Kevin Drum - April 2009

On the Color of Swans

| Tue Apr. 21, 2009 1:24 AM EDT

Rotwang sez:

I'm tired of Nassim Nicholas Taleb. He isn't as brilliant as he thinks he is. He may be a quant jock, but he talks about an idealized laissez-faire capitalism as if he's never read a history book. Dude, this is the way the system works. This IS the system. The bubble bursting was not some unforeseeable event. It's happened many times. Lots of people foresee it. They just don't foresee the timing.

That's kind of my untutored feeling too.  If an asset bubble followed by a banking crisis is a black swan, then black swans must be about as rare as black point guards.  Our current crisis is bigger than most, but it's hardly unprecedented.

UPDATE: In comments, ack says:

This is completely and utterly wrong! Nassim Taleb has two independent arguments:

1) Due to a cognitive limitation, people tend to underestimate the likelihood of improbable bad events ('black swans'). Therefore, you can out-bet the market by continually betting that bad events will happen....Taleb has even described the current crisis as a 'white swan,' and argued that it was totally forseeable.

James Joyner makes the same point at greater length here. Consider me corrected.

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Wealth and Wall Street

| Mon Apr. 20, 2009 7:58 PM EDT

Gabe Sherman has a piece today in New York magazine about how gobsmacked the Wall Street crowd is that people are pissed off at them these days.  There are a million things you could say about it — and since I'm coming late to this, a million things probably have been said about it — but I just want to excerpt this one piece:

Wall Street people are not moral idiots (most of them, anyway) — it’s not as if they’ve never pondered the fairness of their enormous salaries. “One of my relatives is a doctor, we’re both well-educated, hardworking people. And he certainly didn’t make the amount of money I made,” a former Bear Stearns senior managing director tells me. “I would be the first person to tell you his value to society, to humanity, is far greater than anything that went on in the Bear Stearns building.”

That said, he continues, “We’re in a hypercapitalistic society. No one complains when Julia Roberts pulls down $25 million per movie or A-Rod has a $300 million guarantee. We have ex-presidents who cash in on their presidencies. Our whole moral compass has shifted about what’s acceptable or not acceptable. Honestly, you can pick on Wall Street all you want, I don’t think it’s fair. It’s fair to say you ran your companies into the ground, your risk management is flawed — that is perfectly legitimate. You can lay criticism on GM or others. But I don’t think it’s fair to say Wall Street is paid too much.”

It's hard to know what to say about this.  It just leaves you speechless.  And this guy is one of the more self-aware ones.

Later on Sherman quotes another Wall Streeter who's livid over Obama's plan to raise tax rates slightly on the rich.  "He doesn’t want to have any wealth creation," the guy wails, and that really seems to get to the heart of all this.  Financial industry players sincerely seem to view all "wealth" as equal.  If the market pays you a lot, it's because you're responsible for creating a lot of wealth, and that's that.  The fact that the wealth you created was largely divorced from even a notional real-world benefit to the larger economy doesn't matter.  Money is money.

Still, both these guys are right: the big players in the financial industry get paid a lot because they're responsible for creating gigantic streams of money for their firms.  As long as that stays the case, they're going to continue making truckloads of money no matter what we do.  But if we reduce that stream of financial rents to levels more related to the actual value it creates in the real world, pay levels will become more reasonable too.  That's what we should focus on.

Dishing on Chrysler

| Mon Apr. 20, 2009 6:58 PM EDT

This afternoon brings yet another story in which the most interesting question is, Who leaked this?

Top officials at Chrysler Financial turned away a $750 million government loan because executives didn't want to abide by new federal limits on pay, sources familiar with the matter say.

....The Treasury Department previously had loaned Chrysler Financial $1.5 billion....During March, when it seemed that the first loan would run out, the Obama administration began working on a deal to lend the company another $750 million.

Quickly, most of the agreement fell into place. But on April 7, Treasury asked Chrysler Financial to have its top 25 executives sign waivers regarding their compensation, sources said....Within a week, the company responded that some of the executives had refused to give their approval.

Sure, this is sort of interesting on its own merits.  Mainly, though, it seems interesting as a shot across the bow in the war between Washington and the business world over executive pay.  Someone in the White House apparently wants word of this particular round in the fight to become very public indeed.

Chart of the Day - 4.20.2009

| Mon Apr. 20, 2009 1:53 PM EDT

A few days ago, when I read that bank lending had dropped 2.2% in February, I didn't think too much of it.  In fact, it didn't really sound all that bad.  Given that we're in the middle of a serious recession, a decrease of 2.2% seemed like it might be reasonable even if there were no bank crisis at all.

But I wasn't reading closely enough.  First: this is not a year-on-year decline.  It's a one-month decline, which annualizes to about 30%.  Second: that number is a median.  Total lending decreased 4.7%.  Third, it's an average, and some banks cut back a lot more than others.  The Wall Street Journal reports:

According to a Wall Street Journal analysis of Treasury Department data, the biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February, the latest available data, than in October, the month the Treasury kicked off the Troubled Asset Relief Program.

