Year: 2005

BURSTS NEXT JUNE 30

Michael Axelrod: ‘You might want to read this. I know it’s pretty technical, but the graphs and discussion are perfectly readable. The authors say the US housing bubble should end in the middle of next year. They found evidence of a housing bubble in 22 states. In 2003, they found no evidence of a US housing bubble. They say they correctly predicted the end of the UK housing bubble. Note that the end of the bubble does not necessarily mean that housing prices will collapse, although that is certainly a possibility. (The authors are physicists, not economists. They are researchers in a new subject called ‘econophysics.’ This discipline uses mathematical methods popular in statistical physics and nonlinear mechanics (chaos theory). The idea behind their approach is positive feedback. As prices rise, more people buy which drives up prices even more. When this ‘momentum’ gets too great you get a bubble which is an unstable condition that can’t last because counter forces build up to stop. Naturally, econonphysics is controversial. The mainstream economists sneer at it, but I think there is some substance.)’

THE ECONOMIST‘S VIEW

The global housing boom
In come the waves
Jun 16th 2005
From The Economist print edition

The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops.

NEVER before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stockmarket bubble burst in 2000. What if the housing boom now turns to bust?

According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries’ combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America’s stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.

The global boom in house prices has been driven by two common factors: historically low interest rates have encouraged home buyers to borrow more money; and households have lost faith in equities after stockmarkets plunged, making property look attractive. Will prices now fall, or simply flatten off? And in either case, what will be the consequences for economies around the globe? The likely answers to all these questions are not comforting.

The increasing importance of house prices in the world economy prompted The Economist to start publishing a set of global house-price indices in 2002 (see article). These now cover 20 countries, using data from lending institutions, estate agents and national statistics. Our latest quarterly update shows that home prices continue to rise by 10% or more in half of the countries (see table). America has seen one of the biggest increases in house-price inflation over the past year, with the average price of homes jumping by 12.5% in the year to the first quarter. In California, Florida, Nevada. Hawaii, Maryland and Washington, DC, they soared by more than 20%.

In Europe, prices have long been at dizzy heights in Ireland and Spain, but over the past year have also spurted at rates of 9% or more in France, Italy, Belgium, Denmark and Sweden. Both France (15%) and Spain (15.5%) have faster house-price inflation than the United States.

By contrast, some housing booms have now fizzled out. In Australia, according to official figures, the 12-month rate of increase in house prices slowed sharply to only 0.4% in the first quarter of this year, down from almost 20% in late 2003. Wishful thinkers call this a soft landing, but another index, calculated by the Commonwealth Bank of Australia, which is based on prices when contracts are agreed rather than at settlement, shows that average house prices have actually fallen by 7% since 2003; prices in once-hot Sydney have plunged by 16%.

Britain’s housing market has also cooled rapidly. The Nationwide index, which we use, rose by 5.5% in the year to May, down from 20% growth in July 2004. But once again, other surveys offer a gloomier picture. The Royal Institution of Chartered Surveyors (RICS) reports that prices have fallen for ten consecutive months, with a net balance of 49% of surveyors reporting falling prices in May, the weakest number since 1992 during Britain’s previous house-price bust. The volume of sales has slumped by one-third compared with a year ago as both sellers and buyers have lost confidence in house valuations. House-price inflation has also slowed significantly in Ireland, the Netherlands and New Zealand over the past year.

Since 1997, home prices in most countries have risen by much more in real terms (ie, after adjusting for inflation) than during any previous boom. (The glaring exceptions are Germany and Japan, where prices have been falling.) American prices have risen by less than those in Britain, yet this is still by far the biggest boom in American history, with real gains more than three times bigger than in previous housing booms in the 1970s or the 1980s.

The most compelling evidence that home prices are over-valued in many countries is the diverging relationship between house prices and rents. The ratio of prices to rents is a sort of price/earnings ratio for the housing market. Just as the price of a share should equal the discounted present value of future dividends, so the price of a house should reflect the future benefits of ownership, either as rental income for an investor or the rent saved by an owner-occupier.

Calculations by The Economist show that house prices have hit record levels in relation to rents in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. This suggests that homes are even more over-valued than at previous peaks, from which prices typically fell in real terms. House prices are also at record levels in relation to incomes in these nine countries.

America‘s ratio of prices to rents is 35% above its average level during 1975-2000 (see chart 1). By the same gauge, property is ‘overvalued’ by 50% or more in Britain, Australia and Spain. Rental yields have fallen to well below current mortgage rates, making it impossible for many landlords to make money.

To bring the ratio of prices to rents back to some sort of fair value, either rents must rise sharply or prices must fall. After many previous house-price booms most of the adjustment came through inflation pushing up rents and incomes, while home prices stayed broadly flat. But today, with inflation much lower, a similar process would take years. For example, if rents rise by an annual 2.5%, house prices would need to remain flat for 12 years to bring America’s ratio of house prices to rents back to its long-term norm. Elsewhere it would take even longer. It seems more likely, then, that prices will fall.

