Kevin Drum

Financial Innovation Watch

| Thu Feb. 18, 2010 5:43 PM EST

Paul Volcker famously said last year that the only recent positive financial innovation he could think of was the ATM machine. Today, via Tyler Cowen, we have a paper from Bob Litan of the Brookings Institution that tries to judge whether Volcker was right. His conclusion:

I find that there is a mix between good and bad financial innovations, although on balance I find more good ones than bad ones.  Individually and collectively, these innovations have improved access to credit, made life more convenient, and in some cases probably allowed the economy to grow faster. But some innovations (notably, CDOs and Structured Investment Vehicles, or SIVs) were poorly designed, while others were misused (CDS, adjustable rate mortgages or ARMs, and home equity lines of credit or HELOCs) and contributed to the financial crisis and/or amplified the downturn in the economy when it started.

I haven't read the full paper yet, but in the bloggy tradition of tossing out provocative material to see what other smart people have to say about it, here is Litan's summary table of what's good and what's bad in financial innovation. For now, I'll just note that aside from the rise of venture capital, which wasn't a Wall Street phenomenon, there's not a single innovation in the investment arena that Litan scores as a productivity enhancer. (Securitization gets a positive score, but that's provisional on it being "restructured by the market and/or policymakers.") That's pretty damning coming from a guy who's obviously pretty sympathetic to innovation. Other comments welcome.

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Inside the Tea Parties

| Thu Feb. 18, 2010 2:20 PM EST

David Barstow talks to CJR's Greg Marx about his big tea party story that ran in the New York Times on Monday. An excerpt:

At some point along the way I was struck by the number of people who had really been transformed since the recession hit. You could not miss the number of people who were drawn to this movement because of the events of the fall of ’08. That was one theme that became really clear to me — their incredible anger at the economic pain that they were witnessing in their own lives and the lives of their friends and family, and their anger and disappointment at the government’s role in both the events that led to the recession and the response, especially the bailouts.

The other thing that came through was this idea of impending tyranny. You could not go to Tea Party rallies or spend time talking to people within the movement without hearing that fear expressed in myriad ways. I was struck by the number of people who had come to the point where they were literally in fear of whether or not the United States of America would continue to be a free country. I just started seeing that theme come up everywhere I went.

....If you spend enough time talking to people in the movement, eventually you hear enough of the same kinds of ideas, the same kinds of concerns, and you begin to recognize what the ideology is, what the paradigm is that they’re operating in....You begin to understand why it is that they’re so concerned about ACORN, why it is that they’re so concerned about global warming, why it is that they’re worried about the potential for things like FEMA camps. You understand why they’re so angry not just at Obama and the Democrats, but also at people like John McCain. You understand where they’re coming from on stimulus and bailouts and the Federal Reserve. If you scrape deep enough with people and spend enough time really listening to what they’re concerned about, it does tend to gel. There’s a fear that both parties have been complicit in this giant charade that has done enormous damage to ordinary Americans. It’s very complex, and yet at the same time there is something coherent about it.

Barstow's piece is well worth your time if you haven't already read it. Click here. I hope that someday he writes a companion piece focusing just on the ideology that he talks about in this interview. Some of it is well worn, and some of it is new, and it would be fascinating to tease these strands out. On the one hand, you have the perfectly sensible belief that "both parties have been complicit in this giant charade that has done enormous damage to ordinary Americans" — something that even most readers of this blog might largely agree with — and on the other hand you have exotic worries about FEMA concentration camps and Interpol agents arresting U.S. citizens on their own soil.

I'm still not sure where this is going, but my sense is that we've seen this movie before. The tea party movement is basically a modern day John Birch Society, and eventually they'll either wither away or implode. These kinds of groups tend to get increasingly conspiratorial over time, and that limits both their growth potential and their influence. Republicans are pandering to them now, but I wonder how much longer they'll keep it up?

In fact, given the way that politics has been speeded up in virtually every way over the past few decades, the tea party implosion might come faster than we think. Having Fox and Glenn Beck behind them has obviously helped the movement grow far faster than, say, the John Birch Society could grow in the 60s, but it also means that they might hit their peak a lot sooner too. Eventually even conservatives are going to tire of Beck's gold buggery and wacky conspiracy theories, and they'll likely tire of the tea party movement too. And it will all happen at fast forward speed.

That's my guess, anyway. In the meantime, Barstow says you really need to read The Five Thousand Year Leap — the version with the Glenn Beck introduction, presumably — if you want to understand how tea partiers think and what motivates them. So get cracking.

