Kevin Drum - April 2010

Blank Stares

| Thu Apr. 22, 2010 11:22 AM EDT

Sen Chris Dodd (D–Conn.), chairman of the Senate Banking Committee, on the financial meltdown:

The first week in February, we had our first hearing on the crisis of 2007, and it was on the mortgage crisis. We had witnesses who laid out exactly what was going to happen; in fact, they underestimated what would happen, and they were ridiculed for estimating what they did! And all that spring we went back and forth had meetings, we had a big gathering at the Banking Committee room with all the major players on mortgages. We had an awful time getting Hank Paulson to recognize anything. And Ben Bernanke, too. They'd come to meetings and they'd kind of have this blank stare, all during that spring, through that summer, into the fall.

Blank stares? Really? I can almost buy that with Paulson, but Bernanke? He obviously didn't see the housing bubble in time, but whatever else you might think of the guy, he doesn't really strike me as the blank stare type.

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Next Stop: Kandahar

| Wed Apr. 21, 2010 4:33 PM EDT

Michael Cohen is feeling pretty pessimistic about the next stage of the war in Afghanistan:

All the warning signs about operations in Kandahar are blinking red. We have a civilian population that fears NATO intervention and is broadly sympathetic with the Taliban; we have a US military untrained in the ways of counter-insurgency and chafing at restrictive ROEs; we have an Afghan government that is hardly supportive of the mission and with Karzai's drug-dealing brother in charge of Kandahar not terribly interested in good governance and ending corruption; and of course we have a vicious insurgent force more than happy to up the ante by murdering innocent civilians and using mosques as execution chambers.

Read the whole thing for the details that provoked this conclusion. I hope that Cohen and I are both wrong, but I sure have found it difficult to find anything lately that makes me hopeful about the possibility of success in Afghanistan. I won't be at all surprised if the headlines coming out of there ten years from now look pretty much the same as they do today.

Good News on Financial Reform

| Wed Apr. 21, 2010 1:47 PM EDT

Blanche Lincoln's legislation to rein in derivatives trading passed its first hurdle today:

The Senate Agriculture Committee on Wednesday approved legislation to tighten regulation of derivatives trading, with a single Republican, Senator Charles E. Grassley of Iowa, joining Democrats in supporting the measure. The vote was 13 to 8.

The defection of Mr. Grassley, who is the senior Republican on the Finance Committee and is up for re-election, illustrated the increasingly difficult political position for Republicans in opposing the legislation....His vote to support the measure underscored the potential political peril in opposing tighter rules for Wall Street, at a time of public frustration over the return of huge earnings and blockbuster bonuses even as unemployment remains high and the economy struggles to recover in much of the country.

Like I said yesterday, originally I didn't take Lincoln's proposal seriously. It seemed like it was just a stalking horse, a way for her to look tough and get some good hometown headlines even while knowing that it would quickly get watered down. And that might still happen, of course. Her derivatives language still has to survive a merger with the Banking Committee bill, a vote on the Senate floor, and then the conference report. The odds of coming through all that unscathed are pretty remote.

But....you never know. Republicans are obviously feeling some heat on this, and it's not as though anyone outside of Wall Street has any sympathy for the derivatives industry. For now, this remains a possible bright spot on the financial reform horizon.

The McConnell Line

| Wed Apr. 21, 2010 12:49 PM EDT

From a conversation on Twitter yesterday about financial reform:

Brian Beutler: Corker warns that the GOP is screwing up by lying about reg reform: http://bit.ly/d9HXyw

Matt Yglesias: Has "lie like crazy" ever failed as a political strategy?

Bizarrely enough, it looks like the answer might be yes. GOP wordmeister Frank Luntz famously advised Republicans a couple of months ago to attack any financial reform bill as a "bailout" regardless of what was actually in it, and Senate Minority Leader Mitch McConnell took that to heart and has been doing exactly that ever since.

Unfortunately for McConnell, it turns out there really is a limit to just how baldly you can lie and get away with it. The Senate reform bill quite plainly bans bailouts, and McConnell found himself under attack from all corners. President Obama called him out on this, PolitiFact labeled his statements flatly false, fellow Republican Bob Corker told reporters McConnell was wrong, and even Mark Halperin refused to dredge up some unlikely way to defend him. And guess what? It might actually be working:

After a week of attacking the pending legislation as a ticket to new taxpayer "bailouts," McConnell is striking a different tone. Monday on the Senate floor, he called for lawmakers to move beyond "personal attacks and questioning each others' motives" to "fixing the problems in this bill."

And McConnell conceded, after being chastised by no less than President Obama in his weekly radio address, that "both parties agree on this point: no bailouts. In my view, that's a pretty good start."

