Kevin Drum - May 2011

Toward a Unified Theory of Republican Flip-Flops

| Mon May 9, 2011 2:16 PM EDT

Why have Republicans changed their minds recently on issues like cap-and-trade and the individual mandate? My take is that they never really supported these things in the first place, and endorsed them only as a temporary tactic to fight off more liberal proposals from Democrats. But once those liberal proposals were off the table (or could be plausibly defeated in a straight-up vote), they didn't need to pretend to support alternatives anymore and simply reverted to opposing any change at all.

A couple of days ago Ezra Klein improved his counterargument that the real reason is simply partisan opposition to all things Obama. If Republican attitudes had changed gradually, that would be one thing. But if they changed almost overnight between 2007 and 2009? Then it sounds like Obama is the real source of these flip-flops.

I was thinking about this last night, and the topic of campaign finance disclosure popped into my mind. Republicans used to be all for it. Then the Supreme Court handed down its pro-business Citizens United ruling, allowing businesses to spend freely in elections but also making it clear that Congress could require disclosure of campaign contributions if it wanted to. Suddenly Republicans were dead set against disclosure. Norman Ornstein picks up the story:

In March of 2000, a Wall Street Journal editorial said, “Our view is that the Constitution allows consenting adults to give as much as they want to whomever they want, subject to disclosure on the Internet.” That same year, Republican Senator Mitch McConnell asked, “Why would a little disclosure be better than a lot of disclosure?”....Last month, Mitch McConnell now says he views disclosure as “a cynical effort to muzzle critics of this administration and its allies in Congress.” He savaged the White House for considering an executive order to require corporations getting federal contracts to disclose its corporate spending on campaigns....What’s more, last fall, McConnell pulled out all the stops to prevent passage of the DISCLOSE Act, which would have required all corporations and unions to disclose their campaign spending. McConnell managed to pressure every Republican from supporting cloture, leaving the legislation, which had passed the House, stuck at 59 votes in the Senate.

....What to make of the turn away from support for disclosure? I can draw only one conclusion: The earlier support for disclosure was a façade. McConnell, McGahn, and the Journal, among others,don’t actually want transparency or any regulation. At base, they are for a wholly unregulated, Gilded Age-style campaign system where big and secret money rules.

This is actually evidence for both flip-flop theories, I think. Ornstein is almost certainly correct that Republicans want no regulation of campaign finance at all, and at any given time are simply adopting the most extreme position they think they can get away with. On the other hand, there's not much question either that the rock-solid Republican opposition to the DISCLOSE Act was largely motivated by pure partisan hostility. In the end, I guess maybe we don't really have to choose between these two explanations of Republican behavior at all. Why can't they both be true?

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Elites vs. the Public: Round 2

| Mon May 9, 2011 1:28 PM EDT

Who's to blame for our fiscal problems of the past decade? Paul Krugman says elites deserve a lot more of the blame than the general public, but Dan Drezner disagrees: the public, he says, was in favor of tax cuts and in favor of the Iraq war, so they deserve a big chunk of the blame too.

Actually, though, I think Dan's evidence demonstrates exactly the opposite of what he thinks. He's right that polling evidence suggests the public was in favor of both these policies. But the public had been in favor of these things for well over a decade. About 60+% of the public had believed its taxes were too high going back to the beginning of polling on this question in 1957. And support for invading Iraq and overthrowing Saddam Hussein had been in the 50-60% range ever since the Gulf War.

But guess what? Despite this broad support, nobody was crying out for either huge tax cuts or invading Iraq until George Bush and the rest of the GOP started talking them up. Without that, the public would have continued to vaguely think that taxes were too high and Saddam Hussein was a bad guy before switching the TV to Monday Night Football and forgetting about it.

It's true that public support was probably necessary in order to pass the Bush tax cuts and invade Iraq. But the polling evidence is pretty clear that it was far from sufficient. Nothing about public opinion changed in 2001. The only thing that changed was the occupant of the Oval Office. The public isn't blameless in all this, but the polling evidence makes it pretty clear that it was a minor player.

Journalism vs. WikiLeaks

| Mon May 9, 2011 12:57 PM EDT

David Corn has a piece today about a Pakistani businessman who owns several pharmacies in New York City and has been fingered by a Guantanamo detainee as a "possible al-Qaida anthrax operative." So is he? Nobody knows. Maybe the Gitmo detainee was just making stuff up. Maybe it's already been exhaustively investigated and the guy has been cleared. Or maybe he really did have al-Qaeda ties at one time. The Pakistani guy can't be reached, and there's no evidence one way or the other about this aside from the detainee report, so it's impossible to say.

