all levels—all without forcing federal regulators to struggle to develop a rule that would somehow define a standard contract in a marketplace where variety and diversity is the norm.

Some will say that regulating OTC derivatives and creating a strong resolution authority would make the U.S. a "less competitive" financial marketplace. I doubt it. Investors will go to the financial marketplaces that offer the best protections against systemic risk. That has always been true and is especially true today.

Mr. Levitt was chairman of the Securities and Exchange Commission from 1993-2001 and is currently an adviser to Goldman Sachs.

Complex Loans Didn't Cause the Crisis - And the Consumer Financial Protection Agency wouldn't protect us from another one

Complex Loans Didn't Cause the Crisis. By TODD ZYWICKI
And Obama's Consumer Financial Protection Agency wouldn't protect us from another one.
WSJ, Feb 19, 2010

Regulatory reform that can improve competition and consumer choice in financial services is long overdue. But no new federal bureaucracy such as the Obama administration's proposed Consumer Financial Protection Agency (CFPA) is needed to bring that about.

More importantly, the administration is incorrect in claiming that such an agency would have prevented the present financial crisis and is necessary to prevent the next crisis. On the contrary, such an agency might be the first step toward more problems.

During the housing boom bankers made a raft of extraordinarily foolish loans. Some were the result of lenders defrauding borrowers; probably at least as many were the product of borrowers defrauding lenders. But there is no evidence, as Elizabeth Warren (a champion of CFPA and chair of the TARP Congressional Oversight Panel) recently asserted on these pages, that lender fraud was the overriding cause of the crisis.

The bank loans were not foolish because borrowers didn't realize what they were doing. They were foolish because of the incentives they created for borrowers, especially when housing prices turned south.

There were three distinct stages of the housing crisis. In the first, the Federal Reserve's extremely low interest rates from 2001-2004 induced consumers to switch from fixed to adjustable rate mortgages and drew short-term speculators and house-flippers into the market in certain cities. The Fed's increase in short-term interest rates over the next two years increased homeowner payments and precipitated a round of defaults.

My own research confirms the analysis provided by University of Texas economist Stan Leibowitz on these pages last July: The initial onset of the foreclosure crisis was a problem of adjustable-rate mortgages, whether prime or subprime. It was not initially a subprime problem.

In the second phase, falling home prices provided incentives for owners whose mortgages were under water to walk away from their houses. And in the third phase, which we are now experiencing, traditional macroeconomic factors like unemployment led to more foreclosures—especially where homeowners' mortgages are already underwater. Reflecting this situation, the Mortgage Bankers Association reports that the fastest-rising segment of foreclosures in recent months has been traditional prime, fixed-rate mortgages.

None of this analysis has anything to do with fraud or consumer protection problems. Consumers rationally switched to adjustable-rate mortgages when their prices fell relative to fixed-rate mortgages—a pattern that has repeated itself numerous times since the 1980s. And when housing prices fell, underwater homeowners rationally responded by walking away from their houses. The proliferation of mortgages with minimal downpayments, interest-only or even negative amoritzation terms, and cash-out refinances meant that many consumers fell into negative equity territory much more rapidly than they would have otherwise.

Regulators may want to limit mortgages that provide so many borrowers with such strong incentives to walk away when housing prices fall. They may want to prohibit lenders from making loans with minimal downpayments or interest-only loans that result in consumers having minimal equity in their homes. But that's an issue of safety and soundness, not protection against fraud. With respect to ARMs, the obvious solution is a less-erratic Federal Reserve interest rate policy. ARMs have been in widespread use for 25 years (and are common in the rest of the world) without mishap like in the current cycle.

So the problem isn't consumer gullibility or ignorance. Borrowers have shown they understand, and act on, the incentives they face all too well.

It is worth remembering that, although the banking crisis was a national crisis, the foreclosure crisis is concentrated in four states—Arizona, California, Florida and Nevada—that comprise almost half of the mortgages in foreclosure. Even within those states, foreclosures are concentrated within a handful of hot-spots such as Las Vegas, Miami, Phoenix and the Inland Empire region of California. It is unlikely that borrowers in these cities are more gullible than borrowers elsewhere. Evidence does suggest, however, that there were a larger number of speculators and home-flippers in those cities than elsewhere.

This is not to deny that we are overdue for a comprehensive reform of consumer credit regulation. Over the years, federal laws governing disclosures have become encrusted with an ever-thickening coat of litigation- and regulation-imposed barnacles.

One example, according to Federal Reserve economists Thomas Durkin and Gregory Elliehausen in a book to be published this year, involves the Truth in Lending Act, which has grown from a simple effort to standardize disclosures on consumer credit to a morass.

