Leverage

LEVERAGE....Paul Volcker's Group of 30 has produced a report piled high with recommendations for regulating the banking system, including a suggestion that the size of banks be limited so that there's no longer any such thing as "too big to fail." Matt Yglesias likes that idea, but I'm pretty lukewarm about it myself since it's not clear to me that bailing out a hundred small banks is any better than bailing out a dozen big ones. Systemic failure is systemic failure, after all.

But I'll stay agnostic on that for the time being. Recommendation 8b, however, ought to be getting more attention:

Given the recurring importance of excessive leverage as a contributing factor to financial disruptions, and the increasingly complex ways in which leverage can be employed on and off balance sheets, prudential regulators and central banks should collaborate with international agencies in an effort to define leverage and then collect and report data on the degree of leverage and maturity and liquidity mismatches in various national systems and markets.

The rest of the report provides plenty of grist for conversation, but I honestly think that if regulators could figure out some reasonably robust way of defining and limiting leverage and limiting it everywhere (i.e., in the shadow banking system as well as the regular banking system), I'd trade that for all the rest of the rules combined. Put it together with this one, and you've got the skeleton of a serious regulatory overhaul:

Large, systemically important banking institutions should be restricted in undertaking proprietary activities that present particularly high risks and serious conflicts of interest. Sponsorship and management of commingled private pools of capital (that is, hedge and private equity funds in which the banking institutions own capital is commingled with client funds) should ordinarily be prohibited and large proprietary trading should be limited by strict capital and liquidity requirements. Participation in packaging and sale of collective debt instruments should require the retention of a meaningful part of the credit risk.

Banks should be banks, not casinos. Now all we have to do is figure out how to implement these recommendations and then get Congress and the entire rest of the world to agree to phase them in. Should be a piece of cake.

RESURRECTING THE INVESTMENT TAX CREDIT...Bruce Bartlett says Republicans need a stimulus plan of their own, and they need to offer up something more than just the same mindless tax cuts they always do. They need better tax cuts. Cleverly, he recommends an idea already promoted by a couple of Democratic economists in good standing:

In promoting investment, Republicans can even use the theories of economist John Maynard Keynes, which are much in vogue today. In the Keynesian model, investment spending provides just as much stimulus as consumption spending. But investment spending is really better, as common sense tells us.

....To stimulate investment, Republicans might consider resurrecting a Democratic tax idea from the Kennedy Administration — just as Jack Kemp did in 1977. This idea, named the Investment Tax Credit, reduced the cost of machinery and equipment by giving businesses a credit of 7% (later 10%) of the purchase price against their tax liability. In 1981, Kennedy adviser Walter Heller argued that the ITC really marked the beginning of supply-side economics.

Another political virtue of the ITC is that Obama economic adviser Larry Summers and Clinton Administration economist Brad DeLong are the principal advocates of the importance of machinery and equipment to long-run growth....In a 1992 study for the American Council for Capital Formation, DeLong estimated that a 10% ITC would boost economic equipment investment substantially and raise the rate of real economic growth by as much as 0.3 percentage points per year.

The ball's in your court, Brad. What do you say to that?

It's kind of amusing that Zimbabwe is printing a $100 trillion note, but the mind-blowing inflation in that country is destroying what vestiges of a civil society remain there. CNN:

Even vegetable vendors prefer the U.S. dollar, South African rand or Botswanan pula, and most workers now demand their salaries in foreign currency. Doctors and nurses have been on strike since last September, demanding salaries in U.S. dollars. The strike coincided with a cholera epidemic that now has claimed more than 2,000 lives.
Last week, the state media reported that most teachers had left their jobs. As a result, the end-of-year examinations taken in November are yet to be graded after the markers demanded their wages in foreign currency. Schools are yet to re-open this year awaiting the examination results.

The inflation rate in Zimbabwe is currently over 230,000,000%. I really have no idea what that looks like in real terms. I once found an anecdote about what 200,000% inflation looks like; you can find it here.

(H/T Boing Boing)

CIA veteran John Brennan was an early lightning rod for President-elect Obama after word got out that he was being considered for the agency's top job. (Brennan had advised Obama on intelligence and foreign policy during the campaign.) The primary complaint was Brennan's past statements in defense of the CIA's practice of "rendering" terrorism suspects to other countries for interrogation—places where harsh interrogations go far beyond waterboarding. In 2006, he told a reporter that "we do have to take off the gloves in some areas," but went on to say that it must be done in a way doesn't "forever tarnish the image of the United States abroad."

Since 2005 Brennan has been CEO of the Analysis Corporation, which advises the federal government and private companies on counterterrorism. The firm's parent company, London-based Global Strategies, has come under fire for its activities in Iraq and Afghanistan, where it hired Third World private security contractors at cut rates and once shut down Baghdad's airport for several days during a contract dispute with the Iraqi government.

