BUB Three

I’ve changed my mind about the Paulson bailout plan - and the Democrats’ permutation and the Republicans’ alternative - a half-dozen times in the last eleven days. Here’s where I stand now.

If we’re going to give money to people who made stupid decisions, I’d still rather give it directly to the homeowners with the bad mortgages than to the big firms with the bad mortgage-based assets. The only change I’d make to my original Bottom-Up Bailout proposal is that only primary residences will be eligible for the plan. If you put yourself in debt up to your neck to buy a vacation home or to flip houses hoping for a quick buck, you’re on your own.

Barring that, there are two alternatives to the Paulson Plan floating around that sound interesting to me. One is Mort Zuckerman’s
suggestion that the government invest in perpetual preferred shares in the companies that need bailing out. As I understand it, perpetual preferred shares have no voting rights but are first in line for dividends and take precedence over common shares in case of bankruptcy. What I don’t know about this plan is which companies the government would invest in: any companies that wanted in; only companies that are really troubled; or only companies that the government decided were sound enough to get back on their feet with a little help. If the investment was restricted to only certain companies there’s a lot of room for political maneuvering and preferential treatment. It’s worth noting, however, that that’s at least as big a problem with the Paulson Plan since no one seems to be willing to specify which assets will be bought from which companies at what prices.

Another interesting idea is what Peter Robinson at The Corner refers to as “Plan B”:

the use of the FDIC to backstop commercial banks, on which (as quite distinct from investment banks) our system of payments and credits actually depends. The broad outlines of such a plan—increasing the deposit insurance level while giving the FDIC additional discretion to help wobbly banks—are in very little dispute.

As with the Zuckerman Plan and the Paulson Plan, the “discretion” part of “additional discretion to help wobbly banks” means someone has to choose which institutions live, which die, and which get dismembered and sold off.

One final thing to keep in mind when considering the Paulson Plan. We’re now hearing more and more about how the $700 Billion is an investment or even a “loan” because once the government buys the mortgage-based assets, it will hold them until the real estate market stabilizes then sell them and recoup some or all of the original investment - perhaps even make a profit. As Mort Zuckerman pointed out on the McLaughlin group this past weekend, we don’t know when or where the real estate market will stabilize; no one knows what value - if any - these assets have now or will have in the future; and he expects the real estate market to drop by another 15 to 20 percent. (I cannot find a link to this.) Similarly, Jeffrey Miron says:

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.

If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.

This less than rosy view of how much of our $700 Billion we’d get back doesn’t necessarily mean we shouldn’t follow the Paulson Plan. It just means that if we do we should accept we may never see our money again. Think of it like money you invest in your ne’er-do-well brother-in-law’s combination video rental store and laundromat: it’s possible his success will finance your retirement but you shouldn’t stop socking money away in your 401(k).

*****

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Updated October 24, 2008, with links to my subsequent BUB posts

Since I keep adding BUB posts, I updated this on December 13, 2008, to put all BUB posts in their own category. That way they can easily be found without my having to keep updating all the existing ones each time I add a new one.

Who's warming up?

If we go ahead with the Paulson plan, the United States Secretary of the Treasury will become one of the most powerful people on the face of the earth. Given this, I’d like to know who Barack Obama and John McCain intend to put on the mound.

True prophets

Nora Roberts’ Three Sisters Island trilogy is about a speck of land off the Massachusetts coast. The island is under a curse that, if not averted, will cause it to simply sink beneath the sea. In the second book, Heaven and Earth, an expert in the paranormal has come to the island. He is discussing the curse with a woman who lives on the island. She asks:

Do you believe, in that detail-filing brain of yours, that this island is doomed to fall into the sea? How can you buy some centuries-old curse? Islands don’t just sink like swamped boats?

He replies:

...let me just say there’s always room for less-than-literal interpretations. A force five hurricane, an earthquake...

There’s been some discussion of the apocalyptic prophecies of Larry Kroon who is the current pastor at the Wasilla Bible Church, Sarah Palin’s current home church, and of Ed Kalnins who is the current pastor at the Wasilla Assembly of God church, Sarah Palin’s former home church. Max Blumenthal, in a post I discussed earlier says of Pastor Kroon:

While Kroon has cautioned his parishioners against the mass marketed End Times prophecies of Hal Lindsey and Tim LaHaye, he has nonetheless invoked doomsday scenarios that mirror those on the pages of Lindsey and LaHaye’s bestselling tracts.

“It’s so very possible that God, instead of responding by granting spiritual renewal and sustained prosperity,” Kroon said in a sermon on July 13, 2008, “could just as easily…it’s conceivable that He could just as easily, for example, raise up a revived, prosperous and powerful Communist Russia with a web of alliances across the Middle East. And our gas pumps would go dry. The dollar would collapse. And the markets would crash. The kayak could go upside down. And it could happen in a matter of weeks. That could happen. It could happen by this fall.”

