2010 - %3, January

Excess Reserves

| Wed Jan. 27, 2010 4:51 PM EST

Back in 2008 the Fed got authority to start paying interest on excess bank reserves held on the Fed's books. They took advantage of this authority immediately, and as a result banks started stashing a lot of money at the Fed. This is a very useful tool: if you raise the rate then you take money out of circulation, and if you lower rates you give banks incentives to go find better things to do with it. Matt Yglesias comments:

People have wondered for a while what’s the Fed’s “exit strategy” from the current bout of credit easing, and there you have it. Raising the interest rate on excess reserves from 0.25 percent to 0.5 percent or .75 percent or 1 percent would have a contractionary impact and help curb inflation if this becomes a problem in the future. Today, however, inflation is not a problem. Very high unemployment, however, is a problem. So if raising the rate from 0.25 to .5 produces contraction, then why shouldn’t lowering it from 0.25 percent to 0 percent percent produce expansion?

Fiddling with interest rates on excess reserves is indeed a new and powerful weapon in the Fed's arsenal. At the moment, though, it's not clear that lowering rates would do any good, because it's not clear what it is that's keeping bank lending low. The most likely reason, though, is that the private sector growth projections are weak, excess capacity still abounds, the housing market continues to suck, and there's just not a lot of demand for new loans. Lowering the interest rate on excess reserves won't change this, it will just eat into bank earnings, and right now the Fed is eager for banks to recapitalize as quickly as possible. That's probably why the Fed isn't changing its excess reserve policy right now.

Needless to say, comment from informed observers is welcome on this score.

UPDATE: Another possible reason for sluggish bank lending is here. I doubt it's really a major factor, but it's certainly a fascinating example of unintended consequences.

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Will Sen. Dorgan Disclose His Potential New Employers?

| Wed Jan. 27, 2010 3:58 PM EST

When Byron Dorgan announced earlier this month that he is retiring from the Senate to pursue, among other things, work on energy policy in the private sector, I wondered whether the North Dakota Democrat would land a job in the coal industry. Now others are asking questions about Dorgan's post-Senate plans.

PolluterWatch, a project of Greenpeace, sent a letter to Dorgan's office on Wednesday asking for information on whether the senator has been actively seeking work in a particular sector. Dorgan will likely have to vote on some sort of climate and/or energy legislation before he retires, so it's fair to inquire about what, if any, future employers he has been courting.

PolluterWatch also requested a list of energy lobbyists and their respective clients that Dorgan has had contact with about potential employment, as well as details of phone calls, emails, or meetings. And they ask him to pledge to "wait until after an energy bill is passed this year to engage in any further discussions about future employment with interests that lobby you."

"I am sure that you would not allow future career prospects to influence your legislative judgment," the group wrote."However, by releasing your records and pledging to refrain from any employment discussions, you can avoid creating any perception to the contrary."

Senate offices aren't required by law to disclose this sort of information, so it's unlikely that PolluterWatch will get a response any time soon. "We're not accusing him of any malfeasance at this point," PolluterWatch director Kert Davies told Mother Jones. "We're just asking the question and asking for transparency."

CIA Agent Walks Back Waterboarding Claim

| Wed Jan. 27, 2010 3:17 PM EST

A prominent backer of waterboarding has quietly recanted his endorsement of the torture technique. In December 2007, recently retired CIA operative John Kiriakou told ABC News that 30 to 35 seconds of simulated drowning was all it took to make senior al Qaeda commander Abu Zubaydah sing like a bird. "From that day on, he answered every question," Kiriakou said. "The threat information he provided disrupted a number of attacks, maybe dozens of attacks."

Kiriakou's stunning account—made in an exclusive interview with ABC's Brian Ross—was seized upon by torture proponents as proof that they'd been right all along. But the New York Times discovered last April that Kiriakou "was not actually in the secret prison in Thailand where Mr. Zubaydah had been interrogated but in the CIA headquarters in Northern Virginia." Now, Jeff Stein of Foreign Policy magazine has discovered Kiriakou himself retracting the waterboarding claims in his recently released memoir, The Reluctant Spy:

"What I told Brian Ross in late 2007 was wrong on a couple counts," he writes. "I suggested that Abu Zubaydah had lasted only thirty or thirty-five seconds during his waterboarding before he begged his interrogators to stop; after that, I said he opened up and gave the agency actionable intelligence."