Obama has been critical both of the CIA's practice of rendition and the unregulated use of private security contractors in conflict zones, but seems satisfied that Brennan has not been tarnished by his connection to either one. Dropping him from consideration for CIA director (instead picking Leon Panetta), Obama went on to tap Brennan to be his top advisor on counterterrorism—a position that does not require congressional approval.

It wasn't nearly as jarring as it should have been to see these two headlines 'above the fold' in the NYTimes earlier this week: "Banks in Need of Even More Bailout Money" and "Love the Long Eyelashes. Who's Your Doctor?"

Yup. As America crumbles, we're performing plastic surgery on the dead and gearing up to pay $120 a month for stupid eyelashes. First it was frozen foreheads. Now it's Betty Boop eyelashes.

Allergan, the company that turned an obscure muscle paralyzer for eyelid spasms, Botox, into a blockbuster wrinkle smoother, hopes to perform cosmetic alchemy yet again. At the end of the month, the company plans to introduce Latisse, the first federally approved prescription drug for growing longer, lusher lashes.

So what if an already overburdened doctor will have to make time for the hordes of Barbie-obsessed women who'll need a prescription? So what if the medication (cuz that's what it is; it's intended for glaucoma patients) has nasty side effects like changing your eye color, darkening your eye lids,and causing red eye and eye itch? Isn't that worth a possible 25 percent increase in your lashes?

So what, when this nirvana awaits you:

"People would say to me 'Are you wearing false eyelashes?'—even my own mother asked," said Cindy Ross, vice president for sales at Young Pharmaceuticals in Wethersfield, Conn., who participated in the Latisse clinical trial.

Ms. Ross said she liked the effect so much that she had a doctor prescribe the glaucoma drug to use on her lashes until Latisse becomes commercially available. "I wouldn't stop," Ms. Ross said. "I found a way to get it."

So what if it makes you a criminal?

So what, as long as you look marvelous?

Hopefully, there's a way to cross reference patient numbers (and I think there'll be more than a few metrosexuals slavering this stuff on their eyes) with bankruptcy filings, or numbers of people demanding help with the mortgages they could never afford.

Am I living in the same America as everyone else? The one where we need to resume the frugality of our grandparents?

In my post yesterday about House Republicans trying to answer Obama's call for stimulus ideas, I mentioned that the Big O is getting something of an era of good feeling from his congressional opposition. MSNBC's First Read points out more examples, this time from the Senate.

Here's Senate Minority Leader Mitch McConnell, after voting against releasing the $350 billion remaining in TARP:

"Again, I want to express my appreciation to the incoming administration for its responsiveness to Republican concerns. Every time we asked a question it was promptly answered. So far, Republican interactions with the incoming administration have been quite encouraging and appreciated. While I voted on the losing side, I hope the new administration will consider some of my concerns, and we hope their stewardship of these funds is successful in stabilizing the markets according to the original purpose of the TARP."

That attitude probably won't last, but for one day at least, Obama has managed to change the tone in Washington. And here is Senator Bob Corker, a Republican from Tennessee:

"This was a painful vote for me. I greatly respect President-elect Obama's economic team, Larry Summers and Tim Geithner, and I look forward to working with them in any way I can."

Not bad, huh? Not even president, and he's done what George Bush admits he couldn't do in eight years.

TARP SAVES BANK OF AMERICA....Bank of America received $20 billion in new capital from the Treasury today, along with $118 billion in asset guarantees. Why? Because after buying Merrill Lynch in September they discovered that Merrill's losses were a wee bit higher than expected. And when did they finally figure this out?

Bank of America said it learned of Merrill's losses after the Dec. 5 shareholder vote. And in the days following, both Federal Reserve Chairman Ben Bernanke and Mr. Paulson impressed upon [CEO Ken] Lewis the importance of closing the transaction for the firm's own sake and also warned of the consequences for the country's overall financial system, say people familiar with the discussions.

Bank of America spokesman James Mahoney said: "Beginning in the second week of December, and progressively over the remainder of the month, market conditions deteriorated substantially relative to market conditions prior to the Dec. 5 shareholder meetings. So Merrill wound up making adjustments for the quarter that were far greater than anticipated at the beginning of the month. These losses were driven by mark-to-market adjustments which were necessitated by changes in the credit markets, and those conditions change on a daily basis."

....By Dec. 17, Mr. Lewis went to Washington to discuss what he had already disclosed to Mr. Bernanke in an earlier phone call — that his bank was having trouble digesting Merrill's losses. Mr. Lewis described the losses as monstrous, according to a person familiar with the matter.