Certainly Pastor Kroon has gotten some details wrong but somehow the idea that Russia would revive seems less preposterous after the invasion of South Ossetia and the collapse of the Ukrainian government. And the idea that the dollar could collapse and the markets could crash doesn’t seem far-fetched at all as we celebrate the autumnal equinox.

Similarly, an article in the Huffington Post says of Pastor Kalnins:

In his sermons, Pastor Kalnins has also expressed beliefs that, while not directly political, lie outside of mainstream Christian thought.

He preaches repeatedly about the "end times" or "last days," an apocalyptic prophesy held by a small but vocal group of Christian leaders. During his appearance with Palin in June, he declared, "I believe Alaska is one of the refuge states in the last days, and hundreds of thousands of people are going to come to the state to seek refuge and the church has to be ready to minister to them."

Outside of mainstream Christian thought perhaps but directly in line with mainstream global warming thought. Somehow I doubt anyone at the Huffington Post would dismiss these comments from James Lovelock, the environmentalist who originated the Gaia theory (emphasis mine):

Climate change is more serious than we can possibly imagine, but neither the Earth nor the human race is doomed, said Lovelock. The good news is that the Earth itself is in no danger, with world climate likely to stabilize some 5 degrees C warmer than current temperatures - such stable 'hot' states have existed in the past, including some 55 million years ago when the world's own feedback mechanisms took 200,000 years to recover. During that phase no great extinction occurred, but life moved to cooler climes to survive.

Climate-induced migrations could, for example, see Europe's population concentrated in cooler regions such as the British Isles, Scandinavia and western France - and this could happen within the next century.

I have no use for apocalyptic prophecies no matter where they originate. But if prophecies prove accurate then the prophet should get credit. And if you honor your own prophets, how can you dishonor prophets of another God when they predict the same future?

BUB Two

I started thinking about one of the articles I cited under “Sources and additional reading” in my BUB post. The article was a TigerHawk post called “Did Enron beget AIG?” In my earlier post, I said this about that:

Thoughts on mark-to-market regulations; links to a Wall Street Journal article that claims that the fact the market wasn’t moving meant the value of mortgage-based assets was marked down more than was justified by the drop in value of the real estate at the bottom of the heap. Interesting but it is still the case that if no one wanted to buy a mortgage-based asset then that asset’s value was zero regardless of the value of the underlying real estate.

I went back and reread the TigerHawk post and the WSJ article it linked to and the comments on the TigerHawk post (Charlottesvillain is particularly helpful). Then I reread neo-neocon on “Naked shorts and other wonders of the financial world” and the articles she links to.

I still stand by my original statement that “if no one wanted to buy a mortgage-based asset then that asset’s value was zero regardless of the value of the underlying real estate.” To use a simple (and probably simplistic) analogy, imagine I am going to make cupcakes for a bake sale. I purchase $10 worth of ingredients and produce 48 cupcakes. That makes the underlying value of each cupcake about 21 cents assuming my labor is not considered. I price the cupcakes at 50 cents each. A couple sell quickly but when the buyers try them they discover the cupcakes taste terrible. Word spreads and no one will buy my cupcakes. Finally someone offers me 5 cents a cupcake - his dogs love sweets and he figures they won’t be too picky. I can argue until I’m blue in the face that the underlying value of my cupcakes is 21 cents each but the fact remains that their market value is 5 cents. Period.

What is clearer from my reading is that the market price of mortgage-based assets is not tightly tied to the value of the real estate on which they’re based. Home prices declined 20% while the market price of some mortgage-based securities apparently declined nearly 100%. Given this my idea to save the financial system by having the government buy up mortgages themselves rather than the distressed mortgage-based assets may not make a bit of difference to the market price - or liquidity - of those assets. It simply won’t matter that the underpinnings of those assets is now secure - the assets themselves will still be undesirable.

Rather than being a reason to do away with requiring mark to market pricing isn’t this actually a reason to do away with products that are so far removed from reality? The WSJ describes them thus:

Among its many products, AIG offered insurance on derivatives built on other derivatives built on mortgages. It priced those according to computer models that no one person could have generated, not even the quantitative magicians who programmed them.

If no one can understand how these products are priced perhaps we should consider not creating them and not selling them. Or if we believe its important to continue to do so then we need a way to segregate exposure to incomprehensible and unpriceable exotics from more mainstream investment and banking - especially if we are going to insist that mark to market valuation is not applicable to such airy-fairy investments.

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Updated October 24, 2008, with links to my subsequent BUB posts

Since I keep adding BUB posts, I updated this on December 13, 2008, to put all BUB posts in their own category. That way they can easily be found without my having to keep updating all the existing ones each time I add a new one.

BUB

So the Bush administration is proposing a $700 billion dollar bailout for financial institutions that have been “clogged up” by the fall in value of real estate and, therefore, of mortgage-based assets. Obviously the truly capitalist thing to do is nothing: let the market work its will, shake out the bad investments and those who bought them, and just hang on until everything settles down. It seems to have been decided somewhere by someone that that’s not an option: the results would be catastrophic.