A common objection to this analysis is that low interest rates make buying a home cheaper and so justify higher prices in relation to rents. But this argument is incorrectly based on nominal, not real, interest rates and so ignores the impact of inflation in eroding the real burden of mortgage debt. If real interest rates are permanently lower, this could indeed justify higher prices in relation to rents or income. For example, real rates in Ireland and Spain were reduced significantly by these countries’ membership of Europe’s single currency-though not by enough to explain all of the surge in house prices. But in America and Britain, real after-tax interest rates are not especially low by historical standards.

Betting the house

America’s housing market heated up later than those in other countries, such as Britain and Australia, but it is now looking more and more similar. Even the Federal Reserve is at last starting to fret about what is happening. Prices are being driven by speculative demand. A study by the National Association of Realtors (NAR) found that 23% of all American houses bought in 2004 were for investment, not owner-occupation. Another 13% were bought as second homes. Investors are prepared to buy houses they will rent out at a loss, just because they think prices will keep rising-the very definition of a financial bubble. ‘Flippers’ buy and sell new properties even before they are built in the hope of a large gain. In Miami, as many as half of the original buyers resell new apartments in this way. Many properties change hands two or three times before somebody finally moves in.

New, riskier forms of mortgage finance also allow buyers to borrow more. According to the NAR, 42% of all first-time buyers and 25% of all buyers made no down-payment on their home purchase last year. Indeed, homebuyers can get 105% loans to cover buying costs. And, increasingly, little or no documentation of a borrower’s assets, employment and income is required for a loan.

Interest-only mortgages are all the rage, along with so-called ‘negative amortisation loans’ (the buyer pays less than the interest due and the unpaid principal and interest is added on to the loan). After an initial period, payments surge as principal repayment kicks in. In California, over 60% of all new mortgages this year are interest-only or negative-amortisation, up from 8% in 2002. The national figure is one-third. The new loans are essentially a gamble that prices will continue to rise rapidly, allowing the borrower to sell the home at a profit or refinance before any principal has to be repaid. Such loans are usually adjustable-rate mortgages (ARMs), which leave the borrower additionally exposed to higher interest rates. This year, ARMs have risen to 50% of all mortgages in those states with the biggest price rises.

The rapid house-price inflation of recent years is clearly unsustainable, yet most economists in most countries (even in Britain and Australia, where prices are already falling) still cling to the hope that house prices will flatten rather than collapse. It is true that, unlike share prices, house prices tend to be somewhat ‘sticky’ downwards. People have to live somewhere and owners are loath to accept a capital loss. As long as they can afford their mortgage payments, they will stay put until conditions improve. The snag is that eventually some owners have to sell-because of relocation, or job loss-and they will be forced to accept lower prices.

Indeed, a drop in nominal prices is today more likely than after previous booms for three reasons: homes are more overvalued; inflation is much lower; and many more people have been buying houses as an investment. If house prices stop rising or start to fall, owner-occupiers will largely stay put, but over-exposed investors are more likely to sell, especially if rents do not cover their interest payments. House prices will not collapse overnight like stockmarkets – a slow puncture is more likely. But over the next five years, several countries are likely to experience price falls of 20% or more.

While America’s housing market is still red hot, others – in Britain, Australia and the Netherlands-have already cooled (see chart 2). What lessons might they offer the United States?

The first is that, contrary to conventional wisdom, it does not require a trigger, such as a big rise in interest rates or unemployment, for house prices to decline. British home prices started to fall in the summer of 2004 after the Bank of England raised rates by a modest one and a quarter percentage points. Since 2002, the Reserve Bank of Australia has raised rates by exactly the same amount and unemployment is at a 30-year low, yet home prices have fallen. The Federal Reserve’s gradual increase in rates by two percentage-points over the past year has done little to scare away buyers, because most still have fixed-rate mortgages and long-term bond yields have remained unusually low. But as more Americans have been resorting to ARMs, so the housing market is becoming more vulnerable to rising rates.

Rung at the bottom

British and Australian prices have stalled mainly because first-time buyers have been priced out of the market and demand from buy-to-let investors has slumped. British first-timers now account for only 29% of buyers, down from 50% in 1999. And, according to the National Association of Estate Agents, buy-to-let purchases are running 50% lower than a year ago. As prices become more and more heady in America, the same will happen there.

British experience also undermines a popular argument in America that house prices must keeping rising because there is a limited supply of land and a growing number of households. As recently as a year ago, it was similarly argued that the supply of houses in Britain could not keep up with demand. But as the expectation of rising prices has faded, demand has slumped. According to RICS, the stock of houses for sale has increased by one-third over the past year. America has faster population growth than Britain, but its supply of housing has also been rising rapidly. Economists at Goldman Sachs point out that residential investment is at a 40-year high in America, yet the number of households is growing at its slowest pace for 40 years. This will create excess supply.

Another mantra of housing bulls in America is that national average house prices have never fallen for a full year since modern statistics began. Yet outside America, many countries have at some time experienced a drop in average house prices, such as Britain and Sweden in the early 1990s and Japan over the past decade. So why should America be immune? Alan Greenspan, chairman of America’s Federal Reserve, accepts that there are some local bubbles, but dismisses the idea of a national housing bubble that could harm the whole economy if it bursts. America has in the past seen sharp regional price declines, for example in Boston, Manhattan and San Francisco in the early 1990s. This time, with prices looking overvalued in more states than ever in the past, average American prices may well fall for the first time since the Great Depression.

