2009 - %3, March

Zero-Based Budgeting

| Fri Mar. 27, 2009 1:17 PM EDT
I didn't post about this when it happened, but yesterday the Republican brain trust in the House decided to show their seriousness about cutting the deficit by publishing a "budget" that contained no actual numbers.  The press mostly thought it was pretty comical, and today Eric Cantor and Paul Ryan tried to pretend that they had nothing to do with this project and were only bullied into supporting it.  Matt Yglesias isn't buying:

Reps Ryan and Cantor saw that the press was reacting poorly to the Boehner/Pence flim-flam “budget” and decided to throw their colleagues under the bus. And, frankly, I’m not surprised that Ryan and Cantor were surprised. I was surprised, too. I’ve never really seen political reporters get outraged before about the fact that a policy document makes no sense in the past. It was a curious outbreak of substance among the press corps that I don’t think was particularly foreseeable.

I guess that's a fair point: it is a little unusual for the press to call BS for what it is.  At the same time, it's also worth noting just how invisible this whole exercise was.  It got lots of mockery in the blogosphere, and it also showed up on political shows like Maddow and Olbermann, but aside from that it wasn't so much ridiculed as ignored.  If you get your news from the New York Times or NPR or Katie Couric, you'd barely even know this had happened, let alone that everyone thought it was ridiculous.

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Chinese-Made Drywall: The Next Tainted Product Crisis?

| Fri Mar. 27, 2009 12:46 PM EDT
Chinese-made drywall releases a rotten egg smell and might be corroding household wiring and causing health problems. It was installed throughout the Gulf Coast region in the wake of Hurricane Katrina as U.S.-made drywall became scare in the midst of the housing boom. One hundred and fifty homeowners have complained about drywall odors to the Florida Health Department; the large homebuilder, Lennar Corp., has been forced to rip out walls and is suing Chinese drywall companies; and the U.S. Consumer Product Safety Commission is investigating whether the drywall is posing a potential safety hazard. The Wall Street Journal, the only national paper that has covered the issue extensively, wonders if Chinese drywall is the "new mold." It's certainly the new toy or dog food, other Chinese product lines that have proven potentially dangerous and led to recalls. The drywall scare will compound the housing crisis by further burdening struggling builders and homeowners. And it points to the hollowness of the housing boom in the context of the global economy. Even our homes weren't made at home, and the housing boom has imported toxic assets to Main Street in more ways than one.

Global Capital Flows

| Fri Mar. 27, 2009 12:21 PM EDT
That's an exciting headline, isn't it?  But it's important.  One of the key bits of financial deregulation over the past three decades has been the dismantling of capital controls, allowing vast tidal waves of money to flow between borders without hindrance.  In general, this has been a plus: nobody in Britain wants to go back to the days of sleeping on continental friends' couches because they weren't allowed to take more than 50 pounds out of the country. On the other hand, the Asian currency crises of the late 90s were largely due to unsustainable amounts of unregulated foreign capital suddenly flowing into the region (and then just as suddenly stopping), and the current banking crisis in the U.S. is at least partly due to an overreaction to the Asian crisis.  For the past decade all that Asian money has been flowing into the U.S. instead, and a tsunami of cheap money was one of the factors that caused the credit and housing bubble of the past few years.  Megan McArdle examines her free trade beliefs on this score:

[This suggests] that global capital flows may be way more problematic than I have historically been willing to credit.  I don't want to blame all bubbles on foreign money.  But foreign money has two unpleasant characteristics:  there is so much of it that it can relatively easily swamp a nation's productive capacity, and it is relatively uninformed about the local market.

I'm not sure where that leaves me.  The capital controls of the mid-twentieth century were even worse, especially for emerging markets, where they became both focal points for, and sources of, massive corruption.  And one of the reasons America today is such a massively successful economy is that foreign money funded our industrialization.  Bubbles may simply be an inescapable side effect.  But perhaps it's time to rethink a commitment to global capital liberalization.

