2008 - %3, December

Our Writers Are Even More Amazing Than We Thought: Nomi Prins' Challenge to Readers

| Mon Dec. 22, 2008 5:40 PM EST

nomi_pic.jpgWhen we asked readers to help save our D.C. investigative crew after some major funders pulled out, one of our freelancers, Nomi Prins--a former Goldman Sachs managing director turned ace finance reporter--offered to put up the $1,000 fee for her most recent story as a challenge grant. Yes, just like on public radio: We won't hold the blog hostage for 20 minutes every hour to bludgeon you into giving, but we sure don't want to leave this money on the table. Can you help? It's incredibly easy, just follow this link. If you give $45 or more, we throw in a subscription to the magazine. Please help Nomi help us out. And then go read her story on the financial crisis. It will make you weep.

UPDATE: Now you can give via PayPal! Thanks to those of you who have already given, it means a ton. We'll let you know whether we make the match.

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Bruce Springsteen, Neil Young Set for Glastonbury; Coachella Rumors Heat Up

| Mon Dec. 22, 2008 5:26 PM EST

Neil Young Bruce SpringsteenWhat better pastime on this dreary winter day than happily imagining ourselves sprawled on the lawn at a summer music festival, trying to catch a glimpse of the performers between the dancing hippies? Festival promoters are even helping with our creative visualizations by making some lineup announcements. The UK Sun reports that Glastonbury has "gone back to basics" this year with two legendary performers set as headliners: Bruce Springsteen and Neil Young. God bless those guys, but they're probably the only respectable musicians around who could make co-headliners Blur seem young. Ouch, I know, but for reals. Of course, this is the festival that caused an outburst of creepily-verging-on-racist complaints when headliner Jay-Z was announced for the 2008 edition, although the fact that the rapper ended up cheekily covering Oasis' "Wonderwall" at the show seemed to make it all worthwhile. But you can't help wondering if festival boss Michael Eavis is so desperate to avoid a similar controversy, he's going with the oldest, whitest, most respectable rockers around? (And Blur?) (Why am I being so mean to them?)

After the jump: can we legally start Coachella rumors before January 1?

Domestic Spying

| Mon Dec. 22, 2008 3:44 PM EST

DOMESTIC SPYING....Over the weekend Dick Cheney made a point of saying that congressional Democrats were fully on board with the NSA's domestic spying program during the 2001-04 period. This may or may not be completely true, but there's plenty of evidence that it's mostly true: the NSA program really was approved on a bipartisan level. Spencer Ackerman comments:

Cheney might not be acting in good faith, but he's nevertheless pointing to something barometrically significant. In Washington, the phrase "bipartisan" is supposed to cash out to something like "legal" or "wise" or "no longer controversial" or "kosher." The Germans probably have a word that's a more acceptable translation. In any event, that's self-evidently foolish: lots of people can make mistakes and lots of people can make venal decisions, and it's not a function of belonging to one political party or the other. Cheney doesn't get off the hook if Nancy Pelosi is on it with him. Naturally, what I imagine Cheney's doing is warning the Democrats off creating an independent commission into the abuses of the administration, lest it go after them too, but that's all the more reason one should be created.

Agreed. Unfortunately, there appears to be literally no one who has any incentive to do this. Not Republicans, not Democrats, not Bush loyalists, and not Barack Obama, who voted for the wiretapping bill earlier this year and really has no reason to want this to continue to be an issue. Unfortunately, this whole issue is probably destined to fall quickly down the memory hole.

*Stimulus and Energy Efficiency - Together at Last

| Mon Dec. 22, 2008 3:11 PM EST

STIMULUS AND ENERGY EFFICIENCY — TOGETHER AT LAST....Glenn Hubbard thinks the housing market is close to its natural bottom, and in order to keep it from overshooting it's time for the government to step in and start offering below-market mortgage rates. Brad DeLong agrees:

All in all, I approve of the plan: having Fannie and Freddie buy up mortgages at market prices and refinance them at 4.5% could do a lot of good for the country and make a fortune for the government.