But never mind, he says now.

"I wasn't there when the interrogation took place; instead, I relied on what I'd heard and read inside the agency at the time."

In a word, it was hearsay, water-cooler talk.

"Now we know," Kiriakou goes on, "that Zubaydah was waterboarded eighty-three times in a single month, raising questions about how much useful information he actually supplied."

Indeed. But after his one-paragraph confession, Kiriakou adds that he didn't have any first hand knowledge of anything relating to CIA torture routines, and still doesn't. And he claims that the disinformation he helped spread was a CIA dirty trick: "In retrospect, it was a valuable lesson in how the CIA uses the fine arts of deception even among its own."

Two years after Kiriakou went public with his ill-considered support for waterboarding, public opinion has turned in favor of the formerly controversial tactic. In the wake of the attempted Christmas Day airplane bombing, Rassmussen polling found "58% of US voters say waterboarding and other aggressive interrogation techniques should be used to gain information" from the underwear bomber—who spoke readily to authorities without the threat of torture.

Stein goes on to get a priceless response from the CIA and lays into ABC's shoddy investigative reporting. (In the transcript of the interview, Ross fails to ask Kiriakou if he actually witnessed the questioning of Zubaydah.) The whole piece is worth a read.

Preying on the Weak

| Wed Jan. 27, 2010 2:48 PM EST

So how's that program going that's supposed to help homeowners who are close to defaulting on their mortgages? Well, it turns out that banks are largely reducing monthly payment levels for people who participate in the program, but at the same time they're also increasing the principal amount of the loan — despite the fact that the whole problem with these loans is that homeowners are underwater. (That is, the principal amount of the loan is higher than the value of the house, which gives homeowners a big incentive to simply default and walk away.) Mike Konczal is properly outraged:

I’ve seen a lot of bad things during this financial crisis, but this is the most disgusting thing I’ve seen so far. At a time when one out of four homeowners are underwater, banks are using a mortgage modification program to pile on more debt on these loans. They do this even when it’s well known the correlation between the level of being underwater and default.

How? From the report: “Servicers routinely capitalize delinquent interest, corporate advances, escrow advances and attorney fees and other foreclosure-related fees and expenses into the loan balance when completing a loan modification.” So fees allow them to make it look like they are doing their clients a favor, while all they are really doing is running them in a big circle.

So it's the same old story: the real action for mortgage holders is to string homeowners along because they can pocket a whole bunch of fat fees along the way. Sure, the poor saps will probably default in a couple of years anyway since they have an even more crushing principal burden than before, but in the meantime, ka-ching! More from Mike in a followup post:

So I’ll ask the obvious question. Is the current system predatory?....Within 1 year almost 45% of modified loans become “delinquent.” 7-9% reach 60-day delinquency within just the first three months after modification, which for all intents means the borrower didn’t make the first post modification payment.

....So we have a financial technique offered to consumers that (a) piles on principal unexpectedly through hidden fees and surcharges and (b) has a reasonable expectation that the consumer won’t be able to make the payments. That doesn’t sound good, does it? Lawyers in the audience, would you consider this predatory? How do those arguments proceed?

(Or, more pithily via Twitter: "I expected the mods to be ineffectual, but not that they'd bundle an extra layer of sociopathic financial engineer with it.") As it happens, the simple answer to this problem was addressed last year in a bill that would have forced mortgage holders to accept principal reductions imposed by bankruptcy judges. But the finance lobby crushed that effort. Stephen Labaton of the New York Times told the story in a piece that deserved more attention than it got:

The defeat of the bankruptcy proposal is a testament to the enduring influence of banks, even as the industry struggles financially and suffers from its role in the economic crisis.