But even if prices in America do dip, insist the optimists, they will quickly resume their rising trend, because real house prices always rise strongly in the long term. Robert Shiller, a Yale economist, who has just updated his book ‘Irrational Exuberance’ (first published on the eve of the stockmarket collapse in 2000), disagrees. He estimates that house prices in America rose by an annual average of only 0.4% in real terms between 1890 and 2004. And if the current boom is stripped out of the figures, along with the period after the second world war when the government offered subsidies for returning soldiers, artificially inflating prices, real house prices have been flat or falling most of the time. Another sobering warning is that after British house prices fell in the early 1990s, it took at least a decade before they returned to their previous peak, after adjusting for inflation.

Another worrying lesson from abroad for America is that even a mere leveling-off of house prices can trigger a sharp slowdown in consumer spending. Take the Netherlands. In the late 1990s, the booming Dutch economy was heralded as a model of success. At the time, both house prices and household credit were rising at double-digit rates. The rate of Dutch house-price inflation then slowed from 20% in 2000 to nearly zero by 2003. This appeared to be the perfect soft landing: prices did not drop. Yet consumer spending declined in 2003, pushing the economy into recession, from which it has still not recovered. When house prices had been rising, borrowing against capital gains on homes to finance other spending had surged. Although house prices did not fall, this housing-equity withdrawal plunged after 2001, removing a powerful stimulus to spending.

Housing-equity withdrawal has also fallen sharply over the past year in Britain and Australia, denting household spending. In Australia, the 12-month rate of growth in retail sales has slowed from 8% to only 1.8% over the past year; GDP growth has halved to 1.9%. In Britain, too, a cooling of the housing market has been accompanied by an abrupt slowdown in consumer spending. If, as seems likely, home prices continue to fall in both countries, spending will be further squeezed.

Even a modest weakening of house prices in America would hurt consumer spending, because homeowners have been cashing out their capital gains at a record pace. Goldman Sachs estimates that total housing-equity withdrawal rose to 7.4% of personal disposable income in 2004. If prices stop rising, this ‘income’ from capital gains will vanish.

And after the gold rush?

The housing market has played such a big role in propping up America’s economy that a sharp slowdown in house prices is likely to have severe consequences. Over the past four years, consumer spending and residential construction have together accounted for 90% of the total growth in GDP. And over two-fifths of all private-sector jobs created since 2001 have been in housing-related sectors, such as construction, real estate and mortgage broking.

One of the best international studies of how house-price busts can hurt economies has been done by the International Monetary Fund. Analysing house prices in 14 countries during 1970-2001, it identified 20 examples of ‘busts’, when real prices fell by almost 30% on average (the fall in nominal prices was smaller). All but one of those housing busts led to a recession, with GDP after three years falling to an average of 8% below its previous growth trend. America was the only country to avoid a boom and bust during that period. This time it looks likely to join the club.

Japan provides a nasty warning of what can happen when boom turns to bust. Japanese property prices have dropped for 14 years in a row, by 40% from their peak in 1991. Yet the rise in prices in Japan during the decade before 1991 was less than the increase over the past ten years in most of the countries that have experienced housing booms (see chart 3). And it is surely no coincidence that Japan and Germany, the two countries where house prices have fallen for most of the past decade, have had the weakest growth in consumer spending of all developed economies over that period. Americans who believe that house prices can only go up and pose no risk to their economy would be well advised to look overseas.

© The Economist Newspaper Limited 2005

WHAT BUBBLE?

Jeff: ‘I’ve been reading about the ‘real estate bubble’ since 2001 now and, regretfully, held off buying because of it. The reason I regret it is that I’ve recently realized that all the measures of too high prices, including the ones in the article you linked to, are bogus. They measure things like house value to income, but never measure mortgage payments to income. And since it now appears that there won’t be any serious inflation – at least not soon, and maybe not for a while – I don’t see people with today’s variable rate mortgages being unable to keep up with their payments. Available property around the big cities is not being suddenly created – and where it is, it’s too far from the big cities. I wonder if I’ve made the right decision, and if you are advising your readers correctly that this bubble is unsustainable. Even if prices just level off for a long time, the person who didn’t buy just before the top (where they leveled off) still paid more than if he had bought during the bubble.’

FUN VIDEO

Click here (thanks, Marty) and then at bottom right of the video screen click LYRICS to make Billy Joel easier to follow.

MOLLY IVINS ON KARL ROVE AND IRAQ

Click here.

JULY FOURTH

I hope you have a great weekend. Don’t forget to read the Declaration of Independence out loud with your family or friends – at least the first part.

EMINENT DOMAIN

In case you missed this comment on the recent 5-4 decision:

Weare, New Hampshire (PRWEB) – Could a hotel be built on the land owned by Supreme Court Justice David H. Souter? A new ruling by the Supreme Court which was supported by Justice Souter himself itself might allow it. A private developer is seeking to use this very law to build a hotel on Souter’s land.

Justice Souter’s vote in the “Kelo vs. City of New London” decision allows city governments to take land from one private owner and give it to another if the government will generate greater tax revenue or other economic benefits when the land is developed by the new owner.

On Monday June 27, Logan Darrow Clements, faxed a request to Chip Meany the code enforcement officer of the Towne of Weare, New Hampshire seeking to start the application process to build a hotel on 34 Cilley Hill Road. This is the present location of Mr. Souter’s home.

