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Category Archives: economy

If you pumped into my bank account the tens of billions of dollars the Bush and now the Obama administration have pumped into the banks, I’d show a profit too. How can these so-called “profits” be taken seriously?

Update: Oh yeah, I forgot to mention that banks are also borrowing from the Fed at 0% and selling at 4-7%. Again, give me some of that action and I’ll turn a profit too.

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Obama’s Treasury Secretary is scheduled to roll out the administration’s plan to save the financial system tomorrow. The complete details of the plan have now been leaked and reaction is beginning to trickle in. By tomorrow it will be a flood of feedback. The advance take on the plan is that its bad, very bad. Obama was on 60 Minutes pledging his full support of Geithner and he may come to eat those words and soon. What Geithner is coming out with is looking like victory for the zombie banks. The folks at Naked Capitilism, who understand this stuff much better than I, led off with a post titled Investor on Private Public Partnership: “One would have to be a criminal to participate in this”. Neville, a commenter on this post, broke it down to laymans terms like this:

Does anybody remember that the last people who brought in 3% equity partners to take control of an off-balance sheet hedge fund in a no-loss deal designed solely to absorb toxic assets at inflated prices, were sent to jail by the government for misleading the public? Their names were Andrew Fastow, Jeffrey Skilling and a raft of other managers, at Enron.

The goal of their off balance sheet partnerships was to conceal where and when the real losses had occurred and thus who was responsible for them, until some later date when they could either be transferred back onto the public (Enron’s shareholders) in a way they would not notice, or at least after the Enron managers had a chance to unload their shares.

Now we have a virtually identical scheme, but this time it’s being promoted jointly by the banks and the US Treasury. Once again the effort is to construct a vehicle into which toxic assets can be transferred at inflated prices, positioning the public to take the losses while disguising them in the short term, and giving the managers of our biggest banks a chance to both profit now and then sell out ahead of the public.

I know very little about high finance, but this analysis resonates with my gut. If we’re lucky, the administration can be turned from this course. If we’re lucky, the GOP will do more than simply say no, they will come forward with a better plan (note that does not mean ideologically correct) and fight for it.

So says Rep. Paul Kanjorski (D) PA, who was there for the briefings by Paulson and Bernake back in September.

I was there when the secretary and the chairman of the FederalReserve came those days and talked to members of Congress about what was going on… Here’s the facts. We don’t even talk about these things.On Thursday, at about 11 o’clock in the morning, the Federal Reserve noticed a tremendous drawdown of money market accounts in the United States to a tune of $550 billion being drawn out in a matter of an hour or two.The Treasury opened up its window to help. They pumped $105 billion into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks.They decided to close the operation, close down the money accounts,and announce a guarantee of $250,000 per account so there wouldn’t be further panic and there. And that’s what actually happened.If they had not done that their estimation was that by two o’clockthat afternoon, $5.5 trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.Now we talked at that time about what would have happened if that happened. It would have been the end of our economic system and our political system as we know it.….

Ya know, we’re not any geniuses in economics or finances… We’re representatives of people. We ought to take our time, but let the people know this is a very difficult struggle. Somebody threw us into the middle of the Atlantic Ocean without a life raft and we’re trying to determine what’s the closest shore and whether there’s any chance in the world to swim that far. We. Don’t. Know.

Half of America is very wary of the TARP bailout and the other half loathes it and nobody understands the logic going into it. Is it just me, or would it have made a whole lot of sense for there to have been some disclosure of these facts to the public so that there was at least some understanding in the body politic that there was an urgency and an emergency. If the economy is still essentially on as shaky a foundation now as it was apparently in Sept. (if Kanjorski is taken at his word) then Obama’s warnings of imminent disaster if the recovery bill is not passed swiftly are far from the “fear mongering” its been branded on the right from Redstate to Rush. While you might still disagree with Obama’s characterization, in the context revealed by Kanjorski’s comments, you can’t fault him for pressing the case in those tones.

Netflix CEO to President Obama: “Please Raise My Taxes”

My father would say “he must be on dogfood”.  I am a loyal and happy Netflix subscriber and I happen to think Hastings is a great guy, but this is an inordinately stupid thing to say, and more importantly, he does not really mean it.

