Kevin Drum - September 2008

Bailout Update

| Thu Sep. 25, 2008 4:03 PM EDT

BAILOUT UPDATE....The New York Times reports that both Democratic and Republican leaders have reached "general agreement" on a bailout bill:

One plan under consideration would release $250 billion immediately, with another $100 billion available at the discretion of the president.

[Lawmakers] also said that there would be limits on pay packages for executives whose firms seek assistance from the government and a mechanism for the government to be given an equity stake in some firms so that taxpayers have a chance to profit if the companies prosper in the months and years ahead.

The Wall Street Journal says mortgage relief is still up in the air:

Still unresolved is whether or not to include changes to bankruptcy law that would give judges the right to change the terms of mortgages. Democratic Sen. Dick Durbin of Illinois made a plea for it to be included, even though many lawmakers and the White House are hotly opposed.

There still aren't many details, and I guess the main question now is whether McCain and Obama will sign on. McCain, of course, has a pretty big incentive to continue playing politics since this all happened before he could dramatically swoop in and take credit for some bold leadership, and in any case agreeing to it would allow tomorrow's debate to go forward. So I imagine he'll find something to object to. Obama's motives are a little murkier, so it's harder to guess what he'll do. Homeowner protection was one of his five core demands for the bill, however, so it seems unlikely he'll sign on unless there's at least something along those lines in the bill.

Beyond that, who knows? McCain is so unbalanced these days that there's really no telling what's going to happen next. In the meantime, I'm going to go eat lunch.

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Fundraising!

| Thu Sep. 25, 2008 1:43 PM EDT

FUNDRAISING!....Among other casualties of John McCain's recent descent into mental breakdown, you can add the fundraising drive we were planning to hold this week. See, the plan was to make up a bingo card thingie with words and phrases you were likely to hear at Friday's debate — sort of a drinking game for politicals dorks — and invite everyone to go to our fundraising page and download it. Oh, and maybe throw a few bucks our way while you're there.

So what now? Well, the bingo card is already finished. And we still need money to support our (suprisingly expensive!) commitment to in-depth, original, up-to-the-minute reporting on the campaign. Real journalism ain't cheap, and we need your support to keep it up.

So click here to help us out and download your bingo card. After all, maybe everything will get resolved at the big 4 pm summit in the White House and St. John will deign to debate the issues Friday night after all. If that happens, we've got you covered.

Gamesmanship

| Thu Sep. 25, 2008 12:50 PM EDT

GAMESMANSHIP....OK, let me get this straight. (I think I'm going to be using that phrase a lot over the next few days.) Mr. Bipartisan Statesman rushed off to Washington because it was urgent to knock some heads and agree on some principles that would help get the bailout plan moving. So Barack Obama proposed a list of principles that includes oversight, taxpayer protection, CEO pay restrictions, help for homeowners, and no earmarks. These are all things McCain says he supports. President Bush says he supports them as well. But McCain refused to sign on:

So the question is: Why wouldn't McCain agree to a fairly innocuous, Mom and apple pie set of conditions for a bill?

Democrats fear this morning that McCain is setting up a scenario in which he will vote against the bill, rally conservatives to his side and, most importantly, distance himself from both President Bush and Congress before the election.

That's Taegan Goddard. But why would Democrats be so suspicious that they're about to be double crossed? John McCain is too honorable a man to do that, isn't he?

Economy Continues to Suck

| Thu Sep. 25, 2008 12:06 PM EDT

ECONOMY CONTINUES TO SUCK....The latest:

Orders for big ticket items from U.S. factories plummeted in August, new homes sales continued dropping and weekly jobless claims jumped to their highest level since the 2001 terrorist attacks.

...Factory orders in August dropping by 4.5 percent — twice the expected rate — and weekly applications for unemployment benefits jumping by 32,000, to a seasonally adjusted annual rate of 493,000.

[New] home sales, meanwhile, fell by 11.5 percent in August compared with the same month a year ago, signaling that the U.S. real estate market continues to slump. The inventory of unsold homes — one barometer of when the market might begin to turn around — rose to nearly 11 months, more than doubled the median supply in 2006.

The fall in durable goods orders included a 6 percent decline in purchases of machinery and a more than 8 percent decline in purchases of autos and auto parts.

More on the housing market here. There's little evidence that we're close to a bottom, which is bad news for the bailout bill, since its size depends very directly on just how much further housing prices have to fall.

More Torture Docs

| Thu Sep. 25, 2008 11:55 AM EDT

MORE TORTURE DOCS....Unfortunately, this now falls into "dog bites man" territory, but the White House has released documents to Congress confirming that, yes, various torture techniques were discussed at meetings of very high level officials in early 2002:

Senior White House officials played a central role in deliberations in the spring of 2002 about whether the Central Intelligence Agency could legally use harsh interrogation techniques while questioning an operative of Al Qaeda, Abu Zubaydah, according to newly released documents.

....The meetings were led by Condoleezza Rice, then the national security adviser, and attended by Defense Secretary Donald H. Rumsfeld, Attorney General John Ashcroft and other top administration officials.

....The documents were provided to The New York Times by Senator Carl Levin....Mr. Levin, a Michigan Democrat, said the new documents showed that top Bush administration officials were more actively engaged in the debate about the limits of lawful interrogation than the White House had previously acknowledged.

"So far, there has been little accountability at higher levels," Mr. Levin said. "Here you've got some evidence that there was discussion about those harsh techniques in the White House."

What further documents are left to be released? Probably plenty. Will we get to see them when a new administration takes office? Unfortunately, my guess is no.

