Kevin Drum - September 2010

TARP and Creative Destruction

| Fri Sep. 17, 2010 11:41 AM EDT

My post this morning praising TARP for helping to rescue the banking system in 2008 produced the following Twitter conversation:

Will Cain: B/C it may have "worked" doesn't make it right. TARP broke a central tenant of capitalism: success & failure....It's a dangerous place to be — defending and judging things on whether or not they worked and not whether they're principled.

soopertrev: Interning Japanese-Americans during World War II "worked" in a way too.

Will Cain: Exactly.

This is, obviously, a pure libertarian reaction, but it's misguided on a couple of levels. First, even taken on its own terms, interning Japanese-Americans during World War II only "worked" if you genuinely believe we might have lost the war if we hadn't done it. Aside from Michelle Malkin, I don't know anyone who believes that today. Conversely, I do believe that the American (and therefore global) banking system would have been in serious trouble if not for TARP.

Beyond that, though, you simply can't think about the banking system the way you think about, say, the computer industry or the textile industry. In the latter two, as with most industries, there's a private sector, where firms start up and fail, and a public sector that sets some rules of the road but — ideally, anyway — doesn't need (or want) to decide which firms succeed and which ones don't. The relationship between the two sectors varies from country to country and from era to era, but still, the private sector is basically distinct from the public.

In banking it's not. As far as I can tell, every large-scale banking system ever created is fundamentally a partnership between the public and private sectors all the way down to its roots. The fact that the government is charged with regulating the currency ensured this even in the past, and on a practical level the worldwide adoption of central banking over the past century has cemented this bond in ways that simply make it nonsensical to try and divide the two. Citigroup may be a private corporation, but for all practical purposes it's also a branch of the Federal Reserve. Money and credit successfully flow throughout the country (and the world) only because of a symbiosis between the two, and between Citigroup and every other bank in the world.

So, no, you can't simply let big banks fail. It's like letting the electric grid fail: the entire economy would grind to a halt if it did, and no responsible government will allow that. TARP "worked," and I'm happy defending it on those grounds, but I'm also happy defending it on the principle that sovereign governments have a responsibility to prevent their banking systems and their economies from collapsing. Safeguarding money and credit are obligations as fundamental to any modern government as defending against foreign attacks, and that's what TARP did.

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Change Your Oil! Or Not.

| Fri Sep. 17, 2010 10:38 AM EDT

How often do you change your oil? Maybe too often:

“There was a time when the 3,000 miles was a good guideline,” said Philip Reed, senior consumer advice editor for the car site Edmunds.com. “But it’s no longer true for any car bought in the last seven or eight years.”

Oil chemistry and engine technology have improved to the point that most cars can go several thousand more miles before changing the oil, Mr. Reed said. A better average, he said, would be 7,500 between oil changes, and sometimes up to 10,000 miles or more.

You know, I've never changed my oil every 3,000 miles. Every car I've owned, going back to about 1980, I've changed the oil every seven or eight thousand miles and I've never had any problems. No unusual engine wear, no weird noises, no parts wearing out, no nothing. My current car (ten years old) almost seems to not even use any oil. I can drive it five or six thousand miles and it's not even down a quart. More like a pint. Or less.

At this point, I have a feeling I might not ever get an oil change again in my life if it weren't for the fact that it happens automatically when I take the car in for routine service every year or two. So far, no problems after a decade. Will I regret this slothful attitude someday?

TARP, the Tea Party, and Me

| Fri Sep. 17, 2010 5:00 AM EDT

What was I doing two years ago? Well, according to my blog, on September 29, 2008 I was "consumed with a debilitating combination of fury and despair." Why? Because following two weeks of unprecedented financial meltdown, the House had just rejected Henry Paulson's bank bailout bill, the Troubled Asset Relief Program.

Does my reaction seem melodramatic? I suppose it does today, but it's easy to forget just how fragile the financial system seemed back then. Bear Stearns had failed. Lehman Brothers had failed. Merrill Lynch had been sold off and AIG had been rescued at the 11th hour. The commercial paper market had locked up. Interest rate spreads had spiked to unprecedented levels, there were runs on money market funds, and in many parts of the economy credit had dried up almost completely. Some of the biggest banks in the world seemed on the brink of failure and others just plain failed. On Sunday the 28th, Belgium, the Netherlands and Luxembourg had stepped in to rescue Fortis, Germany had been forced to bail out Hypo Real Estate, and the British Treasury had seized Bradford & Bingley and sold it off. In the United States, the Fed was tapped out, panic was in the air, and TARP was pretty much the only option left for rescuing the banking system. But what happened? Even though it was proposed by a Republican president, supported by a Republican treasury secretary and a Republican Fed chairman, and backed by the Republican leadership, two-thirds of House Republicans voted against it.

