Third Way Dispatch

Common Ground Rules

contact@thirdway.com (Rachel Laser, Director of The Culture Project) — Tue, 16 Jun 2009 10:20:00 -0600

President Obama recently delivered his much anticipated Notre Dame commencement speech. With the divide over abortion at the top of everyone’s mind, the President chose to tell the success story of the incredibly diverse six member Civil Rights Commission appointed by President Eisenhower that led to the Civil Rights Act of 1964. As Obama retells it:

“Years later, President Eisenhower asked [Commission participant and then-Notre Dame President] Father Ted how on Earth he was able to broker an agreement between men of such different backgrounds and beliefs. And Father Ted simply said that during their first dinner in Wisconsin, they discovered that they were all fishermen. And so he quickly readied a boat for a twilight trip out on the lake. They fished, and they talked, and they changed the course of history. “

It was Father Ted’s decision to lean into the commonality of the group at the outset that fostered an atmosphere of productivity and success. My own experience matches the lesson in this story: The key to success for a Common Ground initiative is that it identify and embellish upon the shared values in the group. As Third Way’s Culture Program Director and architect of two common ground initiatives- one around abortion and the other about bridging the cultural divide between progressives and Evangelical Christians (the Come Let Us Reason Together initiative), I have been asked write a piece for the debut of RH Reality Check’s new common ground on abortion website about how to find common ground. Below, I share with you my own discoveries, as corroborated in many places by leading common ground voices. There are four necessary steps, no matter what the issue on the table, to achieving long-lasting common ground:

1. Find the right people

2. Establish that common ground isn’t about compromising principles

3. Focus on the commonalities but embrace the differences, and

4. Don’t stretch it

1. Find the Right People The process must start with the right “guide.” Although often the best guide is thought to be outside of the group, the reality is that most guides will have a take on the issue that he or she necessarily brings to the table, whether public or private. In fact, my own experience dictates that the guide may have the most trust and success when he or she is so candid about his or her position as to be a participant officially representing one of the two sides at the table. Third Way, a pro-choice and progressive organization, directed both of its common ground initiatives as an explicitly interested party. Father Ted, also a participant, led the Civil Rights Commission conversation. The guide must also have the passion of Father Ted for capitalizing on the places of commonality. Even with the right guide, however, the project is doomed without the right participants. And though most Americans when asked like the idea of common ground (e.g. 74% of respondents in Third Way’s national abortion survey want their elected official to look for common ground on the abortion issue), you must be selective to find the right people. Above all else, the participants must be courageous, have a strong sense of self, and be confident. Every key participant I have worked with in my initiatives has fit this bill. The group Search for Common Ground, leaders in this field for over 25 years, explain well why these traits are so important: “As human beings we have an instinctive, emotional response to conflict that is often based on fear. ... A leap of faith is required to move from an adversarial response to a non-adversarial one. It takes character and courage to make that shift.” The participants must also believe that finding common ground is good in and of itself and that it will ultimately help achieve at least some of their end goals.

2. Establish that common ground isn’t about compromising principles Common ground should not and does not entail compromising principles on either side. Without this ground rule, participants simply will not be able to stay the common ground course without feeling like they are being disloyal to themselves (what I call the “ick factor”) and without being devoured by those in their base. (Truth be told, they may nonetheless be devoured, but that’s another story and another reason for the “courageous” requirement above). President Obama embraced this notion at Notre Dame, when after explaining where there is common ground on abortion, he acknowledged: “Understand-I do not suggest that the debate surrounding abortion can or should go away.” Search for Common Ground also gets at this principle when they explain that common ground is “[n]ot having two sides meet in the middle, but having them identify something together that they can aspire to and are willing to work towards.”

3. Focus on the commonalities, but embrace the differences You cannot achieve common ground without first identifying the shared values of the group and using them to build a foundation. For the Come Let Us Reason Together initiative, we spent a whole year identifying and writing up the shared foundational values behind such controversial social issues as abortion, gay and lesbian issues and the role of religion in the public square before we successfully tackled what a common ground policy agenda would look like. Identifying these common values is what enables the group to think together, unencumbered by fear and false assumptions, and ultimately to succeed in locating common ground action steps. At the same time, you wouldn’t all be at the table were it not for your differences, so you might as well embrace them. A skilled guide will actually go further and figure out how to employ some key differences to help motivate one side or another to find common ground in the hardest places. It was powerful motivation for our Evangelical Christian friends in finding common ground on gay and lesbian equality to point out to them that many gay and lesbian Americans feel that Evangelical Christians dislike them and wish them ill. Similarly, we helped motivate some of our pro-choice friends to find common ground on abortion by pointing out that many Americans do not realize that pro-choicers agree that abortion is morally complex and would like to reduce the need for abortion.