Hastings makes a million dollars a year, but the bottom line is that he doesn’t really mean he wants the government to take half of that hard earned money right off the top.  And while my fellow brethren think Obama wants all the money and the first born too, we are never going to have fifty percent taxation, so it does not even have the cache of being a bold thing to say.  He’s never going to have to do it, so there is no downside to being ridiculous in this fashion.

Exit thought: Reed, if you’re really that pumped to give up half your dough for the good of the country, why don’t you just send the $500k my way.  I’ll put it to good use stimulating the economy.

Republicans push low-rate mortgage in U.S. stimulus | Economy | Reuters

Mitch McConnel is pushing for a provision in the stimulus bill that would drive down mortgage rates to 4%. 30 year mortgages at that price point would make it easier to purchase a home and for people who refinanced, could save them thousands of dollars over the course of a year of mortgage payments. This is a Political Season Pro Black People Policy Alert

Why should black folks support such a provision? Because the last decade or so has seen a tremendous growth in home ownership and homeonwership remains a traditional path to generational wealth building for the vast majority of Americans. This is perhaps even more true for blacks. The economic downturn is wiping out hard earned wealth gains among blacks as financially devasted families lose their homes. Before this is all over, blacks may lose two generations of wealth gains. A provision such as this one is very much in the interest of black folks to support. Think of it like a 30 year tax break that puts money in your pocket from the get. The even better aspect of this is that it costs the government very little to do it. Because of the economic crisis, investors are parking their money in US Treasury bills as the safest place to keep it for now, which means the government can borrow huge amounts of money at very low rates, like 3%. If they relend that money at 4%, they pass on the benefit of that low cost money to homeowners and the government even makes a little change on the spread. No deficit hit. Its a win win.

Not only should blacks support insertion of this into the stimulus bill though, we need to push a little further in terms of implementation. Many black folk who got mortgages in the last several years got put into sub prime loan products. Sometimes because that was the risk profile of the borrower, but sometimes despite the fact that they could have gotten into a conforming loan. Either way, those mortgages ranging anywhere from 8-11%, are draining black folk dry as they pay these heavy financing costs and leaving even more people exposed to foreclosure, which costs everyone. In addition, I suspect that people who are in sub prime products are more likely to spend the savings they get from refinancing, thereby stimulating the economy with their spending, which is in fact the whole point. This proposal in my view gets even better in terms of impact on black folks if provision is made to get people out of high cost sub prime loan products.

Now, the Heritage Foundation does not like it, and I actually agree with them with regard to doing this to stimulate home sales. Mortgage rates are already quite low, so I think this provision is of marginal benefit on that front. Their other major contention is that its an income transfer from the financial sector to homeowners who don’t really need it, which feels more like an ideological issue that does not help anybody per se, which is why I think the additional twist ought to be providing relief to those stuck in sub prime products. Considering how much income in the form of taxpayer dollars has been transferred INTO the financial sector, I really don’t think its a problem to let some of that circulate back where it came from in the first place.

With a tweak or two, I think this is a good idea and firmly in the interest of black folks to support. Its action time. Call and email your senator and your represenative and the White House. Tell them you support the republican proposal AND that you want provision to be made to make these low cost mortgages available to people stuck in sub prime loan products. Use the links above, get their phone number and call their office now. Ask for the legislative assistant working on housing or on the stimulus and tell them you support Mitch McConnel’s proposal for lowering mortgage rates AND that provisions should be made for people stuck in high cost sub prime mortgage products to refinance out of them, because those people are likely to circulate those savings back into the economy, increasing stimulus. Do it now, do it today.


“Why don’t they just print more money?”

– My nine year old daughter, Lydia, in response to her mother’s explanation of the economic crisis.

Oil prices have now dipped — albeit only briefly — below US$40 a barrel, a precipitous plunge from their highs of more than US$147 a barrel in July. Just as high oil prices reworked the international economic order, low oil prices are now doing the same. Such a sudden onset of low prices impacts the international system just as severely as recent record highs.

