Kevin Drum - September 2008

Cleaning Up the Rot

| Tue Sep. 30, 2008 8:03 PM EDT

CLEANING UP THE ROT....Atrios on the credit crisis:

CNBC just said what most aren't: the reason why interbank lending rates are so high is because banks don't trust each other. The reason they don't trust each other is they don't know how much and which pieces of big shitpile they own.

Yep. That's why having the Treasury Department buy up all those toxic assets is probably a good idea. Recapitalization isn't enough if it leaves banks still owning securities with values so variable that it's too risky to lend to them anyway. We need to get that stuff off their balance sheets in order to make their financial position more transparent and we need to increase their capital base (which the Paulson plan accomplishes by paying above-market prices for the toxic sludge in return for a guarantee of equity down the road if the sludge eventually has to be sold at a loss). That combination has a better chance of working than either one alone.

And why is the toxic sludge so hard to value? Can't we just make banks open their books and provide detailed information on all this stuff? Sure. But you've still got two problems. First, in the later days of the mortgage free-for-all, mortgages were packaged up with no documentation at all. So no one, not even the banks, knows for sure just how good or bad their mortgage portfolios are. Second, even if we knew that, their value would still depend on how much farther down home prices have to go. And that's anyone's guess.

So: get this crap out of the banking system, where it's causing systemic rot. Recapitalize the financial industry. Get equity guarantees in return to protect against future losses. And then hold your breath and hope it's enough.

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More Notes on the Bailout

| Tue Sep. 30, 2008 6:39 PM EDT

MORE NOTES ON THE BAILOUT....Nathan Newman has a pretty good post over at TPMCafe defending the bailout legislation. Take a look. Among other things, he notes that we're bailing out Wall Street on an ad hoc basis already and creating an exclusive troika of megabanks in the process. Whatever its weaknesses, the bailout legislation is probably a better deal than allowing this to continue.

And while we're on the subject, here's a question: assuming the bailout eventually passes, how good a deal are taxpayers likely to get when Henry Paulson starts doling out his $700 billion? The conventional wisdom across a remarkably wide ideological spectrum is that Paulson is a creature of Wall Street and will end up offering sweetheart deals to all his old pals when he begins buying up their troubled assets. But this deserves a closer look.

See, Paulson is a creature of Wall Street. And the way you become successful on the Street is not just by being the smartest guy in the room, but by being the toughest guy in the room; the guy who drives harder bargains than anyone else and always comes out on top. The top execs on Wall Street might be arrogant, they might be crazy, and they might be greedy, but they play a testosterone-fueled game to win. This is practically their religion.

Paulson now works for the United States Treasury, but his instincts are the same as always: even if for no other reason than to boost his own ego, he's going to want to drive the hardest bargains possible — and the weaker the opponent, the harder he'll push.

Don't believe it? Take a look at the Fed/Treasury actions so far. Was the Bear Stearns rescue a sweetheart deal? No. In fact, the original $2 per share terms were so onerous that JP Morgan, which bought Bear, eventually raised the offer voluntarily. And what about Lehman Brothers? Would a Wall Street crony have let Lehman fail? Nope. The next day AIG was rescued, but read this and tell me if you think AIG got any kind of break in return for its $85 billion loan. They didn't. AIG got hammered.

Now, these have been a combination of Fed and Treasury actions, and their track record on other bailouts has been mixed. And I'd be happier if the bailout bill had even more oversight and tighter restrictions on equity sharing than it does. But that aside, the evidence suggests that the Treasury and the Fed are hardly a bunch of pushovers. They deserve to be watched like hawks, but when everything is said and done, I wouldn't be surprised to see them demanding some pretty harsh terms.

Quote of the Day - 9.30.08

| Tue Sep. 30, 2008 5:06 PM EDT

QUOTE OF THE DAY....From Barack Obama, speaking in Nevada today about the financial crisis:

For the rest of today and as long as it takes, I will continue to reach out to leaders in both parties and do whatever I can to help pass a rescue plan. To the Democrats and Republicans who opposed this plan yesterday, I say — step up to the plate and do what's right for this country. And to all Americans, I say this — if I am President of the United States, this rescue plan will not be the end of what we do to strengthen this economy — it will only be the beginning.

Good. That's what he should be saying. Is it politically risky to take a more active role in congressional negotiations — and with it, possibly more responsibility for an unpopular bailout? Maybe slightly. But if you want to be president of the United States, that's what you need to do. And you need to do it for real, not just for the cameras.

The rest of the speech isn't bad either. It could stand to have a little bit punchier explanation of what's going on, but overall, not bad at all.