I'm agnostic on how close we are to a housing bottom. My guess is that we still have a ways to go, but since it takes a while for a program like this to take effect, maybe now is the time to get started.

But if we're going to do some social engineering with mortgage loans, why not go whole hog? An outfit called Architecture 2030, founded by Edward Mazria, suggests that we offer homeowners not just low-interest loans, but a sliding scale of low-interest loans that's conditioned on renovating their homes to increase energy efficiency. Their proposed scale is on the right. The nickel explanation is below:

Mazria walked me through a hypothetical example that highlighted the huge incentives the plan could unleash. Say you're a homeowner with a $272,000 mortgage at 5.55%, paying about $1550 a month. You decide you want your mortgage rate to drop to 3%. In order to qualify for the reduction, you have to improve the energy efficiency of your home 75% below code, and it's going to cost you a pretty penny: about $40,000.

Existing tax credits would take care of about $10,000 of that cost. The rest would get tacked on to your existing mortgage, bringing it up to $302,000. But, at 3%, you'd be paying only about $1280 — saving almost $300 a month on the mortgage alone, plus another $150 in reduced energy costs. The value of your home rises, you have more disposable income, you've given work to someone to do the upgrades for you — and s/he's now paying federal taxes, and you've reduced your carbon footprint.

The Architecture 2030 folks claim that their program (which has a component for commercial buildings as well) would cost a mere $170 billion over two years, and in return would create over 8 million new jobs, jump start a new $1.6 trillion renovation market, save consumers a boatload of money, and reduce CO2 emission by about half a billion tons. What's not to like?

To be honest, I'm not sure. There's something a little too free-lunchish about this plan, and I figure there has to be a catch somewhere. I invite everyone reading this to try and figure out what it is. But if the sums really add up the way they say they do, it seems worth considering, no?

Markets in Everything, War Edition

| Mon Dec. 22, 2008 2:38 PM EST

MARKETS IN EVERYTHING, WAR EDITION....Dan Drezner bemoans the fact that international relations scholars aren't allowed to invade other countries to test out their pet theories1, but says we're about to conduct a natural experiment anyway that might tell us why large scale warfare has become much less common than it used to be:

Liberals will point to the rise of the Kantian triad — democracies, international organizations and economic interdependence. All three of these trends have made war much more costly to leaders than it used to be....Realists offer a different explanation — the rise in nuclear weapons. The logic of nuclear deterrence is inescapable — the prospect of a devastating counterattack is sufficient punishment to prevent a conflict from breaking out in the first place.

....[But] the Kantian triad is about to take a serious beating. The global economic crisis is encouraging beggar-thy-neighbor policies in the form of new tariffs and currency manipulations. The crisis has exposed the powerlessness of international institutions (within a month of the G-20 pledge not to raise new barriers to trade, Russia, India, Brazil and Argentina went back on their word). The longer the recession lasts, the more each major power will turn inward to boost its economic prospects.

Will this lead to more war or not?

Hmmm. I have my doubts that this will really answer the question. What if we continue to have zero wars between nuclear powers (highly likely, I'd say) but an uptick in wars between smaller powers? I think we need a better natural experiment. But sometime long after I'm dead, please.

1But he's just joking, OK?

Spooked and Insolvent

| Mon Dec. 22, 2008 2:03 PM EST

SPOOKED AND INSOLVENT....Atrios sez:

Even now my interpretation is that the Wise Men Of Washington who are "dealing" with this financial crisis believe they are dealing with a liquidity crisis rather than an insolvency one. They think that big shitpile is actually worth something, but that "financial actors" are "spooked." They think that if banks aren't lending it's because they have temporary capital issues because of this, instead of the fact that maybe banks aren't lending because recession is here and it's not the most awesome time to lend money for projects.

