Kevin Drum - September 2010

Endgame for AIG

| Thu Sep. 30, 2010 5:24 PM EDT

The New York Times reports today:

A.I.G. Reaches Deal to Repay Treasury and Fed for Bailout

This is good news. But take it with a grain of salt. Here's the part about repaying the Fed:

The insurance giant [] owes the Fed about $46 billion in two forms: about $20 billion in borrowings under the original revolving credit facility, and a $26 billion preferred stake that the company must redeem....The company said it would use its own resources to pay back the $20 billion in loans....In addition, the Treasury has agreed to help the Fed sever its ties with A.I.G., by providing the means for the company to redeem most of the Fed’s $26 billion in preferred interests. That money will come from the unused portion of an emergency assistance package that the Treasury made available to A.I.G. as its troubles reached a peak in early 2009.

OK. So AIG is going to pay back $20 billion by selling off some assets, but the other $26 billion comes from tapping into unused parts of the existing Treasury rescue package. So now AIG will owe the Treasury even more. How is that going to be paid off?

The Treasury will come out of the transaction with a larger preferred stake in A.I.G....Once the Fed has been fully repaid, the agreement calls for A.I.G. to exchange all of the Treasury’s preferred shares for 1.65 billion shares of common stock....When the exchange from preferred to common has been done, the Treasury will be able to sell its common shares on the public markets, something it is expected to do gradually over time.

This might work! Then again, when the government starts selling off billions of shares of AIG stock, whether slowly or not, it might not. Only time will tell. Basically, though, the Treasury now owns 92% of AIG, and taxpayers will get paid back only if and when it sells that stake. Once this deal is complete I think Treasury will be on the hook for about $50 billion or so in outstanding loans to AIG, so if AIG's share price holds up at around 40 bucks while Treasury's shares are dribbled out to the market, we the taxpayers will end up in decent shape on the whole deal.

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Vegetable Research Grant Needed

| Thu Sep. 30, 2010 2:34 PM EDT

Adam Ozimek rants about vegetables:

[Alice] Waters and her organization are touting a new study showing that school gardens get kids to eat more vegetables. This isn’t surprising, but how much does it impact their lives once they graduate? Are future blue collar workers really going to take the time to grow themselves vegetable gardens in window boxes outside their apartments?....From every description of these programs I’ve read they have an obsession with local, fresh, organic, and growing your own food. The obsession should be on quick, easy, delicious, and inexpensive. These sets of descriptors are damn near antonyms.

If you can get kids to eat and prefer frozen vegetables then you’ve got a sustainable improvement in diet and nutrition. If you get them to like fresh organic vegetables they’ve grown in the garden or bought at the farmers market, then you’ve temporarily instilled in them the tastes of upper middle class people with enough time and money on their hands for such luxuries.

If people like Alice Waters and Jaime Oliver want wider support for heathy schools movements they need to purge them of the wasteful upper-class liberal obsession over local, fresh, and organic foods, and instead focus them on practical and sustainable lessons like how to prepare frozen vegetables cheaply, quickly, and deliciously.

I feel ideally situated to report objectively on this since the only vegetables I like are tomatoes, and they aren't even really vegetables at all — though the Supreme Court has decreed otherwise. In any case, I figure they're close enough, and better than eating nothing vegetable-ish at all.

But back to all those upper-class liberal vegetable gardens in local schools. Haven't they been around long enough for someone to do a serious study of this?1 You know the drill: interview ten thousand 30-year-olds, control for a whole bunch of variables, and then do a regression that plots years of tending vegetable gardens in school vs. current consumption of vegetables. Let's settle this thing once and for all.

1In fact, longer than you think. My mother says her first grade class had a little garden, and that was back in 1938.

The Counterintuitive World

| Thu Sep. 30, 2010 2:06 PM EDT

Back during World War II, the RAF lost a lot of planes to German anti-aircraft fire. So they decided to armor them up. But where to put the armor? The obvious answer was to look at planes that returned from missions, count up all the bullet holes in various places, and then put extra armor in the areas that attracted the most fire.