After the House voted down TARP the Dow Jones plunged 400 points in ten minutes. By the end of the day $1.2 trillion had been lost on U.S. exchanges and regulators were rushing to try to sell off Wachovia, the biggest bank yet to fail. That finally got the attention of GOP backbenchers, and a few days later a revised TARP bill (stuffed with some extra goodies as bribes) was passed. Markets relaxed and everyone breathed a little easier.

But even though TARP eventually passed, September 29th was still the key moment, one that I'll always think of as the birth date of the Tea Party movement. It didn't get its name until CNBC's Rick Santelli famously ranted on air about Obama's housing rescue plan a few months later, but the spirit had been there ever since TARP was initially defeated. To this day, tea partiers remain convinced that it was both unnecessary and a vast black hole for taxpayer money. Neither is true, but the tea party view is now so pervasive that, as Ben Smith reports, politicians of both parties consider TARP the new third rail of American politics:

The Troubled Asset Relief Program is widely viewed as the original sin of the Obama administration — though it was put together under President George W. Bush and succeeded far beyond expectations. It’s widely seen as the tipping point for disgust with elites and insiders of all kinds — though it could also be seen as those insiders’ finest moment, a successful attempt to at least partially fix their own mistakes.

....And the rank and file in both parties have channeled that anger into an assault on members of Congress who voted for the measure. Politicians have spent about $80 million on ads this cycle mentioning bailouts — every penny of it negative — with Democrats spending the bulk of that sum, $53 million, according to an analysis by the Campaign Media Analysis Group’s Evan Tracey.

....A study this summer by former Fed Vice Chairman Alan Blinder and Moody’s chief economist Mark Zandi [...] projected that without federal action — TARP and the stimulus — America’s gross domestic product would have fallen more than 7 percent in 2009 and almost 4 percent in 2010, compared with the actual combined decline of about 4 percent.

“It would not be surprising if the underemployment rate approached one-fourth of the labor force,” they wrote of their scenario. “With outright deflation in prices and wages in 2009-11, this dark scenario constitutes a 1930s-like depression.

And the cost of TARP? CBO estimates the government will make a profit of $7 billion from the bank bailouts (though it may still lose money on GM and Chrysler, which were also rescued with TARP funds) and it now looks like AIG will pay back all its bailout money too. Bottom line: the ongoing recession caused by Wall Street's reckless behavior has cost us a bundle. But TARP itself? Its net direct cost is zero, and when you include the fact that it almost certainly saved the banking system and softened the recession, it may boast the biggest bang for the buck of any bill ever passed by Congress. Karl Smith, a professor of public economics at the University of North Carolina, writes:

If no one else will defend TARP, I will defend it. I will defend it through any medium, at anytime, under any circumstances. I will be the lone voice in a town hall full of Ron Paul supporters. I will say it at a Code Pink Regional Conference. I will not let this go.

There are few moments when I have shed a tear over policy. Despite initial missteps what I saw was lawmakers coming together in the face of overwhelming public opposition to protect the future of our society. It made me more confident in our government than any other single event I have ever experienced.

I can't say that I feel the same way. Yes, TARP eventually passed, and yes, I'll defend it anytime too. But it also represents the modern rebirth of know-nothingism represented by the Tea Party movement. I don't have a problem with the tea partiers' anger — hell, I share it — but instead of channeling it into a demand for genuinely game-changing reform of Wall Street, conservative demagogues and business interests managed to channel it into mindless rage at one of the very things that saved us from Wall Street's folly. The tea parties will eventually pass into the dustbin of history, I suppose, but in the meantime TARP's fortunes certainly haven't made me more confident that our government can do the things it has to do. Instead, TARP turned out to represent the outer limit of what our government can do, and that was just the bare minimum to avoid catastrophe. We deserve better than that.

The White House Takes on Forbes

| Thu Sep. 16, 2010 7:35 PM EDT

The White House gets it. Here's their reaction to the Dinesh D'Souza/Newt Gingrich contention that Barack Obama is motivated by neocolonial hatred of white people and the West:

"It's a stunning thing, to see a publication you would see in a dentist's office, so lacking in truth and fact," White House press secretary Robert Gibbs says in an interview. "I think it represents a new low."