....Documents and interviews with lawmakers, lobbyists and administration officials show that the banks defeated the bankruptcy change — the industry picturesquely calls it the “cramdown” provision — by claiming that it would push up interest rates and slow the housing market’s recovery, even though academic studies have countered such claims.

The industry also steadfastly refused offers to negotiate over a weaker version. And it poured millions of dollars into lobbying: four of the industry’s top trade groups spent nearly as much on lobbying in the first three months of this year as they did in all of 2001.

But an industry strategy of dividing the Democrats had the most success.

One target was Senator Mary Landrieu, the moderate Democrat from Louisiana. On April 1, about 30 bankers from Louisiana crowded into a room off the Senate floor to press their view that the bankruptcy measure would force them to raise mortgage rates and hurt the very homeowners Congress was seeking to help.

Donnie Landry, a senior executive vice president at MidSouth Bank of Lafayette, La., recalled that last year Ms. Landrieu had “not been very receptive to some of our concerns. But this time she could not have been more cordial,” even helping them get to see Senator Christopher J. Dodd, the Connecticut Democrat who is the chairman of the Senate banking committee, while they were at the Capitol.

Etc. Not only did the banks utterly defeat the cramdown proposal, they actually managed to add billions of dollars in extra bailout money for themselves at the same time. Read the whole thing for the entire gruesome story. I should note that I relied heavily on Labaton's reporting for the finance lobby piece I wrote in the current issue of the magazine. If we'd had a couple dozen more like him, the public would have a much better idea of what happened last year than it does.

Reid Spokesman: Abortion Compromise a No-Go

| Wed Jan. 27, 2010 1:50 PM EST

The fate of health care reform depends on getting the House to pass the Senate's health care bill. But anti-abortion House Democrats have demanded changes to the abortion language in the Senate legislation in order to secure their votes. And altering those provisions could be impossible, Senate Majority Leader Harry Reid's spokesman said Tuesday.

That's because Democrats are considering modifying the Senate bill via reconciliation—a procedural maneuver that only needs a simple majority and thus can't be killed by a filibuster. But reconciliation rules forbid the inclusion of any provisions that have no effect on the budget. When the abortion language in the Senate bill was added as a last-minute compromise, the Congressional Budget Office actually certified that it had no budgetary effect. (Otherwise, the whole bill would have to be rescored.) That will make it very hard, if not impossible, to argue that the abortion provisions can be changed using the reconciliation process.

When I asked Reid's spokesman, Jim Manley, whether the Majority Leader's office understood the rules as preventing the Senate from altering the bill's abortion language, he emailed back immediately. "I believe that is correct," he wrote.

If Reid's office stands by that stance, House Speaker Nancy Pelosi is in a real bind. Rep. Bart Stupak (D-Mich.), who pushed for the House bill's strict limits on abortion coverage, has warned that he has 10 to 12 Democrats (including himself) who voted for the House bill but are committed to opposing the Senate bill's abortion language. And without Stupak's 10 to 12 lawmakers, getting the votes to pass the Senate bill in the House—even if other fixes are made using reconciliation—will be very, very hard. The original House bill only passed 220-215. Of the yes votes, Rep. Robert Wexler (D-Fla.) has since retired, and Rep. Joseph Cao (R-La.), will probably vote against the final bill. Some progressives, like Rep. Dennis Kucinich (D-Ohio), voted against the House bill but might be convinced to support a final compromise. And some Blue Dogs who opposed the House bill might have a change of heart. But are there 10 to 12 Democrats who will switch their votes? Unless Stupak is bluffing about the number of votes he has in his corner, health care reform is in serious trouble.