But before we dive into the short-term (that is, up to 12 months) impact of the new price environment, we must state our position in the oil price debate. We have long been perplexed about the onward and upward movement of the oil markets from 2005 to 2008. Certainly, global demand was strong, but a variety of factors such as production figures and growing inventories of crude oil seemed to argue against ever-increasing prices. Some of our friends pointed to the complex world of derivatives and futures trading, which they said had created artificial demand. That may well have been true, but the bottom line is that, based on the fundamentals, the oil numbers did not make a great deal of sense.

CHART: Spot Oil Prices for December 2008

Things have clarified a great deal of late. We are now facing an environment in which the United States, Europe and Japan are in recession, while China is, at the very least, expecting to see its growth slow greatly. Demand for crude the world over is sliding sharply even as the Organization of the Petroleum Exporting Countries (OPEC) member states so far seem unable (or, in the case of Saudi Arabia, perhaps unwilling) to make the necessary deep cuts in output that might halt the price slide. The bottom line is that, while the breathtaking speed at which prices have collapsed has caught us somewhat by surprise, the direction and the depth of the plunge has not.

Prices are likely to remain low for some time. Most of the world’s storage facilities — such as the U.S. Strategic Petroleum Reserve — are full to the brim, so large cuts are needed simply to prevent massive oversupply. Yet any OPEC production cuts — the cartel meets Dec. 17 and deep cuts are expected — will take months to have a demonstrable impact, especially in a recessionary environment. And there is the simple issue of scale. The global oil market is a beast: Total demand at present is about 86 million barrels per day. This is not a market that can turn on a dime. A firm fact that flies in the face of conventional wisdom is that oil actually falls far faster than it rises when the fundamentals are out of whack. This has happened on multiple occasions, and not that long ago.

Falls occurred both in the aftermath of the 1990-1991 Persian Gulf War and as a result of the 1997-1998 Asian financial crises that were similar in percentage terms to the present drop. Until the balance between supply and demand is restruck — something not likely until a global economic recovery is well under way — there is no reason to expect a significant price recovery. The journey, of course, is not necessarily a one-way trip. Quirks in everything from weather to shipping to Nigerian riots and Russian military movements can set prices gyrating, but the fundamentals are clearly bearish. It will most likely take several months for the core features of the new reality to change much at all.

CHART: 2008 Oil Production/Consumption
(click image to enlarge)

Low oil prices create both winners and losers on the international scene. First, the winners’ list.

Far and away the biggest winner from drastically lower prices is the world’s largest consumer and importer of oil: the United States. The last two years of high prices have spawned a sustained American consumer effort to get by with less oil via a mix of conservation and a shift to better-mileage vehicles. Whether this purchase pattern in automobiles lasts is not at issue. The point is that it has already happened: Many Americans have already shifted to more fuel-efficient vehicles. Just as the 1990s obsession with sport utility vehicles artificially boosted American gasoline demand so long as those automobiles were on the road, so the new fleet of hybrids and smart cars will push demand in the opposite direction for a sustained period.

Overall U.S. oil consumption has plummeted by nearly 9 percent from its peak in August 2007 to November 2008, according to the U.S. Department of Energy. Combining this with the drop in prices since July translates into U.S. energy savings of approximately US$1.95 billion at a price of US$50 a barrel and US$2.1 billion at a price of US$40 a barrel. And that is daily cost savings. In recessionary times, that cash will go a long way to building confidence and stanching the recession.

Next on the list are the major European importers of crude: Germany, Italy and Spain. As a rule, European economies are less energy-intensive than the United States, but by dint of fuel mix and lack of domestic production these three major states are forced to rely on substantial amounts of imported oil. We exclude the other major European economies from this list as they are either major oil producers themselves (the United Kingdom and the Netherlands) or their economies are extremely oil efficient (France, Belgium and Sweden). Don’t get us wrong — the EU states are all quite pleased that oil prices have dialed back. Nevertheless, in terms of relative gain, Germany, Italy and Spain are the real winners. And with Europe facing a recession much deeper and likely longer than that in the United States, the Europeans need every advant age they can get.

