The McCain Change

John McCain last night savored the triumph of securing the Republican nomination for President, though his misfortune is to win it in a year when the GOP is at its lowest ebb since the Watergate era.

AP

By historic standards, he should be a sure loser. Yet Mr. McCain remains a formidable contender -- in part because of his opponent's weaknesses, but also because he can credibly claim to be a reformer who often fought his party's worst instincts, notably on spending and immigration. His chances of winning now hang on whether he can make the case to voters seeking change that a President McCain can shake up government while a President Obama would merely expand it.

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If this election were solely about biography and national security, Mr. McCain would win in a walk. As the son and grandson of admirals, Mr. McCain embodies a personal philosophy anchored in notions of courage, duty and honor. He is also a well known figure in American public life, starting with his military service as a fighter pilot, his trauma and steel as a POW in North Vietnam, and as a Senator and Presidential candidate across 20 years. His political character -- a tenacity that can sometimes turn stubborn, a bias for action that can sometimes be impetuous -- is an open book, in marked contrast to Barack Obama's calculated opacity.

Mr. McCain would also bring a wealth of good instincts and personal knowledge to the role of Commander in Chief. This is apart from his military experience, as helpful as that can be in decisions about war and peace. On the two most important recent national security issues -- Russia and Iraq -- his judgment has been both prescient and correct.

He warned early that Vladimir Putin was leading his country in a revanchist direction. Russia's invasion of Georgia last month -- and the possibility that it might attempt similar adventures in Ukraine and the Baltics -- has brought this home even to Mr. Obama, who after a couple of false starts is now sounding like a hawk. But Mr. McCain showed a statesman's foresight and has offered meaningful ideas for imposing costs on Russia for its adventurism.

Similarly with Iraq, Mr. McCain advocated more troops from an early date, as well as a counterinsurgency strategy along the lines of the 2007-08 surge. He stuck with this counsel even as the war became more unpopular and he knew it could ruin his Presidential candidacy. This, too, is in marked contrast not merely to Mr. Obama but also to Joe Biden, who voted for the war but opposed the surge. Now the U.S. and the Iraqi government are on the cusp of victory, leaving the next President in a far better strategic position against al Qaeda and throughout the Middle East.

With all of this going for him, Mr. McCain will have to resist the temptation to fight this election mainly on character and experience. His own campaign manager suggested this week that this election will be about "character" more than issues. But that is a losing strategy in a year when the electorate is also looking for change at home, especially a stronger economy and rising after-tax, after-inflation incomes. Mr. McCain can only win if his character advantage is applied to an agenda of genuine change.

A campaign for reform would have the virtue of fitting both Mr. McCain's temperament and history, and it would justify his selection of 44-year-old Sarah Palin as his running mate. Democrats and the media are saying the choice of Mrs. Palin reflects Mr. McCain's impetuosity -- though they surely would have derided a more conventional choice as "more of the same." Our view is that her selection reflects Mr. McCain's recognition that he needs an energized coalition to win, and that he also is thinking about his party's political future.

Moreover, Mr. McCain is proposing a policy agenda that really would shake up the status quo. His health-care reform would give to individuals the tax benefits that only businesses now have. His proposal of an optional flat tax would go far to rationalize the tax code, just as cutting the corporate tax rate (currently the second highest in the industrialized world) would stem the flow of investment -- and jobs -- abroad. Mr. McCain has also wised up to the benefits of domestic drilling for energy, a good idea that has put Mr. Obama on the defensive. On the other hand, he still clings to a "cap and trade" anticarbon proposal that could vastly expand the federal government.

The challenge for Mr. McCain is linking those proposals to a broader philosophy of government that can mobilize a majority. He will need that support because as President he would likely face a Congress that is both more Democratic and more bitter, if the latter is possible. Though Ronald Reagan is his hero, Senator McCain has never seemed to have the Gipper's philosophical anchor -- and so the risk is that his Presidency would be one of improvisation, for better or worse.

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One thing we're sure of is that a McCain Presidency would not be George W. Bush's third term, notwithstanding Mr. Obama's frantic attempts to link them. Mr. Obama figures he'll win if he can merely persuade an electorate eager for change to throw out the Republicans. Mr. McCain's task is more difficult: To convince voters that his reform politics is superior to the status quo while also persuading voters that Mr. Obama's brand of change is more dangerous. With his speech last night, Mr. McCain reinforced for Americans his stellar leadership qualities. For the next eight weeks he will have to make a more specific case for his vision of re

Sarah Palin's Surge

By now nearly everyone in America knows that Sarah Palin described herself at the GOP convention Wednesday night as "just your average hockey mom." She isn't average anymore, though she can still throw a hip check. After a national political debut that ranks with Barack Obama's in 2004 and Ronald Reagan's in 1964, the Alaska Governor may be the future of the Republican Party.

