Kevin Drum

Friday Cat Blogging - 10 October 2008

| Fri Oct. 10, 2008 4:24 PM EDT

FRIDAY CATBLOGGING....I've still got a lot on my mind today, but I guess that's true for all of us, isn't it? So let's call it a week anyway and spend the rest of the day winding down and admiring our cats instead. They deserve it.

Today we have action shots. Sort of. On the left, what is Domino looking at? A bird? A plane? Superman? No: it was a bird after all. To be precise, a hummingbird flitting around the garden for her occasional amusement. On the right, you'll notice the extreme bushiness of Inkblot's tail. I'm not entirely sure what caused it, but circumstantial evidence suggests he took note of a neighborhood dog and came charging around the corner to run into the house. Thus the tail. He knows perfectly well that the back door is open, of course, but he'd rather have somebody open the front door for him instead.

We are currently suffering from a cat food liquidity crisis, and it's now time for resolute action to prevent it from turning into a cat food insolvency crisis and causing full blown feline panic. So I'm off to the store. Have a good weekend, everyone.

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"William F. Buckley's Son Says He Is Pro-Obama."

| Fri Oct. 10, 2008 4:03 PM EDT

"WILLIAM F. BUCKLEY'S SON SAYS HE IS PRO-OBAMA"....Christopher Buckley explains why he's not writing his endorsement of Barack Obama in his usual column at the back of National Review, the magazine his father founded:

My colleague, the superb and very dishy Kathleen Parker, recently wrote in National Review Online a column stating what John Cleese as Basil Fawlty would call "the bleeding obvious": namely, that Sarah Palin is an embarrassment, and a dangerous one at that. She's not exactly alone. New York Times columnist David Brooks, who began his career at NR, just called Governor Palin "a cancer on the Republican Party."

As for Kathleen, she has to date received 12,000 (quite literally) foam-at-the-mouth hate-emails. One correspondent, if that's quite the right word, suggested that Kathleen's mother should have aborted her and tossed the fetus into a Dumpster. There's Socratic dialogue for you. Dear Pup once said to me sighfully after a right-winger who fancied himself a WFB protégé had said something transcendently and provocatively cretinous, "You know, I've spent my entire life time separating the Right from the kooks." Well, the dear man did his best. At any rate, I don't have the kidney at the moment for 12,000 emails saying how good it is he's no longer alive to see his Judas of a son endorse for the presidency a covert Muslim who pals around with the Weather Underground. So, you're reading it here first.

The modern GOP is the party of Newt Gingrich, Tom DeLay, Karl Rove, George Bush, Dick Cheney, John McCain, and Sarah Palin. It's not just off the rails. It doesn't even know where the rails are anymore.

"Off With His Head!"

| Fri Oct. 10, 2008 3:28 PM EDT

"OFF WITH HIS HEAD!"....Steve Benen describes the ugliness of the Republican Party's recent rallies and campaign events:

The McCain campaign has deliberately been whipping the angry, far-right Republican base into a frenzy. That includes increasing frequency of "Hussein" references, but it also includes looking the other way while campaign supporters exclaim "treason!," "terrorist!," and "kill him!" during official rallies.

On Wednesday, during a McCain harangue against Obama, one man could be heard yelling, "Off with his head!" On Thursday, Republicans erupted when an unhinged McCain supporter ranted about "socialists taking over our country." Instead of calming them down, McCain said the lunatic was "right."....Slate's John Dickerson described the participants' "bloodthirsty" tone.

The danger here is not mobs of violent Republicans marching through the streets. The danger is that John McCain is setting us up for a repeat of the 90s, an era that conservatives to this day have never been willing to come to grips with. If the looney-bin right decides to treat President Obama as not just an opposition leader, but as a virtual enemy of the state, as they did with Bill Clinton, it's going to be a very, very long eight years. Whatever grownups are left in conservative-land really need to step up to the plate soon before their movement goes even further off the rails than it already is.

Selling War

| Fri Oct. 10, 2008 2:33 PM EDT

SELLING WAR....Want to learn more about Randy Scheunemann, John McCain's crazy top foreign policy advisor? The one responsible for marketing Ahmed Chalabi and the Iraq war to a gullible media? And tutoring Sarah Palin in neocon nutbaggery? Sure you do. Laura Rozen's got you covered here.

Trading Derivatives

| Fri Oct. 10, 2008 2:09 PM EDT

TRADING DERIVATIVES....Megan McArdle on the banking crisis:

One of the smarter ideas I've heard for trying to prevent this sort of thing next time around is putting derivatives on exchanges. Most derivatives are traded over the counter, in part because US bankruptcy law encourages it: as I understand it, derivative counterparties don't have to get in line with the others, but can seize any collateral they can get their hands on.

Exchange trading enhances transparency, by making it clear what's out there and roughly who owns it. It also moves the clearing risk to the exchange; while exchanges do fail, they do so much less often than financial firms, and if intervention is needed, they provide a centralized locus for any private or public action.