4. Don’t stretch it Don’t go beyond the agreement you’ve got. Shortly after the Come Let Us Reason Together group debuted its common ground governing agenda, which included an abortion policy, President Obama repealed the controversial Mexico City policy or “global gag rule.” This repeal, which freed up funds for birth control to go to poor women in developing countries, arguably fit into our agreement, which already embraced increasing access to birth control for low-income American women. Except it didn’t. We had never discussed the Mexico City policy repeal as a group, and this policy had always been highly politically charged and embroiled in the abortion debates. Before we had time to raise it, reporters called Third Way to inquire whether the groups’ common ground abortion approach included the repeal. Though it was totally in our right to try to persuade the group to support the repeal, we absolutely could not presume to speak for the group about so loaded an issue. I have high hopes for RH Reality Check’s On Common Ground forum, though also some undeniable trepidation, based only on how badly I want this experiment to work. My hope is that no one enters the conversation with the nagging feeling that they are the fish and that everyone instead, in the words of the President, “[r]emember[s] in the end, we are all fishermen.”

End Note: I wrote this article before the murder of Dr. George Tiller. This sad and shocking moment in history contains many lessons, including one with regard to finding common ground. Tragedies like this present an opportunity for those on opposite sides of an issue to come together around shared values, and to decry such behavior as abhorrent and anti-American. In this case, the two communities did just that. Here is the joint statement from pro-life and pro-choice religious leaders condemning George Tiller’s murder as offensive to all of them.

President Obama's Inauguration

contact@thirdway.com (Matt Bennett, Vice President for Public Affairs) — Wed, 21 Jan 2009 08:33:00 -0700

All of us at Third Way watched President Obama’s inauguration with deep emotion and enormous pride in our country.

Below is his magnificent inauguration speech. Below that is the inaugural poem by Elizabeth Alexander. As she so eloquently wrote, today “anything can be made, any sentence begun.” We greet this new day in America with that spirit.

President Obama

My fellow citizens -

I stand here today humbled by the task before us, grateful for the trust you have bestowed, mindful of the sacrifices borne by our ancestors. I thank President Bush for his service to our nation, as well as the generosity and cooperation he has shown throughout this transition.

Forty-four Americans have now taken the presidential oath. The words have been spoken during rising tides of prosperity and the still waters of peace. Yet, every so often the oath is taken amidst gathering clouds and raging storms. At these moments, America has carried on not simply because of the skill or vision of those in high office, but because we the people have remained faithful to the ideals of our forebears, and true to our founding documents.

So it has been. So it must be with this generation of Americans.

That we are in the midst of crisis is now well understood. Our nation is at war, against a far-reaching network of violence and hatred. Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost; jobs shed; businesses shuttered. Our health care is too costly; our schools fail too many; and each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet.

These are the indicators of crisis, subject to data and statistics. Less measurable but no less profound is a sapping of confidence across our land — a nagging fear that America’s decline is inevitable, and that the next generation must lower its sights.

Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. But know this, America — they will be met.

On this day, we gather because we have chosen hope over fear, unity of purpose over conflict and discord.

On this day, we come to proclaim an end to the petty grievances and false promises, the recriminations and worn out dogmas, that for far too long have strangled our politics.

We remain a young nation, but in the words of Scripture, the time has come to set aside childish things. The time has come to reaffirm our enduring spirit; to choose our better history; to carry forward that precious gift, that noble idea, passed on from generation to generation: the God-given promise that all are equal, all are free and all deserve a chance to pursue their full measure of happiness.

In reaffirming the greatness of our nation, we understand that greatness is never a given. It must be earned. Our journey has never been one of shortcuts or settling for less. It has not been the path for the faint-hearted — for those who prefer leisure over work, or seek only the pleasures of riches and fame. Rather, it has been the risk-takers, the doers, the makers of things — some celebrated but more often men and women obscure in their labor, who have carried us up the long, rugged path towards prosperity and freedom.

For us, they packed up their few worldly possessions and traveled across oceans in search of a new life.

For us, they toiled in sweatshops and settled the West; endured the lash of the whip and plowed the hard earth.

For us, they fought and died, in places like Concord and Gettysburg; Normandy and Khe Sanh.

Time and again these men and women struggled and sacrificed and worked till their hands were raw so that we might live a better life. They saw America as bigger than the sum of our individual ambitions; greater than all the differences of birth or wealth or faction.

This is the journey we continue today. We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished. But our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed. Starting today, we must pick ourselves up, dust ourselves off, and begin again the work of remaking America.

For everywhere we look, there is work to be done. The state of the economy calls for action, bold and swift, and we will act — not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together. We will restore science to its rightful place, and wield technology’s wonders to raise health care’s quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age. All this we can do. All this we will do.

Now, there are some who question the scale of our ambitions — who suggest that our system cannot tolerate too many big plans. Their memories are short. For they have forgotten what this country has already done; what free men and women can achieve when imagination is joined to common purpose, and necessity to courage.

What the cynics fail to understand is that the ground has shifted beneath them — that the stale political arguments that have consumed us for so long no longer apply. The question we ask today is not whether our government is too big or too small, but whether it works — whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified. Where the answer is yes, we intend to move forward. Where the answer is no, programs will end. Those of us who manage the public’s dollars will be held to account — to spend wisely, reform bad habits, and do our business in the light of day — because only then can we restore the vital trust between a people and their government.

Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control — and that a nation cannot prosper long when it favors only the prosperous. The success of our economy has always depended not just on the size of our gross domestic product, but on the reach of our prosperity; on our ability to extend opportunity to every willing heart — not out of charity, but because it is the surest route to our common good.

As for our common defense, we reject as false the choice between our safety and our ideals. Our founding fathers … our found fathers, faced with perils we can scarcely imagine, drafted a charter to assure the rule of law and the rights of man, a charter expanded by the blood of generations. Those ideals still light the world, and we will not give them up for expedience’s sake. And so to all the other peoples and governments who are watching today, from the grandest capitals to the small village where my father was born: know that America is a friend of each nation and every man, woman, and child who seeks a future of peace and dignity, and that we are ready to lead once more.

Recall that earlier generations faced down fascism and communism not just with missiles and tanks, but with sturdy alliances and enduring convictions. They understood that our power alone cannot protect us, nor does it entitle us to do as we please. Instead, they knew that our power grows through its prudent use; our security emanates from the justness of our cause, the force of our example, the tempering qualities of humility and restraint.

We are the keepers of this legacy. Guided by these principles once more, we can meet those new threats that demand even greater effort — even greater cooperation and understanding between nations. We will begin to responsibly leave Iraq to its people, and forge a hard-earned peace in Afghanistan. With old friends and former foes, we will work tirelessly to lessen the nuclear threat, and roll back the specter of a warming planet. We will not apologize for our way of life, nor will we waver in its defense, and for those who seek to advance their aims by inducing terror and slaughtering innocents, we say to you now that our spirit is stronger and cannot be broken; you cannot outlast us, and we will defeat you.

For we know that our patchwork heritage is a strength, not a weakness. We are a nation of Christians and Muslims, Jews and Hindus — and non-believers. We are shaped by every language and culture, drawn from every end of this Earth; and because we have tasted the bitter swill of civil war and segregation, and emerged from that dark chapter stronger and more united, we cannot help but believe that the old hatreds shall someday pass; that the lines of tribe shall soon dissolve; that as the world grows smaller, our common humanity shall reveal itself; and that America must play its role in ushering in a new era of peace.

To the Muslim world, we seek a new way forward, based on mutual interest and mutual respect. To those leaders around the globe who seek to sow conflict, or blame their society’s ills on the West — know that your people will judge you on what you can build, not what you destroy. To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history; but that we will extend a hand if you are willing to unclench your fist.

To the people of poor nations, we pledge to work alongside you to make your farms flourish and let clean waters flow; to nourish starved bodies and feed hungry minds. And to those nations like ours that enjoy relative plenty, we say we can no longer afford indifference to the suffering outside our borders; nor can we consume the world’s resources without regard to effect. For the world has changed, and we must change with it.

As we consider the road that unfolds before us, we remember with humble gratitude those brave Americans who, at this very hour, patrol far-off deserts and distant mountains. They have something to tell us, just as the fallen heroes who lie in Arlington whisper through the ages. We honor them not only because they are guardians of our liberty, but because they embody the spirit of service; a willingness to find meaning in something greater than themselves. And yet, at this moment — a moment that will define a generation — it is precisely this spirit that must inhabit us all.

For as much as government can do and must do, it is ultimately the faith and determination of the American people upon which this nation relies. It is the kindness to take in a stranger when the levees break, the selflessness of workers who would rather cut their hours than see a friend lose their job which sees us through our darkest hours. It is the firefighter’s courage to storm a stairway filled with smoke, but also a parent’s willingness to nurture a child, that finally decides our fate.

Our challenges may be new. The instruments with which we meet them may be new. But those values upon which our success depends — hard work and honesty, courage and fair play, tolerance and curiosity, loyalty and patriotism — these things are old. These things are true. They have been the quiet force of progress throughout our history. What is demanded then is a return to these truths. What is required of us now is a new era of responsibility — a recognition, on the part of every American, that we have duties to ourselves, our nation, and the world, duties that we do not grudgingly accept but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character, than giving our all to a difficult task.

This is the price and the promise of citizenship.

This is the source of our confidence — the knowledge that God calls on us to shape an uncertain destiny.

This is the meaning of our liberty and our creed — why men and women and children of every race and every faith can join in celebration across this magnificent Mall, and why a man whose father less than sixty years ago might not have been served at a local restaurant can now stand before you to take a most sacred oath.

So let us mark this day with remembrance, of who we are and how far we have traveled. In the year of America’s birth, in the coldest of months, a small band of patriots huddled by dying campfires on the shores of an icy river. The capital was abandoned. The enemy was advancing. The snow was stained with blood. At a moment when the outcome of our revolution was most in doubt, the father of our nation ordered these words be read to the people:

“Let it be told to the future world … that in the depth of winter, when nothing but hope and virtue could survive…that the city and the country, alarmed at one common danger, came forth to meet (it).”

America, in the face of our common dangers, in this winter of our hardship, let us remember these timeless words. With hope and virtue, let us brave once more the icy currents, and endure what storms may come. Let it be said by our children’s children that when we were tested we refused to let this journey end, that we did not turn back nor did we falter; and with eyes fixed on the horizon and God’s grace upon us, we carried forth that great gift of freedom and delivered it safely to future generations.