With his nomination last night, John McCain is now the leader of the GOP (see here). But win or lose in November, Senator McCain has elevated Mrs. Palin to new prominence and jumbled Republican categories in a healthy way. The reaction at St. Paul's Xcel Center—and the fascination around the country—shows how welcome this is.

For the past several years, the GOP has been caught in the malaise of what we have often called the Beltway status quo. As insurgents challenging Washington mores in the 1980s and 1990s, Republicans were the party of ideas and energy. But over time, as the Bush Presidency ran into trouble and the Tom DeLay Congress began to care most about its own re-election, the party lost its verve, even its raison d'etre.

On Wednesday, Governor Palin offered a new populist excitement, both as a messenger and in her message. By "messenger," we aren't merely referring to her gender, though that seems to be the preoccupation of the media. Her relative youth (44) and large family—complete with its many complications—were themselves a cultural statement. Though many in the media claim she was chosen because she appealed to the Christian right, Mrs. Palin never even raised the subject of abortion. She didn't have to, since her youngest son, the one with special needs, is proof enough of her pro-life conviction.

The same goes for her record of challenging the powers that be in Alaska. With so many Republicans tainted by corruption, GOP voters have been aching for someone willing to challenge that business as usual. By all accounts, Mrs. Palin has done so in Alaska, and is popular for it. In the coming weeks, we'll learn more about her Alaska record, and rightly so. Her governing record is fair—even essential—media game, in contrast to her daughter Bristol's pregnancy.

It's being said that in choosing Governor Palin, Mr. McCain was making a play for disaffected Hillary Clinton voters. Yet we heard just one line invoke women as a political issue, and then only in a positive sense: "This is America, and every woman can walk through every door of opportunity." Our sense is that the Governor's real political potential lies in her appeal to Reagan Democrats and Truman Republicans, voters Mr. McCain will need in November.

Mrs. Palin was certainly helped this week by the media contempt for her selection. The condescension has been so thick that it offended not just Republicans in St. Paul but others who may have tuned in Wednesday to see if she was as unqualified as Sally Quinn and David Frum said she was. Mrs. Palin's refusal to be cowed is the kind of triumph over media disdain that most Americans relish.

No doubt the press corps—and Democrats—are anticipating that Mrs. Palin will be another Dan Quayle, who was a 41-year-old Senator when he was nominated for vice president in 1988. George H.W. Bush foresaw Senator Quayle as a similar reach across generations. But at the first sign of criticism, Mr. Bush's advisers gave Mr. Quayle a paint-by-numbers speech and all but stuffed him into a trunk for the duration of the campaign. His reputation never recovered.

The McCain camp wisely let Mrs. Palin play the role of a traditional Vice Presidential candidate in attacking the opposition, and doing so in her own voice. Her dissection of Mr. Obama's thin Presidential resume was as effective as anyone's, all the more so because she could compare her own executive experience to the 47-year-old Senator's.

We hope the campaign now resists any temptation to keep her under wraps. No doubt she will make mistakes on the stump, as everyone does, especially with an embarrassed press corps now looking for any what-is-the-capital-of-Laos-type mistake. But after this week, Mrs. Palin won't be easy to dismiss as too small for the job.

Palin Bashing Press Keeps Swinging and Missing

By Jonah Goldberg

"What is wrong with these people?" was the nigh-upon-universal reaction among conservatives at the GOP convention this week. Liberal reporters inquired of conservative journalists, Republican delegates, right-leaning janitors, free-market short-order cooks, even the guys walking around in elephant suits: Will Sarah Palin drop out? What about the Eagleton Option?

For those who don't know, the Eagleton Option refers to Thomas Eagleton, George McGovern's first VP pick in 1972, who was forced to withdraw because of allegations of mental illness.

A hybrid of myth and deceit peddled by the chattering bandersnatches of the Democratic Party's backup communications offices at MSNBC and other press-release transmission belts of the Obama campaign, the whole pseudo-story was surely the brightest flare in the bonfire of asininity in St. Paul this week.

Of course, it was hardly the only journalistic will-o'-the-wisp unleashed from the media bog. The claim that Palin was a Buchananite -- and hence an acolyte of a "Nazi sympathizer" according to Florida Rep. Robert Wexler -- was not true. The claims she cut funding for pregnant teens, that she was a member of the more-goofy-than-scary Alaska Independence Party, that Trig Palin -- her special-needs baby -- was really her daughter's: these were all bogus. As for the even more disgusting smears peddled at the Daily Kos and one blogger at The Atlantic -- smears that drove much of the prurient investigation into the Palin family's privacy by more reputable sources -- they were as untrue as they were repugnant.

But it was the Eagleton canard that spoke volumes. First, just as a matter of reportorial fact, as opposed to Keith Olbermann clicking his ruby-red slippers and wishing it were so, the idea that the rank and file of the GOP wanted her gone before her speech was distilled nonsense. Now, it's plain hilarious.

