'Sky may be falling'
Peter Morton
Financial Post
Thursday, December 07, 2006
WASHINGTON - HSBC Holdings PLC, the world's third-largest bank, said yesterday it will be hurt by its exposure to controversial mortgages that helped spark the U.S. housing boom, but which are now coming up for renewal.
The London-based bank is expected to be the first in a long list of major residential mortgage lenders in the United States forced to take a hit from the increasing number of defaults by homeowners who cannot afford to pay sharply higher interest rates.
About US$2-trillion in the popular adjustable-rate mortgages (ARMs) used to finance the housing boom come due in the next two years. That represents about one-third of the US$6-trillion U.S. mortgage market.
Analysts said other lenders such as Citibank Corp. and Bank of America should soon be telling markets they are in the same boat as HSBC.
"We think the sky may be falling," said Mark Fitzgibbon, director of research at New York investment firm Sandler O'Neill & Partners LP. "Credit quality has been deteriorating for two quarters and we think the pace of deterioration will accelerate this quarter."
At least one Canadian bank with U.S. operations said it does not have a large exposure to these types of controversial mortgages. A spokesman for TD Banknorth Inc., which operates in the U.S. Northeast, said only 11% of its loan portfolio is residential, while more than 60% is commercial. It is owned by Toronto-Dominion Bank.
HSBC underestimated borrowers' ability to repay mortgage loans in the U.S., Douglas Flint, its finance director, said yesterday in a conference call with analysts.
In the United States, loan delinquencies and writedowns increased from the first part of the year because of more bankruptcies and a weaker housing market, he added. HSBC did not put any number to those delinquencies, but said the hit is expected to be felt in the bank's fourth quarter.
However, much of it is linked to its US$14.8-billion purchase in 2003 of Household International Inc., now called HSBC Finance Corp. Widely seen as a lender for high-risk borrowers, HSBC Finance generated 31% of HSBC's North American profit but 65% of its non-performing loans.
Economists have warned that ARMs, the popular finance vehicle used four years ago to finance the housing boom, would come back to haunt homeowners with interest rates up sharply from the time they took out the mortgage.
One-third of U.S. homes were financed with the unusual mortgages, which offered teaser interest rates as low as 1% for between two and five years. But after that the rate would be based mostly on prevailing rates.
U.S. short-term rates have risen by 4.25 percentage points since 2004, while oil prices have more than doubled over three years, putting huge stress on homeowners' wallets.
Benjamin Tal, a senior economist at CIBC World Markets in Toronto, said many of the adjustable mortgages were offered to people with bad credit and who had little or no downpayment. The refinancings have led to higher mortgages and now an increasing number of defaults.
Mr. Tal said he had expected to see the earnings of major mortgage lenders, which were quick to lend the money, get hit as the number of defaults began to increase.
"It's payback time," he said.
Stock markets have widely anticipated the downturn. The Philadelphia KBW bank index was up only 1% this quarter, compared with the 5% increase in the Standard & Poor's 500 index.
Non-conventional lenders are also getting hit by defaults and bankruptcies linked to the housing downturn.
H&R Block's Option One unit, which the tax preparer is trying to sell, posted a US$39-million fiscal second-quarter pre-tax loss, compared with a year-earlier profit of US$48.8-million.
© National Post 2006
Monday, December 11, 2006
Annan criticizes U.S. in farewell speech
- By MARGARET STAFFORD, Associated Press Writer
Monday, December 11, 2006
URL
Monday, December 11, 2006
(12-11) 07:15 PST Independence, Mo. (AP) --
U.N. Secretary-General Kofi Annan, in his farewell address, criticized the Bush administration, warning that America must not sacrifice its Democratic ideals while waging war against terrorism.
In remarks prepared for delivery Monday at the Truman Presidential Museum and Library, Annan also said the Security Council should be expanded.
"Human rights and the rule of law are vital to global security and prosperity," Annan's text said. When the U.S. "appears to abandon its own ideals and objectives, its friends abroad are naturally troubled and confused," he said.