...."I'm happy to hear my counterpart, my friend, Senator McConnell talk about the need for more negotiations," said Senate Majority Leader Harry Reid (Nev.), in remarks on the floor following McConnell's speech Tuesday. "We don't stand in the way of that."

Granted, McConnell might just be changing tactics. And his change of heart may be motivated more by politics than the pummelling he took over this. After all, the bailout lie wasn't really any worse than the death panel lie. The big difference is that healthcare reform was unanimously opposed by conservatives, so nobody minded the lie. Financial reform is a little different, and relentless hostility could pretty easily backfire. That makes lies a little more costly.

Still, we seem to have reached a limit of some kind, and McConnell crossed it. Maybe we should name this the McConnell Line or something so that we know when future politicians have crossed it.

The Treasury Play

| Wed Apr. 21, 2010 12:05 PM EDT

I've heard one version or another of this story about a million times now. Here is William Cohan's take on why Wall Street is so damn profitable right now:

Mostly [] Wall Street is making money by taking advantage of its rock-bottom cost of capital, provided courtesy of the Federal Reserve — now that the big Wall Street firms are all bank holding companies — and then turning around and lending it at much higher rates.

The easiest and most profitable risk-adjusted trade available for the banks is to borrow billions from the Fed — at a cost of around half a percentage point — and then to lend the money back to the U.S. Treasury at yields of around 3 percent, or higher, a moment later. The imbedded profit — of some 2.5 percentage points — is an outright and ongoing gift from American taxpayers to Wall Street.

I guess I'm demonstrating hopeless naivete by asking this, but huh? The market for U.S. treasury bonds is huge and extremely competitive, and the risk of holding treasurys is approximately zero. So if banks have access to giant pools of cash that cost them 0.5%, they should start bidding down the treasury rate until this particular arbitrage play is only barely positive. Treasury yields would very quickly end up around 0.6%, not 3%.

And yet, like I said, I've heard this same basic story over and over and over. Can someone with some serious financial sophistication explain it to us hicks? Are big banks, big as they are, not big enough players to really affect Treasury prices, so they're just free riding on a price set by the rest of the market? What's really going on here?

UPDATE: So far, the consensus in comments is that this whole story is wrong. Banks can borrow from the Fed at low rates, but those are overnight loans. They can buy treasurys at high yields, but those are ten-year notes. Chart here. As The Lounsbury puts it: "One does not finance a 10yr note off of a 24 hour repo. Of course buying and reselling (trading desk) using the overnight funding is possible, although the spread is not what he implies."

The Playbook Crowd

| Wed Apr. 21, 2010 11:31 AM EDT

Here is Mark Leibovich of the New York Times on how Mike Allen's "Playbook" has become the abridged Bible of modern time-crunched Washington:

“The people in this community, they all want to read the same 10 stories,” [Allen] said, table-chopping in the Hay-Adams. “And to find all of those, you have to read 1,000 stories. And we do that for you.”

As a practical matter, here is how Allen’s 10 stories influence the influentials. Cable bookers, reporters and editors read Playbook obsessively, and it’s easy to pinpoint exactly how an item can spark copycat coverage that can drive a story. Items become segment pieces on “Morning Joe,” the MSNBC program, where there are 10 Politico Playbook segments each week, more than half of them featuring Allen. This incites other cable hits, many featuring Politico reporters, who collectively appear on television about 125 times a week. There are subsequent links to Politico stories on The Drudge Report, The Huffington Post and other Web aggregators that newspaper assigning editors and network news producers check regularly. “Washington narratives and impressions are no longer shaped by the grand pronouncements of big news organizations,” said Allen, a former reporter for three of them — The Washington Post, The New York Times and Time magazine. “The smartest people in politics give us the kindling, and we light the fire.”

For years I've avoided reading Playbook (and The Note and First Read) solely because everyone else does read them. That doesn't mean it doesn't influence me, of course, it just means that I'm unaware of the influence. I remain unsure whether I'm better off that way or not.

But groupthink is hard enough to avoid already. Deliberately immersing yourself in it just seems absurd. I guess if I were more of a political junkie I'd understand.

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Quizlet of the Day

| Tue Apr. 20, 2010 11:43 PM EDT

According to a study of students in the College of Arts and Sciences at the University of Oregon, the major with the highest average SAT math scores is....Math. You probably guessed that. But here's a harder one: which major had the highest SAT reading scores? Answer below the fold.