Clements, CEO of Freestar Media, LLC, points out that the City of Weare will certainly gain greater tax revenue and economic benefits with a hotel on 34 Cilley Hill Road than allowing Mr. Souter to own the land.

The proposed development, called “The Lost Liberty Hotel” will feature the “Just Desserts Café” and include a museum, open to the public, featuring a permanent exhibit on the loss of freedom in America. Instead of a Gideon’s Bible each guest will receive a free copy of Ayn Rand’s novel “Atlas Shrugged.”

Clements indicated that the hotel must be built on this particular piece of land because it is a unique site being the home of someone largely responsible for destroying property rights for all Americans.

“This is not a prank” said Clements, “The Towne of Weare has five people on the Board of Selectmen. If three of them vote to use the power of eminent domain to take this land from Mr. Souter we can begin our hotel development.”

Clements’ plan is to raise investment capital from wealthy pro-liberty investors and draw up architectural plans. These plans would then be used to raise investment capital for the project. Clements hopes that regular customers of the hotel might include supporters of the Institute For Justice and participants in the Free State Project among others.

FINDING NPR

Gary Diehl: ‘Since there has been some interest in the ‘This American Life’ piece on National Public Radio, you might note that NPR can always be found between 89.1 and 89.9 on the FM dial. (This is enormously handy on those long road trips.) It can also be heard anywhere in the world here: npr.org.’

DARYL’S DISAPPOINTMENT

Daryl M: ‘Sorry to see you are a Democrat. Must have inherited your wealth certainly did not earn it I am very disappointed in you.’

☞ Actually, I did earn it. Democrats Steve Jobs and Warren Buffett earned considerably more. Why would you even SEND a dumb e-mail like that? I have to assume you were not having your best day. No problem. I have bad days, too. But why not send a more substantive e-mail? For starters, let me know your thoughts on the Republican leadership’s $700 billion annual deficit . . . its failure to catch Bin Laden after nearly 4 years . . . and its effort to seek a global ban on embryonic stem cell research.

ALMOST MAKES YOU WANT TO PUCHA

There are those who believe the Democrats are trying to bring back the 1990s while the Republican leadership would prefer the 1890s. Here is one more example. (Hint: they want to repeal the law Samuel Insull inspired.)

We learned quite some time ago that the ‘humble foreign policy’ the Republican leader promised us began with his very first National Security Council meeting a few days after taking office, the agenda for which was Iraq. (Bin Laden – against the threat of whom the incoming President and Vice President had been warned in urgent terms by the CIA on January 7, 2001, at Blair House – was nowhere on the agenda.)

This is long before 9/11, and it makes it clear to many of us that there were TWO great lies: the first, domestically, was that ‘by far the vast majority’ of the benefit of the proposed tax cuts ‘would go to people at the bottom of the economic ladder.’ That was a complete, knowing lie. By far the vast majority of the benefit of the tax cuts has gone to people at the very top of the economic ladder. It is a trillion dollar lie masking a fundamental shift of resources away from average Americans to the group already best off.

The second lie, internationally, was this humble foreign policy deal and the way we were taken to war. The facts and spin were fixed around the policy – a policy the Republican Administration had been looking to implement long before 9/11 (witness that first National Security Council agenda). As you’ll see from what follows, in a moment, there’s more to the Downing Street memo than that one quote.

But let us acknowledge that there is much more to be dismayed about than just these two points. There is, for example, the effort to impede stem cell research – but at least that is out in the open and based on conviction (if not the Administration’s conviction, that of their key constituency).

And there was the sudden ‘energy crisis’ that arose in California (a deep blue state) and drained billions and billions of dollars to oil companies in Texas (a deep red one) right after the election, and which it was explicitly in the power of the Federal Energy Regulatory Commission to avert. Boy, would I like to know what went on in those secret Cheney energy meetings, a list of whose participants even a subpoena from the General Accounting Office could not pry loose.

(As bad as things have gotten in the world after those 19 Saudis did the unthinkable on September 11, for one group – the Texas oil interests and Saudi royal family with whom the Bushes are so tightly tied – these last few years been the greatest bonanza in history. Literally. A coincidence, one assumes, but, at the least, ruefully ironic.)

And there is this: Even if you agree that we needed to attack Iraq rather than topple Saddam more along the lines of the way we toppled Slobodan Milosovich – and had, therefore, to invent the justification to do so – what are we to think of the planning and execution of the effort?

We really did rush to war without a plan to win the peace, with disastrous results that have greatly weakened our country and jeopardized our security and our prosperity. The Republican leadership ignored the advice of generals who would have sent enough troops to do fundamental things like securing ammunition dumps and national treasures . . . relying instead on advice from people like ‘Curveball.’ We pumped billions into Halliburton but failed to employ ordinary Iraqis (or the Iraqi army), who would have worked a lot cheaper and – employed – been far more supportive. We had no plan for what to do in case we weren’t greeted with flowers. Our soldiers have been magnificent. Their civilian leaders have done our country grave harm.

So here’s the latest, from the Los Angeles Times:

COMMENTARY
The Real News in the Downing Street Memos
By Michael Smith
Michael Smith writes on defense issues for the Sunday Times of London.