Gibbs is meeting with Thursday afternoon with Forbes's Washington bureau chief, Brian Wingfield, to discuss his objections. "Did they not fact-check this at all, or did they fact-check it and just willfully ignore it?" he asks.

The magazine would not make Editor-in-Chief Steve Forbes, who ran for the Republican presidential nomination in 1996 and 2000, available for comment, or any other editor.

D'Souza is a longtime firebrand who gets his kicks saying outlandish things. Gingrich will do anything for attention. If that's all there was to this, it would hardly be worth responding to.

Except that this all appeared in Forbes, a mainstream magazine that, as Gibbs put it, "you would see in a dentist's office." That's something new.

Meanwhile, aside from designated reasonable guy Ramesh Ponnuru, I note that The Corner has been in complete radio silence over the Forbes piece for five straight days even though they were the ones who broke the Gingrich reaction story in the first place. That finally changed a couple of hours ago when Andy McCarthy declared that although he hadn't read the story, "I’m anxious to get to it" — because, unsurprisingly, he's pretty sure it's spot on. No one is ever obligated to blog about anything they don't want to, of course, but you'd think that when one of their own unearths a big ol' chattering class blockbuster like this it would prompt a little more chatter than that.

Following the Money

| Thu Sep. 16, 2010 4:26 PM EDT

Tim Noah has finished up his series on growing income inequality, and here's his final scorecard:

  1. Race and gender are responsible for none of it, and single parenthood is responsible for virtually none of it.
  2. Immigration is responsible for 5 percent.
  3. The imagined uniqueness of computers as a transformative technology is responsible for none of it.
  4. Tax policy is responsible for 5 percent.
  5. The decline of labor is responsible for 20 percent.
  6. Trade is responsible for 10 percent.
  7. Wall Street and corporate boards' pampering of the Stinking Rich is responsible for 30 percent.
  8. Various failures in our education system are responsible for 30 percent.

Most of these factors reflect at least in part things the federal government did or failed to do. Immigration is regulated, at least in theory, by the federal government. Tax policy is determined by the federal government. The decline of labor is in large part the doing of the federal government. Trade levels are regulated by the federal government. Government rules concerning finance and executive compensation help determine the quantity of cash that the Stinking Rich take home. Education is affected by government at the local, state, and (increasingly) federal levels. In a broad sense, then, we all created the Great Divergence, because in a democracy, the government is us.

I'm not necessarily endorsing Noah's percentage breakdowns here — I suspect he somewhat understates taxes and overstates education, for example1 — but assuming they're in the right ballpark I think you can add one more thing to his analysis. He's right to point out that government policy — i.e., politics — was responsible for much of what happened. But take a step back and ask what enabled all this government policy. Labor unions have historically agitated for greater access to education, more labor-friendly trade policy, and higher wages for the middle class (which in turn means less for Noah's Stinking Rich). So in a world in which labor unions were as powerful a force as they were in the 50s and 60s, it's hard to believe that items 6, 7, and 8 would have evolved the way they have over the past three decades. If even a third of that evolution can be traced to the decline of organized labor as a counterweight to business interests, it means that the fading influence of unions is responsible not for 20% of the growth of inequality, but closer to half of it.

I'm not saying this has to be the case. But something like it must be. After all, government policies don't "just happen." They happen because various interests duke it out and some of those interests win and some of them lose — and for the past 30 years, there's been a steady realignment of interests that's promoted outcomes that persistently favor the well off and disfavor the working and middle classes. So if you want to understand what's happened you have to understand not just the economic and social trends that have promoted increasing income inequality, but also which interests have flourished and which have decayed and what impact that's had. The decline of organized labor doesn't have to play a big role in this, but if it doesn't then something else does. But what?

1Why? The income of the today's rich is at least twice what it would be if we still had the tax regime of the 70s, and the enormous income rise of the super-rich is a major part of the inequality story. On education, what matters most from the perspective of inequality is having a college degree, and the U.S. still produces college grads at the same rate as nearly every other advanced economy. This just doesn't seem like a powerful explanation for the striking difference between the U.S. and the rest of the world.

Jury Selection Follies

| Thu Sep. 16, 2010 12:49 PM EDT

Robert Lane Greene passes along an interesting case today. Apparently lawyers have taken to googling potential jurors during the jury selection process, leading to this exchange in a case a year ago:

THE COURT: Are you Googling these [potential jurors]?