Elmo and Broccoli

| Tue Apr. 20, 2010 8:15 PM EDT

In a demonstration of the awesome power of Matthew Yglesias, the blogosphere is abuzz today about broccoli. In particular, the buzz is about whether or not it's possible to get kids to eat more of the stuff:

Findings from Sesame Workshop’s initial “Elmo/Broccoli” study indicated that intake of a particular food increased if it carried a sticker of a Sesame Street character. For example, in the control group (no characters on either food) 78 percent of children participating in the study chose a chocolate bar over broccoli, whereas 22 percent chose the broccoli. However, when an Elmo sticker was placed on the broccoli and an unknown character was placed on the chocolate bar, 50 percent chose the chocolate bar and 50 percent chose the broccoli.

My reaction: Give me a break. You're seriously asking me to believe that 22% of preschool kids will spontaneously choose a piece of broccoli over a chocolate bar? And that merely slapping a picture of Elmo on the broccoli will increase that to 50%? Sorry. I'm not buying it.

And I'm right not to. This study is five years old, had a sample size of 104, and probably took all of an hour to conduct. Here's how it worked:

Researchers went into schools and showed children two cards: one with a picture of broccoli, the other with a snapshot of chocolate. At this stage, 78 percent of the kids preferred the chocolate card. When researchers put Elmo in the chocolate card and a generic red puppet in the broccoli card, the preference for chocolate shot up to 89 percent. But when Elmo was placed next to the broccoli and the generic character next to the chocolate, children's preferences split right down the middle.

Cards! In a classroom! Fuhgeddaboudit! Unless it's real food and the kids really get a free choice, color me unconvinced. The researchers themselves apparently agreed, leading to a proposed followup:

The Atkins grant will fund a broader study that uses real foods rather than photos (as in the first study), and will fund research to see the impact of product placement (broccoli, not chocolate) in Sesame Street episodes. Research begins as early as fall, with results as early as fall 2006.

Hmmm. And what happened to this study? Beats me. If it ever got completed, I can't find it. That might be because I don't know how to search for it properly, or it might be because it produced null results and therefore got tossed in the same dustbin as all the other null results that make for boring reading and never find a home. If anybody knows anything about it, let us know in comments.

DISCLOSURE NOTIFICATION: Like our 41st president, I can't stand broccoli. And I adore chocolate. So I'm naturally skeptical. It's true that we'll be having broccoli with our roasted chicken tonight, but only if by "we" you actually mean "Marian." I'll be having a salad or something.

The Cost of Medicaid Expansion

| Tue Apr. 20, 2010 5:34 PM EDT

I got an email a few days ago asking whether the Medicaid expansion included in the healthcare reform bill would blow up state Medicaid budgets. I answered it and then forgot about it. Or I would have, anyway, except that we have an election for governor this year in California and Silicon Valley zillionaire Steve Poizner keeps running ads on my TV accusing Silicon Valley zillionaire Meg Whitman of, somehow, supporting Obamacare, which will blow up the state budget. Poizner's attack doesn't even make sense — it's just another round of these two moderate Republicans denouncing each other for being too liberal — but still: will Obamacare blow up state budgets? Basically, the answer is no:

The federal government will assume 100 percent of the Medicaid costs of covering newly eligible individuals for the first three years (2014-2016). Federal support will phase down slightly over the following several years, so that for 2020 and all subsequent years, the federal government is responsible for 90 percent of the costs of covering these individuals. According to CBO, over the next ten years, the federal government will pay $434 billion of the cost of the Medicaid expansion, while the states will pay roughly $20 billion.

So it won't cost states an extra dime through 2016, by which time our recession will presumably be over, and even after that states will only pay for a tiny fraction of the increased costs. As CBPP points out, states will pay about 4% of the total costs of Medicaid expansion over the next ten years. This represents an increase in overall state Medicaid spending of slightly over 1%.

Put another way, that $20 billion in state spending will insure an additional 16 million people, which works out to a cost per person of $125 per year over the next decade.  That's a pretty good deal. And not exactly fiscal Armageddon.

Quote of the Day: The Financial Doomsday Machine

| Tue Apr. 20, 2010 4:00 PM EDT

From noted pinko Martin Wolf, after observing that the real cost of the recent financial meltdown is far more than official estimates:

Financial systems are important servants of the economy, but poor masters. A large part of the activity of the financial sector seems to be a machine to transfer income and wealth from outsiders to insiders, while increasing the fragility of the economy as a whole. Given the extent of the government-induced distortions in the system, even the fiercest free marketeer should accept this.

Italics mine. So what to do? "There are two broad approaches now under discussion. The official one is to make something roughly like the present system far safer, by raising capital and liquidity requirements, moving derivatives on to exchanges and enforcing prudential regulation. The alternative is structural reform. Which is the least bad option? I plan to address that issue next week." Betcha he votes for structural reform.