Okay, but then why give money to big financial institutions? I’m a total economic dunce but if the bedrock problem with the financial system is mortgages it seems to me the best way to address the problem is to address mortgages. In other words, how about a Bottom-Up Bailout (BUB)?

Let’s start with my understanding of how this mess happened:

1) Ordinary People took out mortgages to buy homes. (I’m including home equity loans when I talk about mortgages.)

2) Those mortgages got “securitized” and sold just as if they were stocks. That is, Local Bank made 100 mortgages. It glommed those 100 mortgages together and sold an interest in that agglomeration to Bigger Bank just as if it was selling stocks. Bigger Bank glommed together many of these 100-mortgage agglomerations and sold that larger agglomeration to Still Bigger Bank and so on up the food chain to even bigger banks and investment banks and brokerages and hedge funds. That means that AIG, for example, ended up with an interest in home mortgages in Outer Podunk.

3) Things got even messier because of derivatives. It turns out that nobody actually understands them. This means no institution dealing in derivatives could really calculate how exposed it was to a particular counterparty or market or asset holder or even country. In other words, no institution dealing in derivatives really knew how much of its assets were somehow tied to AIG; knew how much of its assets were somehow tied to, say, homeowner mortgages in places where property values were dropping like a rock; knew how much of its assets were somehow tied to a particular Bigger Bank; or knew how much of its assets were somehow tied to the United States. Not knowing how exposed it was to a particular entity or situation means an institution didn’t know enough to stop buying more assets from the entity or situation.

4) There also may or may not have been some problem with short-selling, particularly with “naked shorts”. I’m not even going to pretend to understand that.

5) Remember that the home mortgages taken out by Ordinary People are still the basis for all the assets we’re talking about: the agglomerations of mortgages sold as if they were stocks; the incomprehensible derivatives; and whatever the heck the naked short-sellers were dealing in. One big thing has gone wrong with these mortgages: house prices have dropped. This means the collateral for the mortgage (the house) is worth less than what people owe on that collateral. So if people cannot repay the mortgages they took out then the Local Bank that gave them the mortgages can’t get back their money by seizing and selling the house.

For example, let’s say the 100 mortgages that Local Bank glommed together were for a million dollars each. This means that Local Bank sold an agglomeration worth one-hundred million to Bigger Bank. And it was worth one-hundred million in two senses: the amount loaned for those 100 houses was one-hundred million and if the homeowners all defaulted on their mortgages, Local Bank could take their homes and sell those homes for one-hundred million.

Now, however, let’s say house prices have gone down by 75%. That agglomeration is still worth one-hundred million in the sense that the amount loaned for those 100 houses was one-hundred million. However, if the homeowners all default on their mortgages, Local Bank could only get twenty-five million if it took their homes and sold them. So the underlying asset - the real thing - is no longer worth one-hundred million. As long as people keep paying their mortgages, this is not a problem.

6) Unfortunately, people are beginning to not pay their mortgages. There are multiple reasons for this:

a) Some people got mortgages they couldn’t afford. We can have a big fight over why this happened. Some people say it happened because the government forced lenders to give mortgages to people who couldn’t afford them in order to overcome perceived discrimination toward minorities and poor areas. Some people say lenders took the government’s expressed desire to see less discriminatory lending and used that as an excuse to talk and trick people into mortgages they couldn’t afford and to load up those mortgages with bad fees and wicked interest.

b) Some people got mortgages they could afford but then they lost their jobs and now they can’t afford them.

c) Some people got mortgages they could afford but then the value of their house dropped and now they’re stuck paying a million dollar mortgage on a house they couldn’t sell for more than a quarter of a million dollars. Some of these people are hanging in there, paying their mortgages; these people do not contribute to the current problem. However, some of these people are reneging on their mortgages and abandoning their houses which leaves the bank that holds their mortgages out the three-quarters of a million dollars. Also, some of these people would continue paying their mortgages if they could but they have to move for work or family reasons and they can’t continue to pay a million dollar mortgage when they only get a quarter million to sell the house and they have to buy a new house in their new home.

7) As financial institutions became aware that the original value of mortgage-based assets was disappearing - the value of the homes and the willingness of the homeowners to pay their mortgage were both vanishing - they became less willing to buy those assets. In market terms that translates to offering lower and lower prices for those assets. So a mortgage-based asset that Lehman bought at $100 couldn’t be sold at $100. Instead someone may have offered only $90 for it. It looks like - I’m very hazy on this - Lehman may have said no to $90 and held onto the asset as the price offered for it dropped and dropped and dropped. It’s also possible that the price drop happened quickly: last week Lehman bought the asset for $100, this week it’s only worth $25. Whatever the mechanism(s), financial institutions have found themselves holding a lot of mortgage-based assets for which they paid a lot more than anyone is now willing to offer them. And here’s where things get interesting.