Thank you. God bless you. And God bless the United States of America.

Elizabeth Alexander’s poem:

Praise song for the day.

Each day we go about our business, walking past each other, catching each others’ eyes or not, about to speak or speaking. All about us is noise. All about us is noise and bramble, thorn and din, each one of our ancestors on our tongues. Someone is stitching up a hem, darning a hole in a uniform, patching a tire, repairing the things in need of repair.

Someone is trying to make music somewhere with a pair of wooden spoons on an oil drum with cello, boom box, harmonica, voice.

A woman and her son wait for the bus.

A farmer considers the changing sky; A teacher says, “Take out your pencils. Begin.”

We encounter each other in words, words spiny or smooth, whispered or declaimed; words to consider, reconsider.

We cross dirt roads and highways that mark the will of someone and then others who said, “I need to see what’s on the other side; I know there’s something better down the road.”

We need to find a place where we are safe; We walk into that which we cannot yet see.

Say it plain, that many have died for this day. Sing the names of the dead who brought us here, who laid the train tracks, raised the bridges, picked the cotton and the lettuce, built brick by brick the glittering edifices they would then keep clean and work inside of.

Praise song for struggle; praise song for the day. Praise song for every hand-lettered sign; The figuring it out at kitchen tables.

Some live by “Love thy neighbor as thy self.”

Others by first do no harm, or take no more than you need.

What if the mightiest word is love, love beyond marital, filial, national. Love that casts a widening pool of light. Love with no need to preempt grievance.

In today’s sharp sparkle, this winter air, anything can be made, any sentence begun.

On the brink, on the brim, on the cusp—praise song for walking forward in that light.

Economic Recovery for the Middle Class

contact@thirdway.com (Anne Kim, Director of The Middle Class Project) — Mon, 12 Jan 2009 08:11:00 -0700

As the nation grapples with an historic economic crisis, we write with five ideas that we hope you’ll consider. These ideas have a single aim—to restore the fortunes and confidence of the middle class—which we believe is the key to a long-term recovery.

Unemployment and foreclosure rates are on the rise, and the recovery plan must provide triage for those in desperate circumstances. But the recovery will be predicated even more on the majority of middle-class Americans who will keep their jobs and homes. What they’ve lost are wealth and confidence, both of which must be restored if there is to be a long-term recovery. Middle-class Americans have faced a shattering reversal in their fortunes—stomach-lurching losses in their 401(k)s and home values and an increasing litany of anxieties. Can a family can still afford to send a child to college? Is a retirement with some semblance of comfort still attainable? Even those who have the means are tightening their investments and spending, thereby accelerating the downward spiral.

As critical as it is to strengthen the safety net of unemployment benefits, food stamps and other emergency aid, we must also offer highly visible help to those who may not be on the precipice but who nonetheless hold the mood and confidence of the nation in their hands. These households are in the prime of their working years and earn between $40,000 and $100,000—too wealthy, in fact, for most safety-net programs such as food stamps but not nearly wealthy enough to have benefited from conservative trickle-down policies. These are the households that will lead the nation out of recession—if their confidence is restored.

FIVE PRIORITIES FOR A MIDDLE CLASS ECONOMIC RECOVERY

1. Cutting taxes for the middle class. The middle class needs a college tuition tax credit, as well as relief from child care costs and elder care expenses. For families facing even tighter budgets, affording college may have gone from merely difficult to near impossible. Child care and elder care tax breaks would ease the stress for “sandwich generation” households faced with the challenge of caring for aging parents while at the same time juggling careers and raising children.

2. Ensuring health care coverage stability. A major source of anxiety for middle-class Americans is the possible loss of health care coverage in the event of a loss or change in jobs—and as job losses mount, this anxiety is increasingly becoming a reality. A $3,500 advanceable, refundable bridge insurance tax credit can help pay for transitional health coverage—including 100% of COBRA premiums for up to four months—for workers between jobs.

3. Replenishing retirement savings. For a 55-year-old couple with $100,000 invested in the S&P, this year’s losses would amount to $36,000—potentially enough to require this couple to postpone their plans for retirement. While the markets will recover in time, a federal 401k match of up to $1,000 per worker can help jumpstart people’s ability to recoup their losses and build the confidence necessary to turn the economy around in the long-term.

4. Restarting the housing market. A significant factor depressing the housing market is a glut of inventory—even as potential homebuyers sit on the sidelines. A generous, but temporary, homebuyer credit of $5,000 for all home purchases can help restart the housing market. An above-the line mortgage interest deduction for non-itemizers can help put more money into the pockets of the 37% of homeowners who don’t itemize, and federal grants for the creation of state Emergency Mortgage Loan Assistance Programs can help homeowners who’ve lost their jobs with a few months of mortgage help.

5. Spurring job creation. In addition to new tax breaks for small business, including a standard home office deduction and an increased deduction for start-up costs, we propose a bonus R&D credit for companies that manufacture in America. The size of the bonus would depend on the level of domestic manufacturing. This proposal would reward companies that create and keep good jobs in the U.S.

