Kevin Drum - November 2008

Chart of the Day (Oil Edition)

| Wed Nov. 12, 2008 1:55 PM EST

CHART OF THE DAY (OIL EDITION)....The International Energy Administration has released its latest projections for oil production over the next couple of decades. They report that the average annual decline in existing oil fields will accelerate to about 8.6%, a very high number, but that overall production will continue to increase anyway. No peak oil for these guys! — but only if we invest $13 trillion in drilling and exploration infrastructure between now and 2030, mostly in OPEC countries.

I have my doubts about that, but I really have my doubts about this:

These projections are based on the assumption that the IEA crude oil import price averages $100 per barrel (in real year-2007 dollars) over the period 2008-2015, rising to over $120 in 2030....In nominal terms, prices double to just over $200 per barrel in 2030.

I know that oil fell below $60 yesterday, but I'm still willing to take on all comers on a bet that oil will be selling for only $200 per barrel in 2030. I just don't believe that. Hell, I wouldn't be surprised if oil were selling for $1000 per barrel by then.

In any case, this report, which is paired up with another report about carbon emissions, makes our choice stark. We can invest many trillions of dollars in oil infrastructure, which might keep oil prices relatively low and greenhouse emissions high, or we can do the opposite: allow oil prices to rise, thus reducing demand, and spend trillions of dollars on green power generation instead. The IEA's preference seems to be for both, somehow, which must mean I'm misreading something. I'll try to give the report a more careful read later. In any case, their estimate is that a global program to limit CO2 to 450 ppm would cost a bit less than 1% of world GDP, which includes a cap-and-trade system that sets a price of $180 per ton of CO2. If that's really true, then hallelujah. That's really not such a big number. But as they say, "Time is running out and the time to act is now."

UPDATE: A correspondent emails to point out that in 2004 IEA projected oil demand in 2030 of 121 million bpd, in 2005 lowered that to 115 million bpd, and this year lowered it again to 106 million bpd. Likewise, in 2005 their projection for oil prices was $65 per barrel in 2030. Today it's $200.

Those are huge changes. Like my correspondent, I don't think IEA has fully faced reality yet, but they're getting there.

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Rumors and Reports of Rumors

| Wed Nov. 12, 2008 1:05 PM EST

RUMORS AND REPORTS OF RUMORS....I'm a little torn about whether I should blog more about transition scuttlebutt. On the one hand, this stuff matters a lot for the future course of the administration. If Robert Gates is Secretary of Defense or Tom Vilsack is Secretary of Agriculture, that says a lot about the tone and direction of Obama administration policy.

On the other hand, I'd guess that about 99% of these rumors are completely bogus, just random guesses from people with only a tenuous connection to the transition team. In that sense, reacting to the rumors is just dumb. It's the kind of thing that makes us all stupider, not better informed.

Still, chatting about who might go where, and what it all means, isn't such a bad conversation to have, even if the spark is sort of random and poorly sourced. So I dunno. What do you all think of the possibility of Gates staying on as SecDef or Vilsack being appointed Secretary of Agriculture?

TARP is Dead, Long Live TARP

| Wed Nov. 12, 2008 12:15 PM EST

TARP IS DEAD, LONG LIVE TARP....Henry Paulson has apparently given up completely on buying up troubled assets, the original rationale for the $700 billion bailout fund, and instead wants to inject yet more capital into the banking system and expand the bailout program to other sectors:

U.S. Treasury Secretary Henry M. Paulson Jr. said he wants to expand the government's $700 billion bailout program to include credit card, student loan and car loan companies, part of an effort to ensure that households and businesses have access to a broad array of borrowing options.

...."This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said.

But has this market ground to a halt because of capital losses among the lenders, or has it ground to a halt because there's no demand for new loans among consumers? If it's the latter, all the capital injections in the world won't make any difference.

Chart of the Day - 11.12.2008

| Wed Nov. 12, 2008 2:27 AM EST

CHART OF THE DAY....According to a new CNN poll, 59% of the public thinks one-party rule by the Democrats is a dandy idea. Furthermore, 62% have a favorable view of the Democratic Party, vs. 38% for the Republican Party. "When has the Republican Party image ever been that bad?" asks CNN political analyst Bill Schneider. "Answer: when the Republican Congress impeached President Clinton at the end of 1998."