Treasury Secretary Paulson keeps referring to these mortgage-based assets as “illiquid”. That implies they cannot be sold. However, Naked Capitalist insists that these assets can be sold but the institutions that hold them are unwilling to accept the low prices being offered by bottom-feeders. In other words, if Lehman bought a mortgage-based asset for $100 it is absolutely unwilling to let it go for $75 much less for $50. If this is true, it’s not that the assets are illiquid, it’s that the institutions that hold them are not willing to take the hit they would incur by selling them. In other words, these institutions are refusing to accept a market correction.

So long as institutions continue to hold mortgage-based assets they suffer financially. Once everyone realized the mortgage-based assets weren’t worth much, financial institutions couldn’t use them as collateral to get the short-term credit they rely on to keep their business going; that was like asking your local bank to give you a home-equity line on your house after it burned down. Furthermore, these institutions owned so many of these mortgage-based assets that they didn’t have enough inventory in other assets to get the credit they needed - bad assets had crowded out good. Finally, as a financial institution revalued these mortgage-based assets to anything like their market price the total worth of the institution was dropping. A company that was worth ten billion dollars when mortgage-based assets were worth $100 would be worth less and less as the value of the assets dropped. As that drop was reflected on the institution’s balance sheet the value of the stock would drop. That meant the stock was worth less as collateral to raise operating money and the institution suffered more.

Now the government is going to bail out the entire financial system by buying up mortgage-based assets. Some financial institutions (it’s not clear which ones) will be able to sell the bad assets to the government, use the money to buy good assets, and go back to merrily doing business again. It’s as if the homeowner posited above found someone who would buy his burned downed house. He can go out and buy a new house and leave the buyer with the ruined hulk

The idea is that the government will hold onto the bad assets and gradually sell them. The big questions are:

1) How much will the government pay for these assets?

2) How much will the government be able to sell them for?

It looks like Treasury is claiming it will buy the assets at fair market price. The problem is that if no one is willing to buy these assets - that is, they are truly illiquid - there is no fair market price. If someone is willing to buy these assets, why can’t the institutions that hold them sell to those buyers rather than sticking the taxpayers with the bill? I’m very much afraid that the analysis at Naked Capitalist which insists that there are bottom-feeders currently willing to buy; that the asset holders refuse to sell for what the bottom-feeders are offering; and that the government will offer whatever the sellers demand in order to get their hands on those assets looks like what will happen. As for how much the government will be able to sell them for, I can’t think of any reason the government will be able to sell them for more than the current holders would be able to. So the government will pay the price the asset holders demand then sell the assets to the bottom-feeders. The taxpayer will pay the difference while the asset holder and bottom-feeder both make out like bandits.

So here’s my question. If the Ordinary People with mortgages they can’t or won’t pay are the root of this problem, why not solve the problem by addressing their difficulties? Instead of buying the mortgage based assets, let’s have the government buy the mortgages or, rather, part of the mortgages. That’s a Bottom-Up Bailout (BUB).

My goal is to have every mortgage holder end up in a stable mortgage position. That means:

1) The mortgage on the house is for no more than 80% of the house’s current market value.

2) The amount paid on the mortgage each month is no more than some reasonable percent of the family income. I would set a top-end on that percent - perhaps 25% - but I think the percent has to vary by income level. Someone who is making very little money may simply not be able to afford to allocate 25% of the family income to housing.

Everyone who has a mortgage can apply to the new program. If the homeowners are in a stable mortgage position they don’t qualify. If not, the government will pay off their mortgage to whatever degree is necessary to get them into that position. Let’s take an example.

John Smith bought a $250,000 home a year ago. He makes $50,000 a year. He took out a $230,000 mortgage, putting only 8% down. He has made principal payments totaling $10,000 so he now owes $220,000. His home is now worth only $150,000. So:

1) The mortgage on the house is $220,000 but the house is worth only $150,000. The 80% of current market value rule means his mortgage should be no more than $120,000. The government will pay off $100,000 of his mortgage leaving him with a $120,000 mortgage.

2) If his monthly mortgage payment on the new $120,000 mortgage is more than a reasonable percent of his income, the government will pay off more of his mortgage to get his monthly payment down to the desired level.

Yes, some people who were stupid and some people who were greedy will get away with murder under BUB. However, there is some pain for homeowners:

1) If a homeowner would qualify for this deal and does not apply for it or does not take it and subsequently defaults on his mortgage, he cannot ever qualify for another mortgage.

2) If a homeowner takes this deal then when he sells his house he has to start paying the government back for the help. Specifically, the homeowner pays the government the amount the government paid off for him or half the profit on the house, whichever is less. This rule applies to sales of any subsequent houses until the homeowner has paid off the government’s help. The government does not charge interest.

