No Mas

| Thu Sep. 18, 2008 12:52 PM EDT

NO MAS....Conventional wisdom said it was just a minor gaffe. Or maybe John McCain didn't hear the question right during his radio interview with WSUA 1260 in Miami yesterday. But no: it turns out that, as a matter of policy, McCain refuses to commit to meeting with the prime minister of Spain if he's elected president. (Yes, that Spain. The one in Europe. Liberal democracy. NATO ally. Etc.) McCain foreign policy adviser Randy Sheunemann provided confirmation:

"The questioner asked several times about Senator McCain's willingness to meet Zapatero (and [identified] him in the question so there is no doubt Senator McCain knew exactly to whom the question referred). Senator McCain refused to commit to a White House meeting with President Zapatero in this interview," he said in an e-mail.

Okey dokey. President Bush already has a policy of keeping Zapatero in the deep freeze, and I guess McCain has decided not to deviate from it. Full details on this bizarre incident at the link.

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McCain-Spain, Continued

| Thu Sep. 18, 2008 12:21 PM EDT

McCain said in June that Zapatero, the president of Spain, would be welcome at his White House. This bolsters my argument that McCain didn't intend to give Spain the cold shoulder in the Spanish-language radio interview. He simply didn't know what was going on.

Of course, the McCain campaign had to respond to this situation and they couldn't say, "Our candidate misheard the interviewer or misunderstood what was going on, so let's just forget this little senior moment, shall we?" So they claimed that McCain intentionally refused to sit down with Zapatero, who is a socialist:

"The questioner asked several times about Senator McCain's willingness to meet Zapatero (and id'd him in the question so there is no doubt Senator McCain knew exactly to whom the question referred). Senator McCain refused to commit to a White House meeting with President Zapatero in this interview," the Senator's foreign policy adviser Randy Sheunemann told the Washington Post.

Okay, that's insane. Lumping Spain — a member of NATO and thus a country we are bound to defend militarily in the event of crisis — in with Iran, Venezuela, and North Korea is clearly crazy. And it's a position, apparently, John McCain didn't endorse as recently as June. So we know what's going on here, right? The campaign put out a self-serving, cover-your-ass statement and John McCain is old but not so militaristic he wants to sever ties with one of our oldest allies. Everyone clear?

Afghanistan Update

| Thu Sep. 18, 2008 12:12 PM EDT

AFGHANISTAN UPDATE....I know nobody cares, what with the global financial system collapsing around our ears, but things aren't going too well in Afghanistan these days. Laura King reports:

A summer of heavy fighting during which Western military leaders had hoped to seize the initiative from Islamic militants has instead revealed an insurgency capable of employing complex new tactics and fighting across a broad swath of Afghanistan.

...."In all, we feel that things are going very, very well for us," said a Taliban field commander in Kandahar province whose men fought hit-and-run battles with Canadian and British forces during the summer, the season when fighting is most intense. "And what is more, time is on our side."

....In large swaths of the countryside, insurgents have been able to intimidate local officials into cooperating, in part because President Hamid Karzai's government is perceived to be corrupt and inefficient. "Once, people would look to the government for justice," said Abdul Qadoos, a businessman and tribal leader in Kandahar province. "Now they go to the Taliban."

Read the whole thing for more. The Taliban originally took over Afghanistan in the mid-90s because the central government was widely perceived to be corrupt and inefficient. As long as that continues, the Taliban (or something Taliban-like enough for the difference not to matter) will remain a huge force there. As in Iraq, the key to stability is political reconciliation more than pure military victory.

American Royalty Endorses American Royalty, Citing Rednecks

| Thu Sep. 18, 2008 11:34 AM EDT

The jilted Clinton supporter Lady Lynn Forester de Rothschild recently endorsed John McCain, saying Barack Obama is elitist and unable to connect with everyday people. De Rothschild certainly knows something about elitism — the wife of British banking scion Sir Evelyn de Rothschild, she reportedly splits her time between homes in New York and London — but it's unlikely she knows all that much about everyday people. Here she is on CNN explaining her endorsement of McCain:

"The people out, you know, who are the rednecks or whoever, are bitter."

Surely the rednecks or whoever recognize this woman as one of their own. Video after the jump.

Financial Panic Update

| Thu Sep. 18, 2008 11:29 AM EDT

FINANCIAL PANIC UPDATE....The credit markets have seized up so completely that the world's central banks are now in the overnight repo market in a big way:

The world's leading central banks made a fresh attempt today to ease the growing stress in the world's money markets, taking coordinated action to provide $180bn (£100bn) in extra liquidity.

After the unwillingness of banks to lend to each other led to acute shortages of funds in short-term dollar markets, the Federal Reserve announced that the European Central Bank, the Bank of Japan, the Swiss National Bank, the Bank of Canada and the Bank of England would all provide extra funding in short-term US dollar markets....The Bank of England is making $40bn available, with the ECB increasing its funding by $55bn and the Swiss National Bank offering $15bn. The Bank of Japan will lend $60bn and the Bank of Canada will provide $10bn.

