Kevin Drum - October 2010

Finally a Winner in Iraq

| Fri Oct. 1, 2010 10:57 AM EDT

We might finally have a winner from the March election in Iraq:

Powerful Shiite cleric Muqtada al-Sadr has agreed to support the bid by Iraq's prime minister to retain power, aides said Friday, in a move that could speed an end to the seven-month political impasse and bring dealmaking that may give key concessions to al-Sadr's anti-American bloc.

The decision by al-Sadr would mark a significant boost for Prime Minister Nouri al-Maliki's Shiite-led coalition to secure enough parliament seats to form a new government.

....Al-Sadr's move apparently sets aside past animosity with al-Maliki for a chance to gain a greater voice in a possible new government. Al-Sadr — who has been in self-exile in Iran since 2007 — has denounced al-Maliki's government for its close ties to Washington and a joint security pact that allows U.S. military presence through at least the end of next year.

So we get the same old Maliki government, but with a greater role for Muqtada al-Sadr. I can't say this fills me with hope for Iraq's future, but I suppose it fills me with relief that they're at least going to have a government of some kind. Stay tuned. 

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Wall Street's Sigh of Relief

| Fri Oct. 1, 2010 6:00 AM EDT

How will we know if the financial reform bill passed in July has worked? A few months ago I mentioned four metrics to watch for:

  • Borrowing rates for large banks
  • Derivatives trading
  • Leverage ratios
  • Industry profitability

Of these, the most important and the easiest to measure is the last one: industry profitability. Once you cut through all the chaff and all the technical details, you're left with a simple truth: a safer, less leveraged banking sector is inherently less profitable than the casino trading and finance-oriented one we have right now—the one that accounted for an astonishing third of all corporate profits in the United States during the Bush era. If profits stay at pre-bubble levels, it almost certainly means that financial reform failed.

It's too early to tell how reform will turn out, of course, but recently we got a disturbing glimpse. The people in the best position to know how the new regulations are going to affect the banking sector are the bankers themselves, and bankers don't seem to be very worried. Researchers at an IBM think tank, the Institute of Business Value, did a survey of top financial executives recently and asked them how the new regs were likely to affect them. Results are at the right: a mere 13% of them thought industry returns would decrease significantly. The vast majority thought returns would be the same or only slightly less.

It's a small sample—only 54 executives—and maybe they're just being overoptimistic. But it's a bad sign that they aren't a little more worried. (Another bad sign: asked about their top concerns, the #3 answer was figuring how to get around the new regulations.)

Of course, there's more to banking regulation than just Dodd-Frank. There are also the new capital standards recently adopted by the Basel Committee, and at first glance they seemed gratifyingly stiff. But they were announced two weeks ago, on Sunday the 13th, and when markets opened on Monday the 14th bank stocks shot up. Yet again, the people who are in the best position to judge the real effect of the new regulations didn't seem too worried.

For now, then, things don't look so good. Both Dodd-Frank and Basel III are improvements, but the best evidence so far—namely the reaction of people with money at stake—suggests that it won't be long before Wall Street is back to business as usual. It's been an opportunity lost.

No Good Deed Goes Unpunished

| Fri Oct. 1, 2010 12:00 AM EDT

An internal White House report concludes that money from the stimulus bill has been well spent:

By the end of September, the administration had spent 70 percent of the act's original $787 billion, which met a White House goal of quickly pumping money into the nation's ravaged economy, the report says. The administration also met nearly a dozen deadlines set by Congress for getting money out the door...

Meanwhile, lower-than-anticipated costs for some projects have permitted the administration to stretch stimulus money further than expected, financing an additional 3,000 projects, according to the report..."Certainly, the fraud and waste element has been smaller than I think anything anybody anticipated," said Steve Ellis, vice president of Taxpayers for Common Sense, a nonpartisan watchdog group.

...An independent board established to provide oversight has received just 3,806 complaints — less than 2 percent of more than 200,000 awards. Prosecutors have initiated 424 criminal investigations, representing 0.2 percent of all awards. Typically, 5 to 7 percent of government contracts attract complaints, [Jared] Bernstein said.

According to CBO reports, the stimulus has created 3.5 million jobs and kept unemployment about 1 to 2 percent lower than it otherwise would have been, and apparently it's accomplished this efficiently and with minimal waste. It's a testament to what happens when you take good policy seriously.

Unfortunately, it's also a testament to how little most people care about good policy and competent execution. As near as I can tell, it's practically conventional wisdom these days that the stimulus package was a complete bust—and all because the Obama administration initially made a lousy projection about the future course of the recession and suggested that the stimulus package would reduce unemployment to 8 percent. If their forecast of the depth of the recession had been correct and they'd predicted, say, 11.5 percent unemployment without a stimulus package and 10 percent with it—which is what happened—elite opinion about the stimulus would probably be completely different.

So there you have it. Good policy and good execution gets you bubkes. All it takes is one wrong forecast number to wipe it all out. Welcome to the real world.