West Coast Offense

| Tue Nov. 11, 2008 6:49 PM EST

WEST COAST OFFENSE....Adam Serwer writes today about the pros and cons of class-based affirmative action (vs. race/gender-based AA), and Atrios offers some advice:

If, say, a left of center magazine or some other Washington institution wanted to engage in a bit of class-based affirmative action, I have a fairly simple suggestion. Just make sure you reach out beyond elite schools. I've attended and taught at a variety of institutions, and some excellent students can be found most places. And while I don't know the hiring practices of random left of center magazines, or for Congressional staffs, or for the Washington Post, it wouldn't surprise me if first round resume weeding is frequently done based on the college the applicants attended.

I'll second that. Sure, the East Coast centrism of opinion magazines is easy to understand, since they're almost all based on the East Coast. But while I can't say for sure that things haven't changed recently, a few years ago I was noodling around on this subject and was astonished at the hegemony of the Ivy League in the mastheads of most progressive magazines. I expected it to be heavy, but my recollection is that my (admittedly unscientific) sample was something like three-quarters Ivy League. Considering the number of top notch universities elsewhere in the country, that's pretty hard to defend.

So yeah: recruit on the West Coast. Lots of smart liberals out here! And at public universities, which might produce a wider range of sensibilities. It's true that East Coast weather sucks and us Californians are more than a little crybabyish about snow and sleet and whatnot, but Ezra Klein managed to make the transition. I'll bet plenty of others can too.

UPDATE: But not just California! Recruit from all the other states too!

Yet More on the CDS Market

| Tue Nov. 11, 2008 6:09 PM EST

YET MORE ON THE CDS MARKET....I've been meaning to link to yet another Felix Salmon post about credit default swaps, since I know what a fascinating subject they are for everyone, but one thing led to another and I haven't done it yet. Basically, "one thing and another" means that I spent several hours yesterday trying to understand the whole CDS issue better, but I failed miserably. So instead of pretending otherwise, I'm just going to link. Salmon conducted an IM conversation with Robert Waldmann about the CDS market, and part of it went like this:

Felix Salmon: So, have I brought you around to the idea that CDS really aren't a major cause of the current crisis?
As you know, Kevin Drum calls me "disturbingly persuasive"

Robert Waldmann: Ah well that is ambitious. You have convinced me that there is a perfectly legitimate reason which can explain why face value is so huge. As to the cause of the crisis, I remain confused. Stupid CDS tricks could have done it. So could stupid CDO tricks and what all.

Felix Salmon: I will concede that there were indeed stupid CDS tricks

Robert Waldmann: I mean the situtation is I don't understand the new financial instruments and it sure looks like the trader types didn't understand them as well as they thought.

Felix Salmon: But the stupidity was in understanding credit risk, not in understanding CDS.

Well....sure, but this seems like a bit of a dodge. After all, pretty much all financial bubbles are based on mispricing risk in some way or another. It seems like we need to dig a little deeper and try to figure out if there were specific aspects of the way modern financial markets are regulated that encouraged even more risk mispricing than usual.

The question, then, isn't whether credit default swaps are useful instruments. They are. The question is whether there's something about the way they're managed in real life that makes them potentially more dangerous than, say, stocks or pork belly futures. And if so, what can we do to limit "stupid CDS tricks"? Here's one possibility:

Robert Waldmann: OK a reform proposal. CDS must come with collateral even if you find a sucker willing to buy one without collateral (this is a regulatory restriction).

Felix Salmon: Yes yes yes.
That's why I'm so astonished Berkshire Hathaway is STILL writing CDS without collateral requirements.
But a move to an exchange would have the same effect.

If I understand this right, the benefit of requiring collateral is twofold. First, it keeps the CDS market from going too crazy, since CDS sellers can only sell protection if they have collateral to back their positions. Second, it reduces counterparty risk, since even if the CDS seller goes bust there's collateral that's been posted to make good on the swap. The big problem with AIG, for example, which has been the most spectacular example of a financial firm losing its shirt due to CDS exposure, is that they were writing CDS willy nilly without having to post collateral (thanks to their AAA rating). When their rating started going south, and they had to post collateral to make up for it, the company went down the toilet. If they'd had to post collateral in the first place, that wouldn't have happened.

So I guess that's a good start: make CDS exchange traded and insist on collateral posting requirements for all writers of CDS.

But what I still don't have a handle on is the scale of the losses in the CDS market. Clearly, AIG and the monoline insurers lost a ton of money. But Salmon suggests that the broader banking industry didn't. Partly this is because only a small segment of the financial industry were net sellers of CDS protection:

Felix Salmon: There's AIG, there's the monolines, and there's the synthetic CDOs bought by institutional investors.
Given the zero-sum nature of any derivatives market, that means that everybody else, on net, was a buyer of credit protection.