Live Webcast: New Energy Roundtable with Senator Harry Reid

contact@thirdway.com (Matt Bennett, Vice President for Public Affairs) — Tue, 02 Dec 2008 08:43:00 -0700

On December 2nd, Third Way hosted a roundtable discussion entitled The New Revolution: America’s Clean Energy Future, featuring Senate Majority Leader Harry Reid (D-NV). The second in a series of discussions that Third Way is hosting with major policymakers and leaders on the issue of clean energy, this New Revolution event included 45 principals, representing a variety of perspectives within the government, advocacy, policy and business sectors.

Watch Senator Reid and other business, labor, environmental and policy leaders participate in a roundtable discussion on how the next Congress can move America toward a clean energy economy.

Third Way is focusing on the issue of clean energy because it will touch almost every important issue facing Washington in the coming year: economic stimulus and revitalization, U.S. national security, responding to climate change, and American global leadership. Majority Leader Reid will play a central role in shaping the policymaking required to make that happen, working in concert with his congressional colleagues and the new President.

We hope you will take some time to watch this webcast of the important discussion.

Trick or Treat: National Security as the October Surprise

contact@thirdway.com (Matt Bennett, Vice President for Public Affairs) — Fri, 17 Oct 2008 06:44:00 -0600

NOTE: This article was authored by TW National Security Policy Advisor Scott Payne and also appeared on the Huffington Post

In the fall of 2004, a video hit the airwaves that brought back America’s fear of terrorism and helped seal John Kerry’s fate. No, not the Oct. 29th video released by Osama bin Laden. That hurt Kerry, but the thing that probably put George W. Bush back in the White House was an ad by Progress for America,” a 527 group, that was called Ashley’s Story.

In the spot, 16 year-old Ashley Faulkner, who’s mother died on 9/11 in the Twin Towers, tells the camera: “He’s the most powerful man in the world and all he wants to do is make sure I’m safe, that I’m OK.”

It was moving and it was potent. The ad was funded in part by the Home Depot founder to the tune of $17 million — John Kerry could hear the pounding of these do-it-yourselfer campaign titans hammering the last nails into his campaign’s coffin. The ad ran nearly 30,000 times in battleground states, starting on Oct. 19.

“Ashley’s Story” reminded voters what they liked about President Bush’s response to 9/11, ten days before the bin Laden reminded them what they feared. Effectively, it served as a gateway to the bin Laden video—priming voters to see Bush as their protector.

While this election is vastly different than 2004, with the economic crisis dominating the news and the shock of 9/11 having receded, McCain and his allies will try to use national security to catch up. As Arianna noted in her post Tuesday, John McCain’s only bright spot at the moment is his continued lead on national security and terrorism.

This is not a new phenomenon. The ten-point lead in the Newsweek poll reflects the findings of many others. Third Way’s extensive public opinion research this summer showed Democrats losing on national security by 14 points and on terrorism by 15. Democracy Corps recent poll also shows Obama losing national security by 13 points. It is clear that despite the fiasco in Iraq, the failures in Afghanistan and the multiple other Bush screw-ups around the globe, the national security credibility gap, which has persisted for almost forty years,) continues to plague Democrats.

With these numbers in mind, we’ve seen the Republicans return to the old party playbook—trying to make Democrats appear weak and unable to defend the country. It has worked many times before: they labeled Dukakis) as risky and Kerry as indecisive on national security and undermined both as credible leaders that would protect the country. Now, they are trying to do it to Obama, with ads that suggest he is “too dishonorable, dangerous and risky” to be President. These supplement Sarah Palin saying that Obama “pals around with terrorists,” Cindy McCain getting “chills” after Obama’s vote on an Iraq supplemental, and surrogates using his middle name as a slur. On its own, it doesn’t look like this will be enough to swing this election to McCain. However, should another October surprise like the bin Laden tape emerge, these efforts could be the ground work that knocks Obama off the path to victory in the same way that “Ashley’s Story” did in 2004. The focus of the last few weeks will remain on the economy. Still, the Obama campaign must address national security squarely if they are to neutralize a potential October surprise.

While Arianna is right to argue that Obama should highlight McCain’s shortcomings on national security, the critique has to be more than laundry list of his failings—it requires a frame that quickly allows people to see the trend behind these failures but that also speaks to the nature of the man. On the flip side of that, Senator Obama needs to advocate a set of policies that highlight his ability to lead and his desire to protect the nation. As Third Way laid out this summer, Obama needs to frame John McCain as “reckless and out of touch” and advocate a set of policies that are “tough and smart.” In this frame, the laundry list of mistakes takes on a more significant meaning.

McCain’s policy to not negotiate with enemies is out of touch with the advice of U.S. military commanders; his refusal to draw down troops in Iraq and deploy forces to Afghanistan is reckless; his inability to realize that Spain is a NATO ally and friend of the United States is out of touch; his choice of a Vice Presidential candidate whose only foreign policy bona fides is a hazy view of Russia is reckless.