At that 6 p.m. meeting, Mr. Bernanke and Mr. Paulson both told Mr. Lewis that failing to complete the Merrill acquisition would be disastrous. The policy makers said abandoning the deal would further destabilize markets, and would hurt the bank, potentially setting off a ripple effect that would exacerbate a fragile situation.

Something here really doesn't add up. What happened in the final three weeks of December that could have caused such a massive change in Merrill's position? Those weeks were actually fairly quiet on the toxic waste front.

Not saying it couldn't happen, but there must be more to this story. Or, alternatively, it's just your standard Wall Street fuckup. I guess that's probably it.

POSTSCRIPT: By the way, does anyone else remember that fawning piece about Ken Lewis and Bank of America that 60 Minutes aired last October? I wonder if Lesley Stahl feels embarrassed yet?

At age 57, Chesley Sullenberger hardly qualifies as a geezer in my book. But as commercial airline pilots go, the man who is being hailed for his flawless emergency landing of a U.S. Airways jet in the Hudson River is certainly getting up there in years.

The San Francisco Examiner summarized their local hero's extensive background:

If a Hollywood producer called central casting in search of an actor to play a pilot in a disaster movie, he would probably wind up with somebody who looked a lot like "Sully" Sullenberger: the silver hair of experience, the trimmed mustache of precision and the kind of twinkly, fatherly eyes that lend confidence when accompanying a friendly "Welcome aboard."
Sullenberger has decades of experience not only flying planes–first F-4's for the US Air Force and since 1980 all kinds of aircraft for US Airways–but of studying and teaching how to fly them more safely. His resume shows experience flying everything from a glider to a jumbo jet.

After both engines blew, Sullenberger reportedly told his 150 passengers to "brace for impact because we're going down" before maneuvering over a bridge and between skyscrapers to land the plane safely on the river. He walked the legnth of the sinking jet twice to verify that noone was aboard before exiting himself. The Wall Street Journal described Sullenberger's handling of what it called "one of the rarest and most technically challenging feats in commercial aviation":

Waiting for Tuesday

WAITING FOR TUESDAY....Ramesh Ponnuru thinks the Obama celebrations have gotten a wee bit out of hand:

At least one segment of the economy is booming: the market in Obama kitsch. The dedicated supporter of the incoming President need not content himself with a T shirt or bumper sticker. Also available are Obama coasters, lava lamps, jigsaw puzzles, mugs, skateboards, toy trains, CDs, DVDs and, of course, commemorative dinner plates....Marvel Comics is running a special Inaugural issue of Spider-Man.

....There is no recent analogue to the madness — er, hopefulness — that has seized Obama's fans. Some journalists have been comparing him with F.D.R. and even Lincoln. To find a similar episode of enthusiasm for an incoming President, you might have to go back to 1829....The new President, Andrew Jackson, was his era's version of change....An unprecedented number of Americans trekked to see him take the oath of office. His Inaugural was a massive party at the White House, one that got so out of hand that Jackson was forced to lodge elsewhere.

I'll grant there's something to this. But there's another side to it: this outpouring of excitement is based as much on relief that George Bush is finally leaving office as it is on optimism about Obama taking over. Obama is obviously a charismatic figure, but if he were succeeding Gerald Ford or Ronald Reagan or George Bush Sr., I don't think he'd be getting half the adulation he is. But Bush has been a lame duck for two long years now, and public weariness over his chronic and all-too-obvious ineptitude has reached depths seldom seen in a democracy. At this point, people would be relieved and hopeful if Mike Gravel were the one taking the oath of office on Tuesday.

It is both Obama's good fortune and his bad luck to be taking over from the most hapless president since Hoover. The t-shirts and coffee mugs and other nicknacks may be a little over the top, but they need to be because they're doing double duty: they're a celebration of George Bush's exit as much as they are of Obama's arrival.

George W. Bush gave his final speech to the nation on Thursday night. I skipped it to see my daughter, who has known no other president, perform with her school chorus. But when I later sat before my television to see how the speech was being punditized on the cable news shows, I was surprised. The water-landing of a US Airways flight in New York City dominated the coverage. There was little chatter--almost nothing--about Bush's farewell.

After watching the speech on the White House website, I understood why. It was flat and short. Bush said little of interest. He dwelled mostly on 9/11 and the so-called war on terror, once again (and for the last official time) characterizing the invasion of Iraq as part of his effort to take "the fight to the terrorists." He suggested that although the Iraq war was the subject of "legitimate debate," there "can be little debate about the results. America has gone more than seven years without another terrorist attack on our soil."

Was the nation's safety ensured because Bush invaded Iraq and did not finish the fight in Afghanistan? No doubt, he and his ever-dwindling band of defenders will continue to insist that it is so--just as a rooster might insist there is a connection between his crowing and the rising of the sun. And Bush defended himself for having been "willing to make the tough decisions"--as if making hard choices is the same as making wise ones.