So far, this seems to be right: net losses in the broader financial industry on CDS trades seem to be pretty modest. So far. Unfortunately, though, that still leaves the CDOs, which we don't know much about yet, and it also leaves everyone else, who might be choosing not to settle CDS contracts yet that have big losses associated with them. I have a feeling we might need to wait a while longer to know for sure if the broader CDS market is as benign as Salmon thinks.

But it might be. Obviously it's cheating a bit to single out the particular areas where CDS sales caused big problems and then say, "well, aside from those areas everything was fine" — after all, it's always the case in every industry that aside from the problems there are no problems — but still, if it turned out that the big abuses came from noncollateralized CDS sales and synthetic CDOs, that would make me happy. After all, I'm already on record as thinking that CDOs are the devil's spawn. Anything that heaps more abuse in their direction is fine with me.

Bottom line: I'm still confused. For one thing, an awful lot of smart people seem to disagree with Salmon. I'd like to see some of them engage with his arguments. For another, the CDS market is so opaque that we still don't really know how much exposure is out there and who has it. At the very least, that seems unacceptable. And finally, even if there were only three segments of the financial market that were net sellers of CDS protection, just how much is it going to cost us to bail them out?

One way or another, the losses in the financial markets appear to be far wider than just subprime loans. After all, the size of subprime losses in the U.S. seems to be about half a trillion dollars, but in the past year banks have raised something like $300-400 billion in new private capital and another $200 billion so far in government capital. So that means their overall capitalization levels should be OK. But apparently that's not the case. So where are all the rest of the losses coming from? CDS? CDOs? Currency forwards? What? Does anybody actually know? And if not, what will it take to find out?

POSTSCRIPT: And one more thing. It's really annoying that the plural of CDS is CDS. "CDS market" is fine, and CDS when referring to an individual swap is fine, but why not CDSes when referring to multiple swaps? As in, "Sellers of CDSes should be required to post adequate collateral for each CDS they sell"? What does Wall Street have against plural acronyms?

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Netbooks

| Tue Nov. 11, 2008 2:49 PM EST

NETBOOKS....As part of my mission to stay hopelessly behind the curve in technology matters, I just yesterday discovered the existence of a new class of notebook computers called netbooks. I guess they've been around for nearly a year, but my local Micro Center didn't carry any the last time I was there in August. Yesterday, though, they had half a dozen different models, all of them small enough to toss in a purse or tote without thinking twice, but with screens large enough (barely) to get real work done.

As it happens, I've always wanted something in exactly this form factor, so I almost bought one on the spot. But I didn't. After all, I just bought a Mac notebook on impulse a few months ago. And it's not like I compute mobile-ly very often anyway.

Still, they're pretty damn cute. And cheap. And I think I want one. So consider this an open thread. Should I buy one? What kind? Anyone have any personal experiences to share?

Space!

| Tue Nov. 11, 2008 2:14 PM EST

SPACE!....Ross Douthat suggests that any conservatives foolish enough to support Newt Gingrich as chair of the RNC ought to reread the list of fabulous new ideas for the Republican Party that he published in Human Events last May. I don't have a dog in this fight, but I went back and refreshed my memory anyway. Here's one of Newt's suggestions for GOP revival:

Implement a space-based, GPS-style air traffic control system. The problems of the Federal Aviation Administration are symptoms of a union-dominated bureaucracy resisting change. If we implemented a space-based GPS-style air traffic system we would get 40% more air travel with one-half the bureaucrats. The union has stopped 200,000,000 passengers from enjoying more reliable air travel to protect 7,000 obsolete jobs. This real change would allow the millions of frustrated travelers to have champions in congress trying to help them get places better, safer, faster.

Now, Newt loves anything space-based, and he loves to bash unions too, so this is right up his alley. But what's the deal with this space-based air traffic control system, anyway?

Well, it turns out that it's been on the drawing board for a while. The underlying technology is called ADS-B and has apparently worked well in tests in Alaska and other countries. Last year the FAA awarded a contract for part of a GPS-based system to ITT, but not much has been done since then. The entire project is known as NextGen, and according to this AP dispatch from last month, the real opposition to it comes not from the unions, which are skeptical but apparently not dead set against it, but from the airlines themselves, which don't want to bear the cost of upgrading their planes.