India, far removed from Europe culturally and geographically, sports a somewhat similar economic structure in that it boasts (or suffers from, based on your perspective) an industrializing base that is highly dependent on oil imports. Broadly, the Indians are in the same basket as Spain in that they are voracious energy consumers who have seen their demand skyrocket in recent years. Between the Nov. 26 Mumbai attack, upcoming federal elections and the energy price pain from earlier in the year, the government is desperate to pass on the cost savings to the population to shore up its support.

Then there are the East Asian states of South Korea, China and Japan (listed in descending order of how much each one benefits from the price drop). All import massive amounts of crude oil, but we put them at the end of the list of winners because of their financial systems. In East Asia — and particularly in China and Japan — money is not allocated on the basis of rate of return or profitability as it is in the West. Instead, the concern is maximizing employment. It does not matter much in East Asia if one’s business plan is sound; the government will provide cheap loans so long one employs hordes of people. One side effect of this strategy is that firms can get loans for anything, including raw materials they otherwise could not afford — such as oil at US$147 a barrel.

Therefore, high oil prices just do not affect East Asia as badly as they affect the West. Just as the East Asian financial system mutes the impact of high prices, the converse is true as well. In the West, energy consumers are not shielded from high prices, so lower prices immediately translate into more purchasing power, and thus more economic activity. Not so in East Asia, where the same financial shielding that blunts the impact of high prices lessens the benefits of low prices.

The order in which we listed the three Asian giants relates to how much progress they have made in reforming their financial practices. South Korea’s financial system is much closer to the Western model than the Asian model: South Korea hurts more as prices rise, and so will be more relieved as prices fall. China is in the middle in terms of financial practices, but it is also attempting to unwind its system of energy price-fixing as oil costs drop; due to subsidies being reduced, Chinese consumers actually may not be seeing much of a change in retail prices. Finally, Japan will benefit the least because its system is already highly efficient compared to the other two, so the price impact was less in the first place. One barrel of oil consumed in Japan generates approximately US$2,610 of Japanese gross domestic product (GDP), while the comparative figures for Korea and China are US$1,270 and US$1,130 respectively.

In short, the heavily industrialized Asians still benefit, but the impact isn’t as much as one might think at first glance. In fact, the biggest benefit to these states from cheaper energy is indirect — lower prices spur consumption in the West, and then the West purchases more Asian products.

And now, the losers.

Venezuela and Iran top this list by far. Both are led by politicians who have lavished vast amounts of oil income on their populations to secure their respective political positions. But that public approval has come at its own price in terms of economic dislocation (why diversify the economy if strong oil prices bring in loads of cash?), low employment (the energy sector may be capital-intensive, but it certainly is not labor-intensive), and high inflation (high government spending has led to massive consumption and spurred rampant import of foreign goods to satiate that demand).

Of the two states, Venezuela is certainly in the worse position. By some estimates, Venezuela requires oil prices in the vicinity of US$120 a barrel to maintain the social spending to which its population has become accustomed. Iran’s number may be only somewhat lower, but President Mahmoud Ahmadinejad is in the process of at least beginning to bow to economic reality. On Dec. 5, he announced massive cuts in subsidy outlays with the intent of reforging the budget based on a price of only US$30 a barrel.

It is an open question whether the Iranian government — and especially the increasingly unpopular Ahmadinejad — can survive such cuts (if they are indeed made), but at least there is a public realization of the depth of the crisis at the top level of government. In Venezuela, by contrast, the mitigation process has barely begun, and for political reasons it cannot truly be implemented until after a referendum in early 2009 on term limits that could allow Chavez to run for president indefinitely.

Next is Nigeria. In terms of seeing an increase in human misery, Nigeria should probably be at the top of the losers’ list. But the harsh reality is that Nigerians are used to corrupt government, inadequate infrastructure, spotty power supply and all-around poor conditions. Some of the perks of high energy prices undoubtedly will disappear, but none of those perks succeeded in changing Nigeria in the first place.