But why can't it be both? In the previous post I said it was a bad idea for Henry Paulson to bail out all the big banks instead of reserving funds only for those banks that were genuinely close to insolvency, and this is one of the reasons. Not only did a lot of money get wasted on banks that didn't want it, but it prevented us from finding out which banks were in trouble and which ones weren't. If, say, a quarter of the banking industry is insolvent, but nobody knows which quarter, than we have both an insolvency problem and a "spooked financial actors" problem. Sweden solved both these problems in the early 90s by taking over the banking industry completely, but in their case it was really true that virtually every bank was underwater. In our case, it's not1, and we ought to be spending more time figuring out which banks are viable entities and which ones aren't. The ones that aren't can be bailed out or nationalized if there's some prospect of future recovery, and the rest can be left alone. Result: we still have a big recession, but at least the solvent banks aren't under the same cloud of suspicion as everyone else and can go about their business semi-normally.

1Well, I don't think so, anyway. I could be wrong, though!

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Bailout Babies

| Mon Dec. 22, 2008 1:32 PM EST

BAILOUT BABIES....Hilzoy speaks for everyone who lacks a chauffeur when she wonders why banks that are getting federal bailouts "awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year":

The very people who are getting these bonuses and chauffeurs and private jets and financial planners have just sent the entire global economy into a nosedive. They have caused massive amounts of money to disappear. They are getting bailed out for their mistakes by the rest of us — the people who, if we're lucky, get to fly coach, and if we're not, drive across the country or take a bus.

If they had any shame at all, they would stop. More than that: if they had any sense at all of how angry a lot of us are getting, sheer prudence would do the trick. This is our money. We are giving it to them to get all of us out of a problem that they caused. They should bear that in mind, not treat us as if we were one great big cookie jar.

This is not the first time, of course. When LTCM imploded in 1998, Alan Greenspan arranged a bailout and saved the world. Yippee! But his bailout didn't wipe out the fund's backers. They took a big haircut, but they didn't lose everything. For endangering the entire world economy and bringing Wall Street to the brink of disaster (or so we're told), their reward was to take home a pretty nice piece of change when everything was said and done.

(And all the warnings about how we should prevent the kinds of practices that led to the LCTM debacle in the first place? You can guess what happened to those.)

Of course, there's another problem here: not every big U.S. bank is in trouble, but Henry Paulson forced them all to accept bailout funds anyway. Not only was that probably a bad idea in general, but it makes it hard to figure out who's really playing games with the taxpayer's dough. If Wells Fargo is doing OK, and didn't want any bailout money to begin with, there's no special reason to object to their salary and bonus structure. But AIG and Citicorp? Different story. It's yet another reason that bailouts should have been restricted to only the banks that really need it.

The Financing Problem

| Mon Dec. 22, 2008 12:48 PM EST

THE FINANCING PROBLEM....One of the things that will keep the U.S. housing market in the doldrum for years, even after prices bottom out, is that so many homeowners are upside down on their mortgages: they owe more on their homes than they're worth. Well, guess what? The auto industry has the same problem. Stephanie Mencimer, author of the terrific book Blocking the Courthouse Door, reports over at our main site:

According to industry analyst Art Spinella, president of CNW Research, fully 85 percent of Americans with a car loan have negative equity. Other studies show that these loan holders, on average, owe $4,400 more than their cars are worth.

....Unbeknownst to most car buyers, dealers [] routinely—and legally—bump up the interest rate offered by the bank or finance company in exchange for kickbacks from the lenders, which are often the manufacturers themselves. And in many cases, dealers encourage customers to trade in a car that isn't worth the amount of their current loan by offering to roll the old loan into the new one, thus inflating the principal and making the loan more lucrative for the lender. That's how people can end up owing $40,000 on a Ford Focus. This only works because auto lenders now stretch out the terms to six or seven years to make the payments affordable, a practice that virtually ensures that many cars won't last as long as the loan.

