In front of a half-tough crowd

President Bush will deliver his final State of the Union address tonight. Well, maybe not his final one. After all, nothing in the Constitution says the State of the Union has to be an annual affair. Article II, Section 3 just says the president “shall from time to time give to the Congress information of the state of the union, and recommend to their consideration such measures as he shall judge necessary and expedient.”

Nothing in there about doing it once a year. Nothing in there about making a speech, either. In fact, presidents from Thomas Jefferson to Woodrow Wilson put their statements in writing. So, how did the State of the Union address get to be the way it is? It all started with George Washington.

Precedents for Presidents

In 1790, President Washington delivered the first State of the Union speech to a joint session of Congress convened in New York City (then the nation’s capital). At 1,085 words, Washington’s address is among the shortest ever. After hearing the president’s proposals, Congress debated, drafted, and delivered a courteous reply promising its cooperation.

So such speeches went until 1801, when Thomas Jefferson became president. Jefferson thought Washington’s approach reeked of royalty. (In fact, the idea for the State of the Union address did derive from a British tradition in which the king opened Parliament with a “Speech from the Throne.”) What’s more, Jefferson thought the Congress had better things to do than debate replies to presidential speeches.

Rather than speaking, Jefferson submitted his message in writing–saving Congress from “the bloody conflict which the making an answer would have committed them.” The next 24 presidents followed Jefferson’s lead rather than Washington’s, delivering written “information” instead of speeches.

Memorable Moments

In 1823, James Monroe used his written message to Congress to lay out the Monroe Doctrine, which declared that “the American continents, by the free and independent condition which they have assumed and maintain, are henceforth not to be considered as subjects for future colonization by any European powers.”

In the midst of the Civil War, in 1862, Abraham Lincoln used his message to propose emancipation of the slaves. “The fiery trial through which we pass,” he wrote, “will light us down in honor or dishonor to the latest generation. In giving freedom to the slave we assure freedom to the free–honorable alike in what we give and what we preserve.”

Finally, in 1913, Woodrow Wilson decided to follow Washington’s lead and not Jefferson’s. He gave a speech to both houses of Congress–reestablishing, as he put it, that “the President of the United States is a person, not a mere department of the government hailing Congress from some isolated island of jealous power.”

Media Darlings

Ten years after Wilson’s speech, Calvin Coolidge delivered the first State of the Union address to be broadcast by radio. But most agree that the master of the radio address was Franklin Roosevelt, who in 1941 famously looked forward to a future founded on four freedoms: “The first is freedom of speech and expression. . . . The second is freedom of every person to worship God in his own way. . . . The third is freedom from want. . . . The fourth is freedom from fear.”

President Harry Truman delivered the first televised State of the Union speech in 1947, but he didn’t do it in prime time. The first president to take full advantage of the power of prime-time TV was Lyndon Johnson, in 1965. The following year saw the first televised opposition response immediately following the address. So much for carefully debated replies.

Correction Appended

Even as stocks ended five days of losses with a surprising recovery on Wednesday, officials began moving to defuse another potential time bomb in the markets: the weakened condition of two large insurance companies that have guaranteed buyers against losses on more than $1 trillion of bonds.

Regulators fear a possible chain of events in which the troubled bond insurers, MBIA and Ambac, might be unable to keep their promise to pay investors if borrowers default on their debt.

That could leave the buyers of the bonds — including many banks and pension funds — on the hook for untold billions of dollars in losses, shaking confidence in the financial system.

To avoid a possible crisis, insurance regulators met with representatives of about a dozen banks on Wednesday to discuss ways to shore up the insurers by injecting fresh capital, much as Wall Street firms have turned to outside investors recently after suffering steep losses related to subprime mortgages.

While it is unclear what steps, if any, the banks and regulators may ultimately take, the talks focused on raising as much as $15 billion for the companies, according to several people briefed on the discussion who asked not to be identified because of the sensitive nature of the discussions.