I'm not sure where it leaves me, either, especially since this has been an active subject of conversation for a decade already and hasn't produced anything even close to a consensus.  But this does seem like the kind of topic that lends itself to my "sand in the gears" theory: we don't need to reinstate capital controls, we just need to slow down the flow of global capital ever so slightly.  Even a tiny tax on foreign capital flows could have a significant impact.  Ideas welcome on this score.

Lights Out...Forever?

| Fri Mar. 27, 2009 11:56 AM EDT
Earth Hour starts at 8:30 PM tomorrow. Yet as people around the world prepare to throw the switch to enlighten others about climate change, I'm mildly freaked about the prospect of the lights going out for good. New Scientist reports that NASA and the National Academies of Science are pretty concerned about giant solar plasma balls wiping out the world's power grids in an instant. And not just for an hour or two; we're talking months or years—or at least until someone figures out a way to make more electrical transformers without using electricity. (Read the full report here.) Such a "space weather Katrina," as the NAS helpfully describes it, could literally be the beginning of a new dark age. Oh, and of course, the next round of solar flare-ups is scheduled to start in—when else?— 2012.

Bush Leaves Legacy of Fraud and Abuse At Small Business Administration

| Fri Mar. 27, 2009 11:42 AM EDT

It's been a rough decade for the Small Business Administration. The Bush administration slashed its budget by more than half, and many of its most experienced and knowledgeable employees were let go. To make matters worse, multiple investigations have found evidence of waste, fraud, and abuse at the agency, which is supposed to help small businesses drive economic growth. On Wednesday, the embattled agency was dealt another blow when the Government Accountability Office revealed that the SBA's $8 billion program designed to funnel government contracts to small businesses in poor areas gave millions to companies that did not meet the legal requirements, including one that was "headquartered" in a trailer home occupied by someone unrelated to the company. Some of the owners of the "small businesses" in question admitted straight-out to the GAO that they were defrauding the SBA's HUBZone program by funnelling money to big businesses or businesses outside the zones.

Benchmarks, Again

| Fri Mar. 27, 2009 11:34 AM EDT
The New York Times reports on Obama's plan to get serious in Afghanistan:

President Obama plans to further bolster American forces in Afghanistan and for the first time set benchmarks for progress in fighting Al Qaeda and the Taliban there and in Pakistan, officials said Thursday.

....Although the administration is still developing the specific benchmarks for Afghanistan and Pakistan, officials said they would be the most explicit demands ever presented to the governments in Kabul and Islamabad....American officials have repeatedly said that Afghanistan has to make more progress in fighting corruption, curbing the drug trade and sharing power with the regions, while they have insisted that Pakistan do more to cut ties between parts of its government and the Taliban. Mr. Obama telephoned President Hamid Karzai of Afghanistan and President Asif Ali Zardari of Pakistan on Thursday to share the main elements of the strategic review.

I was a big proponent of setting benchmarks and milestones in Iraq, so I can hardly complain about this without grossly contradicting my past instincts.  But I guess you can just call me Walt Whitman this morning, because at a gut level something about this whole plan makes my blood run cold.  It's so McNamara-ish I can practically see him making the announcement in my mind's eye.

On a less purely emotional level, the key thing here is how Obama plans to make these benchmarks credible.  The problem with benchmarks in a war like this has always been the unlikelihood that an American president will withdraw troops without at least pretending to have achieved victory.  I mean, how do you do it?  Withdrawing support piecemeal because specific benchmarks in specific regions haven't been met makes no sense tactically, but stepping up to the press room podium one day and announcing, "We're losing, so we're pulling out" is political suicide, and everyone knows it.

In related Afghanistan news, David Brooks becomes about the millionth person to kinda sorta change his mind about one of our overseas quagmires after visiting in person and getting six days of full-court press treatment from the folks on the ground.  The arc of his column was so predictable I practically could have written it myself.

For something different, check out Sarah Chayes, an aid worker in Kandahar province.  She admits that things are going badly, but guess what?  That's a reason to double down too.  "The answer is not to lower the bar but to raise it. What is needed is some of that patented Obama 'Yes, we can!' energy."  Sigh.

OK, fine: I'm in a sour mood this morning.  Just consider this a vent.  But I can't say that anything I've read or heard makes me more optimistic about Afghanistan today than I was yesterday.  I sure as hell hope that Obama knows what he's doing.

