Kevin Drum - October 2008

Sparsely Attended

| Fri Oct. 3, 2008 12:58 PM EDT

SPARSELY ATTENDED....Virtually everyone agrees that one of the root causes of the financial system meltdown has been the vast increase in leverage at big financial firms over the past few years. It's a problem that's gotten increased attention since 1998 but one that nobody ever does much about.

In fact, it's worse than that. As the New York Times reports today, four years ago the SEC voted to change the net capital rule for the biggest investment banks — not to decrease allowable leverage or even to make sure it stayed at statutory levels, but to increase it. Pay attention to the last sentence:

Decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control....On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks. They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on.

....The proceeding was sparsely attended. None of the major media outlets, including The New York Times, covered it.

This is surprisingly typical of how things get done in Washington. In all sorts of areas, decisions that turn out to have enormous impact are made in sleepy little commission meetings or by executive order, with hearings attended only by a few die-hard lobbyists on both sides and — at least under the Bush administration — the final decision practically foreordained in favor of whatever the business community wants. Then, like a cherry on top of an ice cream sundae, the budget for oversight is either cut or eliminated because the business community insists that market discipline will take care of such things far better than a bunch of federal bureaucrats.

Turns out that doesn't always work so well.

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Economic Report

| Fri Oct. 3, 2008 12:06 PM EDT

ECONOMIC REPORT....Your economic report for the day: Factory orders plunged 4% in August; the service sector was stagnant; wages were stagnant; auto sales dropped by a third; jobless claims are up dramatically; the commercial paper market fell nearly $100 billion last week, its biggest drop since 9/11; short-term lending rates remain astronomical; employers cut 159,000 jobs in September; and credit remains so tight that Arnold Schwarzenegger is begging the Treasury for a $7 billion loan for the state of California.

That is all. For now. I recommend the House pass the bailout bill today.

Debate Liveblogging - VP Edition

| Thu Oct. 2, 2008 9:59 PM EDT

DEBATE LIVEBLOGGING — VP EDITION....It's Biden vs. Palin. The Kid From Scranton vs. the Hockey Mom From Wasilla. Are you ready?

Wrapup – I'll be honest: I genuinely didn't understand about 50% of what Sarah Palin said. She pretty overtly didn't even pretend to address a lot of Ifill's questions — probably because she couldn't — and a lot of her filibustering ended up sounding like random strings of phrases from the Hockey-Mom-o-Bot 3000. This was especially true as time wore on. If nothing else, this makes it almost impossible to judge the substance of what she believes, and despite the fact that she "connects" with ordinary people, I have a feeling that an awful lot of ordinary people weren't impressed with this.

On grounds of style and affect, Biden seemed fine to me. He had good energy, made his points pretty sharply, and didn't make any mistakes. He was also very good on substance. Palin, conversely, seemed wound up like someone on her tenth cup of coffee, and I just don't know if that seems very presidential (or vice presidential). I think she would have been better off with a lower key style. On the other hand, she had no big gaffes, and we all know that's what we were really waiting for.

As usual, I don't really have a strong idea of how other people will react to tonight's performance, but I think Biden won pretty convincingly. He didn't overdo things, but he did demonstrate a good command of the issues as well as a good command of working class folksiness. He defended himself well without seeming overbearing. For her part, Palin probably seemed friendly enough, but her obvious lack of command of the issues combined with her obvious reliance on stale talking points can't have been very impressive.

UPDATE: CNN snap poll says Biden won 51%-36%. CBS poll of uncommitted voters says Biden won 46%-21%.

UPDATE 2: Dodgers win 10-3. Hooray!

UPDATE 3: Nielsen says 45% of all households watched the debate compared to 31% for the first Obama-McCain debate.

10:26 – Palin says she's never had to change her view on anything. Good to know.

10:25 – Interesting to see Biden take on the "maverick" thing directly. I think Palin has called McCain a maverick about a hundred times so far.

10:21 – In fairness, Biden isn't answering the question either, though at least he knew what it was. But he's not babbling.

10:19 – Now Palin is just babbling. I don't think she even understood what the question was. (It was something about what her real Achilles heel is.) (Via email: "She is being very meta by actually demonstrating her Achilles heel rather than just telling us.")

10:16 – Palin: "Our founding fathers were wise in allowing so much flexibility in the position of the vice president." What the hell?

10:13 – Email from a friend: "Palin is just hyper. It's weird. She's making more sense than not, which I'm sure NRO is high-fiving about. But she is so keyed up, it's frightening. Monotone, snarky, relentless verbiage for her alotted time. Wonder if the perma-smile will wear. No dynamic in her tone. She's cramming."