From Afghanistan, to Iraq, from military readiness to bad remakes of Beach Boys’ songs, John McCain is reckless and out of touch with America’s national security interests.

In contrast, Barack Obama has offered policies that are both tough and smart. His proposal to strike terrorist targets in the Pakistan tribal regions: tough; securing all loose nuclear material in Russia in four years to keep it out of the hands of terrorists: smart; sending troops from Iraq to secure Afghanistan and hunt down bin Laden: tough; a timeline to turn over control of Iraq to the Iraqis: smart; returning military deployments to a normal tempo and increasing benefits to recruit more troops: smart.

Because these frames reinforce perceived qualities about the two candidates, they are likely to be accepted by voters. McCain’s ‘fundamentals of the economy are strong’ quote was clearly out of touch and his response to the economic crisis is seen by voters as reckless. Obama, however, came across as a steady hand who understood the problem (smart) and wants regulation to prevent it from occurring again (tough).

If the campaign can get voters to transpose their concerns about McCain’s leadership on the economy to his ability to lead on national security, and reinforce that Obama is a leader ready to confront and solve America’s problems, then Obama will be well positioned should there be an October surprise. However if a surprise occurs and Obama is caught on the back foot, we could see McCain get the second wind he has been desperately trying to find for the past few weeks. It may be the only way McCain can claw his way back into an election that Obama seems to have done everything else to sew up.

The Roots of the Financial Crisis

contact@thirdway.com (Anne Kim, Director of The Middle Class Project) — Thu, 02 Oct 2008 06:45:00 -0600

Note: This was authored by Stephen Rose, a consulting economist and former senior economic fellow for Third Way and is reprinted from stats.org

To paraphrase a famous saying: the road to financial ruin was paved with good intentions.

But to understand what has happened, you have to start with understanding the role that finance plays in the economy.

This begins with the basic capitalist act—starting a business to make a profit. This process starts with a leap of faith that putting up money today will lead to more money in the future. Even established companies are constantly expanding and changing product lines to respond to the signals from the market. To do this, they are either risking previous profits or having to finance new activities. Consequently, companies always need money at the beginning of each production cycle. This money can come from the individual business proprietor, a small group of people (partnerships), a large group of people (corporate stock) and loans from banks and individuals (bonds). The difference between “equity financing” and “debt financing” is based on how the future profits are provided: lenders are paid first at a fixed rate of return while the owners divide the profits which can vary widely.

Companies turn to debt financing because they don’t have enough capital themselves or as a profit maximizing strategy. To understand the latter approach, consider the following two ways of funding a $100 million project that is expected to last one year and generate revenues of $112 million. For the owner who puts up the entire amount, the profit rate is 12%. An alternative way of financing this project is to borrow $50 million and personally invest the other $50 million. If the interest rate of the loan is 10%, then $55 million must be paid back to the bank at the end of year, resulting in a profit of $7 million or 14% return on the investment.

In financial parlance, the use of the loan permitted the investor to “leverage” his $50 million into the $100 million he needed. If sales in this example turned out to be $106 million rather than the planned $112 million, the profit rates on the two financing schemes change dramatically. In the first case where the investor put up the entire amount, the profit rate would be 6%. The leveraged investor, on the other hand, would still have to pay back $55 million leaving only $1 million of profits or a 2% rate of return on his $50 million. Even worse, if sales turned out to be $96 million, the owner’s loss would not be $4 million but $9 million (because he still would have to pay the bank $55 million). So, the use of debt financing magnifies the risks and rewards of the equity owners.

In addition to loans to businesses for production activities, consumers and government are also users of debt financing. In most cases, the borrowing is used to finance activities whose benefits are spread out over many years. For the public sector, this means public works and transportation activities. By contrast, loans to consumers were originally for home mortgages only. By requiring large down payments, lenders seemed to be protected because they could foreclose and sell the home at auction to recover the outstanding principal.

This broad stroke outline of finance shows that it performs many useful functions. A counter-intuitive statement is that debt is democratic. Although borrowers worry about repayments, using debt enabled them access to resources, be it a new house, furthering their education, or starting a new business. As Glen Yago puts it: “In the absence of inherited wealth or the granting of seigniorial rights to property, debt has been a central tool for acquiring productive assets.” {reference: Junk Bonds: How High Yield Securities Restructured Corporate America, New York and Oxford: Oxford University Press, 1991, p. 109.} The next step is to follow the money and find out where the money for loans comes from. Instead of dealing with person-to-person transactions, institutions develop to combine small amounts of money from many people into a common pot. Banks then are “intermediaries”—they collect money from one group of people and then make it available to another group of people. They make a profit because they pay their depositors less than they charge for their loans.

They can only do this because all of the depositors do not ask for their money at the same time. Hence, they only have a relatively small proportion of their assets readily available (“liquid”) to meet the normal flow of money in and out of their accounts.

As intermediaries, they are mainly dealing with other people’s money and there are many different ways in which the system can break down. Because time and risk are so integral to this process, banks loans are just claims on future money streams. Of course, banks expect some loans not to be repaid but there are unexpected downturns that can lead to a higher than anticipated rate of default.