[PLAINTIFFS COUNSEL]: Your Honor, there's no code law that says I'm not allowed to do that. I — any courtroom — 

THE COURT: Is that what you're doing?

[PLAINTIFFS COUNSEL]: I'm getting information on jurors — we've done it all the time, everyone does it. It's not unusual. It's not. There's no rule, no case or any suggestion in any case that says ...

THE COURT: No, no, here is the rule. The rule is it's my courtroom and I control it.

OK, two things. First, although I understand the need for judges to keep order, I've long been annoyed by their apparent belief that courtrooms are little fiefdoms to be ruled as they see fit. So I'm glad this particular exercise of arbitrary authority got overturned.

But second: can we please do away with lawyer-conducted voir dire completely? True, it produced my favorite John Grisham novel, but what a waste of time for everyone involved. Instead, let the judge do the questioning and allow the lawyers to intervene only if they have a substantive issue to present. Beyond that, just take the first twelve people who aren't plainly compromised in one way or another. It works in Britain, there's no reason it can't work here too, and I'll bet it would cut down on court time and costs by upwards of 10% or so. How about some help with this, small government types?

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Can Sarah Palin Win in 2012?

| Thu Sep. 16, 2010 12:27 PM EDT

Paul Mirengoff thinks the 2012 Republican nomination for president is Sarah Palin's to lose. He bases this on four assumptions:

The first assumption is that Palin will run....The second assumption is that the Tea Party movement will back Palin and that she will capture most of the Tea Party vote....The third assumption is that, backed by the Tea Party movement, Palin can win between 30 and 40 percent of the vote in many of the early multi-candidate primaries and caucuses....The fourth assumption is that Palin can ride a vote count of 30 to 40 percent in crowded early primaries to the front of the pack and then increase that count to 50 percent plus as the field narrow in the later primaries.

Ramesh Ponnuru isn't buying it:

It would be a real mistake, I think, to see [Christine] O’Donnell’s victory as somehow presaging one by Palin. As Mirengoff concedes, Palin, if she runs for president, won’t be running against Mike Castle. Primary voters may also behave differently when the stakes are higher. Taking a gamble on a Senate candidate who might not be able to win is different from taking a gamble on a presidential candidate. That doesn’t mean Palin can’t win. But the conventional wisdom — that the race is wide open — just may be correct.

I'm stonkered on this. A few months ago I was convinced that Palin wouldn't run at all, so it was a moot point. Now I'm not so sure. After all, she's been acting an awful lot like a presidential wannabe lately, hasn't she?1 And Lord knows that plenty of people with less chance than her have been talked into running by friends and consultants with a seductively persuasive scenario for victory.

So let's say she runs. Can she win? On the plus side: she has lots of name recognition, a proven ability to raise money, a loyal core of followers, and tons of charisma.

But then there's the minus side: she's extremely polarizing, she won't get to hide behind Facebook and Twitter if she's running for president, she's never shown much patience for the kind of organization that a presidential run requires, her opponents will be able to make a powerful case that she's unelectable in November, and she seems almost certain to make at least one major gaffe in the early stages of the campaign.

So I just don't see it. In fact, the only real winning scenario I see for Palin is one in which nobody credible really feels like running and Palin ends up getting the nomination by default as sort of a suicide run against an incumbent who's going to crush her. But I don't really see that either. I happen to believe that Obama is probably unbeatable in 2012, but there are hardly any Republicans who agree with me. They all think Obama is a dead man walking and they're almost certainly going to want to nominate someone who can beat him. Palin just isn't that person.

1And that was before I saw this. Apparently she's been acting even more wannabe-ish than I thought.

The Paradox of Healthcare Reform

| Thu Sep. 16, 2010 11:37 AM EDT

I won't pretend that I really know what this means, but here are the results from yesterday's New York Times poll related to healthcare reform. Follow the bouncing arrow:

So: 49% of Americans disapprove of healthcare reform. That's not good. But wait! Only 40% actually want it repealed. The rest figure it should be given a chance even if they don't like it much. That's better. And if you tell them that repeal would also mean repealing the preexisting condition provision, only 19% want it repealed. That's better still.

