Kevin Drum

Capitalization

| Mon Oct. 6, 2008 8:01 PM EDT

CAPITALIZATION....Speaking of bank capitalization, if it turns out that the only solution to the credit crisis is a massive injection of capital into the financial system, just how much capital are we talking about? A trillion dollars? Two trillion? Anybody got a decent guess?

Advertise on MotherJones.com

Bagging on the Bailout

| Mon Oct. 6, 2008 7:54 PM EDT

BAGGING ON THE BAILOUT....Atrios is annoyed:

If we remember way back to about 2-3 weeks ago, Hank Paulson was promising that there would be NO MORE BAILOUTS. Then, suddenly, we needed a giant BAILOUT RIGHT NOW. The media typically responded by using the Dow as a proxy for the economy/magnitude of the crisis in order to help hype the necessity of a massive bailout. And since the bailout passed, the Dow has tanked.

OK, point taken, but there's a big dollop of unfairness here. It's not as if Paulson and Bernanke just changed their minds for no reason, after all, or that a systemic bailout was a dumb response, or that the Dow is meaningless. Remember the sequence of events here.

Three weeks ago Paulson and Bernanke announced that they wouldn't bail out Lehman Brothers. Maybe that was a risk worth taking, maybe it wasn't, but in any case it didn't pan out. In fact, it was a disaster. So unless they wanted to sit and watch the U.S. financial system melt down completely, P&B didn't have any choice but to change their minds. Better that than to stubbornly cling to their free market principles no matter what the consequences, right? And while the Dow may not be a great proxy for the entire economy, the credit markets really are in big trouble and the Dow reflects that. What's more, the S&P 500 reflects it even better, and it's fallen even further than the Dow. Finally, today's drop is almost certainly a reaction to European problems and the inability of the EU to offer a coordinated response, not a reaction to the Paulson plan.

Now, the Paulson plan may turn out to be bad policy. Plenty of economists think a pure recapitalization scheme would be a better bet. But the mere fact that P&B responded to events and offered up a systemic plan after a solid year of dike-plugging efforts and a final scary-as-hell week hardly counts against them.

And as long as we're on the subject, here's another question: is the problem with the credit markets fear or is it bank capitalization? If the problem really is capitalization, then it's not fear that's keeping banks from making loans. The problem is that they just don't have the money. And yet plenty of economists who think capitalization is the fundamental problem also talk as though fear is really the driving force behind the panic. Which is it?

Troopergate Update

| Mon Oct. 6, 2008 4:00 PM EDT

TROOPERGATE UPDATE....I don't know if this is really going anywhere, but it looks like the Troopergate investigation is moving forward despite the best efforts to the McCain campaign to kill it:

Alaska Gov. Sarah Palin's attorney general announced Sunday that seven state employees will now honor subpoenas to testify in the legislative investigation of the "troopergate" affair.

Attorney General Talis Colberg said the decision comes in light of Superior Court Judge Peter Michalski's ruling last week rejecting an attempt to kill the subpoenas.

The state Department of Law "consulted with the seven state employees and advised them of their options," a statement from Colberg's office said. All seven have decided to cooperate with the investigation, the statement said.

But look. I'm sure there's nothing to worry about here. After all, the McCain campaign thoroughly vetted Palin before they picked her, right?

Regulation Overseas

| Mon Oct. 6, 2008 2:50 PM EDT

REGULATION OVERSEAS....Megan McArdle:

Europe's ongoing disaster is starting to match ours. This not only seriously challenge the idea that the main problem is American bank regulation — everyone is having the same problem, despite different regulatory regimes — but also puts us in much deeper jeopardy.

Be careful here. Weak regulation, especially of the shadow banking system, may not be the only culprit in the credit crisis, but it is a culprit. And it's a culprit in Europe as well as the U.S., as Henry Farrell points out:

European business leaders are now complaining that the EU isn't regulating enough – that is, it isn't engaging in coordinated action to stop its own financial markets from tanking. The reasons for EU inaction lie in the lack of any structures that would militate towards concerted action to address problems of market confidence, in large part because European financial markets are even less regulated than their US equivalents (as I've noted before the EU is typically more interested in liberalizing markets than restraining them, contrary to the general impression in the US).

The problems in the European banking system are pretty similar to the problems in the U.S.: too much leverage, too much credulity about the housing market, and too much manic buying and selling of opaque and complex financial derivatives. Like the U.S., the EU could have saved itself at least part of its current pain if it had adopted a more sensible regulatory scheme. But like the U.S., they didn't.

John McCain, Policy Genius

| Mon Oct. 6, 2008 1:02 PM EDT

JOHN McCAIN, POLICY GENIUS....Jon Cohn runs down the McCain campaign's meanderings on healthcare policy today. It goes something like this:

  1. We're going to eliminate the tax deduction of healthcare insurance and replace it with a $5,000 tax credit for families.

  2. Oops, that means a lot of families will end up paying more in taxes. Can't have that. So what we're really going to do is eliminate the income tax deduction, but not the payroll tax deduction. All better now.

  3. Oops again. The new plan saves middle class families from a tax increase, but by doing so it blows a huge hole in the budget. $1.3 trillion over ten years, to be exact.

  4. What do do? Cut Medicare! Hooray!

The McCain campaign, of course, says it's not really "cutting" Medicare. It's going to save $1.3 trillion by "eliminating fraud" and "reforming payment policies" in addition to a bit of other handwaving. You betcha.

I think the lesson here is not so much that McCain is being especially mendacious, but that he was never serious about this plan in the first place. He's never really cared one way or the other about healthcare reform, but Obama had a plan so he needed one too, and this is what his advisors cooked up. If the sums don't work out right — well, tell the numbers guys to jiggle a few things around and then jabber about earmarks or something. And then get back to accusing Obama of palling around with terrorists. Mission accomplished!

