The details of Tim Geithner's plan to buy up banks' toxic waste are still a little vague, but liberal reaction (Krugman, Baker, Smith) has mostly been pretty harsh regardless. Their primary criticism is simple: banks aren't willing to sell their mortgage-backed assets at market prices because they think the market is panicked and only willing to buy at fire sale prices. And fire sale prices will ruin them. But if the government buys at the price banks value this stuff at, they're almost certainly paying too much. It might rescue the banks, but only by essentially giving away lots of free money.

This is all true, but it's a little too glib. After all, if markets can overvalue assets on the way up — and obviously they can — then they can also undervalue them on the way down. There's a pretty good chance that the toxic waste in question really is worth more than the market is currently willing to pay for it.

I think this sometimes get obscured because of a lazy shorthand that a lot of us have fallen into: namely the notion that the value of mortgage-backed securities is certain to keep plummeting because home prices themselves still have another 20-30% to fall. But these securities aren't backed by the value of the homes they represent. They're backed by mortgage payments. Home prices could fall by half, but the value of the securities wouldn't drop by a dime if homeowners kept making their monthly payments. Their value only drops if default rates go up.

So what causes default rates to rise? Falling home prices are certainly a factor, since it's more tempting to mail in the keys when your loan is way underwater. Rising unemployment is an even bigger factor: if you lose your job, you're more likely to stop paying the mortgage. And the crappy lending practices at the height of the bubble produced a surplus of buyers who have always been more likely to default than average.

But there are also forces that can reduce default rates. Fannie Mae and Freddie Mac are buying up billions of dollars worth of mortgages and renegotiating their terms. Barack Obama has committed $75 billion in direct aid for distressed homeowners. Congress is likely to allow bankruptcy judges to rewrite the terms of mortgage loans. And the Fed is trying to reduce long-term interest rates, which will allow homeowners to refinance their loans at lower rates.

Obviously, then, there's tremendous uncertainty about future default rates. But the market appears to be valuing most mortgage-backed securities these days at something like 30 cents on the dollar. That's crazy. When you factor in recovery rates, it assumes that over three-quarters of all homeowners will default on their loans. That might be true of the absolute worst of the toxic waste, and it's certainly true of the equity tranches of even the better stuff, but on average? No way. 30 cents on the dollar simply doesn't represent a reasonable long-term value for most of this stuff.

But everyone is scared, and when there are no buyers prices get unreasonable. So maybe with some nudging (along with plenty of leverage from Uncle Sam), Geithner's plan will motivate private investors to spend more time really trying to figure out what this stuff is worth and making fair bids for it. It's true that there are tricky aspects to running the auctions that Geithner may or may not be able to solve, but if his plan works it will help clean up bank balance sheets and keep taxpayers from getting fleeced. And if it doesn't work? There's always nationalization.

So it's probably worth a try. In the meantime, I'll recommend again Brad DeLong's FAQ, which explains the mechanics of the plan pretty well (though it might be wrong on some of the details since it's based on conflicting press reports). And I'll also re-recommend James Galbraith's post suggesting that we might not have to guess so much about the value of all this toxic waste if banks were forced to allow independent examiners to look at the loan tapes and find out just how vulnerable all these mortgage are.

UPDATE: Robert Waldmann makes the case that the market is actually valuing this stuff pretty accurately. That certainly might be true.  But if it is, then Geithner's plan will fail, the value of the toxic waste will be settled beyond question, and insolvent banks will be exposed for what they are.  That's a good thing, no?

Predator Update

Greg Miller of the the LA Times reports that the CIA says its stepped up Predator attacks in Pakistan have been enormously successful:

An intense, six-month campaign of Predator strikes in Pakistan has taken such a toll on Al Qaeda that militants have begun turning violently on one another out of confusion and distrust, U.S. intelligence and counter-terrorism officials say.

....The stepped-up Predator campaign has killed at least nine senior Al Qaeda leaders and dozens of lower-ranking operatives, in what U.S. officials described as the most serious disruption of the terrorist network since 2001.

....Officials said that the surge in strikes has less to do with expanded capabilities than with the decision to skip Pakistani approval. "We had the data all along," said a former CIA official who oversaw Predator operations in Pakistan. "Finally we took off the gloves."Officials said that the surge in strikes has less to do with expanded capabilities than with the decision to skip Pakistani approval. 

....The effect was immediate....CIA officials had suspected that their targets were being tipped by Pakistani intelligence to pending U.S. strikes; bypassing the government ended that concern.  It also eliminated delays. Former CIA officials said getting permission from Pakistani authorities could take a day or more, sometimes causing the agency to lose track of the target.

I find this pretty believable.  There's really not much question that there are plenty of high-level ISI operatives who are sympathetic to al-Qaeda and likely to tip them off to upcoming attacks.  And as the article mentions, the Pakistani government knows this perfectly well.  Its objections to the drone attacks have been decidedly pro forma.