Obvious but wrong. As Hungarian-born mathematician Abraham Wald explained at the time, if a plane makes it back safely even though it has, say, a bunch of bullet holes in its wings, it means that bullet holes in the wings aren't very dangerous. What you really want to do is armor up the areas that, on average, don't have any bullet holes. Why? Because planes with bullet holes in those places never made it back. That's why you don't see any bullet holes there on the ones that do return. Clever!

On a related note — related because it involves both an air force and some counterintuitive statistical reasoning — Henry Farrell writes about a passage from Justin Fox's Myth of the Rational Market involving the great behavioral economist Daniel Kahneman. Here is Kahneman reacting to an Israeli Air Force flight instructor who told him that whenever he chewed out a student he got better performance the next time out, but whenever he praised a student he got worse performance:

As a man trained in statistics, Kahneman saw that of course a student who had just brilliantly executed a maneuver (and was thus praised for it) was less likely to perform better the next time around than a student who had just screwed up. Abnormally good or bad performance is just that — abnormal, which means it is unlikely to be immediately repeated. But Kahneman could also see how the instructor had come to his conclusion that punishment worked. “Because we tend to reward others when they do well and punish them when they do badly, and because there is regression to the mean,” he later lamented, “it is part of the human condition that we are statistically punished for rewarding others and rewarded for punishing them.”

Likewise, we tend to go to the doctor only when an illness has become really bad. Sometimes, though, that just means the illness is at its lowest point and has nowhere to go but up. And sure enough, after we see the doctor we get better. But it's not always because of something the doctor did. Sometimes it's just a natural consequence of when humans choose to see them.

Finally, on yet another related note — related this time solely because it involves counterintuitive statistical reasoning, not because it involves an air force — check out Nate Silver's brief seminar on how weak most of us are at calculating how much variance there is in the things we do every day. There's a lot of natural variance in everyday life, and there's not always a reason for it. But we like to make up reasons anyway. Statistics is a profoundly unnatural enterprise for most of us.

The Foreclosure Scandal

| Thu Sep. 30, 2010 12:09 PM EDT

I haven't posted yet about the news that thousands of delinquent homeowners are being booted out of their houses in special "expedited" courtrooms using flimsy and often fraudulent documentation produced by foreclosure mills that handle thousands of cases with factory-like efficiency. Part of the reason is that lousy documentation aside, it wasn't clear to me how many people were actually being unfairly evicted. Mike Konczal sets me straight:

I was raised by a family in law enforcement, and as such, I tend to think people who are arrested are usually guilty. And I think that the people who are ending up inside the Florida bankruptcy courts are usually going to be people that shouldn’t be in their homes.

It’s because of the fact that I and others usually believe this to be true that I think due process and the trust in the process of our courts is so incredibly important. It’s necessary to force the parties at hand to marshall evidence that they swear is true, and to present it to an impartial judge to render judgment after full consideration. This is America, where everyone gets a chance before the court. If this breaks, the weak and the innocent are the ones who suffer.

This is right. It's precisely when we're absolutely sure that someone is guilty that we need to be most careful about making sure we actually prove it. Beyond that, as Mike points out in the rest of his post, virtually all of these foreclosure problems could probably be resolved quickly and fairly amicably if banks were simply willing to share the loss with the homeowner. But they're not, and neither Congress nor the president has been willing to change the law to encourage this. It's all about protecting the banks, not anyone else.

Read the whole thing, and then click the links to read a bit more. I think Obama probably gets more flack for his economic policies than he deserves — for the most part they've been about as good as they could have been under the circumstances — but when it comes to home foreclosures the administration and Congress have been cynical and derelict in the extreme. It's a disgrace, whether Rick Santelli likes it or not.

Outraged!

| Thu Sep. 30, 2010 11:41 AM EDT

The New York Daily News reports that city residents are "outraged" because silly federal bureaucrats have ordered all their street signs to be changed from all-uppercase to upper-and-lowercase. Go down nine paragraphs, however, and you get this:

The mixed upper- and lowercase rule was adopted in 2003, but municipalities were given until 2018 to comply completely, Hecox said....The additional cost to the city, if any, will be "marginal" because it receives a steady stream of state funding for routine sign repairs and replacement, DOT spokesman Seth Solomonow said. The life of a typical sign is about a decade, so most of the city's signs would be replaced in the next few years anyway, Solomonow said.