The notion that the failure of even one big bond insurer might touch off a chain reaction of losses across the financial world has unnerved Wall Street and Washington. It was a factor in the Federal Reserve’s decision on Tuesday to calm investors by reducing interest rates by three-quarters of a point, to 3.5 percent.

News of Wednesday’s meeting helped rally stocks, which had been down as much as 3 percent but ended up about 2 percent. Shares of MBIA jumped by nearly a third and Ambac jumped 72 percent, although they both remain far below their levels before the extent of the mortgage debacle became known.

Traditionally, bond insurance has been a low-risk business. State and municipal bonds rarely defaulted, so the insurers paid out few claims for such debt. But in recent years the bond insurers increasingly have guaranteed debt related to subprime mortgages, a business that they thought was safe but has turned out to be risky.

Now, as many subprime borrowers are defaulting, insurers could be obligated to cover some of the losses on securities backed by these loans.

Eric R. Dinallo, the New York insurance superintendent who regulates MBIA, called Wall Street executives on Tuesday to set up the meeting at his office in Lower Manhattan. He led the session on Wednesday and suggested that the group move in as little as 48 hours to get a deal done ahead of any downgrading of the bond guarantors by credit ratings firms.

According to two people, Mr. Dinallo said he would talk with the bankers one on one and reconvene the group — which included executives from Citigroup, Goldman Sachs and Merrill Lynch — on Thursday or Friday. Neither federal officials nor executives of the two insurers attended the meeting.

“Regulators are furiously trying to come up with a plan,” said Rob Haines, an analyst at CreditSights, a research firm, who was not at the meeting.

Mr. Dinallo could face resistance from banks that do not have significant exposure to the guarantors and thus have less incentive to put up money. It is also unclear how executives and shareholders of the companies would react to the plan and the prospect of ceding control.

Sean Dilweg, the commissioner of insurance in Wisconsin, which regulates Ambac, sat in on the meeting but said he would be working with Ambac directly. Mr. Dilweg said he met separately on Tuesday with executives at Ambac, which is based in New York but chartered in Wisconsin.

“Eric is looking at the overall issue, but I am pretty confident that we will work through Ambac’s specific issues,” Mr. Dilweg said in a telephone interview. “They are a stable and well-capitalized company but they have some choices to make.”

Other options open to the banks include providing lines of credit and other backup financing to the guarantors. A chief goal of any rescue would be to help the companies regain or keep triple-A credit ratings, which are seen as vital to their business.

Late last year, Mr. Dinallo encouraged Berkshire Hathaway, the company controlled by Warren E. Buffett, to enter the bond insurance business. At the time, Mr. Buffett said he did not want to invest in existing guarantors because of their financial problems, and he started his own firm instead.

Since then, the troubles have worsened. Last week, Fitch Ratings downgraded Ambac’s credit ratings to double-A, from triple-A. MBIA still has a triple-A rating from the three agencies; the others are Standard & Poor’s and Moody’s Investors Service.

While $15 billion might seem like a large amount of money for banks to commit to bond guarantors at a time when many investors have lost faith in them, Mr. Haines said it would be smaller than the billions the banks might have to write down if the companies lost their top ratings or incurred major losses.

“It’s a calculated kind of risk,” he said.

A spokesman for Ambac did not return calls seeking comment. A spokeswoman for MBIA declined to comment.

Analysts say it is unclear how much money would be needed to capitalize the companies adequately. Ratings agencies have changed their requirements several times already as they update their assumptions of defaults and losses on mortgage securities.

“What is needed to do the job is to solidify the market perception of a triple-A rating,” said Sean Egan, founder of Egan-Jones Ratings, a firm that says the companies may need to raise as much as $30 billion.

A recent effort by some banks to help a smaller bond insurer, ACA Capital, has not gone smoothly. The banks have twice agreed to give the company, which was downgraded to triple-C from single-A, more time to come up with an acceptable plan.

