Is class warfare — the real kind, not the phony conservative talking point kind — close to becoming reality? Felix Salmon has a short post on the subject that's worth reading.

I've already made my semi-defense of Tim Geithner's toxic waste buyup plan, and I won't repeat myself here. But there is one point that I think deserves a post of its own.

It's this: Do supporters of bank nationalization really think it's either legally or politically feasible at this point in time? I'm skeptical on both counts. Legally, I'm not sure Obama has the statutory authority to take over a big bank. He may well need congressional authorization of some kind first. And even if he doesn't, does anyone really think it would be wise to go down this road without broad congressional support anyway? I don't.

Like it or not, there's only one way to get this support: show that (a) one or more of the big banks really is insolvent and (b) every other option for rescuing them has been exhausted. Geithner's plan does both.  If it works — well and good. But if it fails — if nobody is willing to participate, or if the auction demonstrates that the market price for toxic assets really is accurate — then banks will be forced to mark their assets to those prices. Plug in those marks to Geithner's stress tests and it's likely to prove to everyone's satisfaction that some of our big banks really are insolvent. At that point, even skeptics will be forced to accept nationalization as the only remaining alternative.

Politically, I don't see any other way forward. Bank nationalization will be complex, costly, and contentious. To work, it will almost certainly have to include a broad guarantee of all bank system obligations, something the public won't be happy about.  Congressional support won't be easy to come by. Geithner's plan will either work or else it will pave the road for that support. It might not be pretty, but that makes it a plan worth trying.

Eating It

Atrios pungently describes the main objection to the Geithner plan:

Aside from setting up an overly complicated plan to try to disguise what they're really doing, the utility of the Geithner plan rests (or pretends to rest, not sure) on one fundamental premise: that Big Shitpile is greatly undervalued by "the market" and that these mortgage securities really have expected revenues which justify higher prices. One could have reasonably believed this months ago, I have no idea why anyone would believe this now. The housing bubble burst, and now recession is here. There's a lot of shit to be eaten, the question is who will eat it? Timmeh wants to make sure it's not the banksters.

Although I'm less sure than Atrios that we should accept the market's verdict on this stuff unquestioningly, he certainly might turn out to be right. But it's worth noting that taxpayers are going to eat almost all of this shit no matter what happens. If Geithner's plan fails, we eat it. If we nationalize the banks and become owners of all the toxic waste, we eat it. This financial crisis is going to cost the government a ton of money no matter what we do at this point.

Now, it's true that if we nationalize we'd wipe out the shareholders of the bad banks. But although that's the right thing to do, it's also pretty small potatoes since stock prices have dropped so far that shareholders in bad banks have virtually no equity left at this point. (Sweden didn't even bother trying to wipe out shareholders when they nationalized Nordbanken in 1992, for example. They just bought out the minority shareholders at the highly depressed market price.) What's more, a lot of those shareholders are mutual funds and pension funds anyway. The amount of bankster wealth that would be wiped out in a nationalization is probably pretty small.

It's not so much that I disagree with Atrios about this, just that I think he overstates the issue here. Nationalization would hurt bankers a little bit, and it would give taxpayers a bigger upside than the current plan. That's good. But it would also be ungodly complex and create plenty of problems of its own. It's worth avoiding if there's another solution.

If Geithner's plan fails because it turns out that the market price for all this toxic waste is really correct, then his stress tests will almost certainly show that Citigroup and Bank of America are insolvent. At that point, he's out of options and it's time to nationalize. Paul Krugman's fear about Geithner's plan is that "this will be the administration’s only shot," but I think that's wrong. In fact, far from making nationalization more difficult, its failure would make it both inevitable and broadly acceptable. All by itself, that's probably a good reason to let Geithner give this his best shot.

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.