3) If a homeowner takes this deal and defaults on his mortgage, current law prevails except that the government is considered a co-owner with the homeowner for the purposes of receiving proceeds from the sale of the house over and above what the mortgage holder receives. In other words, if the homeowner still owes $100,000 and defaults, the loaning bank seizes the house. If it is sold for $150,000, the homeowner and the government split the $50,000 that the bank doesn’t get.

There’s also some pain for the lending institutions. When the government pays off part of a homeowner’s mortgage, it doesn’t pay 100%. In the example above, I say the government will pay off $100,000 of John Smith’s mortgage. In fact, the government will pay Smith’s lender, say, $75,000. The lender forgives and eats the rest. That spreads the pain to the local lender and from there throughout the financial system without inflicting so much damage the system collapses.

And, of course, the government reforms lending practices in general. Minimum down payments and limits on how much can be borrowed based on income are back in favor. If the government wants to help poorer people own homes they can do the lending to those people themselves with the understanding that the loss rate will be high.

Furthermore, some type of restriction needs to be in effect to compensate for housing bubbles. Perhaps the minimum down payment should vary based on how fast housing prices are going up. In other words, banks should loan less than 80% in areas where housing prices are rising fast.

Last but not least the financial institutions' practices must be reformed. If no one understands derivatives maybe no one should be trading them. If trading in exotically packaged assets puts the whole financial system at risk maybe it’s time to re-segregate parts of the financial system, a new Glass-Steagall law. I don’t know enough about the subject to propose reasonable legislation but if the taxpayers are going to help clean up this mess then their representative - the government - needs to make sure the mess doesn’t happen again.

If the government is unable or unwilling to reform financial institution practices, then the government must make it explicitly crystal clear that those institutions are high-risk and without government backup. Anyone who does business with them does so at his own risk.

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Sources and additional reading:

Naked Capitalism (via Greg Mankiw)

Newt Gingrich at The Corner on NRO

Andrew Stuttaford at The Corner on NRO - Contains links to a Washington Post article and a Brookings Institute write-up on the bailout

neo-neocon on Naked shorts and other wonders of the financial world

Did Enron beget AIG? - Thoughts on mark-to-market regulations; links to a Wall Street Journal article that claims that the fact the market wasn’t moving meant the value of mortgage-based assets was marked down more than was justified by the drop in value of the real estate at the bottom of the heap. Interesting but it is still the case that if no one wanted to buy a mortgage-based asset then that asset’s value was zero regardless of the value of the underlying real estate.

Is Paulson wrong? - This is a link to a brief essay by Luigi Zingales. I cannot read the pdf he links to. You can read what purports to be the full text here.

Analysis: Washington's Trillion Dollar Wall Street Bailout - James Pethokoukis at U.S. News thinks the bailout is the way to go

Bipartisan Support for Wall St. Rescue Plan Emerges

For some very left and very interesting writing, check out
Anglachel’s Journal.

If I were John McCain's trusted adviser ... - An August 17,2008, article by George F. Will in which contains a proposal that sounds awfully good to me:

No officer of any corporation receiving a federal subsidy, broadly defined, can be paid more than the highest federal civil servant ($124,010 for a GS-15).

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Updated October 24, 2008, with links to my subsequent BUB posts

Since I keep adding BUB posts, I updated this on December 13, 2008, to put all BUB posts in their own category. That way they can easily be found without my having to keep updating all the existing ones each time I add a new one.

Holy war

When Charles Gibson interviewed Sarah Palin, one exchange got a lot of attention:

GIBSON: You said recently, in your old church, "Our national leaders are sending U.S. soldiers on a task that is from God." Are we fighting a holy war?

PALIN: You know, I don't know if that was my exact quote.

GIBSON: Exact words.

PALIN: But the reference there is a repeat of Abraham Lincoln's words when he said -- first, he suggested never presume to know what God's will is, and I would never presume to know God's will or to speak God's words.

But what Abraham Lincoln had said, and that's a repeat in my comments, was let us not pray that God is on our side in a war or any other time, but let us pray that we are on God's side.

The words Gibson spoke were not, of course, Palin’s “exact words” and there has been a great deal of comment about Gibson’s misquote. Unfortunately, the idea that Palin referred to the United States' presence in Iraq as God’s will seems to be ineradicable. Nonetheless, here’s my attempt to get on the record exactly what Palin said.

I want to start with a brief tour of Palin’s church history since references to “Palin’s church” and “Palin’s pastor” can be confusing. Palin was baptized Roman Cathoic. When she was four years old (around 1968), her family joined the Wasilla Assembly of God church. Assemblies of God churches are Protestant, Trinatarian, Evangelical, and Pentecostal.

Around 2002, Palin began attending the Wasilla Bible Church as her home church in Wasilla. An article in the New York Times quotes a member of the Wasilla Bible Church who believes the Palins moved from the Wasilla Assembly of God church because the Bible Church is less extreme - it is not Pentecostal - and because the Palins preferred to maintain a lower profile when in church. Palin also attends the Juneau Christian Center when in Juneau.