Picking Palin

| Mon Oct. 6, 2008 12:37 PM EDT

PICKING PALIN....My morning LA Times tells me something I didn't know before. Steve Schmidt, the McCain campaign manager responsible for Paris and Britney, the anti-press jihad, the slurs against Obama's patriotism, and all the rest of the McCain campaign's kitchen sink, was also the brains behind McCain's biggest bet-the-ranch stunt of all:

The effort peaked with the choice of Palin as McCain's running mate. Convinced that McCain needed a dramatic gesture to make the race competitive, Schmidt pressed McCain to pluck the Alaska governor from obscurity.

Other than the candidates, no one in the operation has more riding on that decision than Schmidt. And no one has worked harder to turn the decision into a success.

He defended Palin against what he called sexist attacks, and traveled to Alaska to brief her before her first TV interviews. For three days, he was ensconced at McCain's spread in Sedona, Ariz., helping Palin prepare for her performance on the biggest night of her career: the debate against Democratic vice presidential nominee Joe Biden.

In the world of high-octane political campaigns, Schmidt used to have a reputation for both brains and brawn. After this November, I have a feeling brawn is all his reputation will be left with.

Advertise on MotherJones.com

Reregulation

| Mon Oct. 6, 2008 2:18 AM EDT

REREGULATION....Sebastian Mallaby argues today that, contrary to Barack Obama's claims, deregulation isn't to blame for the credit crisis:

The key financiers in this game were not the mortgage lenders, the ratings agencies or the investment banks that created those now infamous mortgage securities. In different ways, these players were all peddling financial snake oil, but as Columbia University's Charles Calomiris observes, there will always be snake-oil salesmen. Rather, the key financiers were the ones who bought the toxic mortgage products. If they hadn't been willing to buy snake oil, nobody would have been peddling it.

Who were the purchasers? They were by no means unregulated. U.S. investment banks, regulated by the Securities and Exchange Commission, bought piles of toxic waste. U.S. commercial banks, regulated by several agencies, including the Fed, also devoured large quantities. European banks, which faced a different and supposedly more up-to-date supervisory scheme, turn out to have been just as rash. By contrast, lightly regulated hedge funds resisted buying toxic waste for the most part — though they are now vulnerable to the broader credit crunch because they operate with borrowed money.

At a minimum, I'd make a couple of counterpoints. First, Phil Gramm's 2000 Commodity Futures Modernization Act (supported, unfortunately, by the Clinton administration) was specifically designed to "protect financial institutions from overregulation" — primarily by leaving the market for credit default swaps completely unregulated. There may be several underlying causes for the credit crisis, but this is surely one of the very big ones.

Second, after the LTCM debacle of 1998, Alan Greenspan (and, sigh, Robert Rubin) produced a report suggesting that we should "encourage," "promote," and "consider" guidelines that might prod financial institutions into reducing their drunken sailor approach to leverage. But they declined to produce actual regulations to that effect. In fact, as I noted the other day, in 2004 the SEC issued a rule allowing big investment banks to increase their allowable leverage ratios. That turned out not to be such a good idea.

Third, there was a bipartisan failure to regulate the mortgage market into a semblance of rationality. Just the opposite, in fact, as lawmakers pressed Fannie Mae to insure ever dodgier loans and Alan Greenspan encouraged Americans to take advantage of ever cheaper mortgage rates. A little bit of commonsense rulemaking could have gone a long way in the mortgage market a few years ago.

Mallaby is right that deregulation isn't solely at fault for the credit crisis. But it's hardly an innocent bystander either. A little bit of market skepticism over the past decade would have done everyone a world of good (literally), and once we catch our breath from the current meltdown it's time to think about how to rebalance our attitude toward financial regulation. It's an area where Democrats have been barely any better than Republicans, and one that Barack Obama is right to give serious attention to.

LA vs. Philadelphia

| Sun Oct. 5, 2008 7:42 PM EDT

LA vs. PHILADELPHIA....The Dodgers won their divisional series last night. The Phillies won theirs this afternoon. I hereby declare war on Atrios.

Quote of the Day - 10.05.08

| Sun Oct. 5, 2008 2:27 PM EDT

QUOTE OF THE DAY....From George W. Bush, dressing down an advisor who suggested that his 2001 tax rebate plan was bad policy:

"If I decide to do it, by definition it's good policy."

That's from Ron Suskind. Click the link for more.

Iceland's Collapse

| Sun Oct. 5, 2008 2:06 PM EDT

ICELAND'S COLLAPSE....You think there's a banking crisis in the United States? Just be glad you don't live in Scandinavia's smallest country:

Iceland is on the brink of collapse. Inflation and interest rates are raging upwards. The krona, Iceland's currency, is in freefall and is rated just above those of Zimbabwe and Turkmenistan. One of the country's three independent banks has been nationalised, another is asking customers for money, and the discredited government and officials from the central bank have been huddled behind closed doors for three days with still no sign of a plan.

....On Friday the queues at the banks were huge, as people moved savings into the most secure accounts. Yesterday people were buying up supplies of olive oil and pasta after a supermarket spokesman announced on Friday night that they had no means of paying the foreign currency advances needed to import more foodstuffs.

I have to say, though, that the citizens of Iceland seem to be taking their travails remarkably cheerfully. "We will have to eat haddock and Icelandic lamb and forget these imports of goose livers and Japanese soy sauce," says Iceland's most famous chef. And drink more liquor. Lots more liquor.