Kevin Drum - January 2009

Inauguration 2

| Tue Jan. 20, 2009 12:42 PM EST

INAUGURATION 2....From Josh Marshall:

As some of you have seen, Vice President Cheney is getting pushed around today in a wheelchair. Thankfully, it's no serious medical issue. He hurt his back lugging books while moving out of the old digs. But it's iconic. There's no escaping the symbolism of the tired and enfeebled old guard hobbling off the stage. On so many fronts the stage setting, the unpredictable coincidences, perhaps just the fates seem to be conspiring to give us a dose of hyper-reality, not just the truth of the moment but a scaffolding of trappings and symbolic exclamation points to make sure we're paying attention.

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Feeling It

| Tue Jan. 20, 2009 12:13 PM EST

FEELING IT....Even though Barack Obama is a liberal, Jonah Goldberg says today that conservatives ought to celebrate the election of our first African-American president. "Any political movement that is joyless about what this represents risks succumbing to bitter political crankery," he warns. Then he gets down to cases:

For instance, you will not soon see a German chancellor of Turkish descent. Nor will a child of North African immigrants soon take the reins of power in France. It will be a long time before a Pakistani or Indian last name appears on the mailbox at 10 Downing St. And yet these countries bubble over with haughty finger-waggers eager to lecture backward and provincial America about race and tolerance. Why not enjoy rubbing Barack Obama in their faces?

Can you feel the joy?

Fiat and Chrysler

| Mon Jan. 19, 2009 10:57 PM EST

FIAT AND CHRYSLER....Today's news reports say that Fiat is planning to establish a "partnership" with Chrysler:

Under terms of a pact that is being hammered out, Fiat is likely to take a 35% stake in Chrysler by the middle of this year. It would have the option of increasing that to as much as 55%, these people said.

Fiat wouldn't immediately put cash into Chrysler, but would obtain its stake mainly in exchange for covering the cost of retooling a Chrysler plant to produce one or more Fiat models to be sold in the U.S., these people said. Fiat would also provide engine and transmission technology to help Chrysler introduce new, fuel-efficient small cars, they said.

My first thought when I read this was, how did Chrysler manage to find someone dumb enough to want a stake in their company? But then I read a little more closely. Fiat isn't actually buying anything. Chrysler is apparently going to fork over a 35% stake to them in return for Fiat taking over one of its factories. It's true that that 35% stake is probably worth nothing, but unless I'm reading this wrong, Fiat is basically getting the use of a Chrysler plant for free. I guess that's not a bad deal for them.

And for Chrysler? Beats me. It's hard to believe they're really all that desperate for Fiat's engine and transmission technology, but maybe it's worth it to them just to save themselves the cost of shuttering a plant. Or something. But in any case, nobody would be dumb enough to actually invest in Chrysler, would they?

Waiting for Obama

| Mon Jan. 19, 2009 4:00 PM EST

WAITING FOR OBAMA....I'm waiting. You're waiting. The country is waiting. The world is waiting.

International Trade Update

| Mon Jan. 19, 2009 2:25 PM EST

INTERNATIONAL TRADE UPDATE....The LA Times reports on the employment level of nonunion dockworkers ("casuals") at the ports of Los Angeles and Long Beach:

In December 2006, the last month in what became the peak year for business at the harbor, hundreds of casuals were needed every workday for jobs that the International Longshore and Warehouse Union couldn't fill. On one such day, casuals filled more than 2,000 positions over three shifts, lashing and unlashing cargo containers, driving yard equipment or assisting in clerks' offices.

In December 2008, casuals were needed just four days, and only 95 found work on the best of those days.

This is a bellwether for the collapse in international trade. Via Megan McArdle, the Telegraph reports that business is so bad that at some ports shipping charges have dropped to zero:

Shipping journal Lloyd's List said brokers in Singapore are now waiving fees for containers travelling from South China, charging only for the minimal "bunker" costs. Container fees from North Asia have dropped $200, taking them below operating cost.

....Korea's exports fell 30pc in January compared to a year earlier. Exports have slumped 42pc in Taiwan and 27pc in Japan, according to the most recent monthly data. Even China has now started to see an outright contraction in shipments, led by steel, electronics and textiles.

A report by ING yesterday said shipping activity at US ports has suddenly dived. Outbound traffic from Long Beach and Los Angeles, America's two top ports, has fallen by 18pc year-on-year, a far more serious decline than anything seen in recent recessions.

If you have anything large you need to have shipped from Singapore to here, I guess now would a good time to do it.