The Wasilla Assembly of God church was founded by Paul Riley. Mr. Riley was pastor for most of the time the Palins attended the church. In 1999, Ed Kalnins became pastor, apparently because Mr. Riley, who would have been about 70 at the time, retired.

Larry Kroon has been the pastor of the Wasilla Bible Church since 1978, one year after the church was founded.

The Juneau Christian Center has not figured prominently in any stories about Sarah Palin. The Center’s
statement on Palin refers to her as a visitor who “has occasionally attended Juneau Christian Center.”

The statement that Gibson mangled was made in a talk Palin gave at the Wasilla Assembly of God church, her former home church, on June 8, 2008. The occasion was the graduation of a Master’s Commission class. Master’s Commission is a one-year program devoted to discipleship and learning ministry. You can view the video of Palin’s June 8 talk in this Huffington Post article.

Palin talks about God’s will in connection with a natural gas pipeline she wanted to build and in relation to the United States’ military mission in Iraq. Palin’s comment about the pipeline begins around 3:55 into the video. She is striking a deal with the Master’s Commission graduates, essentially splitting up God's work and Caesar's:

I can do my part in doing things like working really, really hard to get a natural gas pipeline - about a $30 billion project that's going to create a lot of jobs for Alaskans and will have a lot of energy flowing through here. And pray about that also. I think God's will has to be done in unifying people and companies to get that gas line built, so pray for that.

I read Palin's comments to mean not that the pipeline is God's will but that in order for the pipeline to be built it must be God's will that people and companies be unified so she is asking her audience to pray that such unification is God's will.

Palin’s comment about Iraq begins around 5:35 into the video. She says:

Pray for our military men and women who are striving to do what is right. Also, for this country, that our leaders, our national leaders, are sending [U.S. soldiers] out on a task that is from God. That's what we have to make sure that we're praying for, that there is a plan and that that plan is God's plan.

I simply don’t see any way to read this the way Gibson did, that “[o]ur national leaders are sending U.S. soldiers on a task that is from God", much less to wonder if Palin thinks we are “fighting a holy war”. She is clearly asking the congregation to pray that our leaders are sending troops on a Godly task. This is entirely in keeping with Lincoln’s sentiments:

To a minister who said he hoped the Lord was on our side, [Lincoln] replied that it gave him no concern whether the Lord was on our side or not "For," he added, "I know the Lord is always on the side of right;" and with deep feeling added, "But God is my witness that it is my constant anxiety and prayer that both myself and this nation should be on the Lord's side."

Obama's "Honor"

Barack Obama recently put out an ad called “Honor” which says John McCain is running a dishonorable campaign. The ad does not provide any specific instances of dishonorable activity by the McCain campaign which has left commenters who do not support Obama puzzled as to what the ad means. (Commenters who do support him are sure they know.) Since the ad provides seven quotes to back up its claim of dishonor, I decided to track down those quotes and determine from them what Obama is objecting to.

For each backup quote from the ad, I report what the ad says via voiceover and screen, give the source I found for the quote, place the quote in context, and give any additional information I think will be helpful. I keep a running total of what objectionable McCain claims the quotes refer to.

1) The screen says, “one of the sleaziest ads ... ever seen”; Time, Klein, 09/10/08

Apology Not Accepted says:

Now he is responsible for one of the sleaziest ads I've ever seen in presidential politics, so sleazy that I won't abet its spread by linking to it, but here's the McClatchy fact check.

The McClatchy fact check he links to is Out of bounds! McCain misstates Obama sex-ed record. This is a reference to the McCain ad called “Education” which can be viewed here. This ad claims Obama wants to teach kindergartners about sex.

Objectionable McCain claims:
Obama wants to teach sex-ed to kindergartners (1 reference)

2) The screen says, “truly vile”; Washington Post, Dionne, 09/10/08

Does the Truth Matter Anymore? says:

And now comes a truly vile McCain ad accusing Obama of supporting legislation to offer "'comprehensive sex education' to kindergartners."

Dionne links to the same McClatchy fact check that Klein did about the McCain ad called “Education”.

Although not the source of the “truly vile” comment, the first paragraph of Dionne’s column also refers to two other McCain claims as false:

John McCain and his campaign keep throwing out false charges and making false claims without any qualms. They keep talking about Sarah Palin’s opposition to the Bridge to Nowhere without any embarrassment over the fact that she once supported it. They keep saying that Barack Obama will raise taxes, suggesting he’d raise them on everybody ...

Objectionable McCain claims:
Obama wants to teach sex-ed to kindergartners (2 references)
Palin didn’t really stop the Bridge to Nowhere (1 reference)
Obama will raise taxes on everybody (1 reference)

3) The screen says, “dishonest smears”; The New Republic, Orr, 09/10/08

Animal Farm says:

... an effort by former Massachusetts Governor--and McCain surrogate--Jane Swift to claim Barack Obama was calling Sarah Palin a pig when, discussing McCain's "change" message, he used the common phrase, "You can put lipstick on a pig, but it's still a pig." [snip]

Still, the bogus charge is further evidence--along with McCain's disgraceful new ad--that he intends to run a campaign that's not fit for rats. Can we expect more dishonest smears like this one? Does a bear shit in the woods?