June 23, 2005

It is now nine months since I obtained the first of the “Downing Street memos,” thrust into my hand by someone who asked me to meet him in a quiet watering hole in London for what I imagined would just be a friendly drink.

At the time, I was defense correspondent of the London Daily Telegraph, and a staunch supporter of the decision to oust Saddam Hussein. The source was a friend. He’d given me a few stories before but nothing nearly as interesting as this.

The six leaked documents I took away with me that night were to change completely my opinion of the decision to go to war and the honesty of Prime Minister Tony Blair and President Bush.

They focused on the period leading up to the Crawford, Texas, summit between Blair and Bush in early April 2002, and were most striking for the way in which British officials warned the prime minister, with remarkable prescience, what a mess post-war Iraq would become. Even by the cynical standards of realpolitik, the decision to overrule this expert advice seemed to be criminal.

The second batch of leaks arrived in the middle of this year’s British general election, by which time I was writing for a different newspaper, the Sunday Times. These documents, which came from a different source, related to a crucial meeting of Blair’s war Cabinet on July 23, 2002. The timing of the leak was significant, with Blair clearly in electoral difficulties because of an unpopular war.

I did not then regard the now-infamous memo – the one that includes the minutes of the July 23 meeting – as the most important. My main article focused on the separate briefing paper for those taking part, prepared beforehand by Cabinet Office experts.

It said that Blair agreed at Crawford that “the UK would support military action to bring about regime change.” Because this was illegal, the officials noted, it was “necessary to create the conditions in which we could legally support military action.”

But Downing Street had a “clever” plan that it hoped would trap Hussein into giving the allies the excuse they needed to go to war. It would persuade the U.N. Security Council to give the Iraqi leader an ultimatum to let in the weapons inspectors.

Although Blair and Bush still insist the decision to go to the U.N. was about averting war, one memo states that it was, in fact, about “wrong-footing” Hussein into giving them a legal justification for war.

British officials hoped the ultimatum could be framed in words that would be so unacceptable to Hussein that he would reject it outright. But they were far from certain this would work, so there was also a Plan B.

American media coverage of the Downing Street memo has largely focused on the assertion by Sir Richard Dearlove, head of British foreign intelligence, that war was seen as inevitable in Washington, where “the intelligence and facts were being fixed around the policy.”

But another part of the memo is arguably more important. It quotes British Defense Secretary Geoff Hoon as saying that “the U.S. had already begun ‘spikes of activity’ to put pressure on the regime.” This we now realize was Plan B.

Put simply, U.S. aircraft patrolling the southern no-fly zone were dropping a lot more bombs in the hope of provoking a reaction that would give the allies an excuse to carry out a full-scale bombing campaign, an air war, the first stage of the conflict.

British government figures for the number of bombs dropped on southern Iraq in 2002 show that although virtually none were used in March and April, an average of 10 tons a month were dropped between May and August.

But these initial “spikes of activity” didn’t have the desired effect. The Iraqis didn’t retaliate. They didn’t provide the excuse Bush and Blair needed. So at the end of August, the allies dramatically intensified the bombing into what was effectively the initial air war.

The number of bombs dropped on southern Iraq by allied aircraft shot up to 54.6 tons in September alone, with the increased rates continuing into 2003.

In other words, Bush and Blair began their war not in March 2003, as everyone believed, but at the end of August 2002, six weeks before Congress approved military action against Iraq.

The way in which the intelligence was “fixed” to justify war is old news. The real news is the shady April 2002 deal to go to war, the cynical use of the U.N. to provide an excuse, and the secret, illegal air war without the backing of Congress.

My country right or wrong, of course. But the Republican leadership has dramatically weakened my country. Economically, with this crazy fiscal policy that now puts us $2 billion a day further into debt to enrich the already rich . . . and that hands control of our fate to creditors like China and Japan. And militarily, by focusing on Iraq instead of Bin Laden and, in fact, doing virtually everything Bin Laden could have hoped we would . . . at the expense of so many more brave American and innocent Iraqi lives than should have been necessary.

THIS AMERICAN LIFE

Marissa Hendrickson: ‘Loved the ‘This American Life’ audio link last Friday. For your readers who don’t listen to the show, they should check their local NPR listings – it’s probably the best show on radio today. As far as the separation of church and state, my favorite answer to people who say the Ten Commandments are the basis of our legal system is that in reality, fully 8 of the 10 are not even illegal (unless you read ‘bear false witness’ as meaning ‘perjury,’ rather than the more general and not illegal ‘lying’). How can they be the basis of our laws if it is lawful to violate them?’

Sue Hoell: ‘Thanks for referencing Julie Sweeney’s work on your blog. I heard her one woman show, ‘Letting Go of God,’ on This American Life, last week. It is pure genious. Her story of growing up in the Catholic Church respecting all that it represented, transitioning into critical thought and reality, is not all that uncommon. Her presentation of the transition is very real and hopefully, very persuasive to those who might be considering taking the same giant step. Her archives on juliasweeney.com are of interest, especially the piece on Lyndie England, commenting that women do crazy things because their boyfriends ask them to.’

