Kevin Drum - December 2008

Milk

| Fri Dec. 26, 2008 12:17 PM EST

MILK....Matt Yglesias explains why he didn't like Milk as much as he expected to:

My first instinct was to say that the problem with the film is that the pacing is odd, but I think the problem may actually be that on some level Harvey Milk's story isn't that interesting.

This is an underappreciated phenomenon. When it comes to fiction, everyone understands that an uninteresting story is a death knell. But when it comes to stories based on real people, filmmakers too often seem to think that just because a person has done something of note, it means that this person's life story is inherently interesting. But it's not. Harvey Milk did worthwhile things and his life ended in a dramatic way, but his life story is actually fairly ordinary. The same can be said for the subjects of a disturbingly large number of biopics.

Which isn't to say that Milk is bad. I didn't think it lived up to its hype, but it was still pretty good. And Sean Penn did a phenomenal job in the title role. The film might be worth seeing just for that.

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A Very Grinchy Christmas

| Fri Dec. 26, 2008 1:42 AM EST

A VERY GRINCHY CHRISTMAS....There's just no way to sugar coat this. Retail sales fell off a cliff this year:

When gasoline sales are excluded, [retail sales fell] 4% in December.... The holiday retail-sales decline was much worse than the already-dire picture painted by industry forecasts, which had predicted sales ranging from a 1% drop to a more optimistic increase of 2.2%.

....A final burst of spending retailers hoped for last weekend never came. Shopper traffic fell 27% compared with the same time last year, while sales declined 5.3%, according to ShopperTrak RCT Corp., which tracks sales in retail outlets nationwide.

Christmas this year was pretty grim in China too. And they're expecting worse next year.

Merry Christmas!

| Thu Dec. 25, 2008 1:20 PM EST

MERRY CHRISTMAS!....Santa brought Inkblot and Domino an exciting collection of boxes, ribbons, and wrapping tissue! They're very excited. What did Santa bring you?

Your Christmas Eve Miracle Story

| Wed Dec. 24, 2008 7:30 PM EST

YOUR CHRISTMAS EVE MIRACLE STORY....Our nation's news media is surprisingly devoid of feel-good Christmas stories for us today, so this will have to do: it's the tale of Bess, a little black cat who was, unbelievably, stranded underneath a window seat for nine weeks without food and water but then rescued and resuscitated.

This is not quite as good as the story of a cat who trekked 30 miles across town to find its owner. I'm not sure it's even as good as the story of my friend's cat, which had cancer and finally disappeared one night for good, only to show up two years later hale and hearty. What's more, poor Bess might have permanent neurological problems because of her trauma — though I'm not sure how you can tell in a cat anyway. But it's Christmas Eve, and she's back, and apparently she's happy and purring. Enjoy!

It's Lott-Tastic!

| Wed Dec. 24, 2008 2:47 PM EST

IT'S LOTT-TASTIC!....I just love me some righteous John Lott bashing, and Nate Silver delivers with the latest example of Lott's customary careful use of primary sources in an op-ed over at Fox News. It's true that his mistake is a small one in the grand scheme of things, but two items make this latest Lott affair especially awesome:

  1. The op-ed in question is co-authored by Ryan S. Lott. You may recall him as the "ry" in Mary Rosh. Awesome!

  2. In comments to Nate's post, Lott says both he and Fox have corrected the error. But it's a stealth correction: you'd never know the op-ed had been changed unless you clicked over to Lott's personal website where he mentions it. Awesome!

Good times. Brings back memories, this does.

Shadow Banking

| Wed Dec. 24, 2008 1:17 PM EST

SHADOW BANKING....Like Ezra Klein, Dean Baker, and me (and a cast of thousands) Paul Krugman is puzzled that so many economists failed to see the housing bubble in real time. But even those who did see it mostly didn't realize that the bursting of the bubble would lead to such an epic financial meltdown. Here's Krugman's explanation:

I think it's understandable, though not entirely forgivable, that economists didn't see the risks of a broad financial breakdown. We're accustomed to thinking of banks as big marble buildings with "member of the FDIC" signs in the window; besides, those are the institutions on whom the standard data series report. (Indeed, some economists still fixate on those data, which is why there are still economists denying that there's a credit crunch.) So neither the size nor the vulnerability of the "shadow" or parallel banking system were widely understood.

I don't know if this is right or not, but it's the first time I've really seen someone take a crack at addressing this question. So I thought I'd pass it along.

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Question

| Wed Dec. 24, 2008 12:54 PM EST

QUESTION....What's the deal with fusion power these days? Is it still 30 years off, same as always?

Stupid Ratings Agency Tricks

| Wed Dec. 24, 2008 1:35 AM EST

STUPID RATINGS AGENCY TRICKS....In an obvious effort to avoid being tarred and feathered by an angry mob, Wall Street apparatchik Noah Millman engages in a lengthy self-criticism session tonight regarding "structured finance" — you know, mortgage securitization, credit default swaps, synthetic CDOs, and all the other financial weapons of mass destruction that have helped melt down the world lately. "I thought it would be of interest," he says, "to relate two stories from my long career in structured finance, one that may help explain why, if you asked me in 2004 or 2005, I would have staunchly defended structured finance technology as having real social benefit and why, by a couple of years later, it was clear to anyone looking honestly at the business that something had gone very wrong."

Yes! It would be! And all kidding aside, we've actually seen very little about this stuff written by the people who actually engineered it all. So it really is interesting.