Nobody knows how much bank assets are worth these days, so no one knows which banks are solvent. And if you don't know which banks are solvent, you aren't willing to do business with any of them. Hence the central banks take over. Eventually all these assets (Atrios's "big shitpile") will get valued, but it's not clear when this will happen or what (if anything) central bankers can do to move the process along. It'll be a while, though.

In other news, Lloyds has taken over the British bank HBOS, the first shotgun marriage outside the U.S. And the flight from bank debt to safe treasury debt is in such full flight that U.S. treasury bonds now have a negative return, the first time that's ever happened.

Palin Blames Wall Street Woes on Lobbyists - The Same Ones Who Now Work for the McCain-Palin Campaign?

| Thu Sep. 18, 2008 11:15 AM EDT

In her third media interview (first two: ABC and People magazine), Sarah Palin talked Wall Street with Sean Hannity. The Fox News host wanted some answers on the current economic upheaval:

HANNITY: How connected is it, though, to Washington? You have 354 lawmakers got money from Fannie and Freddie. 354. If you look at the years from 1989 to 2008, second-top recipient was Senator Barack Obama. Should there be an investigation in terms of the relationship between the political donations and then of course the bankruptcy that ensued and the impact on the economy?
PALIN: I think that's significant, but even more significant is the role that the lobbyists play in an issue like this also. And in that cronyism — it's symptomatic of the grade of problem that we see right now in Washington and that is just that acceptance of the status quo, the politics as usual, the cronyism that has been allowed to be accepted and then it leads us to a position like we are today with so much collapse on Wall Street. That's the reform that we've got to get in there and make sure that this happens. We've got to put government and these regulatory agencies back on the side of the people.

Set aside the fact that she says nothing of substance about the economy or conditions on Wall Street. She says, "even more significant is the role that the lobbyists play in an issue like this... the cronyism that has been allowed to be accepted and then it leads us to... so much collapse on Wall Street." There's some confusing language in there but when you filter it out you get one inescapable conclusion.

Sarah Palin blames Wall Street lobbyists for a major part of the financial industry's "collapse."

If that's the case, why does she let 83 Wall Street lobbyists work for her campaign? McCain and Palin are slamming the "greed" of Wall Street and its lobbying pals on a daily basis, saying that they are hurting average Americans. Wouldn't you think McCain and Palin owe it to those average Americans to keep the lobbyists in question off the campaign payroll?

Photo by Ryan McFarland used under a Creative Commons license.

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A More Generous Interpretation of the McCain-Spain Gaffe

| Thu Sep. 18, 2008 10:32 AM EDT

If you haven't heard about the McCain-Spain snafu, highlighted by Talking Points Memo overnight, here's a quick rundown. My take on the whole thing follows.

McCain did an interview with a Spanish-language radio station. He was asked about a series of Latin American troublemakers, in response to which McCain gave the standard conservative boilerplate about standing up to those that oppose liberty, freedom, etc. The interviewer then asks about Spain and President/Prime Minister Zapatero. McCain appears confused by the question or unclear on who Zapatero is and covers by providing more boilerplate about Latin America. He never embraces Spain as an ally, possibly because he doesn't know the questions are about Spain.

At this TPM post, you can hear the interview in English and evaluate for yourself.

Some in the media are already jumping on McCain. I'm more charitable. I don't think McCain can't identify Spain's correct hemisphere. I don't think McCain is uncertain about Spain's status as an ally. I don't think McCain is unaware of Spain's leader. Honestly? I think he didn't hear the interviewer, who was talking quickly and with an accent, when she transitioned to Spain. And after he missed the transition he got confused and either misheard or misunderstood the rest of what was going on.

I think this whole thing is a symptom of McCain's age.

And to be frank, I think it would work better as an attack on McCain if it was framed that way. Is any voter really going to believe that a 20+ year Senator doesn't know where Spain is? They're likely to dismiss that as the (over)zealotry of the liberal media. Questions about age and fitness are much more believable.

Light at the End of the Tunnel?

| Thu Sep. 18, 2008 12:27 AM EDT

LIGHT AT THE END OF THE TUNNEL?....Oddly enough, this Wall Street Journal piece about the credit crisis may be good news:

Lingering hopes that the damage could be contained to a handful of financial institutions that made bad bets on mortgages have evaporated. New fault lines are emerging beyond the original problem — troubled subprime mortgages — in areas like credit-default swaps....Expectations for a quick end to the crisis are fading fast....[etc. etc.]

I'll probably regret writing something so glib, but bankers are panickers. They panic when markets are going up and they panic when they're going down. One of the signs that you're near the top of a bubble is when the panic grows so deep that everyone convinces themselves that the laws of economics have changed forever and there's really no bubble at all. Likewise, one of the signs that you're approaching the nadir is when the panic grows so deep that everyone convinces themselves that there's no end in sight. So maybe we're close to the bottom.