....In February, nearly half of lending by the 21 banks was to consumers, up from about one-quarter in October. But excluding mortgage refinancings, consumer lending dropped by about one-third between October and February. Commercial lending slumped by about 40% over that period, the data indicates.

That's a big drop, even for the middle of a recession.  What's more, as the Journal's chart shows, some of the biggest drops came from Citigroup and JPMorgan, both recipients of big TARP bailouts.  Even with all that TARP money, they're apparently not capitalized well enough to keep lending at a healthy level — which means that far from being able to pay back their TARP dough, they might very well need even more.  Pat Garofalo at the Wonk Room:

If a bank is truly healthy and can pay back TARP money while maintaining lending, more power to it. If, however, a bank is paying back TARP because it wants to get out from under the program’s restrictions — while not lending and clinging to other government funded rescue programs — that’s problematic.

For instance, Wells Fargo (which received TARP money) has posted a profit and maintained lending. If it announces a desire to exit TARP, the administration should seriously consider the offer. However, this is going to make it transparently obvious which banks are in the best shape. The administration will then have to decide whether the others will ever be anything more than zombies — limping along thanks to government support without actually doing any good — and be honest about the need to take them over and wind them down.

Adventureland

| Mon Apr. 20, 2009 1:18 PM EDT

Reihan Salam on Adventureland:

I saw it the first time with an old friend, a new friend, and two pre-friends at a beautiful movie theater that serves milk shakes, burgers, and nachos, which is one version of heavenly bliss. Our shared verdict was positive, though the movie is definitely a little shambolic....I suppose there’s more to say about Adventureland, and about nostalgia for the late Reagan-era, etc., but this post is prompted by the fact that the movie opens with one of my favorite songs of all time, “Bastards of Young” by The Replacements [etc.] .....

I'm constantly struck by how strongly reaction to movies depends on whether you, personally, can identify with the characters.  I guess I shouldn't be, but I am.  I saw Adventureland last week, for example, and for only the second or third time in a decade I almost walked out halfway through because I was so thoroughly bored.  Did anybody do anything in that movie that was even remotely engaging or compelling or unexpected or anything?  It sure didn't seem like it to me.  I didn't hate it with a passion or anything, it just seemed like a total snoozefest filled with uninteresting, cardboard characters.

But de gustibus and all that.  I kinda liked the generally ridiculous Seven Pounds a little bit, for example.  I do have one question, though: why did the movie take place in 1987?  With a couple of very tiny and unnecessary exceptions, there was really nothing in Adventureland aside from the fashions that placed it in that era.  It could have taken place in 2009 just as easily.  So why was it made into a period piece?

Paging Karl Marx

| Mon Apr. 20, 2009 12:36 PM EDT

On my initial scan through the news the morning I read that the Treasury is planning to convert some of its preferred shares (purchased under the original TARP bailout for distressed banks) into common stock.  It's supposed to be a way for the feds to stretch their bailout dollars because, according the New York Times, "The change to common stock would not require the government to contribute any additional cash, but it could increase the capital of big banks by more than $100 billion."

That didn't seem to make any sense, but hey, what do I know about high finance?  And then I got annoyed by California's latest ballot initiative, and then intrigued by the Jane Harman wiretap, and forgot all about it.

But I guess I'm not crazy after all.  (Not totally crazy, anyway.)  James Kwak, who knows a thing or two about this, says the whole thing sounds ridiculous.  Here's Kwak highly condensed:

If you don’t give a bank any more money, it doesn’t have any more money. By converting preferred into common, you haven’t changed the chances of the bank going bankrupt....If you accept the idea that converting preferred into common creates new capital, then you are implying that those preferred shares weren’t capital in the first place....Tangible common equity and Tier 1 capital are just two ways of measuring the health of a bank. Taking money that wasn’t TCE and calling it TCE doesn’t serve any economic purpose.

Right.  Back when the original TARP bailout money was handed out, the preferred shares were very deliberately and very conspicuously called Tier 1 capital.  That's the bestest capital there is, and converting it into common stock doesn't make it into super-duper Tier 1.  It does get the banks off the hook for paying dividends on the stock, but since most of these banks are (or claim to be) extremely cash flow positive, that shouldn't be their biggest worry at the moment.

So....I dunno.  This is weird.  Might there be text hidden in the conversion contracts that releases banks from those horrible restraints on executive pay that they hate so much?  Or is there more to this than meets the eye?  Stay tuned.

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Quote of the Day #2 - 4.20.09

| Mon Apr. 20, 2009 12:12 PM EDT

I spoke too soon.  Sorry Atrios!  The real quote of the day comes from Jane Harman (D–Calif.), caught on tape during an NSA wiretap:

“This conversation doesn’t exist.”

You just know that any conversation that ends this way can't be good.  Here's the backstory from CQ:

Rep. Jane Harman , the California Democrat with a longtime involvement in intelligence issues, was overheard on an NSA wiretap telling a suspected Israeli agent that she would lobby the Justice Department to reduce espionage-related charges against two officials of the American Israeli Public Affairs Committee, the most powerful pro-Israel organization in Washington.