To account for this potential, banks are supposed to keep a reserve that not only includes a fixed share of depositor’s money but a sizable amount of money from the owners of the bank. Banking practices are supposedly made to be “prudent” because the first money that is applied to losses is the capital of the owners.

A run on a bank occurs when depositors feel that the bank is about to become bankrupt. As many people show up at the door at the same time, the bank is unable to provide the cash and must close its door. This is what happened at the beginning of the 1930s (and happened in Argentina and Uruguay as recently as 2001). To combat this happening again in the US, a series of new regulations were imposed (culminating in the Glass-Steagall Act of 1933) creating federal deposit insurance, new oversight of banks with higher capital requirements, and a strict division between different types of financial institutions.

Once the economy rebounded strongly after World War II, banking became a boring business that one analyst called “3-6-3 banking”—pay your depositors 3%, lend at 6%, and be on the golf course by 3 PM. Savings and Loans banks were particularly hemmed in by regulations that limited what they could pay depositors and the fact that they lent money for long periods of time (they were predominantly home mortgage lenders). The high inflation of the 1970s put them in an untenable position such that in 1980, 85% of the 3,800 federally-chartered S&Ls were losing money.

The deregulation movement that began in the 1970s picked up momentum with Reagan’s push for ‘less government.’ One of the first major pieces of financial regulation was the Garn-St. Germain Act of 1982, which freed the tight reins on the S&Ls. In many ways, this attempt to rely on the market was too late and misguided. Many S&Ls had lost their capital base and were truly playing with other people’s money. Because they had nothing to lose, they made big bets on loans to risky projects (that had high interest rates) hoping that they could recoup their lost capital.

Regulators were denounced for ‘harassing’ S&Ls, even though they were trying to ensure that insolvent banks were forced to close. When the desperate attempts to win big with risky loans failed, there were a series of high profile bank collapses. In the last years of the 80s, the number of S&Ls shrunk by 50% and 1,400 commercial banks had closed or received federal assistance.

The 1980s witnessed many other dramatic financial events. On the negative side, there was the rise of high yield “junk bonds” to facilitate mergers and acquisitions. The famous decade of “greed” led to a handful of high-profile convictions of insider trading. The most famous example was the junk bond king himself, Michael Milken. Although sentenced to 10 years, he only served 22 months and was fined $200 million. But 20 years later, his current net worth is estimated to be $2.1 billion.

On the positive side, the rise of venture capital facilitated the growth of a series of high tech start-ups –e.g., Microsoft, Netscape, Intel, and Cisco—that would lead in the economy in the 1990s. At a World Economic Summit ten years ago, it was widely agreed that only in America could such companies start out with an idea and grow to multibillion operations within 10-20 years.

The rise of these companies also fueled a wild run-up in stock prices. After gaining ground in the 1980s, there was a pause for a few years at the beginning of the 90s. But from 1993 to its collapse in 2000, a tech-led rally led to wild optimism with some people seeing the Dow reaching into the stratosphere for decades to come.

In this environment, the urge to strike it rich led to new financial strategies. The “quants” arrived on Wall Street with sophisticated trading programs that seemed to guarantee success. No one was better placed than Long Term Capital Management (LTCM) which included two Nobel economics prize winners at its founding in 1994. It did not disappoint with a 40% rate of return in its first year but then crashed in 1998 following huge losses after the Russian government defaulted on their government bonds. The ‘sure fire’ strategy of LTCM was based on differences in yields between similar classes of assets. LTCM bet that the price of Japanese and European bonds was too low relative to American bonds. When everyone one rushed to the security of American bonds, LCTM lost nearly $2 billion in a matter of weeks.

But this rise and fall was quickly forgotten as a variety of institutions developed new ways of leveraging investment for maximum gain. Two things happened in the late 90s that set the stage for the current crisis. First, the Clinton administration encouraged the mortgage industry to find ways to expand home ownership to high risk, often low-income families. Second, the limits of Glass-Steagall were abolished with the passage of Grahm-Leach-Bliley act of November, 1999.

Neither September 11th, the tech stock crash, the LTCM collapse, nor the S&L debacle of the late 1980s led to any significant pressure to regulate financial activities in the 2000s. Instead a low-interest rate environment created the perfect conditions for a housing price explosion and home ownership rise.

The Clinton and Bush policies of serving the poor seemed to be working—the home ownership rate, which had been stuck at about 64% from 1975 to 1995, rose to 69%. But without adequate regulatory controls, this advance was done in a crazy way. At one point, getting a home loan required 50% down; in the 1950s, the rule was relaxed to a 20% down payment. Slowly the conservatism of bankers was lost as the lending standards kept on getting lower. First, it was 5% down, then it was nothing down, and then it was no requirement to document one’s assets and incomes.

The incentives for loan originators—they were paid on the basis of how many loans they could sell without much consideration of what the future default rate would be—led to remarkably poor financial practices. In many cases, people were enticed into agreeing to loans that they had very little chance of paying off. In particular, teaser rates on adjustable rate mortgages meant that someone could afford the original payments but could not sustain their payments once the rates were reset.