The real impact on Nigeria will be that the government will have drastically less money available to grease the political wheels that allow it to keep competing regional and personal interests in check. Those funds have been particularly crucial for funneling cash to the country’s oil-rich Niger Delta region, giving local bosses reason not to hire and/or arm militant groups like the Movement for the Emancipation of the Niger Delta to attack oil and natural gas sites. With Abuja having less cash, the oil regions will see a surge in extortion, kidnapping and oil bunkering (i.e., theft). We already have seen attacks ramp up against the country’s natural gas industry: Within the last few days, attacks against supply points have forced operators to take the Bonny Island liquefied natural gas export facility offline. And since Nigeria’s mil itants never really differentiate between the country’s various forms of energy export, oil disruptions are probably just around the corner.

Russia is also in the crosshairs, but not nearly to the same degree as Venezuela, Iran and Nigeria. Russia has four things going for it that the others lack. First, it exports massive amounts of natural gas and metals, giving it additional income streams. (Venezuela and Iran actually import natural gas and have no real alternative to oil income.) Second, Russia never spent its money on its population. Thus, Russians have not become used to massive government support, so there will be no sharp cuts in public spending that will be missed by the populace. Third, Russia has saved nearly every nickel it made in the past eight years, giving it cash reserves worth some US$750 billion. The financial crisis is hitting Russia hard, so at least US$200 billion of that buffer already has been spent, but Russia still remains in a far better position than m ost oil exporters. Fourth and last, the Russians can rely on Deputy Prime Minister and Finance Minister Alexei Kudrin to (somewhat forcefully) keep the books firmly in balance. At his insistence, the government is in the process of refabricating its three-year budget on the basis of oil prices of below US$35 a barrel, down from the original estimate of US$95.

At the end of the losers’ list we have two states that most people would not think of: Mexico and Canada. Both have other sources of economic activity. Canada is a modern service-based economy with a heavy presence of many commodity industries, while Mexico has become a major manufacturing hub. But both are major oil exporters, and have been leading suppliers to the American economy for decades. So both are exposed, but their concerns are more about unforeseen complications rather than the “simple” quantitative impact of lower prices.

Mexico has purchased derivatives contracts that, in essence, insure the price of all its oil exports for 2009. So should prices remain low, Mexico’s actual income will be unchanged. We only include Mexico on the list of losers, therefore, because it’s quite rare in geopolitics that such planning actually works out as planned. Hurricanes and strikes happen. (Mexico also faces the problem of insufficient funds, expertise and technology to counter rapidly declining output, something that will leave it with a lack of oil to sell in the first place — but that is an issue more for 2012 than 2009.)

As for Canada, most of the oil it produces comes from Alberta province, the seat of power of the ruling Conservative Party. Right now, the Canadian government is wobbling like a slowing top. Seeing the Conservatives’ power base take a massive economic hit due to oil prices is not the sort of complication the government needs right now. In the longer term, Alberta recently increased taxes on oil sands projects. Oil sands extraction is among the more capital-intensive and technologically challenging sorts of oil production currently possible. Combine the tax changes with the nature of the subindustry and the recent price drops and there is likely to be precious little investment interest in oil dur ing — at a minimum — 2009.

Most readers will take note of the countries we have chosen not to include on the list of vulnerable states. These include the bulk of the OPEC states — specifically Angola, Iraq, Kuwait, Saudi Arabia, the United Arab Emirates, Qatar and Libya. All of these states count oil as their only meaningful export (except the United Arab Emirates and Qatar, which also export natural gas), so why do we feel such countries are not in the danger zone?

For its part, Angola only became a major producer recently. Nearly all of Angolan oil output is from offshore projects controlled by foreigners — shutting in such production is a very tricky affair for a country that is utterly reliant on foreign technology to operate its only meaningful industry. But the primary reason Angola is not feeling the heat is that most of its income has not been spent but instead has been stashed away due to a lack of the necessary physical and personnel infrastructure needed to leverage the income.

Iraq is in a somewhat similar position as far as finances are concerned. While Iraq has been producing crude for decades, its current government is only a few years old, and its institutions simply cannot allocate the monies involved. Despite massive outlays by both Iraq and Angola, their respective governments simply lack the capacity to spend, and so have stored up cash accounts worth US$26 billion and US$54 billion respectively.