In the wake of Palin's performance Wednesday night, there's vastly more support among conservatives for flipping the McCain-Palin ticket to the Palin-McCain ticket. Send McCain to attend the funerals and cut the ribbons! Put the lipsticked pit bull at the lead of the Alaskanized GOP sled!

One good barometer of conservative support: Rush Limbaugh, who is rumored to kick his cat across the room in rage when he hears the name "McCain," now calls the Arizona senator "John McBrilliant."

For good or ill, going forward, Palin is easily the most popular Republican in the country, at least among people inclined to vote for the GOP. That may not last, of course (she has many trials ahead), but the instant decision of Beltway blowhards to push the Palin-as-liability fable says a lot about how little they understand much of the American electorate.

One partial explanation for the feeding frenzy is the bowel-stewing fear among an Obamaphilic press corps that Palin might actually help McCain win.

But another part of the answer is that the press was simply surprised. Cockroaches scatter when shocked by a flipped light switch. Grizzly bears attack when startled. And when caught napping by big news, the press corps floods the zone. Editors scream at underlings who missed the story. Networks fret they'll be scooped. And all of a sudden, the norms and standards become a blur in the race to be first. In the case of Palin, the press vaulted over every principle and standard they'd established about what is and isn't fair game, like O.J. Simpson leaping over luggage in the old Hertz commercials. It required the Jaws of Life to pry news of John Edwards' affair out the mainstream press. But when it came to the personal drama of Palin's 17-year old daughter, the press clawed for morsels like they were golden tickets from Wonka Bars.

They wouldn't have done the same thing if Palin were an unknown Democrat, because the press' reflex is to assume the worst of Republicans.

The Eagleton Option exposed the press' gut instincts, and the viscera are not pretty. Eagleton dropped out because it was leaked that he'd received shock therapy for ill-defined mental problems. Many of those who expected Palin to withdraw see her values and her choices as proof of a mental problem. "She's more a conservative man than she is a woman on women's issues," quoth a spokeswoman from the predictably shrill National Organization for Women, which always defines womanhood by a woman's commitment to left-wing feminist dogma. If you're pro-life, or even just a Republican, you're not a real woman, you're suffering from some sort of pernicious gender confusion.

How long before the Palin-haters insist she needs shock therapy, too? For her own good, of course.

The Republicans

McCain rallies his troops

John McCain fires up the Republicans, but Sarah Palin remains the main talking point

JOHN MCCAIN considers himself a man of action, whereas his rival, Barack Obama, is merely a man of words. That message came across loud and clear on the evening of Thursday September 4th, as the Republicans wrapped up their convention in St. Paul, Minnesota. Mr McCain’s closing speech charmed his crowd, a Republican base that has not always loved him. He did so with biography and grit, not rhetorical prowess. As a result the party appears fired up and ready to go.

The Republicans have endured a dramatic week. After Mr McCain announced, a week ago, that Sarah Palin would be his running mate, the inexperienced governor generated headlines for several days. As Hurricane Gustav sheared off the first day of the convention, revelations that Mrs Palin's 17-year-old daughter was pregnant distracted the press. Then Mrs Palin, the 44-year-old, short-term governor of Alaska, took to the stage on Wednesday and delivered a speech that thrilled conservatives, in large part for her jabs against Mr Obama. The convention-goers loved it, as did many watching from their living rooms. Mr Obama drew 38.4m viewers when he addressed the Democratic convention in the previous week; Mrs Palin attracted a similarly mighty 37.2m.

Thus Mr McCain had to show that he could perform too. His running mate had delivered attacking lines, but Mr McCain provided a more sober, personal address on the idea of service, centred on his own remarkable story, notably those years in prison in North Vietnam. He also bolstered his reputation as an independent-minded politician, speaking about corruption among Republicans in Washington, DC, and pledging to crack down on such behaviour. It was a brave move and the crowd cheered.

Mr McCain never staked his reputation on his making speeches and the last night was as much a party-wide celebration of finding its collective voice as it was a rally around its man. Mr McCain and Mrs Palin make a striking ticket: an old maverick and a young darling of the conservatives. Both claim that Mr Obama has been a bit too fast in his ambition. They may yet persuade some independents and swing-voters to think about giving the Republicans another turn in the White House, if Mr McCain can push his own theme of reform and getting rid of corruption.

It may help, too, if voters expect the Democrats to have control of both the Senate and the House after the congressional elections. Certainly the presence of Joe Lieberman endorsing his old friend Mr McCain this week might have given some voters—however sick of George Bush—the idea that the Republican candidate represents change of a sort. On the other hand voters may worry that a vote for the older, unorthodox Mr McCain could, if he falls ill, bring an untested, young and extremely conservative candidate to the most powerful job on the planet. Traditionally voters are swayed by the top of the ticket, not by the vice-presidential candidate, but this election—as in so many other ways—could yet prove to be different.

