• More Notes on the Bailout


    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


    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


    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?


    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


    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.

  • SOFA Update


    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


    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


    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


    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?

  • Notes on the Bailout


    NOTES ON THE BAILOUT….Sorry for the radio silence this afternoon. I spent most of the day feeling about the same way I did on 9/11, consumed with a debilitating combination of fury and despair. I don’t feel much better tonight, but here are a few thoughts on the failure of the bailout bill anyway:

    • The Republican Party is now officially hostage to a band of primitive conservative ideologues whose knowledge of economics was already outdated when Christians were being fed to lions. They are simply beyond belief.

    • I’m not much happier with the Jello-like support the bailout bill got from many of our leading liberals. Unfortunately, I include Brad DeLong in this group, but he’s certainly right when he says, “This Republican Party needs to be burned, razed to the ground, and the furrows sown with salt…”

    • John McCain deserves to be tarred and feathered. His behavior over the past week has been almost unbearably craven.

    • Barack Obama’s behavior has been a little better. But only a little. He hasn’t exactly displayed a backbone of steel on this issue.

    • An awful lot of people really, really still don’t get it. I swear, if I hear one more blogger or pundit suggesting that maybe it’s actually a good thing the bailout bill failed because now we have a chance to pass an even better bill, I’m going to scream.

    • After the failure of the bill, the GOP leadership invented a fairy tale about Nancy Pelosi being at fault for the vote debacle because she gave a partisan speech on the floor of the House. The press is almost unanimously reporting this seriously. If Republicans had blamed it on Santa Claus, I guess they would have reported that seriously too.

    • Do you know the old saying about credit? “It’s like oxygen. You don’t know how much you need it until it’s gone.” We’re about to go into financial hypoxia, and it’s not the millionaires who are going to suffer most from this.

    • There are many of you who probably think I’m overreacting. I hope you’re right.

    And if you think this post is too caustic and bleak — well, you should have seen the first draft that Windows ate. This is the toned down version.

  • No Bailout


    NO BAILOUT….The bailout bill has failed. Two-thirds of the House GOP caucus — primarily the lunatics in the Republican Study Committee, I assume — voted against it. I have a feeling we might now get a bunch of emergency nationalizations whether we like it or not.

    Our current financial crisis has never been explained well to the public because (a) it’s mind-bogglingly complex and (b) even the experts don’t entirely know what’s going on. And the Paulson plan was never sold well because (a) the initial draft was indefensible and (b) the theory underlying it was uncertain and complicated. So Lou Dobbs and his brand of populist yahooism won out instead.

    I don’t know what happens next. Hopefully we’ll get another bite at the apple, but with Congress adjourning and elections approaching, action is only going to get harder, not easier. In the meantime, I guess we just have to pray that all the Chicken Littles like me are worrying too much.

    On another note, an upcoming debate whose main attraction is the possibility of Sarah Palin melting down amusingly is suddenly less appealing than it used to be. I’m not really in the mood for bread and circuses right now.

  • Olmert on Israeli Security


    OLMERT ON ISRAELI SECURITY….Laura Rozen points to a remarkable volte-face from Israel’s outgoing prime minister:

    Prime Minister Ehud Olmert said in an interview published on Monday that Israel must withdraw from nearly all the West Bank as well as East Jerusalem to attain peace with the Palestinians and that any occupied land it held onto would have to be exchanged for the same quantity of Israeli territory.

    ….He said traditional Israeli defense strategists had learned nothing from past experiences and seemed stuck in the considerations of the 1948 Independence War. “With them, it is all about tanks and land and controlling territories and controlled territories and this hilltop and that hilltop,” he said. “All these things are worthless.”

    He added, “Who thinks seriously that if we sit on another hilltop, on another hundred meters, that this is what will make the difference for the State of Israel’s basic security?”

    ….On Iran, Mr. Olmert said Israel would act within the international system, adding, “Part of our megalomania and our loss of proportions is the things that are said here about Iran. We are a country that has lost a sense of proportion about itself.”