State regulators are under pressure to help solve a problem that many critics say could have been avoided with closer supervision. The insurers’ problems are also spilling over into the municipal bond market, making it harder for cities, counties and states to raise money for projects.

On Wednesday, for instance, some short-term insured municipal bonds, which typically trade at a premium to other bonds, were trading at a discount of as much as 1.5 percentage points to similar uninsured bonds, said Michael S. Downing, an account manager at Thomson Financial.

The companies have defended their assumptions. They also note that losses on the bonds that they insure would have to rise substantially before they would have to pay claims, and even then they would make interest and principal payments over the life of the bond, not all at once.

MBIA has estimated that in the worst case, which it described as a one in 10,000 event, it expects to incur losses of $10 billion, a fraction of the $673 billion it has insured.

Still, losses of that magnitude could strain the company’s finances, and the difficulties continue to mount. On Wednesday, Moody’s said it was considering downgrading a company, Channel Re, that reinsures more than $40 billion of insurance contracts written by MBIA. If the reinsurer is downgraded, MBIA, which owns more than 17 percent of Channel, would have to acknowledge fresh losses.

“If you are a bond insurer or bank you can never really eliminate the risk that you originated in entirety, unless you sell it,” said Edward J. Grebeck, chief executive of Tempus Advisors.

Economists’ two cents on economic stimulation

“Economic stimulation” is the phrase of the day. Last week, President Bush outlined a $150 billion program to boost the U.S. economy. This weekend, leaders from both parties promised a bipartisan effort to pass stimulating legislation. Meanwhile, stock markets worldwide plunged–thanks partly to fears of a U.S. recession.

When the economy starts to slide, it’s natural to look for ways to stimulate it. The trick is coming up with the right strategy. Fortunately, the world is full of economists ready to give you advice. Unfortunately, they rarely agree with each other, so you’ll have to choose from their competing theories. Here a quick review of three fiscal policy ideas you could adopt–if you decide to run for office.

Idea #1: Create Jobs

That’s what British economist John Maynard Keynes thought. Keynes learned classical economics, which held that market forces alone could produce full employment and a robust economy. Yet he worked during the Great Depression, when it looked like high unemployment might never go away.

It was a vicious circle. High unemployment meant low demand, since fewer consumers were drawing a good salary. And once production outstripped demand, businesses cut costs by laying off even more workers.

Keynes’s solution: create jobs. Governments can spend revenue on public works projects, artificially creating jobs for the unemployed. That will increase their buying power and lift consumer demand. Once businesses see this increase in demand, they will ramp up production, hire new workers, and eliminate the need for the government spending.

Idea #2: Cut Taxes

The economic rationale for cutting taxes is straightforward: tax cuts can put more money in people’s pockets. Like government spending to create jobs, they can increase consumers’ buying power and lift consumer demand.

“Supply-siders” go further, arguing that it’s not just about increasing consumer demand. They point out that high taxes can reduce people’s incentive to work and invest–that you’re less likely to try to make a buck if the IRS takes 70 cents than if the IRS takes 35.

So, they say, cutting taxes–especially high taxes that distort people’s choices–can make markets work more efficiently and spur overall economic growth. Some even argue that cutting taxes can increase tax revenues, as the tax cuts will have such a stimulating effect on the economy that tax revenues will actually rise despite the lower rates.

Idea #3: Go on Vacation

Economists like to talk about “three lags” that hamstring efforts to stimulate the economy: the time it takes for policymakers to realize there are problems, the time it takes for them to do something about it, and the time it takes for their efforts to have a measurable effect.

By the time these three lags have run their course, the economy might well have changed direction–and your stimulus policy could do more harm than good. So, some economists think that the best stimulus is no stimulus at all: take a break, leave the economy alone, and you can be sure at least that you won’t make things worse.

Extra! Extra!
What’s the Fed Got to Do with It?

“Okay,” you say, “but you haven’t even mentioned the Fed. Its rate cut this morning made big news. How does that work?” To find out, review what the Fed does.