But nobody could have predicted etc. etc., right? Uh huh:

In 2004, major auto analysts noted that the lengthening loan terms and the increasing number of potential car buyers who were upside down on loans would lead to no good end for the auto industry, and GM in particular. Deutsche Bank analyst Rod Lache was prescient when he told Automotive News that the negative equity problem would only get worse if the automakers didn't address it. Observing that the average amount of money owed by someone trading in a car with negative equity had jumped from $2,900 to $4,000 in just a five-month period, he wrote, "The impact on US demand, price and mix from this phenomenon could be devastating, particularly if the impact is compounded by rising rates."

Read the whole thing here. This is yet another problem that has to be addressed if the auto industry is going to be successfully bailed out. After all, it doesn't do any good to give them a bunch of bridge loans unless they can figure out a way to get their customers back, and that's easier said than done. Caveat emptor.

Iran Sends Warship to Fight Somali Pirates

| Mon Dec. 22, 2008 12:25 PM EST

Last month, after pirates hijacked an Iranian ship off the coast of Somalia, I speculated on the prospect that Tehran might choose to join the Western-led naval flotilla now patrolling the Gulf of Aden. By signing on to effort, low-level cooperation between US and Iranian ships would be virtually unavoidable, several experts told me, potentially opening the door to a wider detente between the two nations. Well, this morning the BBC reports that the decision has been made:

Iran has sent a warship to the Gulf of Aden to protect its merchant shipping from attacks by Somali pirates, Iranian state media has reported...
Iranian officials said their ships would be prepared to use force against the pirates if necessary.
"After travelling more than 4,000 maritime miles an Iranian warship entered the Gulf of Aden to protect Iranian ships against pirates," said the radio report, but gave no further details.
An unnamed official said the gulf was an international area and that Iran's armed forces would "carry out any decision made by their superiors".

"Merchant of Death" Breaks Silence, Maintains Innocence

| Mon Dec. 22, 2008 11:37 AM EST

viktorbout.jpg

The current issue of The Economist includes a profile of Viktor Bout, the so-called "Merchant of Death," who until his capture earlier this year in a DEA sting operation in Thailand, was the dean of the world's black market in illicit weapons. The piece is a history of sorts, detailing Bout's sordid dealings with Third World dictators in search of the all-mighty dollar. It also describes the sting that brought him down last March—and graciously cites Mother Jones as having published an earlier detailed account of the operation.

Bout's story is the stuff of legend and perfect fodder for filmmakers. Nicholas Cage played a fictionalized version of the Russian arms dealer in the 2005 film, Lord of War. (Bout reportedly was not a fan of Cage's performance). According to the Guardian, Angelina Jolie is also set to play a UN arms investigator obsessed with busting Bout's network in a film due out in a year or two.

Turns out we won't have to wait that long to hear from Bout himself. Today in Bangkok, the arms dealer took the stand for the first time to fight against his planned extradition to the United States to face terrorism charges. Clad in the same orange prison outfit that has been his uniform for most of the year, Bout pleaded innocence. Never mind that he was caught with his hand in the cookie jar: sitting down with what he thought to be members of the Colombian FARC to discuss supplying them with guns, ammunition, and helicopters equipped with rockets. After all, the guy has a number of conflicting alibis: his wife says he was in Bangkok to take a cooking class; his bodyguard says he was there on vacation and to visit a medical center; Sergei Ivanov, a member of the Russian parliament, says he was there gathering "information on the aviation and construction business." It's all the same to Bout, who claims that whatever he was doing in Bangkok, it most certainly wasn't to sell weapons. As he told the court:

I never met or talked to anyone from FARC... I didn't do anything wrong in Thailand. I have never been to Colombia or the United States...I did not commit any terrorist acts... The US is trying to use this to cover up its internal problems and prevent good relations between Thailand and Russia.