So this rule was adopted in 2003, cities have until 2018 to comply, it improves safety, and it won't actually cost much of anything at all. Count me as disappointingly non-outraged.

The Latest Healthcare Non-Story

| Thu Sep. 30, 2010 11:29 AM EDT

Last night, in the latest evidence that the Murdoch-ization of the Wall Street Journal proceeds apace, the WSJ reported that McDonald's was threatening to cancel its employee health insurance, calling it "the latest indication of possible unintended consequences from the health overhaul."

Yawn. Put this one in the same bucket as the student health insurance scare a few weeks ago. As Aaron Carroll points out, there's nothing either new or unintended about this. As Igor Volsky points out, both McDonald's and the Obama administration said this morning that the story was overblown. "Wrong," said HHS. "Completely false," said McDonald's. And as Jon Cohn points out, this whole manufactured story is about crappy health plans that provide almost no benefit in the first place:

The policies in question are so-called mini-med plans with very limited benefits. In the case of McDonald's, according to the Journal, there are two options: Employees who go with the minimum plan pay $14 a week for a policy that won't cover more than $2,000 in medical bills a year. Employees who opt for the "generous" option pay about $32 a week for a policy that maxes out at $10,000.

To call that "insurance" is to distort the definition, since these policies would do very little to help people with even moderately serious medical conditions. (You can blow through $10,000 in medical care with one emergency room visit.)....In the long run, McDonald's employees need policies that protect them in case of serious medical problems. And they need policies they can afford. They'll get those policies thanks to the Affordable Care Act — but not until 2014, because the administration and Congress couldn't come up with enough money to implement the full scheme sooner.

To summarize: ACA requires health insurers to spend 80-85% of premium dollars on actual patient care. The mini-med folks claim they can't possibly meet this target. (They're probably blowing smoke, but leave that aside.) HHS knows all about this and is working on phase-in rules to accomodate problems. McDonald's says they have no plans to drop coverage. And the entire thing is a short-term transition issue, since crappy mini-med policies will hopefully be replaced by actual useful coverage when ACA fully kicks in in 2014.

But other than that, it was a great story.

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How the Game is Played

| Thu Sep. 30, 2010 1:55 AM EDT

The Senate confirmed a bunch of Obama appointees before it recessed today, including a couple of Federal Reserve governors (though not Peter Diamond, who's presumably still held up in Richard Shelby hell) and such dignitaries as Nancy Lindborg as Assistant Administrator of the United States Agency for International Development for Democracy, Conflict and Humanitarian Assistance Bureau. Yes, really. Senate confirmation is required for the post of Assistant Administrator of the United States Agency for International Development for Democracy, Conflict and Humanitarian Assistance Bureau. We are all insane.

There are still loads of nominees still pending, of course, but hey — Obama can always give a few of them recess appointments. Right? In a word, no:

Senate Democrats agreed Wednesday night to a Republican demand to block President Obama from making recess appointments while Congress is out of town campaigning for the midterm elections. Democratic leaders have agreed to schedule pro-forma sessions of the Senate every week over the next six weeks, a move that will prevent Obama from making emergency appointments, according to Senate sources briefed on the talks.

....Republican Leader Mitch McConnell (R-Ky.) had threatened to send Obama’s most controversial nominees back to the president if Democrats did not agree to schedule pro-forma sessions, according to a senior GOP aide....Under Senate rules, the chamber may only carry over pending nominees during an extended recess if senators agree by unanimous consent. Senators rarely invoke this rule, but McConnell threatened to object unless Democrats agreed to prevent Obama from making recess appointments.

Now, that's some hardball from the Republicans. Was there anything Harry Reid could have done to stop it? I think so. Obama can make recess appointments if the Senate is out of session for as little as a week, while the carry-over rule applies only to recesses of 30 days or more. So if Reid had scheduled pro-forma sessions every two weeks, current nominees would have been carried over automatically but Obama still would have retained the option of making some recess appointments.

Now, maybe Obama didn't ask for that. Who knows? Or maybe I'm reading the Senate rules wrong. But if I have it right, Reid didn't have to give in to this extortion.