I've been noodling over a list of regulatory changes that ought to be on the table for the next administration, and this is one of them. Credit default swaps, in particular, should be registered like any other security and traded on public exchanges. This wouldn't make them 100% safe (stock markets have bubbles and busts too, after all), but it would certainly make them a lot safer.

On the other hand, I'd like to hear an argument for even allowing CDOs to exist in the first place, whether they're publicly traded or not. It's one thing to chop up securities into different tranches that appeal to different classes of investors — that's just marketing — but with very rare exceptions the overall yield of such an instrument should be nearly the same as the yield of the underlying securities themselves. A little less, in fact, since you have to factor in additional administrative costs. But the fundamental idea behind modern CDOs is exactly the opposite: not merely that they're providing a bit of convenience or regulatory arbitrage, but that if you bundle up a bunch of securities and then chop them up in specific ways, they'll be magically worth much more than the underlying securities themselves. Much more. But this violates a basic law of economics. We'd prosecute for fraud anyone selling a perpetual motion machine, and I'm not sure why CDOs are really any different. Done properly, the market for CDOs ought to be small and sleepy, barely worth anyone's attention. If it gets non-sleepy, that means it's becoming fraudulent. So maybe it's just not worth having at all?

Needless to say, I have no idea how you'd go about banning a particular class of security. And I suppose it's possible that the underlying problem is with the rating agencies, not the CDO packagers — though real life being what it is, I suspect that's a distinction without a difference.

In any case, I'd like to hear the argument. Why should we allow the sale and marketing of CDOs at all?

Paying the Piper

| Fri Oct. 10, 2008 1:36 PM EDT

PAYING THE PIPER....Matt Yglesias says, sure, people were using their homes as ATM machines during the housing bubble, but it's not as if our political leaders were raising any red flags about it at the time. In fact, just the opposite:

Meanwhile, the broad conservative movement spent a lot of time trying to shout down anyone who worried about rising inequality or stagnant wages by pointing out that the trends looked better if you only examined consumption. In other words, if you ignored the fact that people were maintaining consumption growth by piling on more debt, things looked great! And yet, now somehow things don't look so great....

Obviously, the mere fact that conservative politicians, hacks, and operatives were egging this trend on didn't force anyone to accumulate enormous debts. Plenty of people didn't do so. But the underlying ill here is economic policies that sought to substitute an asset price bubble and innovative credit products for real, broadly-based prosperity.

This deserves a much longer treatment, which I'm not going to attempt right now either. But someone ought to. We usually argue about rising income inequality in moral terms, but there's a practical side to it too: when all the economic growth a country produces goes to a very small class of rich people, stupid things happen. The rich can't possibly consume enough to spend all this money, so they start casting around for something, anything, to do with all the cash they have sloshing around. And since, in an ever more unequal economy that nonetheless preaches ever rising living standards, the poor need payday loans to keep up and the stagnating middle class needs HELOCs, that's where their money goes. It still gets spent, eventually, on things like cars and food and new furniture, because that's what middle class people mostly spend their money on, but instead of being spent directly by people who are earning it, it gets funneled downward to them via increased debt and financial legerdemain that extracts more and more money upward from poor to rich with each cycle.

That's not sustainable. Median income growth produces not just growth, but stable growth for everyone, the rich included. Top end growth, almost by definition, produces unstable, unsustainable growth. Modern economies are driven by consumer spending, and if you want consumer spending to increase consistently you have to increase consumer income. All the financial wizardry in the world will never change that.

Social justice aside, that's why the single most important financial statistic for any modern economy is real median income growth. If you have it, you're in pretty good shape no matter what else is going on. If you don't, you're a banana republic. Guess which one we've become?

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Joe Sixpack

| Fri Oct. 10, 2008 12:38 PM EDT

JOE SIXPACK....David Brooks has a good column today:

Over the past few decades, the Republican Party has driven away people who live in cities, in highly educated regions and on the coasts. This expulsion has had many causes. But the big one is this: Republican political tacticians decided to mobilize their coalition with a form of social class warfare....What had been a disdain for liberal intellectuals slipped into a disdain for the educated class as a whole.

....[Sarah] Palin is smart, politically skilled, courageous and likable. Her convention and debate performances were impressive. But no American politician plays the class-warfare card as constantly as Palin. Nobody so relentlessly divides the world between the "normal Joe Sixpack American" and the coastal elite.

Sure, it would have been nice if Brooks had noticed this a little earlier. And it's not the hardest hitting column on the subject of culture war politics we've ever seen. Still, this stuff isn't easy to write about your own side. It's a pretty decent piece.

Yet More Troopergate

| Fri Oct. 10, 2008 2:52 AM EDT

YET MORE TROOPERGATE....While we're waiting for the Alaska legislature's official report on Troopergate, the New York Times offers the results of its own investigation:

In all, the [public safety] commissioner and his aides were contacted about Trooper Wooten three dozen times over 19 months by the governor, her husband and seven administration officials, interviews and documents show.