I guess this might be more than you wanted to know about this, but hey — I was curious. It was one of Newt's Top Nine ideas, after all. In the end, though, it turns out that the story is fairly prosaic: a GPS-based air-traffic control system might be a very fine thing that would save fuel and allow more air traffic, but it would cost a lot of money, be extremely complex to implement, has some technical issues to overcome, and faces some modest opposition from entrenched interest groups, including both airlines and the air traffic controllers union. In other words, just your standard gigantic federal technology project.

And, perhaps, just the thing to throw into a trillion dollar stimulus bill. Who knows? But part of the rebirth of the Republican Party. I'm thinking probably not.

UPDATE: By coincidence, the Wall Street Journal has a story about this exact subject today. No mention of union opposition at all. You can read it here if you want the latest.

House Democrats

| Tue Nov. 11, 2008 1:32 PM EST

HOUSE DEMOCRATS....Did congressional Dems underperform this election compared to Barack Obama? Should they have won even more than 20 additional seats? Andrew Gelman cries foul:

The only trouble with this theory is that it's not supported by the data. Obama won 53% of the two-party vote, congressional Democrats averaged 56%. The average swing of 5.7% from Democratic congressional candidates in 2004 to Dems in 2008 was actually greater than the popular vote swing of 4.5% from Kerry to Obama.

I think this is basically right, but I want to add something. Andrew compares the average district vote in each state, and for technical reasons he thinks this is the right measure. I, however, prefer something cruder: total congressional vote, which turns out to be a pretty good predictor of total House seats won by each party.

So how did Dems do? In 2004 they lost to Republicans by 2.2 percentage points. In 2006 they won by about 7.4 points, an astonishing swing of 9.6 points. This year they won by about 8.2 percentage points, an even more astonishing swing of 10.4 points since 2004 — and, as Andrew points out, bigger than the 8.7 point swing from Kerry to Obama.

So I guess my question to the skeptics is: Just how much do you think the Dems should have won by? Ten points is an enormous margin, far bigger than any party has enjoyed for the past two decades. If that's underperforming, I'll take it.

The Car Tax

| Tue Nov. 11, 2008 12:41 PM EST

THE CAR TAX....The LA Times chimes in this morning to suggest that if Arnold Schwarzenegger wants to raise revenue, he should think about reimposing the old vehicle license fee, which he cut when he took office, rather than raising sales taxes:

The car tax is a smarter choice than a sales tax for digging out of the current budget hole. Asking Californians to pitch in through their vehicle registration fees rather than at the cash register would have fewer negative effects on sales, which we can expect to be diminished too much already in the coming months.

Sales taxes are regressive: They take a higher percentage of household income from the poor than from the rich. A 1999 California Policy Research Center study found vehicle license fees to be nearly as regressive, but at least the proceeds are unrestricted and could be used to bail the state out of its mess. Because of voter fiat, sales taxes paid at the gas pump are off limits for any use but transportation. Local government also claims a share. Another advantage of car taxes: They are deductible from federal income tax. Try deducting your sales tax on your 1040 form and see how far you get.

I'll add another couple of related points. First, the California sales tax is already high, and local add-ons make it even higher. Schwarzenegger's proposal would hike it above 10% in most places, and most of the tax literature I've read suggests that 10% is an upper bound for an effective sales tax. Above that it has serious effects on sales revenue, promotes out-of-state purchasing, and produces compliance problems.

Second, sales taxes are regressive by nature and there's only a limited amount you can do about it (exempting food purchases is the most common approach to adding a bit of progressivity). Not so with the vehicle license fee. Right now the VLF is a flat rate on the assessed value of a vehicle, which is based on its purchase price and a fixed schedule of depreciation (basically 10% per year). It's true that if all you did was raise the VLF to its old rate of 2% it would remain about as regressive as a sales tax (see Table 5 here), but that's not the only way you can do it. Unlike a sales tax, which needs to be a flat rate for administrative reasons, the VLF could easily vary by assessed value. It could stay at its current rate of 0.65% up to, say, $10,000 in assessed value, increase to 2% for more expensive cars, and increase still further to 4% for top end cars. The average rate would still be about 2%, but the incidence of the tax would be more progressive.

And finally, here's one more great reason for increasing the VLF. It's a truism that if you tax something, you get less of it. So ask yourself: which could California use less of? General consumption? Or cars? The question answers itself, doesn't it?