This is a reference to the McCain ad called “Lipstick” and the controversy that prompted it. The ad has been taken down for copyright reasons but you can read the script for it here. This dustup has several permutations. This article speaks specifically about Obama calling Palin a pig. A more general version is that the Obama comment was a sexist swipe at Palin.

This article also links to another TNR article which references the McCain “Education” ad so I’ve counted that one also.

Objectionable McCain claims:
Obama wants to teach sex-ed to kindergartners (3 references)
Palin didn’t really stop the Bridge to Nowhere (1 reference)
Obama will raise taxes on everyone (1 reference)
Obama was taking a swipe at Palin when he talked about putting lipstick on a pig (1 reference)

4) Voiceover says: “that he repeats even after it’s been”; screen says, “exposed as a lie”; CBS, Benen, 09/08/08

Political Animal: The difference between a lie and a mistake says:

To support its claim about Palin having "stopped" the Bridge to Nowhere, the [McCain] ad cites an article from December in the Anchorage Daily News. When one actually looks at the article, one sees that the Daily News piece doesn't support the claim.

In our reality, Palin supported the bridge project, and campaigned on a pledge to build it. The bridge was scrapped, not by Palin, but when an embarrassed Congress stopped the project. Even then, Palin took the money and spent it on other Alaskan transportation projects. Unless the McCain campaign is prepared to change the meaning of the word "stopped," the ad's claim is obviously not true.

But stepping back, it's not just the ad. McCain and Palin have repeated the same claim, over and over again, in a variety of settings, after it was exposed as a lie.

The reference to the December Anchorage Daily News article leads - via an intermediary - to "Palin flies high as reformer", a 2007 article that chronicles Palin’s accomplishments. It does not credit her with stopping the Bridge to Nowhere but does detail other reforms Palin instituted.

Incidentally, I’ve now explained a discrepancy Althouse points out:

7. "Dishonest smears that he repeats, even after it's been exposed as a lie." "Smears" is plural. What's the antecedent for "it's"? I thought Obama's campaign was largely built on his brilliant speaking ability. You've got to write the adscript in solid English -- especially when you're talking about deception and tearing quotes out of context. Otherwise, you are the one we will be suspicious of.

The voiceover is linking two different stories into one sentence. The “dishonest smears” is a prediction of multiple future trangressions by McCain; the “exposed as a lie” is a judgment about a particular McCain claim about Palin and the Bridge to Nowhere.

Objectionable McCain claims:
Obama wants to teach sex-ed to kindergartners (3 references)
Palin didn’t really stop the Bridge to Nowhere (2 reference)
Obama will raise taxes on everyone (1 reference)
Obama was taking a swipe at Palin when he talked about putting lipstick on a pig (1 reference)

5) The screen says, “the truth be damned”; Chicago Tribune, James, 09/10/08

McCain plays dirty on Obama & sex-ed says:

This is an old-fashioned, unreconstructed politics whose goal, first and foremost, is to get the candidate elected, the truth be damned.

This paragraph follows an extensive quote from the McClatchy fact check that Dionne and Klein referenced about the McCain ad called “Education”.

Objectionable McCain claims:
Obama wants to teach sex-ed to kindergartners (4 references)
Palin didn’t really stop the Bridge to Nowhere (2 reference)
Obama will raise taxes on everyone (1 reference)
Obama was taking a swipe at Palin when he talked about putting lipstick on a pig (1 reference)

6) The screen says, A “disgraceful dishonorable campaign”; Washington Post, 08/28/08

I cannot find this reference. The only “disgraceful, dishonorable campaign” reference I found in the Washington Post is a Dionne column, Tiptoeing Through the Mud , dated September 12, 2008. Right quote, wrong date, not counted.

Objectionable McCain claims:
Obama wants to teach sex-ed to kindergartners (4 references)
Palin didn’t really stop the Bridge to Nowhere (2 reference)
Obama will raise taxes (1 reference)
Obama was taking a swipe at Palin when he talked about putting lipstick on a pig (1 reference)

7) The voice over says, “After voting with Bush 90% of the time, proposing the same disastrous economic polices, it seems deception is all he has left.”; the screen says, “deception”; Washington Post, 08/31/08

One word is not much of a clue but given the reference to economic policies, I believe I've found the article to which the ad is referring: Continuing Deception: Mr. McCain’s ads on taxes are just plain false. The word “deception” appears only in the title but the thrust of the argument can be found in this paragraph:

Instead, the McCain campaign insists on completely misrepresenting Mr. Obama's plan. The ad opens with the Obama-as-celebrity theme -- "Celebrities don't have to worry about family budgets, but we sure do," says the female announcer. "We're paying more for food and gas, making it harder to save for college, retirement." Then she sticks it to him: "Obama's solution? Higher taxes, called 'a recipe for economic disaster.' He's ready to raise your taxes but not ready to lead."