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Insert Headline Here

| Fri Mar. 27, 2009 11:00 AM EDT
Speaking of the LA Times, check this out.  Jeebus.  You kinda hate to kick someone when they're down, but they still have a few editors left on the copy desk, don't they?

Fuel Inefficiency

| Fri Mar. 27, 2009 10:47 AM EDT
Here's an interesting AP dispatch on page A18 of my morning LA Times:

The Obama administration plans to raise fuel efficiency standards by two miles per gallon to a 27.3 average mpg for new cars and trucks in the 2011 model year, marking the first increase in passenger car standards in more than two decades.

Under the changes, which are slightly less stringent than those proposed by the George W. Bush administration, new passenger cars will need to meet 30.2 mpg for the 2011 model year; and pickup trucks, SUVs and minivans will need to reach 24.1 mpg....The Bush administration had proposed regulations last year that would have raised the standards to a combined 27.8 mpg in 2011, requiring passenger cars to meet 31.2 mpg and light trucks to hit 25 mpg that year.

I know that 2011 is only a couple of years away, so nobody expects anything dramatic by then on the auto mileage scene.  But did we really all vote for Obama so that he could set efficiency standards less stringent than George Bush's?

John Galt vs. Bilbo Baggins

| Fri Mar. 27, 2009 9:53 AM EDT

Killer quote from Kung Fu Monkey:

There are two novels that can change a bookish fourteen-year old's life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.

My thoughts on Randians here.

Big Banks, Big Banking Industry

| Fri Mar. 27, 2009 12:49 AM EDT
Simon Johnson writes that he's seen a lot of bank crises during his years at the IMF, and eventually problems with the banking sector always roll downhill onto the rest of the economy.  Unsurprisingly, the same thing has happened here:

But there’s a deeper and more disturbing similarity: elite business interests — financiers, in the case of the U.S. — played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better — in a “buck stops somewhere else” sort of way — on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies — lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership — had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits — such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998 — were ignored or swept aside.

Johnson's solution is twofold: nationalize the bad banks and then carve them up into a bunch of small banks so they can never harm us again.  I have my doubts.  Not about nationalization, which I suspect is inevitable, but about the size of individual banks being at the root of our problem.  As Johnson himself suggests, banks would have to get pretty damn small — smaller than Lehman Brothers and Bear Stearns were — before their failure could be tolerated, and I'm just not sure we live in a world where that's practical.

After World War II we eventually rejected the Morgenthau plan to deindustrialize Germany, deciding (wisely, I think) that industrialization per se wasn't the cause of the conflict.  Likewise, I think crude bank size is a red herring for our current financial collapse.  Small banks can become overleveraged just as easily as big ones, hedge funds pay higher salaries than Wall Street behemoths, the interconnectedness of the global financial sector is a bigger cause of systemic worries than size alone, and credit expansions spiral out of control largely due to lack of political will, not because Citigroup is large and clumsy.  Those are the things we should be focused on.

Now, Johnson makes the fair point that the kind of systemic regulation I prefer is impossible to put in place because big banks have so much lobbying power that they can prevent it.  But again, I don't think it's big banks that produce this kind of power, it's a big banking industry.  If we can somehow shrink the overall size and profitability of the industry, their lobbying power will shrink too.  And if we limit their leverage, limit systemic credit expansion, and force more sunlight into Wall Street's trading activity, there's a pretty good chance we can do that.

It won't be easy, of course.  As Johnson says, the finance industry still has enormous sway in Washington and will fight tooth and nail to keep their toys from being taken away.  But hell — if we can't do it now, of all times, then what chance do we have of permanently slashing the size of big banks either?  Not much.  So since it's going to be a fight either way, why not attack the roots instead of the branches?

POSTSCRIPT: Just in case it's not clear, Johnson's article is terrific reading, well worth a few minutes of your time.  I happen to disagree with his technical approach to reducing the size and power of the finance sector, but his description of the problem is top notch.

Plus, of course, he might be right and I might be wrong.  So go read it.