Kevin Drum - October 2008

Paulson's Record

| Mon Oct. 13, 2008 11:26 AM EDT

PAULSON'S RECORD....Ezra Klein has an eminently fair and nonshrill critique here of Henry Paulson's handling of the ongoing credit crisis. I'll just add one thing. Paulson's reluctance to push the trigger on capital infusions for banks is understandable, even if it was wrong, but his resistance to having even the power to recapitalize banks is genuinely weird. After all, before the latest phase of the crisis hit, Paulson and Bernanke had spent months urging banks to raise private capital to weather the storm. Both men knew perfectly well that bank capitalization was an issue. And before he introduced his version of the bailout bill, Paulson had twice previously bowed to reality on government takeovers and recapitalizations, first in the case of Fannie and Freddie, and second in the case of AIG.

Given all this, his continuing resistance to the idea is difficult to fathom. His caution can perhaps be written off to background and ideology, but not his flat rejection of even being given the authority. I'm not sure what the explanation is.

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What's the Problem?

| Mon Oct. 13, 2008 2:33 AM EDT

WHAT'S THE PROBLEM?....In response to a Paul Krugman post about the Treasury wasting time implementing a capital infusion program for distressed banks, a commenter wrote:

They still don't know why banks don't trust enough to lend commercial paper.

If it's balance sheet issues then unloading toxic debit will work.

If it's a need to de-leverage then a capital infusion is required.

But if it's trust then we need regulation of and a change in management at the banks.

And if it's fear of credit default swaps, or other essentially incalculable obligations, then they need to be unwound and banned, at least the incalculable or morally hazardous ones, going forward.

My guess is that all four of these are issues, but it's the last one that keeps me up at night (metaphorically speaking, anyway). If CDS losses turn out to be the biggest problem — and potentially, at least, they seem to be responsible for far bigger losses than the underlying subprime losses themselves — then even a big capital infusion might not make much of dent in the credit crisis. But how do we find out?

And here's another thing to be curious about. When Gordon Brown announced his capital infusion plan, Britain's four biggest banks apparently took him up on his offer almost immediately. But what about America's biggest banks? Have they been putting out feelers? Burning up the phone lines begging Paulson to get off his ass and offer them a deal? Or what? And which American banks are in weak enough shape to want fresh capital at (presumably) punitive prices? All of them? A few big ones? Lots of little ones? Wait and see, I guess.

UPDATE: That should have been "Nobel prize winning economist Paul Krugman's post." Apologies for the error.

Obama's Ads

| Mon Oct. 13, 2008 1:52 AM EDT

OBAMA'S ADS....Politico reports on Barack Obama's fundraising:

One official close to the campaign said that September's fundraising haul set a new record, surpassing the $66 million Obama raised in August. Another aide, asked about the campaign's take, would only describe it: "big."

How big is "big"? Well, big enough that I've actually seen a few Obama ads myself. In California. I guess maybe they were national ad buys, but I don't think so. And I can hardly remember the last time I saw a presidential campaign bothering to advertise in California. (Maybe for a few days in 2000 when Karl Rove was having delusions that Bush might win here? That's all that comes to mind.)

Anyway, I don't quite know what this means, but Obama must really have money to burn if he's buying ads here in the Golden State.

Sunday Bonus Catblogging - 10.12.2008

| Sun Oct. 12, 2008 3:11 PM EDT

SUNDAY BONUS CATBLOGGING.... There's too much tension and stress this weekend over our ongoing financial tsunami. What's needed is some bonus catblogging to explain in layman's terms how we got into this mess.

In today's installment, Inkblot demonstrates graphically what happened to our banking system. Like the titans of our financial industry, last night he became convinced that the answer to all his problems was increased leverage. With enough leverage, along with some positive thinking, he was sure he could fit himself into the box lying on the floor. And he almost did it. Unfortunately, he eventually found himself forced to deleverage his position, at which point the box went kablooey and he needed to be bailed out. Sort of like our banks. Lesson learned?

Quote of the Day - 10.12.08

| Sun Oct. 12, 2008 2:27 PM EDT

QUOTE OF THE DAY....From IMF chief Dominique Strauss-Kahn, commenting on the financial crisis:

"Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown."

If he means "largest" literally, he's talking about Citi, Chase, and BofA. I wonder if he's talking literally?

Also: why only U.S. and European banks? How are things going in Asia and Australia? How have they managed to avoid the contagion?

Security Agreement Update

| Sun Oct. 12, 2008 2:06 PM EDT

SECURITY AGREEMENT UPDATE....From Juan Cole:

Al-Hayat reports in Arabic that its sources in Baghdad say that the al-Maliki government will sign off on a security agreement with the Bush administration "within days." The report says that Grand Ayatollah Ali Sistani has assured the government that he will accept the agreement if it can pass parliament. Pundits are debating how likely the measure is to get through the Iraqi legislature, with some denying it has a chance and others saying it will sail through.

Cole suggests this might be an attempt at an "October surprise," but I don't really see that. It's been in the works for months, everyone knows it's been in the works for months, and even if it passes the Iraqi parliament it's hardly election-changing news anyway. I'm surprised it's taken as long as it has, but my guess is that the delay has been of a fairly mundane variety.

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Tracking the Markets

| Sun Oct. 12, 2008 1:37 PM EDT

TRACKING THE MARKETS....Am I the only one who finds this chart that I adapted from today's LA Times a little puzzling? Yes, financial stocks are down a bit more than either big caps or small caps, but shouldn't they be down a lot more?