But even if this is all true, it's still not clear that the short-term success of the Predator program outweighs its long-term potential for blowback.  For now, though, I'll let smarter people than me try to figure that out.

A combination of user idiocy and lame blog software just wiped out a long post I wrote about the Geithner plan to buy up toxic waste, and I'm too tired and annoyed to try to recreate it tonight.  Instead, I'll just recommend two other posts for now: Brad DeLong's FAQ and James Galbraith's plea to open up the loan tapes.  As for the mechanics of the plan itself, who knows?  I've read three different articles about it, and since all three disagree on some of the details and are vague on others I'm not sure there's much point in getting too deeply into it at this point anyway.  So for now, just read those other guys and wait for Monday when the plan will be officially announced.

I just saw Watchmen and—spoiler alert!—it kind of sucked. But not just for the obvious reasons (it's based on an impossible-to-adapt comic book; it's terribly acted, pointlessly violent, and infuriatingly shallow; and it ruins a great Leonard Cohen song). It was awful because it turned an unnecessary subplot about clean energy into a major plot point that's the foundation of its unsatisfying climax. Bear with me: In the original Watchmen book, we learn that atomic demigod Dr. Manhattan (owner of a hard to ignore, possibly offensive, glowing blue penis) has figured out a way to make mass quantities of efficient lithium batteries, and as a result, by the 1980s, electric cars have made gas guzzlers obsolete. Goodbye climate change! Yet in the movie, electric cars are nowhere to be seen, though we learn that Dr. Manhattan is working with impossibly skinny crimefighter-turned-tycoon Ozymandias (AKA "the world's smartest man") to come up with some new form of vague yet CGI-intensive clean energy. And that's where things start to get really dumb.

More on the Kindle

Here's a couple more things about the Kindle that I wouldn't have guessed before I started using it.

#1: In the past, I'd go to the bookstore and buy several books at a time.  Naturally I meant to read all of them, and just as naturally, I didn't.  Another book would catch my eye before I'd finished them all, a review book would come in the mail, I'd get a few books for Christmas, etc. etc.  The upshot is that some of the books would fall to the bottom of the pile and never get read.

With the Kindle, though, there's no pile.  When I finish a book, all I have to do is decide at that moment what I feel like reading next.  Ten minutes later I have it.  I don't know for sure if this is good or bad in the long run, but it's certainly different.

#2: I have a floater in my right eye that can get pretty annoying when I read.  However, I only really see it against a bright white background.  Today my floater was in high gear, but I noticed that it wasn't bothering me while I was reading because the background of the Kindle is a soft gray.  When I first got it, that soft gray annoyed me, but now I see that it was a blessing in disguise

So what happens 20 years after 10 million gallons of heavy crude oil hit the delicate interface between land and sea in Alaska? First off, most everyone who doesn't live there has forgotten. But what about the landscape and seascape—is all forgotten there too?

Ten years after the fact, the final dead-bird tally came in at between 100,000 and 700,000 birds killed, reports Nature. Good news: many species have recovered since then. Others are still recovering. Bad news: the Pigeon Guillemot has not.

The what, you ask. Oh, just those little pigeon-sized birds of the high latitudes who can fly in the air, fly underwater, dive to 150 feet below the surface in near-darkness, root around on the bottom for two minutes and actually find things to eat, survive the winter among the ice in subfreezing air temperatures, in water temperatures below the freezing threshold of freshwater, live without ever drinking freshwater, sleep on the water in ferocious Arctic storms… You know, those one-of-a-kind things that make a species unlike any other species.

The Exxon Valdez Oil Spill Trustee Council categorizes human services—fishing, recreation, and subsistence use—as still only recovering.

A few positive developments as a result of the Exxon Valdez disaster:

  • Experiments in Prince William Sound led to groundbreaking bioremediation methods, notably using the bacterium Pseudomonas aeruginosa to break down oil. (Much better than detergents that are as toxic as oil.) Yay, bacteria!

  • Exxon Mobil Corp tried to claim that some of the spilled oil was not its oil. In response, scientists bombproofed the art of hydrocarbon fingerprinting, assuring no one will easily dodge their own unctuous provenance again.

  • The US Coast Guard tightened its chains of command and retrained its clean-up teams for oil spills.


  • Single-hulled tankers—like the Exxon Valdez—are now barred from US ports. France and Spain—with their own disastrous oil-spill history—won't allow them within 200 miles of their coast.

The bad news:

  • The single-hulled Exxon Valdez was repaired, sold, renamed the Mediterranean and is still plying Asian waters.

  • Herring have not recovered since the spill. The problem could derive from the spill. Or it could be from overfishing. Or from ecosystem shifts. Or from an ugly combination of all.