Noah promises to tell us about the "promise and peril" of structured finance, and the "promise" part has to do with the way CDOs and CDS helped make it possible for banks to expand lending in the dismal wake of the Enron/Worldcom/dotcom bust in 2002. That's fine, but let's be honest: it's not what we're interested in, is it? We want to hear about how structured finance destroyed the planet. So let's skip right to the "peril" part.

And it's pretty good. Noah tells the story of the constant-proportion debt obligation, aka CPDO, a cute little invention of the end stage bubble industry. In a nutshell, here's how it worked: the issuer bought up a bunch of BBB securities, and every six months they sold off both the poor performers and the good performers, replacing them with more BBB securities. The idea was to keep the yield roughly the same over time, but since they lost money on the junk and made money on the good stuff, on average they came out even. Or even took a small loss, what with fees and all. So why bother?

Enter the rocket scientists. Even BBB securities are unlikely to default in the short term, which means that the CPDO is basically pretty safe since it sells stuff off every six months. And since it's safe, the issuer can borrow lots of money against it to invest in longer-term bonds. That's called leverage, my friends:

And, if you can get a high enough degree of leverage, the excess in current yield from the differential between where you borrow and the yield on your portfolio should more than pay for the cost of rolling out of your losers every six months. And if you do that successfully, you've got a trading strategy that never loses principal, but has a surprisingly high expected yield. Sound good?

Well, it sounded great to the ratings agencies, who blessed this strategy by giving it a AAA rating.

How did they justify that AAA rating? By looking at the historic cost of rolling credit derivatives on indices of investment-grade corporate issuers, which generally have a high-BBB rating. These had been around for about three years when the first CPDOs were rated, and the roll had never cost more than 3 basis points. Factoring in that cost, at a leverage of 15-to-1, and using historic 6-month default rates for the portfolio (since the index would be rolled every six months), the proposed trading strategy would never lose money. Hence a AAA rating.

Let me reiterate that, just to drive the point home. The ratings agencies said: you can take a BBB-rated index, leverage it 15-to-1, and follow an entirely automatic trading strategy (no trader discretion, no forecasting of defaults or anything, just a formula-driven adjustment to the leverage ratio and an automatic roll of the index), and the result is rated AAA.

....When I first heard about this product, I thought: whichever agencies rated this thing have lost their minds. When people asked me whether it made sense as an investment, I said: it's an outright fraud. You're practically guaranteed to lose money. I never bought or sold one of these things myself, and neither did anyone else in our group. But the existence of such a ridiculous product should have been a wake-up call about just how divorced from reality the agencies were. And if they were out to lunch on something as straightforwardly absurd as the CPDO, how out to lunch were they on other products, ones that were far more significant to the markets and the economy, where the absurdity of their assumptions was less-obvious.

The moral of this particular story is: back during the bubble the ratings agencies were idiots. And today, they might even be worse. Read the whole thing for more.

Blago Update

| Tue Dec. 23, 2008 8:22 PM EST

BLAGO UPDATE....In a turn of events that should surprise no one, Barack Obama has investigated himself and discovered that his staff engaged in no wrongdoing in the Rod Blagojevich affair. According to investigation czar Greg Craig, the accounts he received from staff members "contain no indication of inappropriate discussions with the Governor or anyone from his office about a 'deal' or a quid pro quo arrangement in which he would receive a personal benefit in return for any specific appointment to fill the vacancy."

The reason Craig uncovered nothing wrong is almost certainly because nobody did anything wrong. Unfortunately, investigating oneself isn't likely to convince anyone who doesn't want to be convinced in the first place, which makes me think there really ought to be some way for prosecutor Patrick Fitzgerald to weigh in on this. I guess the rules don't allow it, and rules are rules, but still. In the Valerie Plame case, he at least released enough information in the charging documents to allow people to draw their own conclusions about who did what to whom, and perhaps, eventually, he'll do it this time too. It really doesn't seem right to just leave this hanging forever.

The Decline and Fall of the Newspaper

| Tue Dec. 23, 2008 3:51 PM EST

THE DECLINE AND FALL OF THE NEWSPAPER....I was going to write a post about the subject du jour, namely whether or not newspapers could have done a better job of reacting to the rise of the internet, but via Matt, I see that Tim Lee has pretty much done it for me. Nickel version: Yes, it would have been great if railroads had converted into airline companies, if IBM had taken PCs more seriously, and if newspapers had embraced the web, but that kind of thing is really, really hard to do. That's why it so rarely happens. Cannibalizing your own business is almost impossible for both institutional and economic reasons, and knowing that you're in the generic transportation business, not the train business (or the generic computing business or the generic information business) isn't nearly as profound an insight as some people think. Anyone who thinks differently needs to run an actual business first and then report back on how they did converting its core business into something brand new.

In any case, I have my doubts that there was ever a long-term business model that could have successfully transitioned newspapers onto the web. Sure, the print news media could have done more — though simply asserting that newspapers could and should have been way more awesome isn't very helpful — but the advertising revenue just isn't there to support the kind of reporting infrastructure that the print version of newspapering supported. This isn't for lack of trying, either. Everyone and his brother has tried to figure out a more lucrative web-based advertising model for news, and so far no one has succeeded. Bright ideas are still welcome, of course, but most likely even the best newspapers will eventually die off and be replaced by something entirely different. I'm not as convinced as some that the replacement will be as good, but I suppose old fogies have said that before too more than a few times. We'll just have to wait and see what our brave new bloggy/twittery/decentralized news biz manages to deliver.