Annan, who leaves the United Nations on Dec. 31 after 10 years as secretary-general, has become an increasingly vocal critic of the war in Iraq.
He said in the text that the U.S. has a special responsibility to the world because it continues to have extraordinary power.
Annan summed up five principles that he considers essential: collective responsibility, global solidarity, rule of law, mutual accountability and multilateralism.
He chose the Truman museum for his final major speech in part because it is dedicated to a president who was instrumental in the founding of the United Nations. His text repeatedly praised the Truman administration but never mentioned Bush by name.
"As President Truman said, 'The responsibility of the great states is to serve and not dominate the peoples of the world,'" Annan said.
"He believed strongly that henceforth security must be collective and indivisible. That was why, for instance, that he insisted when faced with aggression by North Korea against the South in 1950, on bringing the issue to the United Nations," Annan said.
"Against such threats as these, no nation can make itself secure by seeking supremacy over all others."
Annan also called for a reform of the Security Council, saying its membership "still reflects the reality of 1945." He suggested adding new members to represent parts of the world with less of a voice.
He said the permanent members, the world powers, "must accept the special responsibility that comes with their privilege.'
"The Security Council is not just another stage on which to act out national interests," he said in another jab at Bush.
Annan has a had a strained relationship with the administration and with outgoing U.S. Ambassador John Bolton.
He was criticized by some in the administration and in Iraq after saying earlier this month that the level of violence in Iraq is much worse than that of Lebanon's civil war and that some Iraqis believe their lives were better under Saddam Hussein.
He also has urged the international community to help rebuild Iraq, saying he was not sure Iraq could accomplish it alone.
Bolton also is leaving this month. He resigned in the wake of the November elections, which gave Democrats control over the next Congress, making his Senate confirmation unlikely.
After a private dinner Tuesday night at the White House for Annan, Bolton joked that "nobody sang 'Kumbaya.'"
<>Told at the time of Bolton's comment, Annan laughed and asked: "But does he know how to sing it?"
URL
Alaska lawmaker arrested in FBI probe
ANCHORAGE, Alaska --A state legislator was arrested on a federal bribery warrant, three months after federal agents raided the offices of at least six Alaska lawmakers in an investigation into a large oil field services company.
Rep. Tom Anderson was arrested Thursday at his Anchorage home and was being held at the city jail, FBI Special Agent Eric Gonzalez told The Associated Press.
Anderson's name had not appeared on a list of offices raided in late August and early September. Agents were searching for possible ties between the lawmakers and VECO Corp., officials and aides have said.
A copy of one of the search warrants obtained by the AP at the time linked the investigation to a new petroleum profits tax and a proposed natural gas pipeline contract.
Global Lessons
Global
Global Transitions
December 11, 2006
By Stephen S. Roach | New York
Global Transitions
December 11, 2006
By Stephen S. Roach | New York
After four years of the strongest growth since the early 1970s, the global economy is entering an important transition. The character of that transition is the subject of endless debate. Financial markets are currently priced for a Goldilocks-like soft landing -- a benign slowdown that tempers inflation and interest rate pressures. The risk, in my view, is that global growth could fall well short of consensus expectations -- with important implications for unsuspecting markets.
I suspect that our current baseline forecast offers only a hint of the coming transition in the global economy. While our projected 4.3% increase in world GDP for 2007 remains well above the 45-year growth trend of 3.7%, it falls significantly short of the 5.0% increase we currently estimate for 2006. The anticipated downshift is broad-based, with the
Downshifts in the
Our
In cutting their near-term growth forecast, Dick and Dave concede that the risks remain on the downside. I couldn’t agree more. The difference between us is that I would assign a higher probability to those risks than they do. I fear that the soft-landing crowd has been too quick to pounce on the first signs of softening as confirmation of the endgame to the current downturn. Experience teaches us to be wary of the lags in jumping to premature conclusions about the scope and duration of cyclical adjustments. Take the residential construction sector, for example. Employment in the residential building and specialty trade contractors industries, combined, has now declined by 110,000 from the February 2006 peak -- reversing only 15% of the cumulative run-up that occurred over the preceding five years. With housing starts already down 35% from their peak, it seems perfectly reasonable for employment in this sector to fall a good deal further -- a headcount reduction that would constrain overall labor income generation and put heightened pressure on personal consumption.