The article cites the Tax Policy Center but provides a link only to their front page not to the articles that provide the numbers the articles cites. The ad the article is talking about is “Higher” and can be viewed here.

Objectionable McCain claims:
Obama wants to teach sex-ed to kindergartners (4 references)
Palin didn’t really stop the Bridge to Nowhere (2 references)
Obama will raise taxes (2 references)
Obama was taking a swipe at Palin when he talked about putting lipstick on a pig (1 reference)

So there are the McCain claims that presumably lie behind Obama's "Honor" ad. I certainly don’t believe that any of these four statements represent the highest form of democratic dialogue. At the same time, I don’t understand why they are being singled out as more sleazy, vile, dishonest, disgraceful, deceitful, and dishonorable than statements made in earlier elections, in the party primaries this year, or by the Obama campaign itself. Each of the four statements can be backed up by an argument - you may agree or disagree with the argument but it can be made in each case. Even more important with regard to the claim that these statements are particularly reprehensible, Obama does not come to this discussion with clean hands.

Here’s my take on each statement.

Obama wants to teach sex-ed to kindergartners: As I said in an earlier post, I don’t like the ad and I wish McCain hadn’t run it. Nonetheless, Byron York makes a case that the McCain ad is accurate based on the wording of the bill itself. Furthermore George Will is unconvinced the McCain ad is untrue or misleading. Will goes on to say:

It is very common across the centuries for parents, not schools, parents to tell their children to be aware of strangers. What's new here and reflects a conservative-liberal difference is the idea, a, it has to be tarted up as sex education to be wary of strangers, and b, parents can't but the schools must in the kindergarten. Now that's a cultural divide and let's vote.

Even if you, unlike York and Will, believe this ad is utterly misleading, how is it any worse than Obama’s oft-repeated charge (via Villainous Company) that McCain wants a hundred-year war?

Palin didn’t really stop the Bridge to Nowhere: I haven’t looked at this closely enough myself to have a firm opinion. To read someone who passionately believes Palin is lying about stopping the bridge, see The Daily Howler. (I link to only one article but he continues to discuss this issue almost every day.) For an alternate interpretation, you can read A Tale of Two Bridges. I haven’t compared the timelines of the two accounts.

Even if you firmly believe Palin deserves absolutely no credit for stopping the Bridge to Nowhere, this is an interesting issue for Obama-Biden to raise. Both men voted for the Bridge to Nowhere which is probably justifiable since I assume it was just one part of a larger appropriations package. Less savory is the fact that both men voted against the Coburn amendment that would have transferred some Bridge to Nowhere money to Katrina relief instead.

Obama will raise taxes on everyone: Again, I haven’t looked at this closely enough to have an opinion. If you want to see how the McCain campaign believes it is justified in making this claim, you can check out their Press Releases page (just do a find on “higher” within the page and you’ll hit a handful of items about Obama’s taxes). I took a quick look at this item and based on a very cursory examination it looks to me like McCain is basing his claims of Obama raising taxes on Obama’s past voting record while those who dispute McCain’s claims are considering Obama’s proposed policy changes. Probably a gross over-simplification but you can judge for yourself.

Even if you believe McCain’s statements about Obama’s tax policy are totally without foundation, consider this. Speaking about the current financial problems, McCain said Monday:

You know that there’s been tremendous turmoil in our financial markets and Wall Street.. And it is, people are frightened by these events. Our economy, I think still, the fundamentals of our economy are strong but these are very, very difficult times. And I promise you we will never put America in this position again. We will clean up Wall Street, we will reform government...

Tuesday, the Obama campaign released an ad called “Fundamentals”. The ad quotes only the “fundamentals of our economy are strong” part of McCain’s remarks and then asks, “How can John McCain fix our economy ... if he doesn’t understand it’s broken?”

I fail to see how this new Obama ad is less misleading than even baseless McCain ads about Obama’s tax policy would be.

Obama was taking a swipe at Palin when he talked about putting lipstick on a pig: It is probably the case that the people who paid any attention to this at all split 50/50 on whether Obama was alluding to Palin’s lipstick comment at the Republican National Convention. It is simply not possible to decide whether this claim is true because we can’t read Obama’s mind.

Even if Obama is totally innocent of thinking about Palin when he made this remark, I am absolutely furious that Obama would consider it “dishonorable” for someone to interpret his remark as an insult. Obama was quite eager to ensure that Hillary Clinton’s remark about RFK and June was interpreted as calling for his assassination. If he encouraged such a hideous interpretation in a far, far more serious matter, he has no room to complain about any misinterpretation of his much less consequentional remark.