IN CASE YOU DON’T REMEMBER YOUR COMMENCEMENT ADDRESS

Do you remember who spoke at your graduation? What was said? In course yours is lost to the ravages of time – mine is (except that I think it was the Shah of Iran and I wasn’t there) – here’s another one for you: Barack Obama’s recent Commencement Address to Knox College. Tiny excerpt:

Focusing your life solely on making a buck shows a certain poverty of ambition. It asks too little of yourself. You need to take up the challenges that we face as a nation and make them your own. Not because you have a debt to those who helped you get here, although you do have that debt. Not because you have an obligation to those who are less fortunate than you, although I do think you do have that obligation. It’s primarily because you have an obligation to yourself. Because individual salvation has always depended on collective salvation. Because it’s only when you hitch your wagon to something larger than yourself that you realize your true potential.

And if the link is not working, here’s the whole thing, if you’re interested. Have a great weekend.

Saturday, June 4, 2005 – Good morning President Taylor, Board of Trustees, faculty, parents, family, friends, the community of Galesburg, the class of 1955-which I understand was out partying last night, and yet still showed up here on time-and most of all, the Class of 2005. Congratulations on your graduation, and thank you for the honor of allowing me to be a part of it. Thank you also, Mr. President, for this honorary degree. It was only a couple of years ago that I stopped paying my student loans in law school. Had I known it was this easy, I would have ran for the United States Senate earlier.

You know, it has been about six months now since you sent me to Washington as your United States Senator. I recognize that not all of you voted for me, so for those of you muttering under your breath ‘I didn’t send you anywhere,’ that’s ok too. Maybe we’ll hold-what do you call it-a little Pumphandle after the ceremony. Change your mind for next time.

It has been a fascinating journey thus far. Each time I walk onto the Senate floor, I’m reminded of the history, for good and for ill, that has been made there. But there have been a few surreal moments. For example, I remember the day before I was sworn in, myself and my staff, we decided to hold a press conference in our office. Now, keep in mind that I am ranked 99th in seniority. I was proud that I wasn’t ranked dead last until I found out that it’s just because Illinois is bigger than Colorado. So I’m 99th in seniority, and all the reporters are crammed into the tiny transition office that I have, which is right next to the janitor’s closet in the basement of the Dirksen Office Building. It’s my first day in the building, I have not taken a single vote, I have not introduced one bill, had not even sat down in my desk, and this very earnest reporter raises his hand and says:

‘Senator Obama, what is your place in history?’

I did what you just did, which is laugh out loud. I said, place in history? I thought he was kidding! At that point, I wasn’t even sure the other Senators would save a place for me at the cool kids’ table.

But as I was thinking about the words to share with this class, about what’s next, about what’s possible, and what opportunities lay ahead, I actually think it’s not a bad question for you, the class of 2005, to ask yourselves:

‘What will be your place in history?’

In other eras, across distant lands, this question could be answered with relative ease and certainty. As a servant in Rome, you knew you’d spend your life forced to build somebody else’s Empire. As a peasant in 11th Century China, you knew that no matter how hard you worked, the local warlord might come and take everything you had-and you also knew that famine might come knocking at the door. As a subject of King George, you knew that your freedom of worship and your freedom to speak and to build your own life would be ultimately limited by the throne.

And then America happened.

A place where destiny was not a destination, but a journey to be shared and shaped and remade by people who had the gall, the temerity to believe that, against all odds, they could form ‘a more perfect union’ on this new frontier.

And as people around the world began to hear the tale of the lowly colonists who overthrew an empire for the sake of an idea, they started to come. Across oceans and the ages, they settled in Boston and Charleston, Chicago and St. Louis, Kalamazoo and Galesburg, to try and build their own American Dream. This collective dream moved forward imperfectly-it was scarred by our treatment of native peoples, betrayed by slavery, clouded by the subjugation of women, shaken by war and depression. And yet, brick by brick, rail by rail, calloused hand by calloused hand, people kept dreaming, and building, and working, and marching, and petitioning their government, until they made America a land where the question of our place in history is not answered for us. It’s answered by us.

Have we failed at times? Absolutely. Will you occasionally fail when you embark on your own American journey? You surely will. But the test is not perfection.

The true test of the American ideal is whether we’re able to recognize our failings and then rise together to meet the challenges of our time. Whether we allow ourselves to be shaped by events and history, or whether we act to shape them. Whether chance of birth or circumstance decides life’s big winners and losers, or whether we build a community where, at the very least, everyone has a chance to work hard, get ahead, and reach their dreams.

We have faced this choice before.

At the end of the Civil War, when farmers and their families began moving into the cities to work in the big factories that were sprouting up all across America, we had to decide: Do we do nothing and allow captains of industry and robber barons to run roughshod over the economy and workers by competing to see who can pay the lowest wages at the worst working conditions? Or do we try to make the system work by setting up basic rules for the market, instituting the first public schools, busting up monopolies, letting workers organize into unions?

We chose to act, and we rose together.

When the irrational exuberance of the Roaring Twenties came crashing down with the stock market, we had to decide: do we follow the call of leaders who would do nothing, or the call of a leader who, perhaps because of his physical paralysis, refused to accept political paralysis?

We chose to act-regulating the market, putting people back to work, expanding bargaining rights to include health care and a secure retirement-and together we rose.