.... On Jan. 4, 2007, a month into the Palin administration and his tenure as public safety commissioner, Mr. Monegan went to the governor's Anchorage office to talk with Todd Palin, who had requested the meeting. Mr. Palin was seated at a conference table with three stacks of personnel files. That, Mr. Monegan recalled, was the first time he heard the name Mike Wooten.

"He conveyed to me," Mr. Monegan said, "that he and Sarah did not think the investigation into Wooten had been done well enough and that they were not happy with the punishment. Todd was clearly frustrated."

....Several evenings later, Mr. Monegan's cellphone rang. "Walt, it's Sarah," the governor said before echoing much of what her husband had said. Trooper Wooten, he recalls being told, was "not the kind of person we should want as a trooper." He told the governor, too, that there was no new evidence to pursue.

Soon after that, Mr. Palin and several aides began pressing the public safety agency to investigate another matter: whether Trooper Wooten was fraudulently collecting workers' compensation for a back injury he said he had suffered while helping carry a body bag.

Mr. Palin's evidence: He told Ms. Peterson, the commissioner's assistant, that he had seen the trooper riding a snowmobile while on medical leave and that he had photographs to prove it.

The Palin family really had the bug, didn't they? Definitely not people you want to get on the wrong side of.

Financial Crisis Update

| Fri Oct. 10, 2008 2:39 AM EDT

FINANCIAL CRISIS UPDATE....The latest on the financial crisis:

The U.S. is weighing two dramatic steps to repair ailing financial markets: guaranteeing billions of dollars in bank debt and temporarily insuring all U.S. bank deposits.

....Under the U.K.'s recently announced plan, which it is now pitching to the G-7 members, the British government would guarantee up to £250 billion ($432 billion) in bank debt maturing up to 36 months. The British concept to expand its proposal to other countries has a lot of support from Wall Street and is being pored over by U.S. officials, according to people familiar with the matter.

....The move to back all U.S. bank deposits, which is only in the discussion stage, would be aimed at preventing a further exodus of cash from financial institutions, including small and regional banks, some of which are buckling under the strain of nervous customers. In recent weeks, customers have pulled money out of some healthy community banks under the assumption that the government will only insure all the depositors of larger banks in the event of a failure.

Directly recapitalizing troubled banks is yet another idea under consideration, of course. Greg Mankiw comments:

That raises several questions. First, which firms? The government does not want to put taxpayer money into "zombie" firms that are in fact deeply insolvent but have not yet recognized it. Second, at what price should the government buy in? Third, isn't this, kind of, like socialism? That is, do we really want the government to start playing a large, continuing role running Wall Street and allocating capital resources? I certainly don't.

Here is an idea that might deal with these problems: The government can stand ready to be a silent partner to future Warren Buffetts.

It could work as follows. Whenever any financial institution attracts new private capital in an arms-length transaction, it can access an equal amount of public capital. The taxpayer would get the same terms as the private investor. The only difference is that government's shares would be nonvoting until the government sold the shares at a later date.

This plan would solve the three problems. The private sector rather than the government would weed out the zombie firms. The private sector rather than the government would set the price. And the private sector rather than the government would exercise corporate control.

Nouriel Roubini offers similar advice here, along with several other ideas.

Mindgames

| Thu Oct. 9, 2008 7:59 PM EDT

MINDGAMES....John McCain and Sarah Palin (with the help of the entire cast of characters at Fox News and NRO) have been trying over the past few days to talk up Barack Obama's ties to former 60s radical Bill Ayers. But McCain didn't bring it up directly in Tuesday's debate, and apparently the Obama campaign has now decided to start taunting him over it. Today's taunts:

Barack Obama: "Well I am surprised that — you know, we've been seeing some pretty over the top attacks coming out of the McCain campaign over the last several days — that he wasn't willing to say it to my face."

Tom Vilsack: "If John McCain were so concerned about things like Mr. Ayers, why didn't he just simply turn to Barack Obama and directly confront him?"

Joe Biden: "In my neighborhood, when you've got something to say to a guy, you look him in the eye and you say it to him."

I guess the Obama folks figure there are three things that could happen. First, McCain does nothing and ends up looking like a coward. Second, their taunts get under McCain's skin so badly that he goes over the edge and does something really stupid. Third, McCain takes the bait and decides to bring up Ayers at the next debate.

The first two possibilities are obviously good for Obama. And the third? I guess they must be really sure they have a dynamite response ready in case McCain decides to unload next Wednesday. Either that or they're trying to fake McCain into thinking they have a dynamite response, thus scaring him into not bringing it up. Or else, by being so obvious about it, they're actually trying to sell McCain on the fakeout theory — and then when he falls into the trap and brings up Ayers, they're going to crush him. Or....um.....you get the idea. Basically, they're just playing mindgames with the old guy. I wonder if it'll work?