Here Are Five Things Republicans Won't Tell You: Caroline Baum

Commentary by Caroline Baum

Sept. 5 (Bloomberg) -- The Republican national convention opened under a cloud, not to mention a hurricane, and by all appearances had emerged into the sunlight by week's end.

It would have been tough to underperform expectations. All vice presidential nominee Sarah Palin had to do was walk onto the stage in an upright position to demonstrate she wasn't some kind of four-legged grizzly from the Alaska wild.

And when presidential nominee John McCain showed up to accept his party's nomination last night without his walker and nasal oxygen catheter, why it was enough to convince folks the 2008 presidential election might be a horse race.

So now that the ballyhoo is over, what were Republicans really thinking that they chose not to share with the crowd?

1. Taxes are going up.

Accepting his party's nomination for president of the United States on July 19, 1984, Democrat Walter Mondale said the country was ``living on borrowed money and borrowed time.''

Then, in perhaps the only memorable moment of his acceptance speech, he said: ``Mr. Reagan will raise taxes, and so will I. He won't tell you. I just did.''

Incumbent President Ronald Reagan won 525 electoral votes to Mondale's 13.

Candidates no longer advocate tax increases, except on the wealthy -- the one class it's still OK to discriminate against.

GOP presidential candidate John McCain plans to keep the top tax rate (35 percent) and capital gains and dividend tax rate (15 percent) where they are and lower the corporate tax rate from 35 percent to 25 percent.

I've got news for you: Taxes are only going up in our lifetime. I don't know which ones or when, but I'm certain of the direction.

Spending on Social Security and Medicare is on automatic pilot. It's projected to grow faster than the economy and revenue from payroll taxes, according to the Social Security and Medicare trustees' 2008 annual report.

Within 10 years, benefits will exceed revenue for both programs. (The disability insurance fund has run a cash-flow deficit since 2005.)

The combined cost of Social Security and Medicare will skyrocket from 7.5 percent of gross domestic product in 2007 to 17 percent of GDP by 2082. In other words, entitlement spending will eat up the entire federal budget.

Social Security's problem is demographic. In 1950 there were 8.6 workers paying Social Security taxes for every retiree receiving benefits. Today there are 3.3 workers, dropping to 2.7 in 2017, at which point ``there will not be enough workers to pay scheduled benefits at current tax rates,'' according to the trustees.

McCain says he will save Social Security without raising taxes. Unless the U.S. produces more babies or imports more immigrants, we the people can look forward to paying higher taxes.

2. Thank God he didn't show up!

With Hurricane Gustav bearing down on the Gulf Coast last weekend, President George W. Bush made an executive decision to skip the GOP convention in St. Paul, Minnesota.

He did such a ``heck of a job'' responding to Hurricane Katrina three years ago, he figured he better be at mission control when the hurricane hit.

Bush ended up addressing the convention via satellite Tuesday night, but most GOP operatives were glad he was MIA.

McCain's best hope for the November election lies in distancing himself from the Bush presidency. If a natural disaster happens to put some physical space between them, so be it.

3. Energy independence is a myth.

Presidents have been preaching the virtues of energy independence for more than three decades. The drumbeat got louder as crude oil prices doubled from July 2007 to July 2008, with the sound traveling across the aisle from Democrats to Republicans.

The idea of reducing our dependence on foreign oil -- the U.S. imports almost two-thirds of its energy -- seems to have broad appeal. Why send U.S. dollars to autocratic Middle East regimes that harbor terrorists?

A better question is, why is the party of free trade advocating a mercantilist energy policy? Why not shoot for auto independence or coffee independence?

Energy prices are set in the global marketplace. As long as the Middle East has a comparative and absolute advantage in finding and extracting oil, closing the U.S. off from imports is a good way to impoverish the nation.

4. Reality of Bush tax cuts underperformed theory.

President Bush reduced the top marginal tax rate to 35 percent from 39.6 percent and cut the rate on long-term capital gains and dividends to 15 percent. Such ``supply-side'' tax cuts are touted as an incentive to work, save and invest.

Oops. Saving and investment were ``anemic'' during the Bush years, according to Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago.

The plunge in the personal savings rate to a post-World War II low of zero during the Bush years coincided with a decline in the labor participation rate, Kasriel says.

Business investment seems to have missed the tax-cut incentive as well.

``The only time the net stock of nonresidential fixed assets grew slower than in recent years'' was when Poppy Bush was president, Kasriel says.

5. Bristol Palin, the 17-year-old unmarried pregnant daughter of our vice presidential candidate, won't be the poster child for our ``abstinence education'' platform.