Feeding the Mouth That Bites You

| Thu Feb. 18, 2010 1:26 PM EST

Is there anything wrong with voting against the stimulus bill but then working hard to steer stimulus dollars into your district? Jonathan Bernstein captures my view pretty well:

There's nothing hypocritical or wrong in any way with a Member of Congress saying that government should not spend money, but trying to get as much of it for his or her district after its been approved.

On the other hand, it is massively hypocritical for a Member of Congress to say that a bill would not create a single job while, at the same time, lobbying for projects from that bill to be placed in his or her district on the basis of all the jobs it will bring.

Agreed. Once the bill has been passed and the money is going to be spent whether you like it or not, there's nothing wrong with getting your fair share of the pie. But going to ribbon cuttings, bragging about the jobs you're providing to your constituents, and loudly taking credit in local media for all the dollars you're bringing into your district? That's a whole different level of hypocrisy. Complaining about it probably won't actually do much good, but there's no question that it's a legitimate target for mockery.

The Taliban on the Ropes?

| Thu Feb. 18, 2010 12:38 PM EST

Hot on the heels of their capture of Mullah Abdul Ghani Baradar, the Taliban's senior military commander, Pakistani forces have now captured another couple of senior Taliban leaders:

Two senior Taliban leaders have been arrested in recent days inside Pakistan, officials said Thursday, as American and Pakistani intelligence agents continued to press their offensive against the group’s leadership after the capture of the insurgency’s military commander last month. Afghan officials said the Taliban’s “shadow governors” for two provinces in northern Afghanistan had been detained in Pakistan by officials there.

....The arrests — all three in Pakistan — demonstrate a greater level of cooperation by Pakistan in hunting leaders of the Afghan Taliban than in the eight years of war. American officials have complained bitterly since 2001 that the Pakistanis, while claiming to be American allies and accepting American aid were simultaneously providing sanctuary and assistance to Taliban fighters and leaders who were battling the Americans across the border.

....It is still far from clear, but senior commanders in Afghanistan say they believe that the Pakistani military and intelligence agencies, led by Gens. Ashfaq Parvez Kayani and Ahmed Shuja Pasha, may finally be coming around to the belief that the Taliban — in Pakistan and Afghanistan — constitute a threat to the existence of the Pakistani state.

This suggests — though hardly proves — that Baradar's capture wasn't a fluke and probably wasn't just game playing by Pakistani authorities who were upset at not being included in negotiations with the Taliban. Barack Obama's team has, somehow, leveraged the events of the past year to convince them that the Taliban is genuinely dangerous and needs to be forcibly taken care of.

To summarize, then: in its first year in office, the Obama administration has (a) doubled American forces in Afghanistan, (b) dramatically increased drone attacks against Taliban hideouts, (c) begun a serious offensive against Taliban strongholds in Marja, and (d) gotten the leadership of Pakistan on board in a mission to seriously go after Taliban leaders who have long had safe haven in Pakistani cities. This is, as near as I can tell, more than then Bush administration accomplished in eight years.

But Republicans are still insisting that Obama is "weak on terror" because he made the decision to treat the Christmas bomber exactly the same way that the Bush adminstration treated every terrorist it captured on American soil. How long is the press going to keep taking these guys seriously?1

1No, don't answer that. I think we all have a pretty good idea.

Book Bleg Followup

| Thu Feb. 18, 2010 12:20 PM EST

Just a quick note to thank everyone who recommended books in my weekend Book Bleg. The response was great, and it's worth checking out if you're interested in some (mainly) fiction recommendations.

So which books did I decide to try? This is necessarily a fairly random thing when you get hundreds of recommendations, but I chose three. First is Hilary Mantel's Wolf Hall, which broke out of the pack based on sheer number of enthusiastic recommendations, plus the fact that so many people were convinced that it was a perfect Kevin book. (We'll see how well you guys know me!) Second is China Mieville's The City & The City. I've been vaguely meaning to read some Mieville forever and somehow I never have. So now I will. Third is Stieg Larsson's Millennium Trilogy, which got several recommendations and has the look of the kind of gratuitously convoluted plot line that I get a kick out of. Part 3 isn't available until May, though, so I'll read the others first.

Thanks again to everyone who pitched in. I'll probably dip back into that thread several more times before the year is out.

Only in America

| Thu Feb. 18, 2010 12:05 PM EST

I just wrote a longish post about how income mobility in the United States is actually pretty anemic, but our blog software ate it and I don't feel like trying to recreate it. So here's the nickel summary: despite what Florida senate candidate Marco Rubio says, America isn't the only place where you can start a business in a spare bedroom. In fact, whenever you hear a politician say "only in America," it's an almost certain dead giveaway that they're blowing smoke. On the specific question of rags to riches stories, the fact is that America has less income mobility than most other rich countries, and that mobility has been declining for the past several decades.