  • Surface puddles of Valdez crude oil can still be found.

  • Pockets of undegraded oil rest just below the surface of some beaches, where sea otters dig for food.

  • Last year the US Supreme Court eviscerated the financial punishment to Exxon Mobil by lowering the punitive damages from $2.5 billion to $507.5 million. The court judged the initial award as excessive under maritime law.

Sounds like we need a Planet Earth law that accurately reflects the costs of ecosystem services, one that even a high court sequestered far from the wild can understand.

Any Alaskans out there want to tell us what else it looks like on the ground or in the water 20 years on?

Speaking today to the National Conference of State Legislatures, President Obama placed some stiff new restriction on stimulus lobbying:

Decisions about how Recovery Act dollars are spent will be based on the merits. Let me repeat that: Decisions about how Recovery money will be spent will be based on the merits.

They will not be made as a way of doing favors for lobbyists. Any lobbyist who wants to talk with a member of my administration about a particular Recovery Act project will have to submit their thoughts in writing, and we will post it on the Internet for all to see. If any member of my administration does meet with a lobbyist about a Recovery Act project, every American will be able to go online and see what that meeting was about. These are unprecedented restrictions that will help ensure that lobbyists don't stand in the way of our recovery.

These are great new rules, and any good government crusader would support them. The only question: why can't this be the standard for all executive branch lobbying?

The White House put out a memo today titled "Ensuring Responsible Spending of Recovery Act Funds." It provides details on the lobbying restrictions above. It also includes a funny little quirk -- I'll add that below.

The Louisiana Department of Corrections has transferred Herman Wallace, who has spent more than three decades in solitary confinement in the state's notorious Angola prison, to another prison in the state, Mother Jones has learned. Wallace is a member of the so-called Angola 3, a group of prisoners who spent decades in solitary after being convicted of prison murders based on questionable evidence. The prolonged confinement of Wallace and fellow Angola 3 member Albert Woodfox is the subject of a civil habeaus corpus suit charging Angola with cruel and inhuman punishment. Wallace's transfer follows stories by NPR and Mother Jones raising questions about the evidence and witness testimony used to convict Wallace and Woodfox of the 1972 murder of Angola prison guard Brent Miller.

According to one of Wallace's lawyers, Nick Trenticosta, prison officials moved Wallace unexpectedly--and without informing his attorneys-- on Wednesday night to the Hunt Correctional Facility in St. Gabrielo, Louisiana. Hunt is used as both a permanent prison and as a way station where prisoners are evaluated before being sent on to other facilities. Wallace's defense team has been scrambling to contact their client, though they have been told by corrections officials that they won't be able to speak with him until next week. (Corrections officials at Angola did not return a call for comment).

Federal Magistrate Judge Docia L. Dalby, in a decision rebuffing the state of Louisiana's attempt to dismiss the civil case, describes the decades of solitary confinement endured by Wallace and Woodfox as "durations so far beyond the pale that this court has not found anything even remotely comparable in the annals of American jurisprudence." In a 2008 deposition in the suit, Angola Warden Burl Cain claimed the men had been held in solitary for so long due in part to their association with the Black Panther party.

On the left, Inkblot is worried that Congress will consider him a fat cat and tax his evening dinner bonus away.  I told him it actually counts as straight salary in his case, so no worries.  On the right, we have a rare shot of Domino actually walking somewhere.  It's not that she never does this, just that it's hard to take a picture of it since she instantly makes a beeline for the camera if she sees it pointed in her direction.  This time I caught her just in time.

Debt, Debt, Debt

The Congressional Budget Office released some new numbers today and the White House had this to say:

Responding to today’s new, more pessimistic CBO scoring of the president’s budget in light of the deteriorating economic situation, Peter Orszag was at pains to emphasize that deficit projections are highly sensitive to relatively small changes in assumptions. For example, suppose that first you project revenues of $100 and spending of $103 for a $3 deficit. Then you get some bad news about the economy so projected revenue drops by five percent. Well, suddenly you’re looking at a deficit of $8. The alarming way to put this is that the deficit has nearly tripled. The calm way is that revenue has fallen by 5 percent.

Well, yes, deficit projections are highly sensitive to small changes in assumptions, which is why presidents traditionally tweak their assumptions to produce rosy economic projections.  It doesn't take much.  Obama and Orszag actually did this less than most administrations in their initial budget proposal, I think, but they still did it.  And now it's coming back to bite them since, in fact, the alarming way of looking at this is also the correct one.

Now, given the current state of the economy, a larger deficit might be a feature, not a bug.  But if the deficit stays above 4% of GDP for an entire decade, as the CBO suggests, then we have a problem.  We can't keep that up forever any more than Wall Street could keep the subprime bubble going forever.  Someday we're going to pay.