As usual, maybe I'm just missing something here. But if our banking system is systemically undercapitalized; if the global financial system is close to meltdown; and if the solution is likely to include massive share dilution from a federal government equity injection, shouldn't financial stocks be sucking really, really hard? Can someone enlighten me?

Troopergate Finale

| Sat Oct. 11, 2008 8:58 PM EDT

TROOPERGATE FINALE....I read most of the Branchflower report on Troopergate last night, but the MSM seemed to be doing a fine job of reporting the results all its own so I never got around to posting about it. The basic story, of course, revolves around Todd and Sarah Palin's crusade to get their ex-brother-in-law, Mike Wooten, fired from his job as a state trooper, and their efforts to get Alaska's Commissioner of Public Safety, Walt Monegan, to do the firing. Most of this story is pretty well known already. However, Time's Nathan Thornburgh points out the aspect of the report that struck me as the most remarkable:

The result is not a mortal wound to Palin....But the Branchflower report still makes for good reading, if only because it convincingly answers a question nobody had even thought to ask: Is the Palin administration shockingly amateurish? Yes, it is. Disturbingly so.

The 263 pages of the report show a co-ordinated application of pressure on Monegan so transparent and ham-handed that it was almost certain to end in public embarrassment for the governor.

....Monegan and his peers constantly warned these Palin disciples that the contact was inappropriate and probably unlawful. Still, the emails and calls continued — in at least one instance on recorded state trooper phone lines.

The state's head of personnel, Annette Kreitzer, called Monegan and had to be warned that personnel issues were confidential. The state's attorney general, Talis Colberg, called Monegan and had to be reminded that the call was putting both men in legal jeopardy, should Wooten decide to sue. The governor's chief of staff met with Monegan and had to be reminded by Monegan that, "This conversation is discoverable ... You don't want Wooten to own your house, do you?"

Monegan pointed out to a steady stream of people that (a) Wooten was protected by civil service and there was nothing more that could be done since he'd already gone through a formal disciplinary procedure, and (b) any conversation about Wooten was discoverable in court if Wooten ever got tired of being hounded and decided to file a civil suit. And yet the contacts kept coming and coming and coming — and coming and coming. And Branchflower documents them in painful detail. It's all quite remarkable.

In fact, here's the part that really puzzles me: what exactly did Todd and Sarah Palin hope to accomplish? Surely they knew perfectly well that Monegan was right: he couldn't have fired Wooten even if he wanted to. And they must also have known that even if Monegan were replaced, any replacement would quickly check into the situation and report back the same thing. Wooten had already been disciplined, and unless something new cropped up there was simply nothing that anyone could do to force him out of his job. In fact, the Palins' efforts probably made it nearly impossible even to reassign Wooten since it would so obviously have been politically motivated. It was a completely futile crusade they were on.

So what were they thinking? Or were they?

Banks

| Sat Oct. 11, 2008 1:20 PM EDT

BANKS....Justin Fox on the "shadow banking system":

And another thing: If you borrow short and lend long, you're effectively a bank. It's becoming ever less clear to me what justification there is for nonbank borrow-short-lend-long-institutions other than regulatory arbitrage.

Brad DeLong responds:

Not just "effectively" a bank. You are a bank. Not until the twentieth century did we have organizations that borrowed short and invested long that did not call themselves "banks." The emergence of non-bank banks has always been the result of attempts at regulatory arbitrage.

So what's the answer? What should our 21st century definition of "bank" be for regulatory purposes? Any entity that invests other people's money in any way? That can't be right, can it? Or can it?

Dialing it Down

| Fri Oct. 10, 2008 8:14 PM EDT

DIALING IT DOWN....OK, credit where it's due. After watching his campaign events turn into increasingly ugly free-for-alls, John McCain has apparently decided that enough's enough. Ana Marie Cox reports on his latest rally in Minnesota:

But then something weird happens: He acknowledges the "energy" people have been showing at rallies, and how glad he is that people are excited. But, he says, "I respect Sen. Obama and his accomplishments." People booed at the mention of his name. McCain, visibly angry, stopped them: "I want EVERYONE to be respectful, and lets make sure we are."

The very next questioner tried to push back on this request, noting that he needed to "tell the American the TRUTH about Barack Obama" — a not very subtle way, I think, to ask John McCain to NOT tell the truth about Barack Obama. McCain told her there's a "difference between record and rhetoric, and I plan to talk about his record, respectfully... I don't mean that has to reduce your ferocity, I just mean it has to be respectful."

And then later, again, someone dangled a great big piece of low-hanging fruit in front of McCain: "I'm scared to bring up my child in a world where Barack Obama is president."

McCain replies, "Well, I don't want him to be president, either. I wouldn't be running if I did. But," and he pauses for emphasis, "you don't have to be scared to have him be President of the United States." A round of boos.

And he snaps back: "Well, obviously I think I'd be better. "

Of course, this is kind of the best of both world: Crazy base-world gets to bring up Ayers and whatever else, really, and he gets to say, "Be respectful." But I think he means it.

UPDATE: Indeed, he just snatched the microphone out the hands of a woman who began her question with, "I'm scared of Barack Obama... he's an Arab terrorist..."

"No, no ma'am," he interrupted. "He's a decent family man with whom I happen to have some disagreements."

Good for him. Now I wonder if he can get the same message out to Sarah Palin?