On top of this, the rating agencies became enablers of the craziness. Packing loans and selling different components as separate securities potentially is a great way to add more money to the mortgage market. But with little historical experience to go on, the rating agencies rated very weak bundles of mortgages as being very financially sound.

This combination of events was bound to fail in a big way. One day, housing prices would stop going up; one day people who did not have the incomes to support a mortgage would lose their homes; one day, adjustable rates would mean that people couldn’t afford the payments; one day, speculators who were flipping houses would get caught with a property worth less than they bought it at; and one day people who were taking out second mortgages or home equity loans would find that they owed more than the current value of the home. Because of the linkages between these events, each negative trend would reinforce the others.

The housing price bubble bursting would have caused problems under all circumstances. The problems would have been huge considering how many inappropriate borrowers were given loans with no down payments. While this was not sustainable, a downturn in the housing market would not have caused the current financial implosion without the expansion of exotic financial instrument based on “securitizing debt,” leveraging investments, and hedging against loss.

The principles of these strategies are fairly straight forward. In the past, the banks that originated the loan held that loan through maturity. The new innovation was to have a financial entity buy up lots of mortgages and then create bonds that were backed by the monthly payments of the borrowers. But the loans were not simply packaged, they were divided into various groupings (called “tranches”) based on their risk.

Things got really off track for three reasons. First, the rating agencies were unprepared to evaluate these different bonds and used a sloppy approach in saying that even bonds with very risky loans were themselves quite safe. Second, a lot of the purchasers of the bonds leveraged their investment by purchasing them with loans and thus exposing themselves to large losses when the bonds underperformed so badly. And third, in order to protect against risk, a new set of instrument financial instruments were used (e.g., ‘credit default swaps’). But these back-up protections were not adequately funded and were not financially viable during a big downturn.

So when the housing market collapsed, the financial structure behind the mortgages has so many instrument intertwined that any localized problem would rapidly spread throughout the international financial system. Even after a year and half of housing price declines, it is still uncertain where the losses are. And since no one knows the quality of lots of assets, there is an erosion of trust and people are hesitant to make deal with firms that may collapse in the future. Without this trust, markets ‘seize up’ and you can’t turn your assets into cash to repay your obligations. When you can’t sell them, firms have to make up a price to determine the value of their assets. When people know lots of people are making up a price, confidence declines yet more.

The main lessons of this history are that it is very easy to misuse other people’s money and that unforeseen events happen. We are paying dearly for many people forgetting these lessons and blithely increasing the number of financial instruments. Financial innovation when done right allocates capital in an efficient way and can price risk at the appropriate level. But when financial deregulation leads to too little regulatory oversight, it is a certainty that a number of people will overstep the line. When things go well for a period of years, it is a certainty that the line will be pushed that much further back from sustainability and that the resulting meltdown will be that much larger.

Finance was meant to facilitate the functioning of production and consumption. Instead it has become the hub of the system by centralizing huge amounts of money. In addition, there has been a transformation from the stolid, conservative banker to aggressive risk takers.

Their sophisticated use of mathematical models has identified trends that are rarely broken. Unfortunately, the key word here is ‘rarely’ and not ‘never.’ They misunderstood how time could work against them. The people who bought out the remains of LTCM actually made a profit on the remaining positions. But LTCM did not have the luxury of waiting out the market once their huge bets went bad leaving them without any cushion to pay off desperate customers. Managing risk is not the same as avoiding risk. And as long as people are using other people’s money, the titans of finance will use money in a way that lines their pockets. As the Milken example shows, even if caught and punished, the rewards are very high.

So what can we expect in the future? Certainly a lesson has been learned, much as investors learned a lesson from the technology stock crash. At this moment, Congressional leaders have realized that the stakes are too high and have agreed in principle to a massive bailout of the financial industry. After watching the failure of Lehman Brothers and the government takeovers of Fannie Mae, Freddie Mac, and AIG, leaders of both parties wanted to send a strong signal that the federal government was going to provide liquidity to markets that were not functioning. It is possible that a meltdown would not have happened without this intervention, but many people did not want to take this risk. Understandably, the public is not happy because the people who caused this mess are not bearing the costs of clean-up. There are currently ongoing FBI investigations of a number of financial institutions to determine whether financial executives lied about the state of their companies. This is going to be tough to prove with perhaps only a couple of cases going to trial. The real problem was that financial leaders were just doing what they were paid to do—seek out more profits and fees for their company. They not only collectively underestimated the risks; they created so many different layers of instruments that few knew where the bad assets were.

After the election, there will be a push for reforms. Despite his recent tough talk, McCain has prided himself as being a deregulator so it is hard to see him pushing for strong limits on what financial institutions can do. While Obama seems to understand that the financial architecture needs to be changed, the political power of financial leaders is very great, even inside the Democratic Party. So reform will be an uphill battle under all circumstances. Certainly we are never going to see the practices that led to the explosion of sub-prime mortgage lending. And the magnitude of this bailout means that people will be hesitant to go down this road again soon. But memories can fade and without a lot more oversight and regulation, we may face another round of financial bubbles bursting a number of years into the future.