It’s not just the nascent recession in homebuilding. Also at risk are the related businesses like furniture, appliances, mortgage finance, and real estate brokers. And, of course, there is the likely unwinding of the consumer wealth effect. Only asset-driven wealth effects can explain how a decade of frothy consumption growth (3.7% in real terms) has exceeded after-tax real income growth (3.2%) by an average of 0.5 percentage point per year. With the last bubble now bursting, I suspect that the wealth effect is about to turn negative for overly-indebted, saving-short US households -- dragging consumption growth below the pace of income generation as rational households abandon asset-based saving strategies and return to more of an income-based approach. As consumption slows, demand-driven capital spending should be quick to follow -- precisely the inference that can be taken from a weak capital goods report in October. The lesson of post-bubble shakeouts is important here: When a booming sector goes bust -- dot-com six years ago, housing today -- there are no built-in firewalls that contain the ripple effects. The
Moreover, I am highly suspicious of the idea that the rest of the world is likely to be insulated from a
The
The year ahead is not just about a looming transition in the global business cycle. It could also mark an important transition in the globalization debate. I suspect that the focus is likely to shift away from the brilliant successes of
In looking to 2007, my main message is to be wary of extrapolation. After a powerful four-year boom, an important transition lies ahead for the world -- both on economic as well as on political terms. The consensus appears to be unprepared for the full extent of the transition that could well occur -- banking on the benign outcome of a soft landing in the US to be offset by accelerating growth elsewhere in a decoupled world. The official baseline forecast of the IMF is quite consistent with such a sanguine prognosis. It calls for a 4.9% increase in world GDP next year -- virtually identical to the 4.8% average gains over the 2003-06 period. The Morgan Stanley forecast of 4.3% global growth is already well below that consensus. As post-housing bubble adjustments begin to play out in the
United States
It’s a “Growth Recession,†Not a Lasting Downturn
December 11, 2006
By Richard Berner | New York
It’s a “Growth Recession,†Not a Lasting Downturn
December 11, 2006
By Richard Berner | New York
Forecast at a Glance
|
| 2006E | 2007E | 2008E |
| Real GDP | 3.3% | 2.4% | 3.0% |
| Inflation ( | 3.3 | 1.6 | 1.9 |
| Unit Labor Costs | 3.3 | 3.2 | 2.7 |
| After-Tax “Economic” Profits | 22.2 | 3.8 | 4.7 |
| After-Tax “Book” Profits | 19.3 | 2.1 | 2.4 |
Source: Morgan Stanley Research E = Morgan Stanley Research Estimates
We’ve sharply cut our near-term expectations for
This “growth recession” — a period of growth appreciably below potential — likely will last long enough to reduce somewhat the lingering upside risks to inflation. As we previewed last week, the combination of slower growth and reduced inflation risks, if it occurs, will thus allow the Fed to stay on hold for much of 2007, and to ease gradually as inflation moves lower late next year and into 2008 (see “Changing the Fed Call,” Global Economic Forum, December 4, 2006).
Now that our calls are close to consensus, what are the risks for the economy and for financial markets? Most important, we do not see this period of sluggish growth as the prelude to a more lasting downturn in economic activity. And thematically, like the consensus, we envision rising personal saving, peaking inflation, and a steeper yield curve in the year ahead. But in our view these themes may play out in ways the consensus doesn’t envision, and that may make all the difference for the outlook. Here’s why.