Now, none of this changes the broad political fact that "healthcare reform" as a standalone campaign pitch seems to be a loser. That's not what I expected this far after the bill was signed, but other polls confirm it. However, it's also the case that what the bill actually does seems to remain pretty popular. This poll only asks about one particular provision, but previous polls have gotten similar results for most (though not all) of the bill's other provisions.

Now there are two ways you can work with this result. The first is the complicated way: you explain that the bill bans companies from dropping customers with preexisting conditions (hooray!), but if you do that then you also have to insist that healthy people all get insurance too. Otherwise insurance companies will go out of business due to cherry picking. And if you do that, then you have to subsidize working class families that can't afford insurance and expand Medicaid for poor families who can't even afford subsidized private care. And once you've done that, that's 90% of healthcare reform right there.

This is all true, but your audience's eyes will glaze over about five seconds after the word "preexisting." Still, there's also an easy way to do this: just stop. Don't explain the whole bill, just campaign on the preexisting condition clause. And also the tax credits, the end of the doughnut hole, the end of copayments for preventive care, the end of lifetime limits, the subsidies, and the Medicaid expansion. Oddly, though, that seems to be harder than it appears. Tim Kaine tried this tack on Jon Stewart the other night, and Stewart practically sneered him off the stage for it. It's true that Kaine didn't do a very good job, but still. Stewart is a pretty sympathetic audience.

So....it's a mystery. People generally like the provisions of the law, but they yawn (or worse) when you tell them about all those provisions. I'm not sure what to make of this aside from concluding that people are just in a bad mood and it doesn't matter what you say to them.

Staffing Up

| Thu Sep. 16, 2010 10:06 AM EDT

So Obama isn't going to officially nominate Elizabeth Warren to head up the new Consumer Financial Protection Bureau. Josh Marshall comments on what Obama is going to do:

ABC's Jake Tapper has a curious scoop, reporting that President Obama will name Elizabeth Warren not to run the new consumer financial protection bureau but instead will give her the previously unheralded "special position reporting to both him and to the Treasury Department and tasked with heading the effort to get the new federal agency standing." Get that?....I tend to agree with Matt Yglesias on this: "With Warren, Obama showing real innovation in developing odd, satisfying to nobody compromises."

Matt seems to have changed his mind here, and I think his second take is the right one. It's pretty obvious to anyone with a pulse that Republicans will filibuster Warren, thus sucking up Senate floor time that no one can afford with only a few weeks left before Congress goes into recess. At the same time, the CFBP needs to get off the ground, and appointing an unofficial interim head is a way of doing it. Warren is clearly the best choice for this.

I have no inside scoop on whether Obama or Tim Geithner "really" like Warren, but honestly, I've seen no serious evidence that either one of them is standing in her way. Geithner supposedly doesn't like the grillings Warren has given him in the past, but come on. He's a big boy, and in any case what better way of getting Warren out of his hair than giving her a job that will keep her too busy to bother him much? If George Bush had done something like this we'd all be gnashing our teeth about how he and Karl Rove were so committed to their base that they were once again cleverly bending the rules to evade Democratic opposition and why can't wussy Democrats ever act like that too? Well, now one is. So bravo. Given the realities of Republican subjugation to whatever the Chamber of Commerce wants, this is a good solution. Then next year maybe Obama will just give Warren a recess appointment and that will keep her in place for a couple of years. What's good for the goose is good for the gander, no?

The Mind of America, Part 2

| Thu Sep. 16, 2010 12:52 AM EDT

Via the latest New York Times poll, here's the Obama administration's problem in a nutshell:

This is, of course, a simple factual question with a simple factual answer: Obama has lowered taxes for virtually all Americans. Unfortunately, hardly anyone knows it.

In other news, people hate Democrats but hate Republicans even more; they're unsure if Obama has a clear plan for solving the nation's problems but they're absolutely sure Republicans don't; they think Democrats have better ideas than Republicans; they think Democrats are more likely than Republicans to help the middle class and small businesses; they blame George Bush and Wall Street for the crappy economy; they think the stimulus package probably improved the economy;1 they support Obama's plan to allow Bush's tax cuts for the rich to expire; they think Obama is doing more to improve the economy than congressional Republicans; and they hate Sarah Palin and are less likely to vote for anyone she supports.2

Oh, and they're going to kick Democrats out of office this November anyway. Bummer, guys.

1But they're less likely to vote for someone who supported it anyway.

2In fairness, the public also continues to dislike the healthcare bill and they continue to think that Republicans are better on terrorism than Democrats. That's about it for favorable impressions of Republicans.