Gold Bugs

| Wed Sep. 29, 2010 5:52 PM EDT

CJR's Ryan Chittum picks up on one of my pet peeves:

The Wall Street Journal goes page one with a misleading story about gold, splashing this headline across four columns atop the page:

       Gold Vaults to New High

Gold hit $1,306 an ounce yesterday, which is a nominal record. Emphasis on nominal. That doesn’t mean anything, really. The real record was set thirty years ago at $2,318 in 2010 dollars. The Journal, incredibly, doesn’t mention this once in its story. This isn’t just an institutional knowledge failure, it’s one of numeracy.

With rare exceptions, inflation-adjusted prices should always be considered the baseline when you're reporting on trends. I know that it can make for clumsy writing, but that's life. It's the right thing to do, and nominal prices should be the ones in parentheses if you need to include them. Adjusted for inflation, gold peaked 30 years ago at a daily fix of about $2,300 and a monthly average of about $1,800. We're still quite a ways from that record.

However, this is an excuse for me to ask about something else: what is the deal with gold, anyway? I understand that historically it responds to panics, which explains why gold prices have been rising for the past couple of years. But why did it double between 2001 and 2008? Those were nice, low-inflation times, not the kind of environment that's usually friendly to gold bugs. What's the story here?

UPDATE: Via comments, a reminder that not everything is about us. China deregulated gold ownership in 2001, and since then demand in both China and India has boomed. So perhaps that's (part of) the answer.

Who is Obama Allowed to Assassinate?

| Wed Sep. 29, 2010 5:10 PM EDT

National Review editor Kevin Williamson once again tries to persuade his fellow conservatives that the American government should not have the right to assassinate American citizens:

I am not a lawyer, but it seems clear to me that the state of our law is such that anybody with sufficient legal training can make a reasonably strong-sounding argument for any policy he chooses, and that if his argument is wrong, it is likely to be wrong in ways that are non-obvious....So, set aside the legal questions for a second. The Awlaki case speaks to something even more fundamental than law: Decent nations do not permit their governments to assassinate their own citizens. I am willing to give the intelligence community, the covert-operations guys, and the military proper a pretty free hand when it comes to dealing with dispersed terrorist organizations such as al-Qaeda and its affiliates. But citizenship, even when applied to a Grade-A certified rat like Awlaki, presents an important demarcation, a bright-line distinction in our politics.

....If Awlaki were to be killed on a battlefield, I’d shed no tears. But ordering the premeditated, extrajudicial killing of an American citizen in Yemen or Pakistan is no different from ordering the premeditated, extrajudicial killing of an American citizen in New York or Washington or Topeka — American citizens are American citizens, wherever they go. I’m an old-fashioned limited-government guy, and I am not willing to grant Washington the power to assassinate U.S. citizens, even rotten ones.

Actually, I'd like to know if the Obama administration really does believe that it has the authority to assassinate U.S. citizens in Washington or Topeka in the same way it believes it has the authority to assassinate them in Sanaa and Karachi. And if not, why not?

Unfortunately, they've declared the entire thing to be a state secret, so we'll never find out. But as far as any of us are allowed to know, their official stand is that the entire world is a battlefield in the war against terrorism, and therefore killing terrorists is fair game anywhere in the world. Even if Williamson is right that a good lawyer can defend pretty much any proposition, I'd sure like to see the legal justification for that. At a bare minimum, you'd think that in a free democracy we'd all have the right to hear at least that much.

Glenn Beck and Fox News

| Wed Sep. 29, 2010 3:24 PM EDT

From Mark Leibovich's profile of Glenn Beck today:

When I mentioned Beck’s name to several Fox reporters, personalities and staff members, it reliably elicited either a sigh or an eye roll. Several Fox News journalists have complained that Beck’s antics are embarrassing Fox, that his inflammatory rhetoric makes it difficult for the network to present itself as a legitimate news outlet.

Look, I'm willing to blame Glenn Beck for a lot of things. But making it difficult for Fox to present itself as a legitimate news outlet? That's a bridge too far. You really can't tie that one around Beck's neck, folks.