When World War II required the most massive homefront mobilization in history and we needed every single American to lend a hand, we had to decide: Do we listen to skeptics who told us it wasn’t possible to produce that many tanks and planes? Or, did we build Roosevelt’s Arsenal for Democracy and grow our economy even further by providing our returning heroes with a chance to go to college and own their own home?

Again, we chose to act, and again, we rose together.

Today, at the beginning of this young century, we have to decide again. But this time, it is your turn to choose.

Here in Galesburg, you know what this new challenge is. You’ve seen it.

All of you, your first year in college saw what happened at 9/11. It’s already been noted, the degree to which your lives will be intertwined with the war on terrorism that currently is taking place. But what you’ve also seen, perhaps not as spectacularly, is the fact that when you drive by the old Maytag plant around lunchtime, no one walks out anymore. I saw it during the campaign when I met union guys who worked at the plant for 20, 30 years and now wonder what they’re gonna do at the age of 55 without a pension or health care; when I met the man who’s son needed a new liver but because he’d been laid off, didn’t know if he could afford to provide his child the care that he needed.

It’s as if someone changed the rules in the middle of the game and no one bothered to tell these folks. And, in reality, the rules have changed.

It started with technology and automation that rendered entire occupations obsolete-when was the last time anybody here stood in line for the bank teller instead of going to the ATM, or talked to a switchboard operator? Then it continued when companies like Maytag were able to pick up and move their factories to some under developed country where workers were a lot cheaper than they are in the United States.

As Tom Friedman points out in his new book, The World Is Flat, over the last decade or so, these forces-technology and globalization-have combined like never before. So that while most of us have been paying attention to how much easier technology has made our own lives-sending e-mails back and forth on our blackberries, surfing the Web on our cell phones, instant messaging with friends across the world-a quiet revolution has been breaking down barriers and connecting the world’s economies. Now business not only has the ability to move jobs wherever there’s a factory, but wherever there’s an internet connection.

Countries like India and China realized this. They understand that they no longer need to be just a source of cheap labor or cheap exports. They can compete with us on a global scale. The one resource they needed were skilled, educated workers. So they started schooling their kids earlier, longer, with a greater emphasis on math and science and technology, until their most talented students realized they don’t have to come to America to have a decent life-they can stay right where they are.

The result? China is graduating four times the number of engineers that the United States is graduating. Not only are those Maytag employees competing with Chinese and Indian and Indonesian and Mexican workers, you are too. Today, accounting firms are e-mailing your tax returns to workers in India who will figure them out and send them back to you as fast as any worker in Illinois or Indiana could.

When you lose your luggage in Boston at an airport, tracking it down may involve a call to an agent in Bangalore, who will find it by making a phone call to Baltimore. Even the Associated Press has outsourced some of their jobs to writers all over the world who can send in a story at a click of a mouse.

As Prime Minister Tony Blair has said, in this new economy, ‘Talent is the 21st century wealth.’ If you’ve got the skills, you’ve got the education, and you have the opportunity to upgrade and improve both, you’ll be able to compete and win anywhere. If not, the fall will be further and harder than it ever was before.

So what do we do about this? How does America find its way in this new, global economy? What will our place in history be?

Like so much of the American story, once again, we face a choice. Once again, there are those who believe that there isn’t much we can do about this as a nation. That the best idea is to give everyone one big refund on their government-divvy it up by individual portions, in the form of tax breaks, hand it out, and encourage everyone to use their share to go buy their own health care, their own retirement plan, their own child care, their own education, and so on.

In Washington, they call this the Ownership Society. But in our past there has been another term for it-Social Darwinism-every man or woman for him or herself. It’s a tempting idea, because it doesn’t require much thought or ingenuity. It allows us to say that those whose health care or tuition may rise faster than they can afford-tough luck. It allows us to say to the Maytag workers who have lost their job-life isn’t fair. It let’s us say to the child who was born into poverty-pull yourself up by your bootstraps. And it is especially tempting because each of us believes we will always be the winner in life’s lottery, that we’re the one who will be the next Donald Trump, or at least we won’t be the chump who Donald Trump says: ‘You’re fired!’

But there is a problem. It won’t work. It ignores our history. It ignores the fact that it’s been government research and investment that made the railways possible and the internet possible. It’s been the creation of a massive middle class, through decent wages and benefits and public schools that allowed us all to prosper. Our economic dependence depended on individual initiative. It depended on a belief in the free market; but it has also depended on our sense of mutual regard for each other, the idea that everybody has a stake in the country, that we’re all in it together and everybody’s got a shot at opportunity. That’s what’s produced our unrivaled political stability.

And so if we do nothing in the face of globalization, more people will continue to lose their health care. Fewer kids will be able to afford the diploma you’re about to receive.

More companies like United Airlines won’t be able to provide pensions for their employees. And those Maytag workers will be joined in the unemployment line by any worker whose skills can be bought and sold on the global market.

So today I’m here to tell you what most of you already know. This is not us-the option that I just mentioned. Doing nothing. It’s not how our story ends-not in this country. America is a land of big dreamers and big hopes.

It is this hope that has sustained us through revolution and civil war, depression and world war, a struggle for civil and social rights and the brink of nuclear crisis. And it is because our dreamers dreamed that we have emerged from each challenge more united, more prosperous, and more admired than before.