The rest of the Arab oil producers warrant a much simpler explanation: They’ve been fiscally conservative. While all have shared the wealth with their somewhat restive populations, none of them has repeated the mistakes of the 1970s, when they overspent on gaudy buildings and overcommitted themselves to expensive social programs. All have been saving vast amounts of cash, with the Saudis alone probably having more than US$1 trillion socked away. Tiny Kuwait officially has a wealth fund worth more than US$250 billion.

So while none of the Arab oil states are particularly thrilled with the direction — and in particular the speed — oil prices have gone, none of these governments faces a mortal danger at this time. What they are now missing is the ability to make a substantial impact on the world around them. At oil’s height the Gulf Arab oil producers were taking in US$2 billion a day in revenues — far more cash than they could ever hope to metabolize themselves. Bribes are powerful tools of foreign policy, and their income allowed them — particularly Saudi Arabia — to wield outsized influence in Iraq, Syria, Lebanon, and even in Beijing, London and Washington. So while none of these states faces a meltdown from falling prices, there are certainly some hangovers in store for them. It is jus t that they are more political than economic in nature, at least for now.

“If government is “for the people”, then it needs to do its job. And in case anyone in the government has forgotten why they went to Washington, I will give you a news flash – your real job isn’t to feed us when we are on the bread lines, but to keep us off of them in the first place.”

– Brown Man Thinking Hard

By George Friedman ~ Honorary Political Season Contributor

Three weeks after the U.S. presidential election, we are getting the first signs of how President-elect Barack Obama will govern. That now goes well beyond the question of what is conventionally considered U.S. foreign policy — and thus beyond Stratfor’s domain. At this moment in history, however, in the face of the global financial crisis, U.S. domestic policy is intimately bound to foreign policy. How the United States deals with its own internal financial and economic problems will directly affect the rest of the world.

One thing the financial crisis has demonstrated is that the world is very much America-centric, in fact and not just in theory. When the United States runs into trouble, so does the rest of the globe. It follows then that the U.S. response to the problem affects the rest of the world as well. Therefore, Obama’s plans are in many ways more important to countries around the world than whatever their own governments might be planning.

Over the past two weeks, Obama has begun to reveal his appointments. It will be Hillary Clinton at State and Timothy Geithner at Treasury. According to persistent rumors, current Defense Secretary Robert Gates might be asked to stay on. The national security adviser has not been announced, but rumors have the post going to former Clinton administration appointees or to former military people. Interestingly and revealingly, it was made very public that Obama has met with Brent Scowcroft to discuss foreign policy. Scowcroft was national security adviser under President George H.W. Bush, and while a critic of the younger Bush’s policies in Iraq from the beginning, he is very much part of the foreign policy establishment and on the non-neoconservative right. That Obama met with Scowcroft, and that this was deliberately publicized, is a signal — and Obama understands political signals — that he will be conducting foreign policy from the center.

Consider Clinton and Geithner. Clinton voted to authorize the Iraq war — a major bone of contention between Obama and her during the primaries. She is also a committed free trade advocate, as was her husband, and strongly supports continuity in U.S. policy toward Israel and Iran. Geithner comes from the Federal Reserve Bank of New York, where he participated in crafting the strategies currently being implemented by U.S. Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson. Everything Obama is doing with his appointments is signaling continuity in U.S. policy.

This does not surprise us. As we have written previously, when Obama’s precise statements and position papers were examined with care, the distance between his policies and John McCain’s actually was minimal. McCain tacked with the Bush administration’s position on Iraq — which had shifted, by the summer of this year, to withdrawal at the earliest possible moment but without a public guarantee of the date. Obama’s position was a complete withdrawal by the summer of 2010, with the proviso that unexpected changes in the situation on the ground could make that date flexible.

Obama supporters believed that Obama’s position on Iraq was profoundly at odds with the Bush administration’s. We could never clearly locate the difference. The brilliance of Obama’s presidential campaign was that he convinced his hard-core supporters that he intended to make a radical shift in policies across the board, without ever specifying what policies he was planning to shift, and never locking out the possibility of a flexible interpretation of his commitments. His supporters heard what they wanted to hear while a careful reading of the language, written and spoken, gave Obama extensive room for maneuver. Obama’s campaign was a master class on mobilizing support in an election without locking oneself into specific policies.