    I wonder what Sarah Palin thinks of this? I especially wonder after reading this.

  • Limiting CEO Pay


    LIMITING CEO PAY….Henry Blodget says the provisions of the bailout plan limiting CEO compensation are “toothless”:

    The plan ostensibly prohibits golden parachute payments to CEOs and other “C-level” execs at bailed-out companies. However, it really only prevents payments on severance deals that are struck AFTER the bailout (specifically, it prohibits these deals completely). There is nothing about cancelling the severance payments that the executives are ALREADY contractually entitled to. What this means in practice is that bailed-out companies will have trouble hiring the best talent…because why would you work at Bailed Out Company A when you could go across the street and get a fat severance deal? It also doesn’t mean the companies can’t pay their CEOs $500 million a year. IN ADDITION: There’s another absurd section that makes all compensation above $500,000 for the three highest paid employees at the company not tax-deductible for the company. This is LUDICROUS. It means the company can pay the executives anything it wants and that the penalty for this will be exacted on the company and its shareholders. (Unless we’re mistaken, Americans are furious that CEOs make $50 million a year for running companies into the ground, not that the $50 million is tax deductible).

    Unfortunately, this sounds about right to me. Sometimes symbolic stuff like this can be important, but it’s symbolic nonetheless. The plain fact is that there’s very little in this bill to genuinely limit executive compensation, and probably very little that could have been in the bill. It’s better than nothing, but only barely.

  • Owning the Debate


    OWNING THE DEBATE….Ezra Klein on the Paulson rescue package:

    One point Paul Krugman makes here is that the terms of the bailout were sharply constrained by the political strategy chosen by the Democrats. When Pelosi and Reid decided that this bill would not go through without Republican votes because Democrats would not be demagogued for cleaning up the mess caused by deregulation, they took more sharply liberal options like nationalization off the table.

    That’s true, but I think I’d make a different political point. Henry Paulson unveiled his plan on Friday the 19th, and that was when the frame of the debate was set. And that frame was: purchase of troubled assets. At that point, virtually no one had so much as mentioned large scale nationalizations as a potential solution to the banking crisis. It just wasn’t on the public radar screen.

    Now, maybe that wouldn’t have mattered. Maybe our current political coalition wouldn’t have been willing to consider it regardless. But virtually everyone agreed that action needed to be taken quickly to prop up the financial markets, and under circumstances like that there’s simply no chance of popping up at the last minute with a huge new proposal and thinking it has any chance of passing. If large-scale nationalization was really the preferred solution among liberal activists, the time to start pushing it was before Paulson and Bernanke introduced their bill. Doing it in the middle of last week, and then complaining that it didn’t get seriously considered, displays a failure of vision on the left, not from its congressional leadership.

  • January 21st


    JANUARY 21st….Matt Yglesias isn’t happy with the bailout bill:

    Under the circumstances, it looks like a bill that’ll be good enough to stave off collapse of the financial system, but probably won’t wind up addressing the full extent of the problem. This subject is going to have to be revisited after the election. But the unfortunate reality is that the current configuration of power in Washington still leaves the conservatives whose policies and ideology is largely responsible for the collapse in command of too many levers of power to simply implement a solution that’s not tainted by their misconception of the problem.

    I’m less unhappy than Matt. I think there’s a decent chance the bill will provide enough systemic relief to prevent a scattershot government takeover of failed banks, and I’m OK with that. More to the point, though, if the bailout doesn’t solve the problem completely, I’m perfectly happy to put off further action until after the election. If widespread nationalizations do turn out to be necessary, there’s a way, way better chance of doing it decently on January 21st than there is today. One thing is certain, after all: we’re not going to end up with a Swedish-style political solution in which both parties put down their hatchets and sing Kumbaya as they announce a rescue plan. Events of the past week have made that crystal clear. If it happens at all, it will only be because Democrats manage to push it through on sheer muscle.