Regulatory mandates and lawsuit fears are largely responsible for the mind-numbing length of a typical credit-card agreement and monthly statement. The most recent mandate-induced clutter requires the monthly statement to disclose how long it would take to repay the balance by making the minimum payment while making no new charges. According to a Federal Reserve Study by Mr. Durkin, only 4% of consumers would even consider this option.

Similarly, a 2007 Federal Trade Commission staff report by economists James Lacko and Janis Pappalardo documented the convoluted nature of current mortgage disclosure rules (which fail to convey key costs) and presented prototype disclosures that significantly improved key mortgage cost disclosures. Yet such common-sense proposals remain buried in the bureaucracy.

What's needed is simplified and streamlined regulation, not another agency.

Policies based on a misdiagnosis of the true nature of the problem might actually lay the seeds for the next crisis. For example, Ms. Warren rails in her op-ed about "tricks and traps" such as "universal default" provisions in credit-card contracts, where a failure to pay one credit-card bill can trigger a default on another one. Yet it is obvious that a consumer's failure to pay some of his bills provides valuable information about the likelihood of default on his credit-card bill (universal default provisions are common in commercial loans for this reason).

Thus a lender's elimination of universal default will have to be offset by higher interest rates or fees. To the extent that a CFPA makes access to credit cards less available, excluded borrowers will inevitably shift to more expensive alternatives such as payday lending or pawn shops. If the CFPA were to impose bans on efficient risk-based pricing by lenders in the name of vague claims about "fairness," the likely result will be to increase overall risk and make the next financial crisis more likely.

The financial crisis resulted primarily from the rational behavior of borrowers and lenders responding to misaligned incentives, not fraud or borrower stupidity. Policies that fail to appreciate the difference will not protect, and may hurt, the very consumers they are intended to protect.

Mr. Zywicki is a law professor at George Mason University and a senior scholar at the Mercatus Center. This op-ed is based in part on a Mercatus working paper, "The Housing Market Crash."

Yoo: Obama misunderstands his constitutional role

Getting It Backwards. By John Yoo

Obama misunderstands his constitutional role.

The Weekly Standard, February 15, 2010, Vol. 15, No. 21

Democratic postmortems on Barack Obama’s disappointing first year in the Oval Office have emphasized, as the president himself did, difficulties inherited from “the last eight years.” Republicans, for their part, credit public opposition to Obama’s overreaching policies. But a full explanation goes much deeper. Obama is failing because he has turned the constitutional functions of the presidency upside down.

The 2010 State of the Union address nicely summed up Obama’s topsy-turvy approach to the presidency. He pressed for a new jobs bill, more domestic spending, and health care nationalization. He attributed his political setbacks not to broad opposition to his domestic ambitions but to “a deficit of trust—deep and corrosive doubts about how Washington works that have been growing for years.”

National security amounted to an afterthought. He devoted one paragraph each—out of the approximately 110 paragraphs in the speech—to Iraq, Afghanistan, and terrorism. It is as if Lincoln had spent most of his Inaugural Addresses on the transcontinental railroad and the Homestead Act.

Obama believes the president should lead a revolution in society, the economy, and the political system, but defer on national security and foreign policy to the other branches of government. This upends the Framers’ vision of the presidency. They thought the chief executive’s powers would expand broadly to meet external challenges while playing a modest role at home.

The latest Democratic president is repeating the mistake of the first. When Thomas Jefferson entered office 210 years ago, Chief Justice John Marshall warned that Jefferson would “embody himself in the House of Representatives.” This would “increase his personal power,” Marshall predicted, but it would lead to the “weakening of the office of the President.” The chief justice meant that his political rival (and distant cousin) would gain power by joining forces with his party’s legislative majorities. But the combination would realize the Framers’ fear that Congress would come to dominate the executive branch.

Marshall’s observation explains much about Obama’s first year. By associating himself so closely with congressional Democrats, Obama became responsible for their every misstep. Their reckless overspending and earmarks became his. Their corrupt deal to buy Senator Ben Nelson’s support for nationalized health care became his sordid bargain. Their command-and-control approach to global warming, which will set nationwide limits on energy use and industrial production, became his socialist program.

Putting the president’s fortune in Congress’s hands not only makes for poor politics, it runs counter to the Framers’ plans for the office. They saw Congress, not the presidency, as the main threat to the people’s liberties. In a democracy, James Madison wrote in The Federalist, “the legislative authority, necessarily, predominates” because it has access to the “pockets of the people.” He warned that “it is against the enterprising ambition” of Congress “that the people ought to indulge all their jealousy and exhaust all their precautions.”