10:12 – Palin: "There you go again, Joe." Oh please. Palin is desperate to insist that McCain just has nothing at all in common with Bush.

10:08 – Ifill asks how a Biden administration would differ from an Obama administration. Biden uses this as an opportunity to deliver a basic stump speech. The CNN focus group loves it.

10:02 – Palin is grinning like the cat who caught the canary while Biden talks about Iraq. Why? Because she's just waiting for the chance to say that Biden supported the war before he was against it. Childish stuff.

10:00 – McClellan? Who's that? Is Palin talking about General McKiernan? Did I hear her wrong?

9:55 – Palin: "There have been huge blunders with this administration." Glad we can all agree on that. Hopefully we'll get some specifics on that after the debate.

9:52 – I guess the format of the debate is set in stone, but Ifill really isn't pressing either Biden or Palin to actually address her questions. I guess there's a limit to what she can do.

9:48 – Not a strong response from Palin. She's just regurgitating old soundbites about meeting with the Castro brothers et. al. without preconditions.

9:46 – Biden's doing a pretty good job on Afghanistan and Pakistan being the central front in the war on terror.

9:43 – Audience reaction to Biden's "We will end this war" is off the charts. Reaction to Palin's "That's a white flag of surrender" is deep into negative territory. Interesting.

9:41 – Biden isn't always the easiest guy to understand, but Palin's statement on Iraq was just an astonishing string of soundbites and miscellaneous, unconnected phrases. I have almost no idea what she was talking about. (Except that we have to "win in Iraq.")

9:34 – Hmmm. "Drill baby drill" decidedly didn't go over well with the women in CNN's focus group.

9:31 – Wow. Palin's statement on climate change was spectacularly incoherent, even by her standards. And she still doesn't think it matters whether human activity is to blame. But she thinks we need to cut back emissions anyway. Even though we don't know if that's the cause. Sheesh.

9:29 – Biden could have done a better job defending his support for the bankruptcy bill. Or, better yet, he should have said even less and just jumped straight to his statement that we should allow bankruptcy courts to reset mortgages.

9:27 – Palin is really rambling. Biden is doing a little better, but he could stand to be even more pointed, just as a counterpoint.

9:25 – Biden wants a windfall profits tax on oil companies just like they have in Alaska! Possibly a decent attack.

9:23 – Palin: The nice thing about McCain is that he doesn't say one thing to one group and another thing to another group. Huh? What was that all about?

9:15 – Well, that's original. Palin just said outright she's not going to bother answering the questions if she doesn't feel like it.

9:13 – Biden: "The middle class needs tax relief." Palin: "Darn right we need tax relief."

9:10 – Palin: "We need strict oversight of those entities in charge of loaning us our dollars" — or something like that. "Never again will we be taken advantage of." Okey dokey. But it went over great with the CNN focus group!

9:08 – Palin is making lots of eye contact with Biden. No condescension for her!

9:06 – On the financial crisis, Biden starts off very much in Obama style, with a laundry list of policy distinctions (oversight, CEO pay, equity shares, etc.). Palin goes straight for a soccer mom story.

9:04 – According to the audience-o-meter, women really, really want to punish Wall Street CEOs.

9:02 – "Can I call you Joe?" I guess I wasn't expecting that.

8:59 – So what do I expect tonight? Honestly, I have no idea. Basically, I figure that Biden will do OK because he's not an idiot and Palin will do OK because this is a format that allows her to get away with easy soundbites and folksy homilies. Still, it does have sort of a NASCAR quality to it, doesn't it? You just never know if suddenly someone is going to crash and burn.

The Debate Looms Ever Closer

| Thu Oct. 2, 2008 6:45 PM EDT

THE DEBATE LOOMS EVER CLOSER....Today is the big debate! Exciting, no? Will Sarah Palin burble amusingly? Will Joe Biden be a mean ol' bully? Will conservatives blame Gwen Ifill if Palin claims that that she can see Pakistan from the window of her house? Will the media declare Palin the "winner" if she manages to speak in complete sentences 80% of the time? Will prepackaged small town zingers defeat Amtrak-riding liberal gravitas? Tune in and find out!

I'll be liveblogging, of course, so come on by and join us in comments. And while you're at it, head over to our fundraising page and download our debate drinking game. (You're going to need it.) Then throw a few dollars our way if you can spare it. It keeps both the magazine and the blogs going and helps keep progressive journalism alive. Pretty good deal, eh?