For the economy, we see risks evenly balanced around our new, more subdued baseline. We continue to envision a ‘two-tier’ economy, with housing and
Importantly, however, we’re not “compartmentalists.” Instead, our two-tier call rests on four key premises. First, while we believe that the housing recession is far from over, we think that the intensity of the downturn will peak by spring 2007. Our new baseline does envision a more intense housing recession in the near term than we thought a month ago. We estimate that the decline in housing activity will cut a full percentage point from GDP both in the current quarter and in the first quarter of next year as builders are moving even more aggressively to cut supply.
But the pace of declining housing demand seems to be slowing, and that combination seems likely to reduce the odds of declines in home prices appropriately measured on a nationwide basis (see “False Dawn for Housing? Global Economic Forum, December 8, 2006). And we continue to think that the housing wealth-consumer spending link is weaker than many believe. As a result, the spillover from housing wealth to consumer spending seems unlikely to derail the consumer.
A second key premise is that the economy’s income-generating capacity has improved sustainably, and by enough to allow consumers to rebuild personal saving in the face of decelerating housing wealth while maintaining moderate gains in spending. Solid job gains, firmer labor markets and thus wage gains, and a decline to 2% headline inflation have lifted real wage income growth to a solid 4½% annual rate over the year ended in October.
November’s employment canvass implies more of the same: Nonfarm payrolls rose by 132,000, not far from the 150,000 (1.3% annualized) average in the first ten months of 2006, especially considering the strong, upward pattern of revisions seen since the summer. Demand for labor inputs is stronger still, running at a 2% rate, as the workweek has risen throughout the year after adjustment for changes in the industry composition of employment. And while sharp downward revisions to GDP-based compensation per hour data call into question the pattern of wage growth, we believe that the acceleration in private hourly earnings to 4.1% in the year ended in November reasonably represents the current pace. While personal saving hasn’t yet turned back into positive territory, the fourth-quarter combination of 6.2% annualized growth in real disposable income and 2.9% in spending suggests that it will do so soon.
The third key notion is that while global growth may be slowing, growth in domestic demand abroad is still stronger than in the United States, and thus net exports seem likely to contribute to US growth (for the global outlook, see Steve Roach’s accompanying dispatch, “Global Transitions”). We don’t buy into the decoupling story — that overseas growth is immune to
Finally, we think that notwithstanding a monetary policy that has become mildly restrictive,
Against that backdrop, we see slightly less inflation risk than a month ago, because four quarters of growth averaging 2.2% will begin to reverse the narrowing of economic slack that characterized the first four years of the expansion. The gap between actual and potential growth will widen somewhat, the unemployment rate will rise towards 5% (in part as labor force growth outpaces employment), and future operating rates in industry will rise only slowly.
Nonetheless, in our view, inflation has yet to peak and likely will turn down gradually. That’s because inflation expectations remain slightly elevated, the relationship between economic slack and inflation is not a strong one, and the dollar is now declining. Measured by the core personal consumption price index (PCEPI), inflation has leveled off at 2.4%, but in the past three months has moved higher. Measured by the
Like the consensus, we believe that the yield curve will disinvert or resteepen from current levels, but how that happens is critical. Many think that a turn toward ease will be the dominant factor, so that short-term rates decline by more than long-term rates, in classic cyclical fashion. In contrast, we think cyclical comparisons probably won’t help analyze the current yield curve setting. We think that the Fed will anchor short-term rates, and long-term rates may rise somewhat from current levels.
Following November’s employment report, market participants dramatically scaled back the chance of Fed ease by the March FOMC meeting to 30% from 70% just a week ago. Those odds will probably shrink further in coming months. To be sure, Fed officials following this week’s FOMC meeting will surely acknowledge the recent stretch of sub-par growth and its potential disinflationary benefits. But subpar growth has yet to reverse the decline in the unemployment rate, and core inflation, especially measured by the PCE price index, hasn’t come down significantly. Thus, policymakers’ belief that inflation is still too high likely will persuade them to retain their tightening bias. Longer-term yields may rise gradually beyond 4¾% as the odds of a downturn and Fed ease fade, as rising term premiums elevate the level of real long-term yields, and as a weaker dollar may erode the appeal of carry trades.
