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The Rise of the Technocrats

| Sun Sep. 28, 2008 11:51 PM EDT

THE RISE OF THE TECHNOCRATS....The New York Times on the Paulson bailout plan:

The rescue package, if successful, would make the recognition of losses and the inevitable winnowing of the banking system more an orderly retreat than a collapse. Yet that pruning of the banking industry must take place, economists say, and it is the government's role to move it along instead of coddling the banks if the financial system is going to return to health.

...."The lesson from Japan is that tough love for the banks is what's needed," said Kenneth Rogoff, an economist at Harvard. "In the current crisis, you do want to get rid of the bad assets from the banks, to get markets working again. But the key is going to be in the details of how the bailout works. You don't want it to be a subsidy in disguise that keeps insolvent banks alive. That would just prolong the economic pain."

Words to live by. The Treasury technocrats and asset managers who end up running the bailout are going to have a tremendous influence over whether it's successful or not. If they do it right, the plan should shine a bright light on which banks need to fail and which ones can be saved. If they do it wrong, we could be in for a long, gray twilight of economic stagnation.

In other words, we all better cross our fingers and pray that the Treasury department still has good technocrats these days. I wonder what the odds are?

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Global Warming Update

| Sun Sep. 28, 2008 6:20 PM EDT

GLOBAL WARMING UPDATE....What with financial Armageddon crashing down on our heads as we speak, it's hard to believe that the worst news of the week was actually buried on page A2 of the Washington Post. But it was:

In 2007, carbon released from burning fossil fuels and producing cement increased 2.9 percent over that released in 2006, to a total of 8.47 gigatons....This output is at the very high end of scenarios outlined by the Intergovernmental Panel on Climate Change (IPCC) and could translate into a global temperature rise of more than 11 degrees Fahrenheit by the end of the century, according to the panel's estimates.

We are so screwed.

All the Right Enemies

| Sun Sep. 28, 2008 6:06 PM EDT

ALL THE RIGHT ENEMIES....Sure, maybe you don't believe me about whether the Paulson bailout will work. Why should you? But the fact that Mike Pence opposes it surely lends the plan some credibility, doesn't it?

"Utterly Unqualified"

| Sun Sep. 28, 2008 4:35 PM EDT

"UTTERLY UNQUALIFIED"....Fareed Zakaria on Sarah Palin:

Can we now admit the obvious? Sarah Palin is utterly unqualified to be vice president. She is a feisty, charismatic politician who has done some good things in Alaska. But she has never spent a day thinking about any important national or international issue, and this is a hell of a time to start.

....In these times, for John McCain to have chosen this person to be his running mate is fundamentally irresponsible. McCain says that he always puts country first. In this important case, it is simply not true.

I don't want to overstate the importance of this, but it's definitely a sign that Palin's jig may be up. Zakaria frequently writes astutely, but he's something of an establishment weathervane, reluctant to state firm opinions unless he's got plenty of company. So if he's willing to say flatly that Palin is "utterly unqualified," it suggests that the center-right establishment pretty unanimously agrees about this. I don't know for sure that this will have a noticeable effect on the campaign, but when you add it to the growing list of conservatives who have taken similar stands (George Will, David Frum, Rod Dreher, Kathleen Parker, Ross Douthat, David Brooks, Charles Krauthammer), it suggests that dismay over Palin may be reaching critical mass.

Who Won the Debate?

| Sun Sep. 28, 2008 3:53 PM EDT

WHO WON THE DEBATE?....A non-snap poll done on Saturday suggests that Barack Obama really did win Friday's debate:

A new USA TODAY/Gallup Poll shows 46% of people who watched Friday night's presidential debate say Democrat Barack Obama did a better job than Republican John McCain; 34% said McCain did better.

....The poll suggested the debate was to some extent a wash for McCain: 21% of those who watched say it gave them a more favorable view of him, 21% say less favorable and 56% say it didn't change their opinion much.

Three in 10 said their opinion of Obama became more favorable after seeing the debate, compared to 14% who said less favorable and 54% who said it didn't make much difference.

Polls done on weekends are tricky, and "winning" debates doesn't always translate into a tangible advantage. Still, it's notable that a significant number of people who were apparently unsure about Obama before the debate now see him in a favorable light. That's a big deal, since being taken seriously is the biggest hurdle for a younger, less-experienced candidate to get over.

And while we're at it, here's the RealClear Politics poll average, which doesn't yet account for any possible bump Obama might have gotten from the debate. As of this morning, they have him 4.8 points ahead.

Quote of the Day - 9.28.08

| Sun Sep. 28, 2008 3:24 PM EDT

QUOTE OF THE DAY....From John McCain, responding to the fact that Sarah Palin repudiated his Pakistan policy in a conversation at Tony Luke's cheesesteak shop in South Philly yesterday:

"In all due respect, people going around and... sticking a microphone while conversations are being held, and then all of a sudden that's — that's a person's position... This is a free country, but I don't think most Americans think that that's a definitve policy statement made by Governor Palin."