Not that we're all the way there yet, by any stretch. We've still got a pretty tough recession ahead of us as we start to wind down our gargantuan current account deficit. Still, it's possible that once WaMu's hash gets settled, the worst of the panic might start to subside, and then we'll face only a painful but basically orderly retreat for another year or two before bouncing back. We can hope, anyway.

This, by the way, is why I think the feds might end up making a profit on AIG. Once the worst of the panic subsides, it's likely that AIG's losses are going to turn out to be huge but not completely catastrophic. Nobody knows what all their bundled up assets are worth, but eventually they'll get unwound and I suspect they'll turn out to be worth more than the dime-on-the-dollar that everyone is currently valuing them at. When that happens, Uncle Sugar will cash in its warrants and come out ahead on the deal.

So does that mean I approve of the AIG bailout? You bet. For two reasons. First, Paulson and Bernanke seem like pretty decent technocrats to me, and they have way more information about what's going on than any of the rest of us. I suspect they wouldn't have agreed to the bailout unless a genuine meltdown was really the alternative. Second, I'm not very worried about moral hazard. It's way overrated as a genuine motivation for human activity. (Nobody wants to run their company into the ground, bailout or not. Even in the healthcare market, where moral hazard is a far more concrete issue, it appears to have only a modest effect on actual behavior.) Besides, I think the government should backstop the financial markets — as long as those markets are properly regulated up front. In the modern world, no one else can do it. So I say: go ahead and bail out AIG, but then implement a new regulatory regime that covers all financial activity, not just the small part of the market that it covers now. Voilà. Moral hazard problem solved.

As for the scope of that regulation, it's not so much that it has to be a lot stricter (though there may be some of that), but that it needs to be broader. You have to regulate the money flows wherever they happen to be. If the derivatives market is where the big money is, then that's what you regulate. If it's hedge funds, you regulate those. If it's big enough to cause a problem, you regulate it. You can't do it with the same tools that you'd use to regulate, say, deposit accounts, but you can still use a lot of the same principles — even if the eventual implementation ends up being orders of magnitude more complex.

And as long as you don't overdo it, the end result is smoother and more profitable capital markets. Regulation is a way of reducing panic when markets are rising, and government backstops are a way of reducing it when they're falling. They are the yin and yang of modern finance. With any luck, the events of the past year have finally persuaded even Republicans of this.

Yogi Berra for Vice President?

| Wed Sep. 17, 2008 11:13 PM EDT

YOGI BERRA FOR VICE PRESIDENT?....A plea from Dan Drezner: "Do any of my readers speak Palin?" Head over and see if you can help him out. I'm afraid this one is beyond my feeble skills.

Miscellaneous AIG Stuff

| Wed Sep. 17, 2008 8:11 PM EDT

MISCELLANEOUS AIG STUFF....Here are some random links related to the AIG bailout. When it's all said and done, by the way, I suspect that the Fed is going to end up making a tidy profit on the deal. But that's a few years down the road. In the meantime, here are some worries, offered without comment because they're above my pay grade:

  • Stephen Bainbridge has some very specific questions about the legality of the Fed's takeover of AIG. For example: "How can the federal government take a security interest in AIG's assets? Presumably AIG had debt securities outstanding that include negative pledge covenants. If so, why doesn't this deal violate the trust indentures? This one really bugs me."

  • Tyler Cowen has some more general concerns about the legality of what happened: "First, the referee is on the playing field. Second, while Dodd and others are on board, basically we have the executive branch of our government — the Treasury — operating without formal checks and balances....The broader implications here are very worrying, both for governance and for the future of the Fed itself. Maybe there is no better alternative, but these developments are a sign of just how dysfunctional American government has become."

  • Jim Manzi notes that the Fed has been forced to ask the Treasury for additional funds to backstop its AIG bailout: "The reason this is so important is that, in effect, it materially undermines the independence of the US central bank, while central bank independence is a widely-accepted predicate for anti-inflationary policies over time in a modern democracy. If the Fed becomes just a part of the Treasury Department (though this announcement is only a move in that direction), we could have real problems."

  • Reuters reports that the federal government's AAA credit rating is under pressure. Also this: "The cost of insuring 10-year U.S. Treasury debt against default rose Wednesday to a record high, a day after the government rescued insurer AIG with an $85-million loan....Ten-year credit default swaps, or CDS, on Treasury debt widened three basis points to 26 basis points, according to data from CMA DataVision. This means it costs $26,000 per year to insure $10-million of U.S. Treasury debt against default."

You know, I never even realized there was a market for insurance against U.S. Treasury default (let alone that the cost of a CDS on American debt is now twice as high as that on German debt). I mean, think about it: what would have to happen for the U.S. government to start defaulting on its bonds? The only scenarios I can think of are so cataclysmic that (a) you'd have way bigger things on your mind than whether your T-bills are going to get paid off, and (b) the odds that the insurer would still be solvent while the U.S. government collapsed around it are about nil. So what's the point of buying it?