There are several downside economic risks: The housing recession could deepen, capex is a question mark, and credit quality may begin to erode, triggering tighter lending standards. And weaker growth means more downside risks to corporate earnings. But upside economic risks and their consequences for markets should not be ignored: The housing downturn could end more quickly, the capital-spending pause may have been a false alarm, and although global growth may be slowing, US firms may be getting a bigger market share. For markets that have thrived on low volatility, these crosscurrents may begin to reverse that trend.
Dictators right and left
Pinochet croaks on International Human Rights Day.
---
EDITORIAL
Kirkpatrick and Pinochet shared a conservative political orbit. But history has proved both wrong.
December 11, 2006
IT'S A COINCIDENCE that Jeane Kirkpatrick, the astringent U.S. envoy to the United Nations in the 1980s, and former Chilean dictator Augusto Pinochet died only a few days apart. But in death as in life, the two are associated with a political theory that defined the early days of the neoconservative movement in the United States. Unfortunately for Kirkpatrick, its author, the theory proved to be dead wrong.
The idea was that right-wing authoritarian governments were much better bets for conversion to democracy than left-wing totalitarian ones. This is how Kirkpatrick put it in "Dictatorships and Double Standards," the influential 1979 essay in Commentary magazine that brought her to the attention of Ronald Reagan.
"Although there is no instance of a revolutionary socialist or communist society being democratized, right-wing autocracies do sometimes evolve into democracies — given time, propitious economic, social and political circumstances, talented leaders and a strong indigenous demand for representative government." Kirkpatrick's article, which focused on the Carter administration's policy toward Iran under the shah and Nicaragua under Anastasio Somoza, made some valid points about the differences between Marxist and traditional authoritarian societies. But the article — and Kirkpatrick — are remembered most for the suggestion that dictatorships of the right (especially those friendly to the United States) offered more fertile ground for democratization than dictatorships of the left.
Chile, where the murderous Pinochet eventually relinquished much of his power after a 1988 referendum, seemed to vindicate the Kirkpatrick doctrine. But then came the collapse of the Soviet Union and the creation of more democratic governments not only in the formerly captive states of Hungary and Czechoslovakia but also in Russia. And as China has shown, spectacularly, Marxist states can turn capitalist in a hurry, though political freedoms may still lag.
Like other reductionist theories, the Kirkpatrick doctrine ran up against the wisdom of H.L. Mencken's observation that "for every problem, there is a solution that is simple, clean and wrong."
The bubble boy in the Oval Office
JONATHAN CHAIT
Try to mend Iraq all you want; just don't tell Bush the war was a mistake.
Jonathan ChaitDecember 10, 2006
THERE IS a famous "Twilight Zone" episode about a little boy in a small town who has fantastical powers. Through the misuse of his powers, the little boy has ruined the lives of everybody in the town — for instance, teleporting them into a cornfield, or summoning a snowstorm that destroys their crops. Because anyone who thinks an unhappy thought will be banished, the adults around him can do nothing but cheerfully praise his decisions while they try to nudge him in a less destructive direction.
This episode kept popping into my head when I was reading about President Bush and the Baker-Hamilton commission. Bush is the president of the United States, which therefore gives him enormous power, but he is treated by everybody around him as if he were a child.
Consider a story in the latest Time magazine, recounting the efforts — before the commission was approved by Congress — of three supporters to enlist Condoleezza Rice to win the administration's approval for the panel. Here is how Time reports it:
"As the trio departed, a Rice aide asked one of her suitors not to inform anyone at the Pentagon that chairmen had been chosen and the study group was moving forward. If Rumsfeld was alerted to the study group's potential impact, the aide said, he would quickly tell Cheney, who could, with a few words, scuttle the whole thing. Rice got through to Bush the next day, arguing that the thing was going to happen anyway, so he might as well get on board. To his credit, the President agreed."