As soon as the election results were in, Obama understood that he was in a difficult political situation. Institutionally, the Democrats had won substantial victories, both in Congress and the presidency. Personally, Obama had won two very narrow victories. He had won the Democratic nomination by a very thin margin, and then won the general election by a fairly thin margin in the popular vote, despite a wide victory in the electoral college.

Many people have pointed out that Obama won more decisively than any president since George H.W. Bush in 1988. That is certainly true. Bill Clinton always had more people voting against him than for him, because of the presence of Ross Perot on the ballot in 1992 and 1996. George W. Bush actually lost the popular vote by a tiny margin in 2000; he won it in 2004 with nearly 51 percent of the vote but had more than 49 percent of the electorate voting against him. Obama did a little better than that, with about 53 percent of voters supporting him and 47 percent opposing, but he did not change the basic architecture of American politics. He still had won the presidency with a deeply divided electorate, with almost as many people opposed to him as for him.

Presidents are not as powerful as they are often imagined to be. Apart from institutional constraints, presidents must constantly deal with public opinion. Congress is watching the polls, as all of the representatives and a third of the senators will be running for re-election in two years. No matter how many Democrats are in Congress, their first loyalty is to their own careers, and collapsing public opinion polls for a Democratic president can destroy them. Knowing this, they have a strong incentive to oppose an unpopular president — even one from their own party — or they might be replaced with others who will oppose him. If Obama wants to be powerful, he must keep Congress on his side, and that means he must keep his numbers up. He is undoubtedly getting the honeymoon bounce now. He needs to hold that.

Obama appears to understand this problem clearly. It would take a very small shift in public opinion polls after the election to put him on the defensive, and any substantial mistakes could sink his approval rating into the low 40s. George W. Bush’s basic political mistake in 2004 was not understanding how thin his margin was. He took his election as vindication of his Iraq policy, without understanding how rapidly his mandate could transform itself in a profound reversal of public opinion. Having very little margin in his public opinion polls, Bush doubled down on his Iraq policy. When that failed to pay off, he ended up with a failed presidency.

Bush was not expecting that to happen, and Obama does not expect it for himself. Obama, however, has drawn the obvious conclusion that what he expects and what might happen are two different things. Therefore, unlike Bush, he appears to be trying to expand his approval ratings as his first priority, in order to give himself room for maneuver later. Everything we see in his first two weeks of shaping his presidency seems to be designed two do two things: increase his standing in the Democratic Party, and try to bring some of those who voted against him into his coalition.

In looking at Obama’s supporters, we can divide them into two blocs. The first and largest comprises those who were won over by his persona; they supported Obama because of who he was, rather than because of any particular policy position or because of his ideology in anything more than a general sense. There was then a smaller group of supporters who backed Obama for ideological reasons, built around specific policies they believed he advocated. Obama seems to think, reasonably in our view, that the first group will remain faithful for an extended period of time so long as he maintains the aura he cultivated during his campaign, regardless of his early policy moves. The second group, as is usually the case with the ideological/policy faction in a party, will stay with Obama because they have nowhere else to go — or if they turn away, they will not be able to form a faction that threatens his position.

What Obama needs to do politically, then, is protect and strengthen the right wing of his coalition: independents and republicans who voted for him because they had come to oppose Bush and, by extension, McCain. Second, he needs to persuade at least 5 percent of the electorate who voted for McCain that their fears of an Obama presidency were misplaced. Obama needs to build a positive rating at least into the mid-to-high 50s to give him a firm base for governing, and leave himself room to make the mistakes that all presidents make in due course.

With the example of Bush’s failure before him, as well as Bill Clinton’s disastrous experience in the 1994 mid-term election, Obama is under significant constraints in shaping his presidency. His selection of Hillary Clinton is meant to nail down the rightward wing of his supporters in general, and Clinton supporters in particular. His appointment of Geithner at the Treasury and the rumored re-appointment of Gates as secretary of defense are designed to reassure the leftward wing of McCain supporters that he is not going off on a radical tear. Obama’s gamble is that (to select some arbitrary numbers), for every alienated ideological liberal, he will win over two lukewarm McCain supporters.