McCain Promises to Change Washington, Restore Party Principles

Sept. 5 (Bloomberg) -- John McCain accepted the Republican nomination for president with a vow to ``restore the principles'' of his party and transform Washington.

``We were elected to change Washington, and we let Washington change us,'' McCain said at the Republican National Convention in St. Paul, Minnesota, last night. ``We lost the trust of the American people when some Republicans gave in to the temptations of corruption.''

McCain, 72, an Arizona senator, sought to build on the enthusiasm spurred the previous evening by his running mate, Alaska Governor Sarah Palin, 44. After days of questions about whether she had enough experience to lead, Palin delivered an address that had delegates raving about her speaking skills and ability to take on Democratic nominee Barack Obama.

McCain told cheering convention-goers that he was proud to introduce Palin to the country and said, ``I can't wait until I introduce her to Washington.'' Together, he said, they would ``shake up'' the capital. ``Change is coming,'' he promised.

In a speech that lasted almost 50 minutes, McCain focused on his record of service as a prisoner of war in Vietnam and his fights to reduce wasteful government spending. One of his most impassioned moments came when he vowed to take on unnecessary special projects in so-called government earmarks.

`Know Their Names'

``The first big-spending pork-barrel earmark bill that comes across my desk, I will veto it,'' McCain said. As for the lawmakers who requested the earmarks, ``I will make them famous,'' he said. ``You will know their names.''

The Republican Party, ``the party of Lincoln, Roosevelt and Reagan, is going to get back to basics,'' he said.

Other than a conclusion in which McCain urged delegates to ``fight,'' ``stand up,'' and ``never give up,'' his speech was more subdued and caused less excitement in the convention hall than that of his vice presidential nominee.

Palin quickly emerged as a flashpoint after being selected by McCain on Aug. 29. Her presence on the ticket energized social conservatives, who like her stance against abortion and that she speaks about governing with ``a servant's heart.'' And she won more converts in St. Paul.

``She was dynamic,'' said Jim Durkin, 47, an Illinois legislator and state chairman for the McCain campaign. ``What most impressed me was that she's taken so many punches over the past few days, and she showed she can really deliver one.''

$10 Million Haul

Palin also revved up the opposition. Obama reported raising more than $10 million yesterday, a one-day record, after the Republican governor criticized the Democratic nominee's experience in her speech.

``Sarah Palin's attacks have rallied our supporters in ways we never expected,'' Obama campaign spokesman Bill Burton said.

Palin skewered Democrats and the news media as a ``Washington elite'' in her introduction to a national audience two days ago. Contrasting herself with Obama, she said, ``I guess a small-town mayor is sort of like a community organizer, except that you have actual responsibilities.''

Palin was mayor of Wasilla, with a population of less than 10,000, before she became Alaska's governor in December 2006; Obama, 47, a U.S. senator from Illinois, worked as a community organizer in Chicago and a state legislator before running for national office.

Distorting Record?

Obama said yesterday that such attacks distort his record.

``They're talking about the three years of work I did right out of college as if I'm making the leap from two or three years out of college to the presidency,'' Obama said after campaigning in York, Pennsylvania. He said he highlights his community work because it shows ``where I'm coming from'' and demonstrates his commitment to fighting for middle- and lower-income people.

Former Democratic presidential candidate Gary Hart, who served as a groomsman at McCain's second wedding, yesterday criticized the choice of Palin, calling it ``irresponsible,'' in an interview with ABC News. ``There are minimum standards; you have to qualify to govern this country,'' Hart said.

Yet Palin's addition to the ticket provided a boost to McCain. The day after McCain announced her as his running mate, his campaign took in a record $6.8 million. His crowds also swelled. After focusing on events with a few hundred people, McCain greeted 10,000 in Pennsylvania on Aug. 30 and 22,000 in Missouri on Aug. 31 with Palin at his side.

Audience

Palin, little-known beyond her state's borders, got a television audience of 37.2 million people, or about a quarter of American households, for her convention address, the Nielsen Co. said. That's just shy of the 38.4 million who watched Obama's acceptance speech last week from Denver.

``Palin electrified the Republican base while shifting media attention, and America's attention, toward her rather than Obama,'' said Julian Zelizer, a history and public affairs professor at Princeton University in New Jersey. ``McCain gave a mediocre speech, but that was the most people expected. His life story is what the GOP hopes to sell.''

McCain's nomination caps an improbable rise. Once the Republican front-runner, he was all but written off last year after his campaign was broke and in disarray, causing him to sink in the polls. In his speech tonight, McCain thanked supporters who ``stood by me when the odds were long.''

Cutting Taxes

He also praised Obama's achievement in winning the Democratic nomination before outlining his differences with the Illinois senator.

``I will keep taxes low and cut them where I can; my opponent will raise them,'' McCain said. ``I will open new markets to our goods and services. My opponent will close them.''