The article treats this exchange in a matter-of-fact way, but, what it suggests is completely horrifying. Rice apparently believed that Bush would simply follow the advice of whoever he spoke with. Therefore the one factor determining whether Bush would support the commission was whether Cheney or Rice managed to get to him first.
And now that the Baker-Hamilton report is out, the commissioners are carefully patronizing the commander in chief. As this newspaper reported, "Members of the commission said they were pleased that Bush gave them as much attention as he did, a full hour's worth. 'He could have scheduled us for 20 minutes plus 10 minutes for the cameras,' said former Atty. Gen. Edwin M. Meese III." Wow, a commission devoted hundreds or thousands of man-hours to addressing the central conundrum of U.S. foreign policy, and the president gave them a whole hour of his time!
In return for these considerations, the commission generously avoided revisiting the whole question of who got us into this fiasco and how. As the Washington Post put it, "The panel appeared to steer away from language that might inflame the Bush administration." Of course, "inflame" is a word typically associated with street mobs or other irrational actors. The fact that the president can be "inflamed" is no longer considered surprising enough to merit comment.
Indeed, everybody seems to understand that if you want to help amend the disaster in Iraq, the No. 1 rule is that you can't acknowledge it's a disaster in Bush's presence. Weekly Standard Executive Editor Fred Barnes, the court stenographer of the Bush administration, recently reported that this was a key factor in the hiring of Defense Secretary Robert Gates.
Now, I would bet every dollar I own that Gates thinks the war was a mistake. But you can't say that to Bush. "Before hiring him," Barnes wrote, "Bush had to make sure Gates didn't think America's intervention in Iraq was a mistake."
Yes, Mr. President, it's good that you turned Iraq into a Hobbesian inferno of Al Qaeda terrorists and Islamist death squads. It's really, really good!
jchait@latimescolumnists.com
GOP alienation marks turnabout for Bush
Dissent and calls for checks on the president have mushroomed since the party lost Congress in the midterm election.
By Noam N. LeveyTime Staff Writer
December 10, 2006
WASHINGTON — President Bush, weakened by an unpopular war and the loss of Republican control in Congress, is now confronting disaffection within his own party that could complicate his attempt to set an agenda for his final two years in office.
As Republicans departed Capitol Hill this weekend, some who used to dismiss Democratic attempts to investigate the administration as political posturing are now lining up behind calls for greater oversight of the executive branch.
They are advertising attacks on Bush's foreign policy that they once kept largely private. Last week, Oregon Sen. Gordon H. Smith gave a speech calling the current war strategy "absurd" and sent out a news release with his remarks.
Some longtime Bush allies, such as Texas Sen. John Cornyn, are even adopting Democratic rhetoric to criticize the Iraq war.
And on other issues that will confront the new Congress in January — including trade and judicial appointments — Republican lawmakers have signaled an unwillingness to follow the White House.
"Frankly, I think there is a greater recognition and awareness of the necessity for us to exercise checks and balances," said Sen. Olympia J. Snowe (R-Maine), noting how much the Nov. 7 election changed the climate on Capitol Hill.
"If there was a reluctance to express that in the past, there isn't anymore," Snowe said.
To be sure, no one is expecting Republicans to abandon the president. And the ideological gap between Democrats and Republicans in Congress remains large.
But Republican disaffection marks a remarkable turnabout for a president whose command of his party was once so supreme he virtually appointed the Senate majority leader and GOP lawmakers openly acknowledged taking orders from the White House.
And it suggests that the Bush administration may have as much work to do to repair ties with Republicans as it does to build links with Democrats who will assume control of the House and Senate in January.
"They need to have a better relationship with members on both sides of the aisle," said Rep. Christopher Shays, a Connecticut Republican whose early support for Bush's war policy nearly cost him his seat last month.
Not so long ago, it was Republican members of Congress who labored to stay close to the president.