So let’s dream. Instead of doing nothing or simply defending 20th century solutions, let’s imagine together what we could do to give every American a fighting chance in the 21st century.

What if we prepared every child in America with the education and skills they need to compete in the new economy? If we made sure that college was affordable for everyone who wanted to go? If we walked up to those Maytag workers and we said ‘Your old job is not coming back, but a new job will be there because we’re going to seriously retrain you and there’s life-long education that’s waiting for you-the sorts of opportunities that Knox has created with the Strong Futures scholarship program.

What if no matter where you worked or how many times you switched jobs, you had health care and a pension that stayed with you always, so you all had the flexibility to move to a better job or start a new business? What if instead of cutting budgets for research and development and science, we fueled the genius and the innovation that will lead to the new jobs and new industries of the future?

Right now, all across America, there are amazing discoveries being made. If we supported these discoveries on a national level, if we committed ourselves to investing in these possibilities, just imagine what it could do for a town like Galesburg. Ten or twenty years down the road, that old Maytag plant could re-open its doors as an Ethanol refinery that turned corn into fuel. Down the street, a biotechnology research lab could open up on the cusp of discovering a cure for cancer. And across the way, a new auto company could be busy churning out electric cars. The new jobs created would be filled by American workers trained with new skills and a world-class education.

All of that is possible but none of it will come easy. Every one of us is going to have to work more, read more, train more, think more. We will have to slough off some bad habits-like driving gas guzzlers that weaken our economy and feed our enemies abroad. Our children will have to turn off the TV set once in a while and put away the video games and start hitting the books. We’ll have to reform institutions, like our public schools, that were designed for an earlier time. Republicans will have to recognize our collective responsibilities, even as Democrats recognize that we have to do more than just defend old programs.

It won’t be easy, but it can be done. It can be our future. We have the talent and the resources and brainpower. But now we need the political will. We need a national commitment.

And we need each of you.

Now, no one can force you to meet these challenges. If you want, it will be pretty easy for you to leave here today and not give another thought to towns like Galesburg and the challenges they face. There is no community service requirement in the real world; no one is forcing you to care. You can take your diploma, walk off this stage, and go chasing after the big house, and the nice suits, and all the other things that our money culture says that you should want, that you should aspire to, that you can buy.

But I hope you don’t walk away from the challenge. Focusing your life solely on making a buck shows a certain poverty of ambition. It asks too little of yourself. You need to take up the challenges that we face as a nation and make them your own. Not because you have a debt to those who helped you get here, although you do have that debt. Not because you have an obligation to those who are less fortunate than you, although I do think you do have that obligation. It’s primarily because you have an obligation to yourself. Because individual salvation has always depended on collective salvation. Because it’s only when you hitch your wagon to something larger than yourself that you realize your true potential.

And I know that all of you are wondering how you’ll do this, the challenges seem so big. They seem so difficult for one person to make a difference.

But we know it can be done. Because where you’re sitting, in this very place, in this town, it’s happened before.

Nearly two centuries ago, before civil rights, before voting rights, before Abraham Lincoln, before the Civil War, before all of that, America was stained by the sin of slavery. In the sweltering heat of southern plantations, men and women who looked like me could not escape the life of pain and servitude in which they were sold. And yet, year after year, as this moral cancer ate away at the American ideals of liberty and equality, the nation was silent.

But its people didn’t stay silent for long.

One by one, abolitionists emerged to tell their fellow Americans that this would not be our place in history-that this was not the America that had captured the imagination of the world.

This resistance that they met was fierce, and some paid with their lives. But they would not be deterred, and they soon spread out across the country to fight for their cause. One man from New York went west, all the way to the prairies of Illinois to start a colony.

And here in Galesburg, freedom found a home.

Here in Galesburg, the main depot for the Underground Railroad in Illinois, escaped slaves could roam freely on the streets and take shelter in people’s homes. And when their masters or the police would come for them, the people of this town would help them escape north, some literally carrying them in their arms to freedom.

Think about the risks that involved. If they were caught abetting a fugitive, you could’ve been jailed or lynched. It would have been simple for these townspeople to turn the other way; to go live their lives in a private peace.

And yet, they didn’t do that. Why?

Because they knew that we were all Americans; that we were all brothers and sisters; the same reason that a century later, young men and women your age would take Freedom Rides down south, to work for the Civil Rights movement. The same reason that black women would walk instead of ride a bus after a long day of doing somebody else’s laundry and cleaning somebody else’s kitchen. Because they were marching for freedom.

Today, on this day of possibility, we stand in the shadow of a lanky, raw-boned man with little formal education who once took the stage at Old Main and told the nation that if anyone did not believe the American principles of freedom and equality, that those principles were timeless and all-inclusive, they should go rip that page out of the Declaration of Independence.

My hope for all of you is that as you leave here today, you decide to keep these principles alive in your own life and in the life of this country. You will be tested. You won’t always succeed. But know that you have it within your power to try. That generations who have come before you faced these same fears and uncertainties in their own time. And that through our collective labor, and through God’s providence, and our willingness to shoulder each other’s burdens, America will continue on its precious journey towards that distant horizon, and a better day.

Thank you so much class of 2005, and congratulations on your graduation. Thank you.