The Framers expected the presidency to counterbalance the “impetuous vortex” of Congress. A vigorous executive, Alexander Hamilton wrote in The Federalist, would protect against those “irregular and high-handed combinations which sometimes interrupt the ordinary course of justice” and provide security against “enterprises and assaults of ambition, of faction, and of anarchy” which would emanate from the “humours of the legislature.” The great threat to the Constitution, Hamilton wrote, was the “propensity of the legislative department to intrude upon the rights and absorb the powers of other departments” such as the executive branch, the courts, and the states. The president’s veto would not only protect the executive’s constitutional rights from Congress, he wrote, it would also furnish “an additional security against the enaction of improper laws” and allow the president “to guard the community against the effects of faction, precipitancy, or of any impulse unfriendly to the public good.”

The initiative to regulate the domestic economy and society—limited as it originally was to have been—rested with Congress. The president was to restrain the legislature when it favored party or special interests over the public good. This was no easy job. To give it institutional backbone, the Framers clothed the presidency with independent election, consistent pay, and control over the execution of the laws. Still, Hamilton could only hope that when the legislature gave in to demagogues or temporary passions, the president would “be in a situation to dare to act his own opinion with vigor and decision.” Obama has inverted the presidency in domestic affairs by transforming it from a check into a facilitator of Congress.

Obama’s second and even more significant reversal of the presidency’s constitutional position is his hesitance toward, and even retreat from, its core role as the protector of the nation’s security.

Throughout his first year, Obama has placed the national security second to his ambitious plan to remake the American economy and society. Even as Obama delayed and delayed on whether to send 30,000 additional troops to Afghanistan, he retreated from his predecessor’s aggressive strategy against al Qaeda. He remains intent on closing the detention facility at Guantánamo Bay, Cuba, despite the clear and growing evidence that released jihadists have rejoined al Qaeda and were even linked to the Christmas Day bombing attempt. He announced the end of the tough interrogation of al Qaeda leaders that had yielded crucial intelligence on their plans. He announced the transfer of the trial of Khalid Sheikh Mohammed (KSM) and other 9/11-attack plotters from specially created military tribunals to federal court in New York. Sending KSM and the Christmas bomber into the civilian law enforcement system effectively gives the final say over terrorists to the judicial branch, not the commander in chief.

As Hamilton wrote, the presidency was to be the one part of government that could respond with “decision, activity, secrecy, and dispatch” to unforeseen crises, especially war. Borrowing liberally from John Locke, Hamilton argued in The Federalist that the central function of the executive was to be a branch of the government always in being, one that could respond swiftly to emergencies. War would make the most demands on the presidency. “Of all the cares or concerns of government,” Hamilton wrote, “the direction of war most peculiarly demands those qualities which distinguish the exercise of power by a single hand.”

The dependence of executive power on the circumstances was not lost on early observers of the American system. In Democracy in America, Alexis de Tocqueville stated that the presidency would grow with the United States. “The President of the United States possesses almost royal prerogatives, which he has no opportunity of exercising; and the privileges that he can at present use are very circumscribed. The laws allow him to be strong, but circumstances keep him weak.” That would change, -Tocqueville predicted, as America became a great nation. It is in foreign relations “that the executive power of a nation finds occasion to exert its skill and its strength.” If the security of the country “were perpetually threatened, if its chief interests were in daily connection with those of other powerful nations,” Tocqueville continued, “the executive government would assume an increased importance in proportion to the measures expected of it and to those which it would execute.”

Obama, by contrast, has operated the presidency in his first year in exactly the opposite direction. He wants the executive to be a domestic strongman who can speedily dismiss opposition to his health care and economic ambitions. His decisions to try KSM in federal court and to place the Christmas bomber in FBI custody represent an unprecedented effort to leave critical wartime decisions—here, final decisions on the disposition of enemy combatants—up to the other branches.

Obama should take a lesson from his political hero, the last truly great Democratic president, Franklin D. Roosevelt. If World War II had not come, FDR might have ended up an average president. His New Deal, we now know, did not end the Great Depression, though it did wreck his own political party. But FDR joined the pantheon of Washington and Lincoln by foreseeing and preparing for the existential threat posed by Hitler and the Axis powers. As FDR himself said, “Dr. New Deal” had to give way to “Dr. Win the War.”

To save his presidency, Obama should follow the real lesson of FDR and our other great presidents and turn away from the failures of health care reform and nationalization of the economy. He will be remembered if he follows through in Iraq, pursues al Qaeda with the restoration of aggressive measures, and achieves victory in Afghanistan. If he loses in war in favor of an attempt to expand the size of government at home, he will take his place in presidential history alongside Jimmy Carter and Lyndon Johnson, rather than FDR and Ronald Reagan.


John Yoo is a scholar at the American Enterprise Institute and a law professor at the University of California, Berkeley. He is the author of Crisis and Command: A History of Executive Power from George Washington to George W. Bush.