The Bush administration's ability to win approval from a compliant legislative branch for everything from tax cuts to foreign invasions and other initiatives was a source of awe. In 2002, the president was widely seen as responsible for making Tennessee Republican Bill Frist the Senate majority leader.
That influence was slipping even before the November midterm election swept Republicans from power on Capitol Hill.
House Republicans abandoned Bush over immigration. And in the Senate, some of the chamber's most respected GOP members stood up to the White House on Iraq and the prosecution of terrorism suspects.
In the run-up to Nov. 7, Bush weathered more defections as some Republican congressional candidates tried to distance themselves from the president's war policies, calling for troop withdrawals and the resignation of Defense Secretary Donald H. Rumsfeld.
But since the pivotal election, dissent has mushroomed.
And as the House and Senate prepare for what many expect to be heated debates next year over the course of U.S. policy in the Middle East, Republican lawmakers have stepped up their critiques of the war, directly challenging the White House in ways that had been the province of Democrats.
Sen. Sam Brownback of Kansas, Sen.-elect Bob Corker of Tennessee and others have explicitly called for more engagement with Syria and Iran, two states the Bush administration has treated as pariahs for most of the last six years.
Even some of the president's most loyal allies, including Texas Sens. Cornyn and Kay Bailey Hutchison, are tacking away from the White House by calling for more troops in Iraq.
While the president tried to remain upbeat after the Iraq Study Group brought its grim assessment to the Capitol last week, Cornyn offered no more encouragement than Bush's toughest critics.
"What we're doing now is not working," Cornyn said, echoing a Democratic campaign slogan. "We need a change of course."
The change in climate on Capitol Hill has been remarkable, said Rep. Walter B. Jones, a North Carolina Republican who broke with his party to oppose the war last year.
"Many of my friends said to me [then], 'You know, Walter, you are beginning to be so independent that it may end up hurting you,' " Jones said. He added that a number of his colleagues told him that although they agreed with him, they feared being disloyal to the president.
"I haven't heard that recently," Jones said
The reason is simple, said Paul Begala, a Democratic consultant who worked in the White House when President Clinton was forced to confront congressional Democrats after the party lost its majorities in 1994.
"When you are in the White House, members of Congress respond to two things: what you can do for them and what you can do to them," Begala said. "Here's what [Bush] did to them: He cost them control…. Republicans are paying the political consequences for Bush's policy failures. They don't like that."
Beyond Iraq, that may spell trouble for the White House next year.
Already, GOP lawmakers are signaling their eagerness to join in the kind of congressional investigation that Democrats promised on the campaign trail this fall.
Last week, Republicans scrambled to express support for expanding the power of an independent agency to monitor spending on Iraq reconstruction, a move that House Republicans had quashed in an appropriations committee earlier this year.
On other issues too there were signs of dissent last week. Many GOP lawmakers bucked the White House over trade deals with Vietnam and Haiti, forcing a flurry of last-minute parliamentary maneuvering to get the agreements through Congress.
As the congressional session drew to a close, the president also couldn't get a hearing for a raft of conservative judges he renominated for positions on the federal bench.
Amid the growing signs of defiance, the president gave a nod to the other end of Pennsylvania Avenue last week, inviting Democratic and Republican congressional leaders to the White House.
And the administration communicated a new willingness to talk with Congress about overhauling Social Security without insisting on setting up private accounts.
"We can't have talks if everyone doesn't start with a clean sheet of paper," said a White House official who asked not to be named because the talks had not been announced.
But lawmakers, congressional aides and political scholars say the White House has its work cut out for it.
Other weakened presidents, including Ronald Reagan, have had to deal with a sour Congress in their final two years, said John J. Pitney Jr., a former Republican National Committee staffer who teaches government at Claremont McKenna College.
But though Reagan was saddled with the Iran-Contra affair, Americans weren't dying overseas every day.
"Bush has low approval ratings. He has an unpopular war. And every day is one day closer to his exit," Pitney said. "That is not a recipe for legislative success."
noam.levey@latimes.com
Times staff writer Joel Havemann contributed to this report.
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