Harman was recorded saying she would “waddle into” the AIPAC case “if you think it’ll make a difference,” according to two former senior national security officials familiar with the NSA transcript.

In exchange for Harman’s help, the sources said, the suspected Israeli agent pledged to help lobby Nancy Pelosi , D-Calif., then-House minority leader, to appoint Harman chair of the Intelligence Committee after the 2006 elections, which the Democrats were heavily favored to win.

Harman vigorously denies that anything of the sort happened.  Conversely, CQ reports that not only does the conversation exist, but that then-Attorney General Alberto Gonzales stopped the probe of Harman because he wanted her support for the NSA wiretapping program, which was under fire at the time.

Juicy!  So I wonder who leaked this?

Ths Scourge of the Ballot Initiative

| Mon Apr. 20, 2009 11:57 AM EDT

Life in the Golden State:

California voters routinely use the ballot box to approve big spending on big things — canals and superhighways, light-rail systems, levees and social programs.

Now, with the state struggling financially, they're being asked to do some ballot box demolition.

State lawmakers fighting to escape a riptide of budgetary red ink have two propositions on the May 19 special election ballot that would yank more than $2 billion from a pair of popular programs that help some of the state's most vulnerable: young children and the mentally ill.

This is one of the reasons I loathe the initiative process these days.  Take Proposition 1E.  It asks me if I'd like to temporarily transfer some funds earmarked for mental health services to the general fund.  The amount at stake is a little over $200 million per year.

This is ridiculous.  I have no idea if this is a good idea or not, and for a trivial sum like this I'm not about to spend hours poring over ballot arguments.  It's like having a municipal initiative here in Irvine to decide if we want to plant a new tree in front of city hall.  But year after year, we keep passing these absurd initiatives because, after all, they're all for a good cause.  Education!  Mental health!  Children's hospitals!  Bullet trains!

Bah.  This is why we elect a legislature.  Unfortunately, thanks to some even earlier initiative nonsense, the California legislature is unable to actually pass a budget during a recession.  Our current pile of six initiatives (1A through 1F, for some reason or another) is on the ballot solely because one (!) member of the state senate extorted them as the price for his vote on a compromise bill to raise some taxes and cut some spending a couple of months ago.  So now we have a special election, at a cost of God knows what, so that the good people of California can decide, among other things, whether to move 0.2% of the state budget from one account to another.

Idiocy.

Quote of the Day - 4.20.09

| Mon Apr. 20, 2009 11:22 AM EDT

From Atrios, after attending a technology conference:

I do think there's a tremendous not very understood generation gap forming between those who grew up online and those who didn't, along with the class-based digital divide within generations.

I agree!  And lately I've been wondering if this is quite as benign as I used to think.  Mysteriously, however, I'l have to leave it at that.  More later, maybe.

Good News, Bad News

| Mon Apr. 20, 2009 7:20 AM EDT

The bad news: no blogging from me on Sunday.  Sorry about that.  The good news: in its place, several thousand steaming words on marijuana legalization were produced for the summer issue of the magazine.  You can't wait to read them, can you?

By coincidence, one of the things I puzzled over a bit while I was researching my piece was the total size of the cannabis business in the United States.  Basically, the numbers I saw didn't seem to make much sense, but since I wasn't planning to use them anyway I didn't bother trying to track down the problem.  Perhaps in honor of 4/20, though, Michael Hiltzik did it for me:

Let's start, as [Jon] Gettman did, with a standard quantification of U.S. domestic cultivation today: 10,000 metric tons, or 22 million pounds. This figure has a curious history. It first appeared in a 2003 report by the Bush White House. Yet, as Gettman observed, that was nearly triple the estimate of 3,500 metric tons the feds had been using for years.

....The government backpedaled in 2007, when the Justice Department estimated the domestic crop at 5,650 to 9,417 metric tons. That's a huge margin — like saying the distance from L.A. to New York is between 1,000 and 6,000 miles.

....Gettman acknowledges that concrete information is exceedingly scarce in this field. "When you drill down, the only hard fact is they seize a lot of plants," he said.

The "soft facts" include the size in dollars of the U.S. marijuana market. Gettman's 2007 estimate of $113 billion is in the stratosphere compared with some others. In a 2001 report, the federal government pegged the black market at $10.5 billion, a discrepancy that suggests either that we became a nation of total potheads over the following few years, that pot prices experienced an inflation rate that would make the rise in college tuition look sick, or that somebody's numbers are way off.

In other words, no one really knows.  Which doesn't surprise me.  One of the things I've found out over the past few weeks is that virtually all of the research related to cannabis is, perhaps fittingly, sort of hazy.  The research is hard to do, it often points in contradictory directions, and natural experiments are hard to come by.  We know a fair amount, but our confidence level in what we know isn't all that great.

But enjoy 4/20 anyway.  Just don't blog while high, OK?