Got that? It's unfair for someone to "stick a microphone" in the face of a vice presidential candidate during a campaign appearance and then take her words seriously. This is no longer even low farce. It's more like we're all in the middle of a bad vaudeville skit.

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My Take on the Paulson Plan

| Sun Sep. 28, 2008 3:09 PM EDT

MY TAKE ON THE PAULSON PLAN....Will the Paulson bailout work? Is it the really best solution to our financial problems? Before I answer, my standard caveat: I'm a semi-informed, non-credentialed amateur who has no experience in the finance world and only barely understands exactly how this crisis has unfolded. If it makes you happy, you should feel free to echo this critique in more biting and sarcastic terms in comments.

That said, I think the answer is yes and yes. The leading alternative appears to be some version of nationalization: Recapitalize failing banks, nurse them back to health, and then sell off the government stakes sometime down the road. One advantage to doing this is that it automatically forces banks that made the dumbest mistakes to pay the highest price for rescue. Sweden, which faced a financial collapse in the early 1990s that was similar in some ways to ours (though different in others) did this and it seemed to work OK for them.

And it may yet come to that. It's not a serious alternative right now because there's simply no political support for it (there's barely political support for the Paulson plan), but I'm skeptical that it's the best solution anyway. Why twiddle our thumbs waiting for banks to fail? Why prop up entire institutions when their problems are narrowly focused on a particular class of assets? Who decides which banks are worth nationalizing and which ones aren't?

The Paulson plan, by contrast, seems to have a pretty good chance of accomplishing multiple things:

  1. Thanks to falling house prices and a general panic, toxic mortgage assets are currently valued by the market at about zero. This is plainly absurd: they're worth quite a bit less than face value, but they aren't worthless. The Paulson plan, by creating a mechanism to pay some kind of reasonable price for these assets, cleans up banks' balance sheets and increases their capital base at the same time. Doing both those things is better than recapitalization alone.

  2. Creating a controlled market in these assets should help to jumpstart the public market for all the toxic waste currently on bank balance sheets, not merely the parts of it that Treasury purchases. This will help the balance sheets of every bank in the industry, even the ones who don't participate in the bailout. In this sense, we're getting a very big bang for our buck.

  3. Once prices are set, we'll have a much better idea of which banks really are insolvent — or are likely to become insolvent shortly. This is pretty useful information. It gives us a better idea of the scope of the problem, and allows us to make rational decisions about whether to let banks fail or whether we really do have to nationalize them.

  4. If it then turns out that we have to nationalize a bunch of banks, we can still do it. But the Paulson plan seems like a better first step: more focused, easier to manage, and with a good chance of unstopping the credit markets quickly and putting the finance industry back on its feet.

Letting Lehman Brother go bust was obviously a disaster. Everyone agrees we can't let that happen again. And by all accounts, Paulson drove a pretty hard bargain when he nationalized AIG, one that quite possibly will end up being profitable for the taxpayers. The same might be true for the broader bailout, especially if the plan to get contingent equity shares in participating banks is included in the final legislation — as it seems to be. So I say: let him try to make the current bailout plan work. I think it's got a good chance of working, and if it doesn't, Plan B is still available.

McCain: No, Palin Did Not Mean That

| Sun Sep. 28, 2008 2:49 PM EDT

If you watched the debate, you know John McCain attacked Barack Obama's position on Pakistan. Here's how Obama articulates it: "If the United States has al Qaeda, bin Laden, top-level lieutenants in our sights, and Pakistan is unable or unwilling to act, then we should take them out."

McCain said at the debate that it was unwise to "threaten" Pakistan in this way, and that Obama's position was a product of his inexperience. "You don't say that out loud," McCain said. "If you have to do things, you have to do things, and you work with the Pakistani government."

But there's a problem. On a recent campaign stop in Pennsylvania, Sarah Palin was asked by a voter if American forces should move from Afghanistan into Pakistan to pursue terrorists. Palin responded, "If that's what we have to do stop the terrorists from coming any further in, absolutely, we should."

Whoops. That's Obama's position. So today McCain was in the painful position of having to retract his vice presidential pick's statement:

"She would not…she understands and has stated repeatedly that we're not going to do anything except in America's national security interest. In all due respect, people going around and… sticking a microphone while conversations are being held, and then all of a sudden that's—that's a person's position… This is a free country, but I don't think most Americans think that that's a definitve policy statement made by Governor Palin."

Translation: Just because my candidate for vice president said something into a microphone doesn't mean it should be taken seriously or that she actually believes it.