The Mood in Davos

| Wed Jan. 27, 2010 1:41 PM EST

So what's the mood in Davos this year? Who knows. But Felix Salmon is there, and his mood is distinctly sour:

I'm [] siding with the pessimists like Nouriel Roubini and Martin Wolf. They're both convinced that the problems of southern Europe are both grave and intractable, although they differ in their prediction of what the consequences will be: Nouriel sees a good chance of the eurozone breaking up, while Martin sees the PIGS (Portugal, Italy, Greece, Spain) staying in the euro and ending up stuck in a long-term slump, able to neither cut interest rates nor devalue their currencies in an attempt to regain competitiveness. The only other option is an across-the-board cut in nominal wages, on the order of 30% or so. That's something which is pretty much inconceivable, although Ireland seems to be trying to move in that direction.

....My feeling is that the US poses at least as much of a risk to the global economy as southern Europe does. There's a good chance that 2010 could be the year of walking away from underwater mortgages; there's no sign of the private sector releveraging; and the government has clearly reached its limit in terms of the degree it can step in and borrow on behalf of the rest of us. If the attempt to prop up the still-overvalued housing market fails and there's another downwards lurch, there will be a whole new wave of bank insolvencies and much less fiscal space to bail them out than there was pre-crisis. And the fact that most delegates here at Davos seem blissfully unconcerned about the possibility of a second nasty lurch downwards doesn't reassure me in the slightest.

For what it's worth (and you can guess how much that is), I think I agree about Europe but I'm not quite so pessimistic about the U.S. The American economy seems unlikely to come roaring back to life this year, and a midyear dip seems at least plausible, but overall I suspect we're just going to see a long, hard slog to recovery, not a second disaster.

The wild card, though, is whether a disaster somewhere else will ripple across the globe and eventually touch off a disaster here. That's certainly possible, and it's part of the risk I think Tim Geithner took when he chose to rescue the banking system the way he did. It's left the entire system in fragile shape, which is OK if nothing terrible happens in the next couple of years and everyone has time to earn their way back to full strength. But if something terrible does happen, we're still not in very good shape to handle it. So let's hope for a lack of disasters, OK?

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Grayson Introduces Bills to Dull SCOTUS Ruling

| Wed Jan. 27, 2010 1:39 PM EST

The newest installment in his "Save Our Democracy" platform, firebreathing Congressman Alan Grayson introduced two new bills yesterday to dull the impact of last week's Supreme Court decision, which determined that corporations can spend unlimited amounts of money on elections. Grayson called the 5-4 ruling the "worst since Dred Scott."

The first bill, patriotically titled the "America is for Americans Act," bans political expenditures from any corporation with foreign owners. "Foreigners cannot vote in our elections, so they should not be allowed to spend unlimited money to buy votes either," Grayson said in a press release. "If we do not limit foreign influence, we will soon have 'the Distinguished Member from Russia' or 'the Esteemed Senator from Saudi Arabia.'"

The second bill introduced last night demands that companies "cannot have it both ways" when it comes to "campaign propaganda." The "Pick Your Poison Act" would force corporations to choose between lobbying congress to further their political agenda and supporting candidates in election years. "If they want to use hired guns to influence lawmakers," Grayson said, "they need to stay out of the election process."

Among the six bills Team Grayson says can "Save our Democracy" are measures to implement a 500% excise tax on corporate contributions, apply antitrust laws to PACs, and require corporations to disclose SEC filings on funds used to influence public opinion.

Grayson's outspoken demeanor has earned the freshman congressman the unfortunate reputation as the liberal antidote to GOP Reps. Michele Bachmann and Steve King, both prone to exaggeration and ideological grandstanding. But these measures could strike a chord among lawmakers who think the Supreme Court went too far last week by extending the free speech rights for individuals to massive corporations.

Follow Ben on Twitter. 

Frank: Wall St. Crackdown Could Arrive Within Months

| Wed Jan. 27, 2010 1:24 PM EST

Rep. Barney Frank (D-Mass.), chair of the influential House financial services committee, says Obama's lastest regulatory crackdown on Wall Street could make it into law in as soon as few months. Frank, who said the president's flurry of recent financial reforms surprised him, told the Financial Times in Davos, Switzerland, that the administration's new proposals could very well be included in an existing financial services bill already in the works within his committee. (To watch the full interview with FT's Gillian Tett and Frank, click here.)