The Obama campaign rebutted the speech, saying the Democrat has pledged to cut taxes for middle-class families. Obama has said he would raise levies on the highest-income brackets by letting President George W. Bush's tax cuts expire.

Two polls released yesterday differed on the state of the presidential race. A Sept. 1-3 CBS News survey showed the race tied, with McCain and Obama each at 42 percent. A CBS poll taken last weekend had Obama ahead by 8 percentage points.

The daily Gallup tracking poll, also from Sept. 1-3, showed Obama with a 7-point lead, a 1-point increase over the previous day. Obama was supported by 49 percent of those surveyed by Gallup and McCain by 42 percent.

Open Question

The conflicting polls leave the question open about how much Palin has affected McCain's support as the two prepare to campaign together today in Wisconsin and Michigan.

Palin is only the second woman to be nominated for the second-highest office in the nation. Democratic vice presidential candidate Geraldine Ferraro in 1984 also ``was a great big deal as the first female, and she played to enthusiastic Democratic audiences,'' said Bruce Buchanan, a political scientist at the University of Texas in Austin.

Still, because she and presidential nominee Walter Mondale were running against popular incumbent Ronald Reagan, Ferraro's candidacy had little effect in the end, he said.

While Palin roused the party base at the convention, it remains to be seen how she'll be received by the nation, Buchanan said.

``She has to continue to earn her spurs on the campaign trail,'' he said.

Russian Stocks, Bonds Tumble as Central Bank Props Up Ruble

Sept. 5 (Bloomberg) -- Russian stocks plunged and the cost to protect government bonds from default jumped to the highest in almost four years as the central bank shored up its currency pummeled by the conflict in Georgia and tumbling commodity prices.

The central bank said it intervened after the ruble fell to the lowest level in almost a year against the dollar yesterday. Russia's RTS Index dropped the most among 88 stock indexes tracked by Bloomberg today, capping its worst week since May 2006, and credit-default swaps on the government's debt rose 13 basis points to 165, the highest since November 2004, according to CMA Datavision prices.

Russia investors pulled out a net $4.6 billion since the invasion of Georgia last month, according to the central bank, contributing to the worst quarterly slump in shares since the government's debt default a decade ago. Russia, the world's biggest energy exporter and largest producer of nickel and palladium, was also hurt as crude oil slumped 7 percent this week to the lowest since April.

``They have to intervene because people are selling ruble assets and taking the money out of the country,'' said Nigel Rendell, senior emerging-markets strategist at Royal Bank of Canada Ltd. in London. ``In a time of uncertainty, I think it's a sensible move to get out of Russia. The political situation doesn't look good.''

The central bank is probably buying more rubles than at any time in recent years, possibly the most since 1998, Rendell said.

American Ally

The five-day war with Georgia brought Russia into conflict with one of the region's staunchest U.S. allies. Georgia is the third-largest member of the allied coalition in Iraq and part of a U.S.-backed ``southern energy corridor'' that connects the Caspian Sea region with world markets, bypassing Russia.

The ruble, which is kept within a trading band against a currency basket to limit the impact of fluctuations on the competitiveness of Russian exports, fell to as low as 25.4602 per dollar yesterday, the weakest level in a year.

The central bank in Moscow responded by selling a ``significant'' amount of foreign currency to prop up the ruble, First Deputy Chairman Alexei Ulyukayev said. ``The ruble had got to the higher end of the trading band, so it was reasonable,'' he told reporters in Sochi today, declining to give the exact amount.

The bank sold about $4.5 billion of foreign reserves yesterday, according to Mikhail Galkin, a fixed-income analyst at MDM Bank in Moscow.

The currency snapped three days of declines today, advancing to 30.3236 against the central bank's dollar-euro basket as of 1:15 p.m. in Moscow.

Goldman's Call

Goldman Sachs Group Inc. said today that investors should close their long ruble positions, or bets that the Russian currency will rise, based on 12-month non-deliverable forwards. The contracts oblige traders to exchange one currency for another at a set price and date in the future. Settlements are made in dollars.

Russia's RTS stock index fell 33 percent since July 1, the worst slump since the government defaulted on $40 billion of debt in August 1998, devaluing the ruble and crushing the banking system. The dollar-denominated index dropped 5.7 percent to 1,440.26, bringing its weekly slide to 12 percent. The ruble- denominated Micex Index also sank 5.7 percent to 1,209.4, the lowest since June 2006.

Ukraine Suspended

Neighboring Ukraine's PFTS Index was the world's second- worst stock index this quarter, falling 29.1 percent, as Russia's invasion of Georgia and the feud between President Viktor Yushchenko and Prime Minister Yulia Timoshenko shook investor confidence. Stock market trading was suspended today because of a 7 percent slump, according to Andriy Kolomiets, the spokesman for the PFTS Stock Exchange.