Next Steps

| Thu Oct. 2, 2008 5:44 PM EDT

NEXT STEPS....Clay Risen speculates on what's next if the Paulson plan passes on Friday:

In a way, all the Paulson plan does is get us back to where we were a few weeks ago, when we were focused not on bank closures but housing foreclosures....But there's a silver lining here: Maybe now policymakers will set aside their concerns about moral hazards and recognize the risk that unhealthy mortgages pose to the rest of the economy.

Well, I wouldn't count on that happening anytime soon. Maybe next January, though.

As has often been the case these days, Columbia Business School Dean Glenn Hubbard, former chair of Bush's Council of Economic Advisers, has been a voice of reason on this dilemma. In today's Wall Street Journal, he co-wrote a piece with his Columbia colleague Chris Mayer proposing that "all residential mortgages on primary residences ... be refinanced into 30-year fixed-rate mortgages at 5.25% (matching the lowest mortgage rate in the past 30 years)." They argue that we should then place them with Fannie Mae and Freddie Mac. Such a move would directly help out homeowners, and in turn reassure credit markets worried about the wobbly mortgages underlying all those asset-backed securities we've heard so much about.

....This isn't the final step, of course. If one looks at the economy as a heart-attack patient, the Paulson plan is the CPR. A refinancing plan would be the bypass surgery and recovery. Beyond that, just as a heart-attack survivor needs to make serious changes in diet and exercise, we need a thorough round of regulatory reform — including a restructuring of the regulatory system — to help make sure this doesn't happen again and to prepare ourselves for the unknown tumult that a globalized financial infrastructure will bring.

I'd add some broader macroeconomic reforms to that list too, but obviously that's going to take time and lots of political capital. But we can hope.

Eleven Answers

| Thu Oct. 2, 2008 4:15 PM EDT

ELEVEN ANSWERS....Tyler Cowen rounds up some criticism of the Paulson bailout plan:

There is the O'Neill plan....Or the Soros plan. And here is a "SuperBond" plan to recapitalize the banking system. And then there is the Phelps plan....Not to mention the French plan. Or how about the Wright plan.

You remember the old joke, don't you? Ask ten economists a question and you'll get eleven different answers. Has that ever been more true than during our current credit crisis?

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Stevens Case in Trouble?

| Thu Oct. 2, 2008 2:10 PM EDT

STEVENS CASE IN TROUBLE?....The government's case against Alaska Senator Ted Stevens, who is accused of accepting free renovations to his "chalet" from a campaign donor, is in trouble because the prosecution has been withholding evidence from Stevens' defense team:

The potentially exculpatory material involves remarks by the executive, Bill Allen, a key prosecution witness, who said he believed Stevens would have paid for the renovations if Allen had ever billed him. Attorneys for the government did not disclose those remarks until late yesterday.

In court this morning, prosecutor Brenda Morris acknowledged that the information should have been provided earlier but also argued that Stevens's lawyers could still cross-examine Allen on what he had said.

"We admit we made a gross error, Your Honor," Morris said. ". . . But there is no harm to the defendant."

Well, this puts me in a pickle. The overall fact pattern suggests to me that Stevens really is guilty. On the other hand, prosecutorial misconduct is a cancer. It's far more widespread than anyone ever likes to acknowledge, and one of the reasons is that judges usually let prosecutors off the hook for their misconduct with little more than a stern talking to. Frankly, having a high-profile case tossed out as a warning to the feds might not be such a bad idea. The judge will decide later today whether to declare a mistrial.

Privacy and Abortion

| Thu Oct. 2, 2008 1:39 PM EDT

PRIVACY AND ABORTION....Adam Serwer takes on Sarah Palin's apparent view that you can be pro-life even though there's an inherent right to privacy in the constitution:

In my view, if there's a constitutional right to privacy, you can't take away someone's right to have an abortion, anymore than you can take away someone's right to bear arms.

In fairness, I really don't think this is true. The Fourth Amendment protects you against the police busting into your home without a warrant, but that doesn't mean it's OK to murder your kids as long as you do it in your living room. If Roe v. Wade were overturned, states could almost certainly declare that human life begins at conception and then outlaw abortion as murder regardless of any constitutional or statutory doctrine on privacy.

This would cause plenty of other problems for conservatives, of course, who are loathe to actually follow through on their belief that abortion is murder (Palin herself, for example, has been explicit that she doesn't think abortion should be criminalized). But I don't think privacy doctrine by itself would be conclusive one way or the other.