The Importance of Being Boring

| Tue Sep. 30, 2008 3:47 PM EDT

THE IMPORTANCE OF BEING BORING....Barack Obama has another 2-minute ad running. Jonathan Stein says it's pretty dull ("I tuned out at 0:42"), but that being dull is the whole point:

Obama is presenting himself as the boring choice in this financial crisis. To the extent that boring correlates with responsible, adult, and steady, Obama wins. And with Obama's poll numbers looking the way they are, that appears to be a correlation worth betting on.

I think I'd take this even further, addressing Ross Douthat's surprise that Obama won last week's debate at the same time. The key insight is this: lots of ordinary viewers enjoy a bit of policy wonkishness. We political junkies, even those of us who enjoy policy discussions, don't. We've heard it a million times before.

But most viewers haven't, and they find it kind of interesting, the same way they mostly liked Bill Clinton's endless laundry list State of the Union addresses. They don't hear this kind of thing very often, and when they do it's a nice change of pace from the daily soundbites on the evening news, which are hard to put together into a coherent understanding of what each candidate stands for. Hearing it all in one piece is a bit of a revelation.

Needless to say, this can be overdone. And a financial crisis is an unusually good time for a sober, wonky address to the voters. But we shouldn't be too surprised that it works well both in ads and in debates. Voters like being treated like adults more than most of us give them credit for.

Where's Main Street?

| Tue Sep. 30, 2008 2:21 PM EDT

WHERE'S MAIN STREET?....Matt asks a question:

Here's what I don't understand about either the politics or the policy of the bailout failure. If the situation is as dire as Kevin Drum says then where's corporate America? That swathe of American business that isn't in the finance and housing sectors. ExxonMobil, Wal-Mart, Proctor & Gamble, Johnson & Johnson, Microsoft, Google, Chevron, etc.

Actually, I've been wondering the same thing. Here are two guesses.

First, these guys all thought the bill was going to pass. Sure, there'd be lots of grandstanding and high drama, but in the end they figured everyone would act like adults and understand that allocating money to buy a fire hose is a good idea when the economy is on fire. So there wasn't a big sense of urgency.

Second, they might have been sensitive to the possibility that their support would just make things worse. Saving "Main Street," to most Americans, means the dry cleaners down the street, not ExxonMobil. They're mad enough already about bailing out Wall Street, and if they thought they were bailing out ExxonMobil too — well, that might just be the last straw.

Anyway, those are just guesses. But I'll bet there's way more business lobbying going on behind the scenes today than there was last week. That might make the difference if the House takes up the bill again on Wednesday.

McCain and bin Laden

| Tue Sep. 30, 2008 1:59 PM EDT

McCAIN AND BIN LADEN....Our story so far: Barack Obama says that if he had actionable intelligence about Osama bin Laden's whereabouts in Pakistan, he'd take him out. John McCain says that's naive and reckless. Then, a couple of days ago while ordering a cheesesteak, Sarah Palin jumped in and said she'd take him out too. Huh? So on Monday Katie Couric asked the two of them whether Palin had gone off the reservation. Answer: that's a silly gotcha question. The issue isn't whether McCain/Palin take out bin Laden, it's whether they'd say that they're willing to take out bin Laden. "Never would our administration get out there and show our cards to terrorists," Palin said, "in this case to enemy, and let them know what the game plan is."

Got that? They'd do it, but they'd never publicly say they were going to do it. But Judah Grunstein points us to this interview with McCain from a year ago:

Q: So if you were president and you knew that bin Laden were over there, you had a target spotting, you could nail him, you'd go get him?

McCain: Sure. Sure. We have to, and I'm sure that after the initial flurry, that whoever our friends are, wherever he is, would be relieved because, as I mentioned to you before, he's still very effective in the world, very, very effective.

So long ago, before all of this nonsense hit the campaign trail, McCain himself was saying the exact same thing as Obama: if we knew where bin Laden was, of course we'd take him out — and then pick up the pieces afterward. Needless to say, this will come as no surprise to the government of Pakistan, which has never been under any illusions about this. (And neither have the terrorists, regardless of what Palin burbles about it.) But it's a useful attack line for McCain, so I guess we'll keep hearing it.

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SOFA Update

| Tue Sep. 30, 2008 1:23 PM EDT

SOFA UPDATE....Nouri al-Maliki tells AP that (a) a security agreement with the United States is critical, and (b) legal jurisdiction is the biggest remaining hurdle:

The most important hanging issue here is the immunity or the legal jurisdiction over the American troops because certain powers, political powers inside Iraq are getting ready to use this issue once it's — if it's — approved, as a vehicle to overthrow, to destabilize the entire political system in Iraq, to destabilize the government. They would use it as a vehicle to re-ignite public feelings inside the country.