Credit-default swaps on Ukraine's government debt rose 25 basis points to a record 502, according to CMA Datavision.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality.

Five-year credit-default swaps on OAO Gazprom, Russia's largest company, increased 13.5 basis points to 298, the highest level since March, Bloomberg data show.

``There is a global risk aversion and an understanding that there will be new debt issued that will pay more than existing curves,'' said MDM's Galkin.

Shares of OAO Rosneft, the country's biggest oil producer, dropped as much as 8.8 percent and last traded at 191 rubles. OAO GMK Norilsk Nickel, Russia's biggest mining company, tumbled as much as 15.2 percent and was trading at 3,805 rubles.

Oil has fallen more than 7 percent this week, heading for its biggest weekly decline in a month, with crude for October delivery at $106.90 on the New York Mercantile Exchange. Nickel dropped $605 to $18,600 a metric ton.

U.S. Payrolls Fell 84,000; Jobless Rate Jumps to 6.1% (Update3)

Sept. 5 (Bloomberg) -- The U.S. lost more jobs than forecast in August and the unemployment rate climbed to a five- year high, heightening the risk that the economic slowdown will worsen.

Payrolls fell by 84,000 in August, and revisions added another 58,000 to job losses for the prior two months, the Labor Department said today in Washington. The jobless rate jumped to 6.1 percent, matching the level of September 2003, from 5.7 percent the prior month.

Workforce reductions at companies from UAL Corp. to Gannett Co. are adding to the woes of Americans hurt by lower home values, scarcer credit and higher prices. The report may fuel concern that consumer spending, the biggest part of the economy, will decline and bring the expansion to a halt. Stock-index futures dropped, Treasury notes climbed and the dollar pared gains.

``It certainly increases the probability that we really are in a recession,'' William Poole, former president of the Federal Reserve Bank of St. Louis, said in an interview with Bloomberg Television. ``It is a weak number, including the revisions.''

Payrolls were forecast to drop 75,000 after a previously reported 51,000 decline in July, according to the median estimate of 76 economists surveyed by Bloomberg News. Estimates ranged from declines of 40,000 to 150,000. The jobless rate was projected to remain at 5.7 percent.

Factory payrolls dropped 61,000 after decreasing 38,000 in July. Economists had forecast a drop of 35,000. The decline included a loss of 39,000 jobs in auto manufacturing and parts industries.

Factory Workforce

Today's report also showed the effects of the housing slump and the credit crisis that it triggered. Payrolls at builders fell 8,000 after decreasing 20,000. Financial firms trimmed payrolls by 3,000 for a second consecutive month.

Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 27,000 workers after cutting 12,000 in July. Retail payrolls fell by 19,900 after a drop of 18,100.

``We're losing jobs in all kinds of industries now,'' Roger Kubarych, chief U.S. economist at UniCredit Global Research in New York, said in an interview with Bloomberg Radio. ``This is the clearest recessionary signal we've seen.''

Government payrolls increased by 17,000 after rising 6,000. That meant private payrolls fell by 101,000 in August.

Today's report brings the total decline in payrolls so far this year to 605,000. The economy created 1.1 million jobs in 2007.

Recession Indicators

Employment is among the indicators tracked by the National Bureau of Economic Research, the official arbiter of U.S. economic cycles, in calling a recession. The others are sales, incomes, production and gross domestic product.

The group defines a recession as a ``significant'' decrease in activity over a sustained period of time, and usually takes six to 18 months to make a determination.

Job losses are one reason economic growth will soften after a second-quarter rate of 3.3 percent. The economy may expand at an average 0.7 percent annual pace from July through December, according to the median forecast in a Bloomberg survey.

Consumer spending, which accounts for more than two-thirds of the economy, in July posted the biggest drop in four years after inflation.

``The pace of economic activity has been slow in most districts,'' the Federal Reserve said in its Beige Book report this week. There's ``a general pullback in hiring.''

`Close to Stagnating'

The economy ``is close to stagnating,'' Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, said in an interview with Bloomberg Radio. In part because of continued gains in worker productivity, employers will keep cutting jobs, sending the U.S. unemployment rate to 6.75 percent next year, he said.

Goldman economists projected a 100,000 decline in payrolls for August.

The average work week remained at 33.7 hours. Average weekly hours worked by production workers fell to 40.9 hours from 41 hours, while overtime decreased to 3.7 hours from 3.8 hours.

Workers' average hourly wages rose 7 cents, or 0.4 percent, to $18.14 from the prior month. Hourly earnings were 3.6 percent higher than August 2007. Economists surveyed by Bloomberg had forecast a 0.3 percent increase from July and a 3.4 percent gain for the 12-month period. Average weekly earnings increased to $611.32 from $608.96.

U.S. Stocks Fall on Drop in Payrolls, Extending Global Slump

Sept. 5 (Bloomberg) -- U.S. stocks fell, adding to the worst week for global equities since September 2001, after the unemployment rate reached the highest level in five years as the world's economy slows.