Like President Bush, we’ve been touring Arabian states all week, from Kuwait to the UAE. While we’re in the neighborhood, we figured it made sense to go back to the biggest state on the Arabian Peninsula’s block: Saudi Arabia.

Saudi Arabia has been a U.S. ally and a key Middle East trading partner for decades, but it’s not exactly the sort of country Uncle Sam would bring home to meet the founders. It’s an absolute monarchy where mosque and state are thoroughly interwoven. And, along with lots of oil, it keeps producing terrorists, including Osama bin Laden and 15 of the 9/11 hijackers. Here’s a look at Saudi Arabia, by the numbers.

Size Matters

830,000 – Saudi Arabia’s total area, in square miles (2,150,000 sq km). That’s a little larger than Mexico, a little smaller than Greenland, and roughly one-fifth the size of the United States. Saudi Arabia covers about four-fifths of the Arabian Peninsula, which it shares with Oman, Yemen, Qatar, Kuwait, and the United Arab Emirates. (Another small nation, Bahrain, is an island near Qatar.)

27,600,000 – Saudi Arabia’s total population, including some 5.6 million non-nationals who call the kingdom home. That’s more people than live in Texas, but not nearly as many as live in California. Take away the non-nationals, and Saudi Arabia would have just a few more people than Australia. Add in the more than 2 million Muslim pilgrims who visit each year, and it would have almost as many people as Canada.

4,700,000 – Population of Riyadh, Saudi Arabia’s capital and largest city. Riyadh gets more rain than many parts of Saudi Arabia, but it still relies on hundreds of miles of pipes to carry water from desalination plants on the Persian Gulf.

Religious Matters

100 – Percentage of Saudis who are Muslim. Sound impossible? Well, Saudi Arabia is Islam’s birthplace and home to its two holiest cities, Mecca and Medina. Its constitution is the Qur’an and Sunnah (the “trodden path” of the prophet), its legal system is based on Sharia (Islamic law), and its religious “police” enforce traditional values. Blasphemy is punishable by beheading. So is conversion from Islam to other religions, whose public practice is banned. Oh, and the government requires that citizens be Muslims.

0 – Number of drivers licenses issued to women. Despite a handful of recent reforms, it’s still illegal for women to drive a car in Saudi Arabia. Human rights groups also regularly condemn the Saudi government for its treatment of political and religious minorities (including Islamic ones). The government generally brushes such claims aside.

Money Matters

264 billion – Barrels of oil in Saudi Arabia’s proven reserves, according to the leading oil industry survey. That’s around 22 percent of all of the world’s proven crude. (For more on what “proven reserves” actually means, click here.)

90 – Percentage of Saudi Arabia’s export earnings that come from oil. Much of that money flows from the United States. And much of it goes to fund generous social welfare programs. But times aren’t as good as they once were. In 1980, oil exports raked in $22,589 for every man, woman, and child in the kingdom. Thanks to a population boom and a changing market, the number these days is around $5,000.

7,000 – Estimated number of members of the Saudi royal family. Some 200 of those are direct descendents of Abd al Aziz al Saud, the king who founded the country in 1932. The nation’s current king, Abdullah, officially assumed the throne in 2005, but he’s no newcomer to power. Abdullah has effectively run Saudi Arabia since 1995, when the previous king–his half-brother Fahd–suffered a stroke.

What would Ben Franklin think?

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Friends, America’s Federal Communications Commission voted on Tuesday to let media companies own both a newspaper and a television or radio station in the nation’s 20 largest media markets. The controversial decision reverses a longstanding ban on such cross-media conglomeration.

Opponents of the change say the old rule helped prevent major media companies from becoming too dominant. Supporters say the new rule simply recognizes a changing media landscape, in which newspapers are struggling to find readers and more folks find the information they need online.

Either way, we say it’s a good time to look back at American media’s roots–to a time when local voices like Ben Franklin’s dominated. After all, before he messed around with lightning or charmed French royalty, old Ben was a newspaperman.