John McCain, Hero of Wall Street

| Wed Sep. 24, 2008 8:42 PM EDT

JOHN McCAIN, HERO OF WALL STREET....Katie Couric interviews Sarah Palin about reforming the finance industry:

COURIC: You've said, quote, "John McCain will reform the way Wall Street does business." Other than supporting stricter regulations of Fannie Mae and Freddie Mac two years ago, can you give us any more example of his leading the charge for more oversight?

PALIN: I think that the example that you just cited, with his warnings two years ago about Fannie and Freddie — that, that's paramount. That's more than a heck of a lot of other senators and representatives did for us.

COURIC: But he's been in Congress for 26 years. He's been chairman of the powerful Commerce Committee. And he has almost always sided with less regulation, not more.

PALIN: He's also known as the maverick though. Taking shots from his own party, and certainly taking shots from the other party. Trying to get people to understand what he's been talking about — the need to reform government.

COURIC: I'm just going to ask you one more time, not to belabor the point. Specific examples in his 26 years of pushing for more regulation?

PALIN: I'll try to find you some and I'll bring them to you.

How dare Couric ask the question three times in an effort to elicit an actual answer? She has obviously become a tool of the Obama campaign and is hereby banned from further contact with the McCain campaign on the grounds of insufficient deference.

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Cynicism Watch

| Wed Sep. 24, 2008 7:52 PM EDT

CYNICISM WATCH....A couple of hours ago I suggested that maybe John McCain would try to postpone the first debate to October 2nd because that would then eliminate the vice presidential debate. (So sad....) I thought I was just being hackishly cynical when I said that, but no: according to CNN, that's exactly what McCain is proposing. The VP debate would then be "rescheduled." (Perhaps to November 5th, joked Dana Milbank.)

My lesson for the day: No matter how hackishly cynical you think you are, you're no match for the hackish cynicism of the McCain campaign.

Stunt Fatigue

| Wed Sep. 24, 2008 6:31 PM EDT

STUNT FATIGUE....Over at The Corner, even Kathryn Jean Lopez thinks Barack Obama sounds more sensible today than John McCain. Jason Zengerle comments:

That's how a McCain supporter is reacting to all of this. You do wonder if stunt fatigue is simply setting in. First there was the Palin pick. Then there was the jihad against the Times. At a certain point McCain's "bold" moves start to seem a little stale and predictable, don't they?

The McCain campaign is running on fumes at this point. They've been all over the map on the financial crisis. Both McCain and Palin are afraid to meet with reporters and answer actual questions. Even their prepared statements barely make sense anymore. They're completely at sea.

And now this. Obama calls McCain to privately work out a genuinely bipartisan statement about the bailout bill, and McCain immediately panics and runs off to the TV cameras to offer up a faux public one instead (and then leaves without taking questions, of course). A joint statement? Hah! Too puny. I dare Senator Obama to suspend our campaigns, sequester ourselves from the American public, and hold photo ops on Capitol Hill instead! In fact, I double dare him!

Sheesh. It's time for the Drama King to take his bows and exit stage right. Enough.

McCain Lurches Again

| Wed Sep. 24, 2008 5:21 PM EDT

McCAIN LURCHES AGAIN....OK, let me get this straight. After spending a full week flailing madly, tossing around wild charges almost daily, and careening from free market deregulator to the second coming of William Jennings Bryan — after all that, John McCain is now trying to gravely present himself as a man above politics: suspending his campaign, asking for Friday's debate to be postponed, and calling for a statesmanlike bipartisan bailout compromise.

Spare me. Let me guess: the debate should be postponed until October 2, which, sadly, will mean eliminating the vice presidential debate entirely. What a bummer, eh? And the guy whose campaign is funded by federal funds thinks all fundraising should be suspended. Imagine that. And the senator who hasn't showed up for a roll call vote since April suddenly thinks Capitol Hill is the place everyone needs to be. That should speed things up and calm down the financial markets, shouldn't it?

The cynicism is pretty stunning. Instead, how about switching the subject of the first debate to economic issues and actually hearing what John McCain thinks we ought to do? He does have a serious grasp on the issues, doesn't he? Why discuss them only behind closed doors?

Financial Innovation Update

| Wed Sep. 24, 2008 4:28 PM EDT

FINANCIAL INNOVATION UPDATE....Yesterday I passed along Dani Rodrik's question about whether financial innovation has actually benefited the real economy. As he pointed out, it made homes available to a lot more people, but that turned out not to be such a great thing after all. Reader Brian J. then pointed me to Ben Bernanke's take on this issue from last year:

The increasing sophistication and depth of financial markets promote economic growth by allocating capital where it can be most productive. And the dispersion of risk more broadly across the financial system has, thus far, increased the resilience of the system and the economy to shocks.

Nope, neither of those turned out to be the case either. I'm tempted to say three strikes and you're out, but for now let's keep it an open question.

By the way, yesterday Tyler Cowen recommended this 2006 paper on credit derivatives, so I read it last night. It was quite good, and very accessible to lay readers. I was pleased to see that the authors basically concluded that CDOs are little more than a scam that violates basic economic principles and can only work (for a short time) thanks to industrial size helpings of hooey and sales malarkey. That's been pretty much my conclusion too. Credit default swaps are a different story, but the problem there is that, perhaps, hedging of risk might not really be such a good idea after all if it turns into an economy-wide phenomenon. After all, the people making/taking a loan (or issuing/buying a bond etc.) are the ones who are in the best position to assess the risk of the loan/bond/whatever and monitor its performance. Selling off risk to someone else often has real benefits, but it also produces incentives not to bother assessing risk properly and creates serious problems of nontransparency.

Also, it can cause the global economy to collapse via cascading counterparty defaults that send us back to the stone age. But that's a story for another time.