Tick Tick Tick

| Mon Jan. 19, 2009 1:52 PM EST

TICK TICK TICK....Less than 24 hours to go! Are you excited yet?

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Kevin Drum Smackdown Watch

| Mon Jan. 19, 2009 1:28 PM EST

KEVIN DRUM SMACKDOWN WATCH....In case you missed my (fascinating!) posts over the weekend about the Swedish banking crisis of the early 90s — I said nationalization was a modest part of their eventual solution, Steve Waldman disagreed — John Hempton chimes in with this: "Having long followed the Scandinavian banks (and once having spoked for 2% ownership of Nordea — the former State Bank) I can confirm that Steve Waldman is closer to the truth."

Fair enough. But although I'm not wedded to my narrative, I think that if you're interested in this subject you'll probably get a better idea of what happened by reading both of our accounts, so here they are in order: me, Steve, me again. Nickel version: the Swedish solution involved some nationalization, a systemic bank guarantee, aggressive writedowns of bad assets, and an end to the early 90s recession. All of these things played a role. (Though, as Hempton points out, this was a Nordic banking crisis, not just a Swedish one, and Norway and Finland followed different paths than Sweden did. In particular, nationalization played a larger role in Norway than in Sweden.)

On a related noted, nationalization fan Felix Salmon wants to know why I'm so cautious about the notion of nationalizing Citigroup and Bank of America — and possibly other banks as time goes by. There's a fairly long post I could write about that, but I'll spare everyone that agony for the moment. (Short version: I prefer private ownership of just about everything unless there's a really compelling reason for state ownership. So I don't want to get stampeded into nationalizing banks. I want to hear a really compelling case for why we have to do it1.) Instead, I'll just respond to something Atrios said today: "All along there's been a general unwillingness to acknowledge that the banks lost a lot of money. It isn't a problem of liquidity, or a problem of temporarily mispriced assets. The problem is that they lost a lot of fucking money."

Right. I don't think there's a person on the planet who doesn't realize this. The question is, how much fucking money have they lost? Federal regulators presumably have access to bank balance sheets, but they haven't shared their findings with me, which means I don't know how much trouble Citi and BofA are in. If they're in big trouble, but not so big that they might not be able to work themselves out of it on their own, then I'd prefer a solution that allows that to happen. If their trouble is so deep that they're just kidding themselves about their future prospects, then we nationalize. John Hempton, who argues that nationalization carries some significant costs, suggests something he calls "nationalisation after due process." Picking up on Paul Krugman's column today about a hypothetical Gothamgroup bank that's in deep trouble, he proposes something like this:

It goes to the government. Under the Bush administration the government would make a set of rules up for Gotham over a disorganised weekend. The fait-acompli would be presented before Asian markets opened.

But it does not have to be that way. The government could inject some capital into the bank as a temporary subordinated loan. A third party could then be appointed (new management — or answerable to another arm of government) to produce fair accounts for Gotham. Ten weeks should do it. At the end of ten weeks Gotham will be found to have — as a middle estimate — say $150 billion in losses — it is thus negative capital by $50 billion or a full $150 billion short of its required regulatory capital.

The management of Gotham can go to the markets. If the management can raise $100 billion (something to get it back to half capitalisation) then the shareholders keep Gotham. Sure existing shareholders might get diluted — but at least they get to have a decent go at keeping their capital stake.

If they can't or won't fund the bank in full knowledge of its position then it is nationalised. It is in that case unambiguosly not theft — shareholders had the chance to keep the bank under fairly administered rules.

What I want is extreme government action (nationalisation) but with a process to ensure that existing property rights are honoured. I want the benefits of nationalisation (that it works) without the costs (that it is seen to be arbitrary to capital providers).

This is, roughly speaking, a proposal that I like. Enforce transparency, demand an aggressive writedown of bad assets, and then allow shareholders the option of holding on. If they don't — if the bank is in such deep trouble that no one thinks it can work its way back to solvency even with government assistance — then the shareholders are wiped out and the government takes over. And no one can complain that the process was in any way unfair or unnecessary. A real-life plan might not take precisely this shape, but to answer Felix, this is roughly the kind of thing it would take to convince me that nationalization is the right approach.

1That is, I want to hear a compelling case for specific instances of nationalization (Citi and BofA in this case). The general case for nationalization is fairly well known. Among other things, you nationalize if a bank is too big to fail but in too much trouble to ever work its way back to solvency. You nationalize because it allows rapid reorganization and writedown of debts, just as in a normal bankruptcy. You nationalize because it's fair: it wipes out shareholders and provides taxpayers with an upside for their investment. You nationalize because it makes the selloff of toxic assets easier since they can be hived off and held onto for a while without having to value them first. The fundamental principle is that in a capitalist system, ownership and control of failed enterprises should reside in the hands of whoever buys up the corpse. If that's the government, then that means nationalization.