There's a longer version of this, but you'll just have to pretend that I wrote it and you read it. In the meantime, take my word for it. Or, if you don't trust me, take David Frum's word for it.

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The Rich and Their Taxes

| Thu Feb. 18, 2010 1:59 AM EST

Tax data is always a few years out of date, so today David Cay Johnston reports on how the rich did during the last of the boom years:

In 2007 the top 400 taxpayers had an average income of $344.8 million, up 31 percent from their average $263.3 million income in 2006, according to figures in a report that the IRS posted to its Web site....

Their effective income tax rate fell to 16.62 percent, down more than half a percentage point from 17.17 percent in 2006, the new data show. That rate is lower than the typical effective income tax rate paid by Americans with incomes in the low six figures....Payroll taxes did not add a significant burden to the top 400, not changing the rounding of rates by even one decimal. With payroll taxes taken into account, the effective tax rate of the top 400 would be 17.2 percent in 2006 and 16.6 percent in 2007, my analysis shows — the same as not counting payroll taxes. As a point of comparison, about two-thirds of Americans pay more in Social Security, Medicare, and unemployment taxes than in federal income taxes.

I don't know about you, but Johnston is certainly right about me: I make considerably less than $344 million a year and I pay considerably more than 16.6% in federal taxes. This, of course, is fair, because, um, the rich really hate paying taxes. So there.

Heads I Win....

| Wed Feb. 17, 2010 6:39 PM EST

Rich Lowry's "smart friend" just sent him an email warning that the economy is improving and conservatives need to prepare for this frightening possibility. How should they do this? By making sure that the media turns economic success into a narrative of liberal failure:

Republican candidates and conservative media commentators must prepare the American people for this phony boom with terrible long-term consequences. The news story here is: the revival of the economy by central bank money-printing and enormous government deficits to be paid for by our children.  Also, triumphalism about the weak economy should stop. Otherwise, Republican and conservative triumphalists will be sandbagged and look foolish in a mere six months, maybe sooner.

Since the economy and jobs are the central issues now, the focus must be on the Obama deficits, the Obama tax hikes on the middle class, and the Obama economic policy which makes government employees richer and the American working people poorer.

Well, at least we've been prepared. If the economy sucks, it's Obama's fault. If the economy prospers, it's a dangerous mirage brought about by Obama's failed policies. What do you think are the odds that the media will buy this?

The Taliban Fog

| Wed Feb. 17, 2010 1:49 PM EST

Matt Steinglass highlights a passage from the New York Times today about the capture of Mullah Abdul Ghani Baradar, the Taliban's top military commander. According to the Times, Baradar's capture "could come at the expense of the Afghan government of Hamid Karzai and complicate reconciliation efforts his government has begun":

An American intelligence official in Europe conceded as much, while also acknowledging Mullah Baradar’s key role in the reconciliation process. “I know that our people had been in touch with people around him and were negotiating with him,” the official said, speaking on the condition of anonymity because he was not authorized to discuss the issue.

....“He was the only person intent on or willing for peace negotiations,” said Hajji Agha Lalai, former head of the government-led reconciliation process in the city of Kandahar, who has dealt with members of the Taliban leadership council for several years.

He and other officials in Afghanistan who are familiar with the Taliban leadership said Mullah Baradar’s arrest by Pakistani intelligence, and his interrogation by Pakistani intelligence officers and American agents, could play out in two ways. Mullah Baradar might be able to persuade other Taliban to give up the fight. Or if he is perceived to be mistreated, that could end any hopes of wooing other Taliban.

Naturally, this is all completely opaque. Apparently Pakistan is miffed that they've been left out of negotiations with the Taliban, and they want back in. Getting Baradar out of the picture might have simply been a chess move on their part to eliminate someone they didn't have any control over.

Or not. Maybe Baradar's capture means that Pakistan is getting serious about fighting the Taliban on their own soil, which has been the standard narrative up until now. There's no telling, really. But it's worthwhile at least keeping in mind that there are multiple, competing storylines here.

Healthcare Reform On the Edge

| Wed Feb. 17, 2010 12:50 PM EST

Chris Hayes calls this the "Most important piece of polling data I've seen in months." I don't know if I'd go that far, but politically it's pretty important. What it shows is about what you'd expect: opposition to healthcare reform comes overwhelmingly from people who would never consider voting for a Democrat in the first place. Among that group, opposition to HCR is 94%-1%, and obviously no Democrat risks losing any of their votes by passing healthcare reform.

But among those in the middle, those who might vote for a Democrat but aren't sure bets, support is about evenly split. These people are obviously persuadable, but they're only persuadable if Dems actually pass healthcare reform first and then campaign on it as if they actually believed in it. This is still a winnable campaign issue. Full poll results here.