To those who celebrate Obama as a conciliator, these appointments will resonate. For those supporters who saw him as a fellow ideologue, he can point to position papers far more moderate and nuanced than what those supporters believed they were hearing (and were meant to hear). One of the political uses of rhetoric is to persuade followers that you believe what they do without locking yourself down.

His appointments match the evolving realities. On the financial bailout, Obama has not at all challenged the general strategy of Paulson and Bernanke, and therefore of the Bush administration. Obama’s position on Iraq has fairly well merged with the pending Status of Forces Agreement in Iraq. On Afghanistan, Central Command chief Gen. David Petraeus has suggested negotiations with the Taliban — while, in moves that would not have been made unless they were in accord with Bush administration policies, Afghan President Hamid Karzai has offered to talk with Taliban leader Mullah Omar, and the Saudis reportedly have offered him asylum. Tensions with Iran have declined, and the Israelis have even said they would not object to negotiations with Tehran. What were radical positions in the opening days of Obama’s campaign have become consensus positions. That means he is not entering the White House in a combat posture, facing a disciplined opposition waiting to bring him down. Rather, his most important positions have become, if not noncontroversial, then certainly not as controversial as they once were.

Instead, the most important issue facing Obama is one on which he really had no position during his campaign: how to deal with the economic crisis. His solution, which has begun to emerge over the last two weeks, is a massive stimulus package as an addition — not an alternative — to the financial bailout the Bush administration crafted. This new stimulus package is not intended to deal with the financial crisis but with the recession, and it is a classic Democratic strategy designed to generate economic activity through federal programs. What is not clear is where this leaves Obama’s tax policy. We suspect, some recent suggestions by his aides not withstanding, that he will have a tax cut for middle- and lower-income individuals while increasing tax rates on higher income brackets in order to try to limit deficits.

What is fascinating to see is how the policies Obama advocated during the campaign have become relatively unimportant, while the issues he will have to deal with as president really were not discussed in the campaign until September, and then without any clear insight as to his intentions. One point we have made repeatedly is that a presidential candidate’s positions during a campaign matter relatively little, because there is only a minimal connection between the issues a president thinks he will face in office and the ones that he actually has to deal with. George W. Bush thought he would be dealing primarily with domestic politics, but his presidency turned out to be all about the U.S.-jihadist war, something he never anticipated. Obama began his campaign by strongly opposing the Iraq war — something that has now be come far less important than the financial crisis, which he didn’t anticipate dealing with at all.

So, regardless of what Obama might have thought his presidency would look like, it is being shaped not by his wishes, but by his response to external factors. He must increase his political base — and he will do that by reassuring skeptical Democrats that he can work with Hillary Clinton, and by showing soft McCain supporters that he is not as radical as they thought. Each of Obama’s appointments is designed to increase his base of political support, because he has little choice if he wants to accomplish anything else.

As for policies, they come and go. As George W. Bush demonstrated, an inflexible president is a failed president. He can call it principle, but if his principles result in failure, he will be judged by his failure and not by his principles. Obama has clearly learned this lesson. He understands that a president can’t pursue his principles if he has lost the ability to govern. To keep that ability, he must build his coalition. Then he must deal with the unexpected. And later, if he is lucky, he can return to his principles, if there is time for it, and if those principles have any relevance to what is going on around him. History makes presidents. Presidents rarely make history.

Thats right folks. He’s not black. Or at least not any longer in any real way that matters to me. Now, he’s the President of the United States. Now, its all about the job baby. I don’t care if he ever shows up at another Negro chicken dinner for the next 4 years. I don’t care if he doesn’t make the King memorial gig next year, or deliver a commencement address at an HBCU. If he can fit that stuff in, thats cool. But to me, its all about the job now. The economy, the war, security, the environment, energy, health care, this is what its about. His blackness now means absolute bupkis to me. Its time to govern. Now…I’m all about his effectiveness.