  • Biden vs. Palin


    BIDEN vs. PALIN….Nancy Gibbs, like many other people, wonders how Sarah Palin is going to do against Joe Biden on Thursday night:

    With Charlie Gibson the waters were smooth if shallow; with Katie Couric she seemed forever at risk of drowning in her own syntax. But if she’s growing less surefooted with each passing day of cramming, who can blame her, when the highly experienced Republican pols around her don’t seem to trust her to talk past her talking points….All I know is that with each passing day, Palin’s road gets harder, the expectations higher, the margin for error smaller.

    No kidding. But there’s a flip side to this too: it takes a lot of pressure off Biden. When Palin was first nominated, pundits fell all over themselves to advise Biden to watch his tongue when he faced Palin in debate. Don’t look like a bully! Don’t be sarcastic! Don’t talk down to her!

    Well, guess what? It turns out he doesn’t need to. Attacking Palin — all the while worrying about whether this attack is too much or that attack will turn off women — is completely unnecessary. Biden just needs to show up, talk normally, and wait for her to implode. That’s got to be a relief, no?

  • Hedge Fund Watch


    HEDGE FUND WATCH….The end of the third quarter is nearly upon us, and hedge fund managers are feeling nervous:

    Even as Washington reached a tentative agreement on Sunday over what may become the largest financial bailout in American history, new worries were building inside the nearly $2 trillion world of hedge funds. After years of explosive growth, losses are mounting — and so are concerns that some investors will head for the exits.

    ….The big worry is that a spate of hurried sales could unleash a vicious circle within the hedge fund industry, with the sales leading to more losses, and those losses leading to more withdrawals, and so on. A big test will come on Tuesday, when many funds are scheduled to accept withdrawal requests for the end of the year.

    “Everybody’s watching for redemptions,” said James McKee, director of hedge fund research at Callan Associates, a consulting firm in San Francisco. “And there could be a cascading effect, where redemptions cause other redemptions.”

    The article says optimistically that “No one expects a wholesale flight from hedge funds.” But no one ever does, do they?

  • The Rise of the Technocrats


    THE RISE OF THE TECHNOCRATS….The New York Times on the Paulson bailout plan:

    The rescue package, if successful, would make the recognition of losses and the inevitable winnowing of the banking system more an orderly retreat than a collapse. Yet that pruning of the banking industry must take place, economists say, and it is the government’s role to move it along instead of coddling the banks if the financial system is going to return to health.

    ….”The lesson from Japan is that tough love for the banks is what’s needed,” said Kenneth Rogoff, an economist at Harvard. “In the current crisis, you do want to get rid of the bad assets from the banks, to get markets working again. But the key is going to be in the details of how the bailout works. You don’t want it to be a subsidy in disguise that keeps insolvent banks alive. That would just prolong the economic pain.”

    Words to live by. The Treasury technocrats and asset managers who end up running the bailout are going to have a tremendous influence over whether it’s successful or not. If they do it right, the plan should shine a bright light on which banks need to fail and which ones can be saved. If they do it wrong, we could be in for a long, gray twilight of economic stagnation.

    In other words, we all better cross our fingers and pray that the Treasury department still has good technocrats these days. I wonder what the odds are?

  • Global Warming Update


    GLOBAL WARMING UPDATE….What with financial Armageddon crashing down on our heads as we speak, it’s hard to believe that the worst news of the week was actually buried on page A2 of the Washington Post. But it was:

    In 2007, carbon released from burning fossil fuels and producing cement increased 2.9 percent over that released in 2006, to a total of 8.47 gigatons….This output is at the very high end of scenarios outlined by the Intergovernmental Panel on Climate Change (IPCC) and could translate into a global temperature rise of more than 11 degrees Fahrenheit by the end of the century, according to the panel’s estimates.

    We are so screwed.

  • All the Right Enemies


    ALL THE RIGHT ENEMIES….Sure, maybe you don’t believe me about whether the Paulson bailout will work. Why should you? But the fact that Mike Pence opposes it surely lends the plan some credibility, doesn’t it?