Looking Forward

| Mon Jan. 19, 2009 12:25 PM EST

LOOKING FORWARD....In a way, I'm not surprised that Barack Obama's popularity has remained strong. He's a charismatic guy in the first place, he's handled the transition with very little rancor and an apparently sincere dedication to working across the aisle, and people are naturally hopeful about a new guy coming to office when times are bad.

Still, it's pretty eye-opening that optimism is running as far ahead of past precedent as this New York Times poll shows. Tellingly, though, people are considerably more optimistic about Obama's ability to fix the economy and withdraw from Iraq than they are about his ability to fix the healthcare system. Only a bare majority thinks he'll make any serious progress at all on healthcare in his first term. I hope the American public turns out to be less than prescient in that regard.

Obama's Agenda

| Sun Jan. 18, 2009 6:57 PM EST

OBAMA'S AGENDA....Hilzoy, noting that Barack Obama plans to meet with his military advisors on Wednesday to discuss Iraq, says this is hardly unexpected:

On This Week, George Stephanopoulos asked David Axelrod whether, in this meeting, Obama would ask those officers to come up with a plan to withdraw US combat forces in Iraq within sixteen months. Axelrod said, simply: "Yes."

This should not be surprising in view of the fact that Obama has consistently promised to do exactly this.

I'm not surprised either. In fact, so far Obama has given every sign — both for good and ill — of taking campaign trail promises unusually seriously. I know it's premature to say that with any authority, but on taxes and stimulus and DADT and Iraq and a slew of other issues, I've been impressed with how seldom he's given any indication of either backing down from promises or adding in lots of stuff he once said he was against.

Obviously Congress will force plenty of changes on him in the future, and so will events on the ground. But so far, despite the endless rounds of ungrounded rumors and speculation from the punditocracy, the betting man's line on Obama ought to be pretty simple: just take a look at what he said he was going to do during the campaign. More than likely, that's what he's going to do when the rubber meets the road in the Oval Office.

Nationalization Revisited

| Sun Jan. 18, 2009 6:28 PM EST

NATIONALIZATION REVISITED....Steve Waldman takes issue today with my contention that Sweden didn't actually nationalize very much of its banking industry during its credit crisis of the early 90s, and his rebuttal is worth a read. In the end, though, it turns out that we don't actually disagree about that much. We both agree that Gota was nationalized, and we both agree that Nordbanken was bailed out. However, we disagree a bit about whether Nordbanken was a "state bank." This is something of a judgment call: since the Swedish government was the majority owner, I think that's a fair description, but Waldman points out that it was publicly traded and "not actively controlled by the state prior to the nationalization." Fair enough. It's also a judgment call whether this was really a nationalization. If the state goes from majority ownership to full ownership, is that nationalization?

To some extent this is splitting hairs, of course, and you get into some of the same issues in the U.S. Fannie Mae and Freddie Mac, for example, have plainly been nationalized, but how about AIG? For some reason no one wants to call it nationalization, but what else should you call it when the feds own 80% of the company? But semantic arguments to one side, there's also this:

Nordbanken alone had an asset base of 23% of GDP. To put that in perspective, in US terms that's almost as large as Citi and Bank of America. (Citi and Bank of America together had an asset base of 26% of US GDP at the end of 2007.)

Again, fair point. It's one thing to say that "only" two banks were taken over, but if those two banks account for a third of your banking system, then you've nationalized quite a bit even if a big chunk of that third was state-owned in the first place.

Anyway, read the whole thing. Just to be clear, I'm not trying to make any kind of bulletproof argument against nationalization, only trying to point out that the story is more complicated than it's sometimes made out to be. Sweden did some nationalization, but it was the systemic banking guarantee in late 1992 that formed their biggest policy response to the crisis.

FWIW, I think it's wise to be wary of nationalization. It should be a last resort, and I've gotten a sense recently that a lot of people are talking about it awfully casually. Still, it's true that there are some benefits to nationalization, and one of them is that it allows us to avoid the problem of valuing and buying up toxic assets from troubled banks. If the government owns the whole bank, then the bad stuff can be easily hived off without any kind of valuation at all, and then left to sit for a while before it's sold off — which is what the Swedes did.

If we have to nationalize, then we have to nationalize. But we should understand the precedents before we do, and go ahead only if we have to. No stampedes, please.