Bailout Package Almost Finished?

| Sun Sep. 28, 2008 2:24 AM EDT

BAILOUT PACKAGE ALMOST FINISHED?....The Wall Street Journal reports exclusively tonight that there was a "delivery of food from sandwich shop Cosi to Ms. Pelosi's office just before 8 p.m. EDT." Exciting!

On a more substantive note, I'm trying to figure out if there's any Republican position at all regarding the financial crisis and what to do about it. John Boehner says he's against the Paulson bailout but has steadfastly refused to offer an alternative. Richard Shelby refuses to even acknowledge that a bill is being negotiated. Eric Cantor has offered an actual policy proposal, but as near as I can tell it's one of those weird movement conservative things that doesn't even begin to make sense. It's billed as an insurance scheme to rescue an insolvent banking system, but I gather (?) that what he wants to do is assess fees on the very firms that are insolvent in order to set up an insurance pool that allows them to bail themselves out. Huh? This sounds like a bunch of skydivers forming a circle and thinking they can all pull each other up. I think you'd need M.C. Escher to illustrate it.

Despite all this, Politico reports that a verbal agreement among lawmakers has finally been reached and just needs to be "committed to paper":

The plan would likely give Paulson a relatively free hand accessing the first $350 billion of the $700 billion he sought. It was not clear when the remaining $350 billion would become available, but Treasury apparently agreed that a future Congress could block its release though a joint resolution signed by the president.

The agreement would also include much greater oversight than the Bush administration had initially proposed; an opportunity for the government to take an equity share in the companies it helps, either through warrants or options to buy stock; and a provision limiting the compensation paid to executives of those companies.

This sounds good, especially the equity share language. Unlike some of the bells and whistles that both sides have been trying to festoon on the bill, this one really does seem like a must-have. If it's structured right, it ensures that taxpayers are protected against losses due to overpaying for toxic mortgage securities and guarantees that the eventual cost of the bailout will be far, far less than the nominal $700 billion price tag.

Supposedly, this deal will get substantial support from House Republicans, though it doesn't really seem to be any different from the language that was being discussed a couple of days ago. Apparently it includes Cantor's insurance scheme, but only for future use and only on a voluntary basis — though this part is murky. It sounds like a fig leaf to me, but if that's what it takes to get them on board, I guess that's fine.

And what if they're not on board? Assuming that the rest of the oversight/comp/equity language is reasonable, Obama should support it and Democrats should stand up and pass it regardless. Yeah, it's a drag having to clean up Republican messes, but you know what? We'd better get used to it. This is just the first of many.

Pass the Effin Bill

| Sat Sep. 27, 2008 9:57 PM EDT

PASS THE EFFIN BILL....You would think that the imminent collapse of our financial system, much like a firing squad, would concentrate our collective minds wonderfully. You would be wrong. Ten days after the credit markets nearly seized up completely, nine days after Henry Paulson and Ben Bernanke finally decided to press the big red financial panic button and propose a systemic bailout plan to replace a year's worth of fingers in the dike, we're pretty much back where we started. Washington Mutual has gone bust. Wachovia is in trouble. Over in Europe, Bradford & Bingley has imploded and Fortis is on life support. The TED spread is once again bobbing around at just under 300 basis points. Solidly profitable companies trying to float bonds are having to offer premiums of 300-400 basis points just to find willing buyers.

And what's happened in the meantime? The good news is that Paulson's original bailout proposal has been improved. Hooray. The bad news is a little more extensive. John McCain decided that his campaign might benefit from gumming up the negotiations a bit, so he swooped into Washington and did just that. House Republicans, who apparently earned their high school degrees from a rack of gumball machines, decided to hold their breath and stamp their feet unless capital gains taxes were eliminated, a lunatic proposal that has exactly nothing to do with our current problems. A band of Democrats (I can only pray it was a small one), in an apparent effort to prove that idiocy is not confined to one party, decided that this was the right time to insist that all profits from the plan be plowed into housing programs. Profits! You betcha. Meanwhile, outside Congress, every pundit, academic, and blogger in the country seemed determined to prove their manhood by proposing that we ditch the Paulson plan and instead spend our time considering some shiny new idea that they insisted was way more bitchin' than anything coming from all those other guys.

Sure, why not? We've got plenty of time, after all. If a few more banks crumble, no biggie. A couple extra points of unemployment? Whatevs. A global credit contraction at just the time when our economy is teetering into recession anyway? Yawn. It probably won't affect most of us well-off pundit types anyway. But it'll sure provide plenty of opportunity for finger pointing later on, and that's what really counts, isn't it?

Look: there's now pretty broad agreement on issues of oversight, CEO compensation, and equity sharing. So how about if we concentrate on that stuff, cut all the extraneous crap, and pass the fucking bill? It's not like it'll be carved in stone. We can always take additional swings later if we have to.

Now go read Joe Nocera and Bruce Bartlett.