Harley Davidson Inc., Abercrombie & Fitch Co. and Exelon Corp. tumbled more than 4 percent each after payrolls shrank by a higher-than-projected 84,000 in August. Merrill Lynch & Co. lost 3.7 percent as Goldman Sachs Group Inc. predicted the third- largest U.S. securities firm will post more writedowns and advised clients to sell the shares. The MSCI World Index fell 6.1 percent this week on expectations credit losses and slumping consumer spending will reduce earnings at banks and retailers.

``The concern over the earnings outlook for 2009 is well founded,'' Mario Gabelli, who oversees $28.3 billion as the chief executive officer of Gamco Investors Inc., told Bloomberg Television. ``The U.S. consumer is greater than China, Russia, India and Brazil in terms of the impact. As we're slowing down, we're slowing down the world. The consumer has been in a recession since November of 2007.''

The Standard & Poor's 500 Index lost 11.23 points, or 0.9 percent, to 1,225.6 at 10:23 a.m. in New York. The Dow Jones Industrial Average fell 81.25, or 0.7 percent, to 11,106.98. The Nasdaq Composite Index dropped 17.05 to 2,241.99. About four stocks fell for each that rose on the New York Stock Exchange.

The S&P 500 lost 4 percent so far this week and is down 16 percent in 2008. The benchmark index for American equities has fallen for five straight days, its longest losing streak since January. The week's losses threatened to erase the S&P 500's rebound from an almost three-year low set on July 15. The index is up 1.4 percent since then after rebounding as much as 7.4 percent.

6.1 Percent Unemployment

Today's report showing an unemployment rate of 6.1 percent added to concern that the worst housing slump since the Great Depression and more than $500 billion in credit losses and writedowns at global banks are dragging the nation into a recession. Indexes of commodity and energy producers tumbled more than 7 percent this week amid expectations slowing growth will curb demand for oil and metals.

Today's decline is smaller than the plunge signaled by S&P 500 futures prior to the open of U.S. exchanges. The September contract traded on the Chicago Mercantile Exchange dropped as much as 1.3 percent seven minutes after the employment report was released. The retreat was pared by half when the pre-market session ended.

Treasuries rose and the dollar fell against the yen.

Merrill Lynch, down 54 percent this year in New York trading, sank 97 cents to $25.24. Goldman added the company to its ``conviction sell'' list and lowered its share-price projection by 23 percent to $22.

Merrill Valuation

``Merrill currently trades at the highest price-to-book multiple in our large-cap brokerage universe, despite having some of the most significant exposures to troubled assets such as CDOs, mortgages and leveraged loans,'' analysts led by William Tanona wrote. ``With these markets still under pressure, we believe additional writedowns and book value deterioration will continue to plague the stock.''

New York-based Merrill, battered by more than $50 billion of credit market losses and writedowns, has sold mortgage-linked assets to reduce risk and free up capital. The company traded at 1.22 times book value at the open of exchanges today, compared with 0.91 for Citigroup Inc., the only other firm that's lost more from the credit market crunch, according to data compiled by Bloomberg.

M&A Speculation

SanDisk Corp. jumped 25 percent to $16.80. Samsung Electronics Co. said it may buy the memory-card maker in what would be the South Korean company's biggest acquisition. Samsung, which is the world's second-largest chipmaker after Intel Corp., said it's considering various options, including an acquisition.

UST Inc. added 24 percent to $66.86. Altria Group Inc., largest U.S. cigarette maker, is in talks to buy the nation's biggest snuff producer for more than $10 billion, the New York Times reported, citing people with knowledge of the discussions who weren't identified.

Stocks in Europe and Asia fell today on concern weakening economic growth will curb earnings at semiconductor makers while credit-related losses at banks increase.

``We're clearly in a bear market,'' Simon Moss, who manages the equivalent of $4.1 billion as investment director of U.S. equities at Scottish Widows Investment Partnership in Edinburgh, said in a Bloomberg Television interview. ``There is no doubt the economy is slowing.''

Fed Bets

The employment report spurred investors to increase bets the Federal Reserve will hold interest rates steady for the rest of the year. Odds policy makers will leave the target rate for overnight loans between banks unchanged through the end of 2008 rose to 85 percent from 79 percent yesterday, futures trading shows.

The average price-earnings multiple of the S&P 500 has declined more than 5 percent from a five-year high of 26.2 on Aug. 15. The index is trading for 24.72 times profits in the last 12 months, or 14.6 times analysts' earnings estimates.

Companies in the S&P 500 are forecast to report profits in the fourth quarter that are 42 percent higher than a year ago, the biggest increase ever. Financial company earnings are projected to rise more almost five-fold, while income at mining and chemical companies may increase 35 percent.