An Ink-Stained Wretch

Back then, printers did it all–interviewing recently arrived ship captains for out-of-town news, writing articles, plagiarizing stories from other newspapers, selling ads, printing the pages, and distributing the final product. In fact, most colonial newspapers sprang from small printshops that employed just the owner and his teenage apprentice.

Ben Franklin started in the printing trade as an apprentice to his older brother, James, who ran a small printshop in Boston. Working there exposed the young Franklin to different kinds of writing and gave him a chance to borrow books on the sly from booksellers’ apprentices.

In those days, printers had to be smart and strong. Composing the pages was a mental feat–type was set letter by letter, using little blocks of metal, and for the page to appear correctly when printed, every line had to be composed in reverse. (Many printers were as adept at reading backward as forward.) After the pages were made, the printer personally pulled the lever on the heavy wooden press to stamp the image–one page at a time. No wonder few colonial newspapers had a press run of more than 300.

The Life and Times of Silence Dogood

James Franklin wanted his publication, the New-England Courant, to be more than the usual collection of 6-month-old news that appeared in other colonial newspapers. So he solicited articles. In 1722, 14 letters appeared in the New-England Courant signed by “Silence Dogood.” The middle-aged widow had a lot to say about the clergy, fashion, and political matters, and people loved it–even if they didn’t know who the Widow Dogood really was.

Using a pen name was common at the time, so everyone knew “Dogood” wasn’t her real name. But no one knew that 16-year-old Ben had actually written the letters, sliding them under the printshop’s door at night.

A year after the Silence Dogood letters were published, Ben ran away from his brother’s employ. (Things got rough for James after he was thrown in jail for suggesting the local authorities were in cahoots with pirates.) Still in his teens, Ben apprenticed with a Philadelphia printer before sailing for London and working there for two years. By 1729, he was back in Philadelphia and publishing his own newspaper, the Pennsylvania Gazette.

All the News Ben Could Print

The Gazette was like most newspapers of its day–no headlines, few illustrations, and it ran only four pages. What set it apart was Franklin’s lively version of local news. He filled the columns with anecdotes like this one: “And sometime last Week, we are informed, that one Piles a Fidler, with his Wife, were overset in a Canoo near Newtown Creek. The good Man, ’tis said, prudently secur’d his Fiddle, and let his Wife go to the Bottom.” The Pennsylvania Gazette became one of the most successful newspapers of its time.

Colonial newspapers had no separate editorial pages, but they were packed with opinions. Just as he had done in his Silence Dogood days, Franklin often wrote an article in the voice of a fictional citizen. In 1735, he printed a letter purportedly written by an elderly gentleman, who encouraged his fellow Philadelphians to establish a volunteer fire department. The imaginary old man described leaping out the window of a burning house. By the end of the year, the Union Fire Company of Philadelphia had formed.

“Poor Richard” Makes Ben Wealthy

Franklin’s most successful editorial alter ego was “Poor Richard” Saunders, the pen name Franklin used for the 25 years he published Poor Richard’s Almanack. In the colonies, practically every printer published an annual almanac. These thick pamphlets, showing the phases of the moon and predicting the weather, were moneymakers because most literate households purchased one every year.

In 1732, Franklin threw together a 24-page publication with a first-person preface signed by Richard Saunders. The “author,” a destitute stargazer whose shrewish wife threatened to burn all his books and astronomy instruments if he didn’t “make some profitable use of them,” admitted the reason he wrote the almanac was to make a little money and get her off his back.

From 1732 to 1757, Poor Richard’s grew in popularity as readers found more than the usual astronomical charts and tidal tables. Tucked into this almanac were proverbs such as “Early to Bed, and early to rise, makes a Man healthy, wealthy and wise.” Franklin said he saw the almanac as a way to educate folks who might not buy any other books and so “filled all the little spaces that occurred between the Remarkable Days in the Calendar, with Proverbial Sentences, chiefly such as inculcated Industry and Frugality.”