More from the FT story:

This essentially gives a new systemic regulator the discretionary power to clamp down on banks' proprietary businesses or force banks to shrink in size—if necessary. Until recently, this aspect of the bill had not garnered much attention, since there has been a wider controversy about the future identity of a systemic regulator.

However, Mr Frank argued that Volcker's plan could be incorporated within this enhanced definition of a supervisory authority—and said he was sure that a bill would be in place well before the mid-term elections in November, if not signed off by Chris Dodd, his counterpart in the Senate, within weeks. "I think Chris will get a bill out in March."

Overall Mr Frank said the drive to de-risk banks was to be applauded. "I wish banks had fewer ways to make money than deposits," he said. He also expressed confidence that the US reforms could form part of a wider regulatory blueprint that would be incorporated elsewhere, including in Europe—dismissing scepticism that Mr Obama's initiative had upset a measured, internationally co-ordinated response to the future regulation of the world's banks.

Elections Fraught in post-Tiger Sri Lanka

| Wed Jan. 27, 2010 1:20 PM EST

It was quite possibly the most important election in recent Sri Lankan history, the first peacetime vote in more than three decades. Newspapers around the globe reported that 70 percent of the electorate turned out to reelect President Mahinda Rajapaksa in early elections on January 26th. Yet, as one might expect from a country that less than a year ago decisively crushed one of the longest and most violent insurgencies in the world at an enormous cost to human life, elections were fraught. Fraught in a way only Sri Lankan politics would be: challengers lobbing accusations of war crimes at each other; one blocking the other from voting...for himself; and a supposedly king-making minority that never appeared.

Rajapaksa beat his ex-General Sarath Fonseka, who delivered the coup-de-grace in the government's 26-year-long war with the separatist LTTE (Tamil Tigers) and subsequently suffered a massive falling out with the President, his erstwhile ally. (Both had hoped to ride their post-war popularity into office). Widely seen as the dark horse after he threw his hat in the ring last month, Fonseka was endorsed by Tamil National Alliance and other minority groups; his victory, many felt, would have proved that despite the extreme violence that characterized the LTTE endgame, the Tamils could still be king-makers in Sri Lanka. 

 

Pass the Bill

| Wed Jan. 27, 2010 1:14 PM EST

Paul Starr on healthcare reform:

If Congress can complete work on health-care legislation and send it to the president (as of mid-January, the final bill is still under negotiation), it will be a stunning historical achievement and the most important liberal reform since the 1960s. It may also be the most underappreciated social legislation in recent history. Never in my experience has such a big reform been treated as so small. Never have Democratic members of Congress who are putting their careers on the line for something they believe in been so vilified as sellouts by influential progressives. And never have those progressives been so grudging in their endorsement of landmark legislation or so willing to see it defeated.

Exactly right. Elsewhere, James Morone looks to the legacy of Harry Truman to show Obama and the Democratic Party the way forward:

Truman submitted his healthcare plan in 1946 to mighty cries of "socialism!" So many groups lined up to blast the proposal that Congress extended its hearings and then buried the plan. The Democrats lost their congressional majorities, and Truman went into the 1948 reelection campaign polling below 30%.

If ever there was a time to retreat on healthcare, this was it. Instead, Truman (who had been, as he put it, "a dub of a speaker") found his voice. He passionately embraced the policies he cared about, especially national health insurance. Fifteen times a day on his long, famous whistle-stop tour he would rise and scorch the medical lobbies and their congressional pals. Truman, of course, won that election. He never came close on healthcare reform, but he kept on fighting. As a result, he left his party a legacy, an ideal to fight for.

Truman didn't get the healthcare plan he wanted, but he won reelection that year and Democrats took back the House. And thanks to his full-throated defense of universal healthcare, the ground was paved for LBJ to pass Medicare 15 years later.

Obama needs to provide the same defense tonight. And when he's done, Democrats need to knock some heads, agree on a reconciliation compromise, and pass the Senate bill. If they don't, disaster awaits in November.