Pearlstein's Prize

| Thu Oct. 2, 2008 1:05 PM EDT

PEARLSTEIN'S PRIZE....Atrios has declared Washington Post business columnist Steven Pearlstein "Wanker of the Day" for his performance during a bailout Q&A on Wednesday. As Glenn Greenwald documents, Pearlstein was indeed a bit of a dick, reminding everyone about his Pulitzer Prize and dismissing opposition to the bailout as little more than ignorance and mindless partisanship from demented bloggers. "Oh how we long for the Glory Days when the Steve Pearlsteins had their Supreme Wisdom honored and never had to hear anyone talking back," Glenn snarks.

Unfortunately, I'd say Pearlstein deserves the abuse. He must have been having a rough week or something. At the same time, it turns out he did address the questions Glenn highlights. Here, for example, he acknowledges that lots of academic economists oppose the Paulson plan and then explains why he thinks they're wrong:

Academic economists very widely believe that if the government would simply recapitalize the banks somehow, it will solve the problem by giving banks the room to borrow more and lend more, and by bringing in additional private capital. In a well functioning market, that would happen. But it ignores the reality that this is not a well functioning market, which is the basic problem we are trying to solve with this legislation. First, a dollar of new capital would not allow the banks to leverage it 10 times and lend out $11 because the market is not willing to lend at decent rates even to well-capitalized banks. Second, even if they had the money, banks are hoarding and unwilling to make loans because they are gripped by the same fear and panic as everyone else, particularly because they have assets on their books that have gone down in value every quarter for a year now and are likely to decline in the quarters to come. So the simple recapitalize the banks solution isn't going to cut it. That needs to be part of the solution, and but it is not sufficient at the moment.

And he also addresses the issue of whether we should bail out homeowners instead of Wall Street bankers:

We have already passed legislation to "bail up," several months ago, using an idea that I was one of the first people to push (refinancing involving a reduction of principal in return for equity stake in the house). We might want to expand that program even further, but it is simply not true that we haven't done anything. We put $300 billion of refinancing into that, thanks to Congressman Frank, who you would villify.

....The obvious problem is that, if you say you'll do it prospectively, then everyone will make themselves delinquent if they think they can get a better deal, and we'll have a huge bill. My guess is that it will also be politically unacceptable when people see that their taxes are being used to help out the guy next door who took on too much debt.

Pearlstein's tone is unusually snotty in this Q&A, and he should watch himself. Bloggers aren't the only ones pissed off about the bailout, the issues are genuinely complex, and insulting critics as morons is hardly a way to build support for the Paulson plan. Still, he did generally answer the questions put to him. There's plenty of substance there to go along with the snark.

Staring Into the Abyss

| Thu Oct. 2, 2008 2:49 AM EDT

STARING INTO THE ABYSS....Joe Nocera has a pretty readable tick-tock about the events that led up to the unveiling of the Paulson bailout plan. It started on Monday the 15th when Lehman Brothers was allowed to go bankrupt, accelerated on Tuesday when the Reserve Primary Fund broke the buck, and went critical on Wednesday:

Since the Bear Stearns bailout, Treasury and Fed officials had discussed what a broad government intervention might look like....Almost from the start, they concluded the best systemic solution was to buy hard-to-sell mortgage-backed securities.

On Wednesday morning, during a conference call with other top officials, including Jean-Claude Trichet, the president of the European Central Bank, Mr. Bernanke sounded them out on a big government bailout. The other officials sounded relieved; their main questions were about whether Congress could act quickly.

That evening, Mr. Bernanke told Mr. Paulson during a conference call: "You have to go to Congress. This is pervasive." Mr. Paulson agreed.

.... [On Thursday evening], Mr. Paulson and Mr. Bernanke trooped up to Capitol Hill for a somber session with Congressional leaders. "That meeting was one of the most astounding experiences I've had in my 34 years in politics," Senator Schumer recalled.

As the members of Congress and their aides listened, the two laid out their plan. They would begin offering federal insurance to money market funds immediately, in order to stop the run on money funds.

In addition, the S.E.C. would institute a ban on short-selling of financial stocks. Although Treasury officials concede that the move was mostly symbolic — investors can still buy put options that have the same effect as shorting stocks — they did it mainly "to scare the hell out of everybody," as one official put it.

After Mr. Bernanke made his remark about the possibility that there might not be an economy on Monday without this plan, you could hear a pin drop.

"I gulped," Mr. Schumer said.

Whether you like the bailout plan or not, it's worth reading the whole thing to get a good sense of what prompted it.