We have proposed that the legal jurisdiction would be on one hand, on one side, with the Americans ... when the troops are performing military operations. When they are not performing a military operation, they are outside their camps, the legal jurisdiction would be in the hands of the Iraqi judiciary.

Translation: if we don't get civil jurisdiction over U.S. troops, the government will fall. It's too much of a hot button issue for guys like, oh, Muqtada al-Sadr, just to pick a name out of a hat.

This actually seems pretty doable to me. The trick is to write language that appears to give Iraq jurisdiction over soldiers who aren't performing military missions, but then define "military mission" in a way that effectively prevents Iraqi police from issuing anything more important than a parking ticket to U.S. troops. This would be accompanied by a tacit agreement with Maliki that they won't force the issue by ever actually arresting an American soldier in the first place.

Of course, if that's all there were to it, we'd already have an agreement. Still, it's hard to imagine that this issue can't be finessed fairly easily.

The Lehman Bankruptcy

| Tue Sep. 30, 2008 12:59 PM EDT

THE LEHMAN BANKRUPTCY....Henry Paulson (and the Bush White House in general) handled the politics of the bailout bill poorly. But Ezra Klein says another factor is even more important:

Paulson's political mismanagement doesn't much surprise me. He's not a politician....It was his economic mismanagement that requires closer scrutiny. 15 days ago, he was presented with a crucial choice: Do you let Lehmnn fall into bankruptcy and create a market panic? Or do you save it and risk insulating Wall Street from the consequences of its actions? Timothy Geitner, the head of the New York Federal Reserve, warned that you had to save Lehman; the market couldn't endure that sort of uncertainty. Paulson disagreed. Lehman fell. It was the biggest bankruptcy in history. Within days, AIG, Goldman Sachs, and JP Morgan were swallowed by the chaos. It was arguably the costliest mistake in the crisis, and it was Hank Paulson's fault.

That's true. But the funny thing is that I don't think this really played a role in the events of the past week. The Lehman bankruptcy may have been a consensus disaster — even defenders of the decision are only willing to argue that maybe it was a necessary test case — but nobody really seems to be blaming Paulson for this. Maybe behind the scenes they are, but in public it's rarely even mentioned.

I'm not sure why. Maybe it's because a lot of people at the time seemed to agree that it was time to stop bailing out banks. Maybe it's because everyone knows there was no political support for propping up Lehman. I don't know. But I'd sure be interested in seeing a tick-tock of the events that led up to Paulson's decision. I've seen a couple of good pieces about the aftermath of the Lehman bankruptcy, but not much about the couple of days before it. Anybody know of one?

David Brooks is Unhappy with the Republican Party

| Tue Sep. 30, 2008 2:47 AM EDT

DAVID BROOKS IS UNHAPPY WITH THE REPUBLICAN PARTY...David Brooks on the congressional revolt against the bailout bill:

House Republicans led the way and will get most of the blame. It has been interesting to watch them on their single-minded mission to destroy the Republican Party. Not long ago, they led an anti-immigration crusade that drove away Hispanic support. Then, too, they listened to the loudest and angriest voices in their party, oblivious to the complicated anxieties that lurk in most American minds.

Now they have once again confused talk radio with reality. If this economy slides, they will go down in history as the Smoot-Hawleys of the 21st century. With this vote, they've taken responsibility for this economy, and they will be held accountable. The short-term blows will fall on John McCain, the long-term stress on the existence of the G.O.P. as we know it.

I'm not sure that "interesting" is quite the right adjective to use here unless you happen to be an op-ed columnist from Mars who's on a field trip to the third planet, but point taken anyway. The lunatics are running the GOP asylum these days, but unfortunately, all of us are paying the price.

By the way, if you're interested in seeing how the vote on the bailout bill broke down, the New York Times has a very informative graphical map here. And I'll add this: judging from my email and comments, there are quite a few people who are as upset about the failure of the bill as I am. But apparently none of us are calling our congress members, who seem to be hearing from no one but refugees from talk radio and Lou Dobbs. So check that map, and if your guy/gal voted No maybe you should give 'em a call on Tuesday morning.

Housing Question

| Tue Sep. 30, 2008 1:32 AM EDT

HOUSING QUESTION....I have a question related to the bailout bill that maybe some economist can answer. Here it is:

  • Much of the grassroots on both left and right feels that if we're going to bail out the fat cats on Wall Street, we should also bail out homeowners. This seems only fair, and there are various proposals floating around for doing this.

  • Economists seem to unanimously believe that housing is still overpriced and needs to be allowed to drop to its natural level, the sooner the better.

These two desires are in tension, aren't they? If we prop up homeowners with bad loans, we prop up home prices at the same time, don't we? Is there an answer to this dilemma? Or am I just missing something?