Some years Franklin sold 10,000 copies. Combined with good investments and lucrative printing contracts, the profits from the almanac allowed him to retire from printing at the ripe old age of 42. Of course, Franklin’s “retirement” was more active than many a person’s working life. And though he was hailed as a scientist, diplomat, patriot, and philosopher, at the end of his days, Franklin was still proud of his printshop roots. When he wrote his will at the age of 82, he began: “I, Benjamin Franklin, printer, . . . “

Sep 6th 2007 From Economist.com

Rates on hold

SOMETIMES inaction can speak louder than words. Announcements on Thursday September 6th by the European Central Bank (ECB) and the Bank of England that they would leave their policy rates unchanged—at 4% and 5.75% respectively—shocked no one, given recent turbulence in money and credit markets. Yet the decision to do nothing carried more significance than it normally would, particularly in the case of the ECB. And neither bank relied solely on its rate calls to do the talking.

It was only a month ago that Jean-Claude Trichet, the ECB’s chief, gave warning that the threat of high inflation merited “strong vigilance”, a phrase that signalled a firm intention to raise rates at the next policy meeting. Troubles in the money markets meant that plan had to be abandoned. The rates that banks charge each other for short-term loans have risen to unusually high levels in recent weeks—in Europe and elsewhere. There are fears that economic growth will suffer if credit continues to be hard to obtain. Understandably, the ECB held off from squeezing the economy further.

Britain’s central bank left no such hostages to financial market fortune. It is not keen on the kind of signalling practised by its close neighbour (once derided as “monetary policy by code word” by Mervyn King, the bank’s governor). If it thinks rates should go up, it raises them: it rarely warms up the markets first. Yet expectations are formed and, until recently, the financial markets thought rates would rise to 6% by the end of the year.

That prospect seems unlikely now and the bank’s monetary-policy committee (MPC) saw fit, most unusually, to issue a statement when it announced its decision to keep rates on hold. The MPC said it was “too soon to tell” if recent disruptions would materially affect the economy, but that it was “monitoring closely” events in credit markets as well as “all other data relevant to the outlook for inflation”. Even the most skilled kremlinologist would be hard pushed from this to detect a steer about future rate decisions.

The ECB, for its part, evidently still believes that interest rates need to rise. Policy is still “accommodative”, said Mr Trichet on Thursday, so the risks are that inflation will pick up. It is less clear when it will be able to push through the required tightening, given ongoing gyrations in the credit market. During the press conference Mr Trichet was careful not to tie himself too closely to an increase next month—there was no mention of “strong vigilance” in his prepared statement. If markets settle down soon, though, he will presumably find a convenient opportunity to say the magic words.

Big European central banks were not alone in their inaction. Earlier in the week the Bank of Canada kept its benchmark rate at 4.5% and, in a statement, in effect retracted its previous bias to further tightening—an understandable move given Canada’s close trade links with the vulnerable American economy. Australia’s central bank sat on its hands too, keeping rates at 6.5%, despite surprisingly strong economic growth.

Not all central banks have been knocked off course. Norway’s one raised its main rate last month right in the eye of the financial storm. The Riksbank, Sweden’s central bank, meets on Friday and is likely to prove another exception to the general rule of central bank inaction. Sweden is at an earlier stage in its normalisation of rates and is widely expected to raise them from 3.5% to 3.75%. Like the ECB, the Riksbank thinks its policy is still too lax: it believes that a “neutral” interest rate lies somewhere between 3.5-5% and said in June that it expects rates to be at 4% by the end of the year.

The Swedes and Norwegians aside, policymakers are having to rethink the outlook for interest rates given tighter conditions in credit markets. If borrowing is rationed more carefully, economies are likely to grow less quickly and inflation risks are correspondingly diminished. Britain’s central bank might congratulate itself that it got its monetary tightening in when the going was good. The ECB, meanwhile, might regret the luxury of giving the markets a month’s notice every time it plans to increase rates.