Normally, I'd say that even running a story this thin would be criminally irresponsible. But here's the thing: the guy's name and the accusations against him were part of the WikiLeaks release of Guantanamo documents a few weeks ago, so it's all publicly available now. Here's David:

Mother Jones contacted the FBI in Washington and New York and asked for information regarding this suspect. After all, wouldn't the bureau have thoroughly run down such a lead? Each office said that the FBI would not comment on information in a leaked document.

....With the document now in the open—and on the Internet—the public has a right to know whether this potentially dangerous matter has been resolved. (And, if turns out the intel is faulty, the Pakistani businessman deserves to have his name cleared.) The FBI has the usual bureaucratic reasons for not commenting; it does not want to legitimize leaks. But alarming information of this sort does warrant a response. The critical issue is not the leak, but the nightmarish possibility of an anthrax operative on the loose.

So how about it? Is this now a legitimate story, even though the charges are eight years old and have almost certainly been thoroughly investigated by now? Under the circumstances, should the FBI be willing to comment? Should we have run this story in the first place? What would be your call if you were running things here at MoJo?

Leverage is Everywhere

| Mon May 9, 2011 11:57 AM EDT

States have always competed with each other to attract corporate business, just as cities and counties compete to attract retail business. Usually they do this by offering tax breaks, which produces a downward spiral in overall tax revenue but doesn't otherwise cause any damage to the overall economy. But now states are competing with each other to attract dodgy insurance subsidiaries:

Companies looking to do business in secret once had to travel to places like the Cayman Islands or Bermuda. Today, all it takes is a trip to Vermont.

....Aetna recently used a subsidiary in Vermont to refinance a block of health insurance policies, reaping $150 million in savings, according to its chief financial officer, Joseph M. Zubretsky. The main reason is that the insurer did not need to maintain conventional reserves at the same level as would have been required by insurance regulators in Aetna’s home state of Connecticut.

....For the states, attracting these insurance deals promotes business travel and creates jobs for lawyers, actuaries and other white-collar workers, who pay taxes. States have also found that they can impose modest taxes on the premiums collected by captives. For insurers, these subsidiaries offer ways to unlock some of the money tied up in reserves, making millions available for dividends, acquisitions, bonuses and other projects. Three weeks after Aetna’s deal closed, the company announced it was increasing its dividend fifteenfold.

This is all possible because, for historical reasons, the insurance industry is regulated at the state level, not the federal level. And it's yet another example of how the bright boys in the finance industry can always figure out new and innovative ways of increasing leverage anyplace that regulations can be gamed in some way: Reducing reserves is, basically, a way of increasing leverage, and it's a great way of making more money. Until it isn't, that is. Unfortunately, "when it isn't" is a timeframe that's hard to predict. The only thing you can really say about it is that it's pretty much inevitable, and when it finally happens a whole lot of people are going to feel a whole lot of pain.

Bad News on Housing

| Mon May 9, 2011 1:40 AM EDT

The Wall Street Journal reports on the trajectory of housing prices following the expiration of the first-time homebuyer credit last year:

Home values posted the largest decline in the first quarter since late 2008, prompting many economists to push back their estimates of when the housing market will hit a bottom.

....While most economists expected sales to decline after tax credits expired, the drag on the market has been greater than many anticipated. "We expected December and January to be bad" as the market reeled from the after-effects of the tax credit, said Stan Humphries, Zillow's chief economist. But monthly declines for February and March were "really staggering," he said. They indicate "a reflection of the true underlying demand, which is now apparent because most of the tax credit is out of the system, and it's being completely overwhelmed by supply."

....Prices are decelerating in large part because the many foreclosed properties that often sell at a discount force other sellers to lower their prices. Mortgage companies Fannie Mae and Freddie Mac have sold more than 94,000 foreclosed homes during the first quarter, a new high that represented a 23% increase from the previous quarter. More could be on the way: They held another 218,000 properties at the end of March, a 33% increase from a year ago.

Most analysts now expect that the housing market won't bottom out until sometime next year. Until that happens, it's unlikely that that the sluggish economic recovery we're seeing right now will improve much.

Cui Bono?

| Mon May 9, 2011 1:27 AM EDT

On Saturday, in a post about opposition to European bailouts from the German public, I asked, "Why should thrifty Germans bail out spendthrift euro countries on the periphery?" As it happens, this was bad phrasing: I didn't mean to endorse this view, merely to point out that it was easy to understand why Germans might feel this way. But Matt Yglesias makes a good point in response to my apparent meaning:

I think this conceptual scheme of saver = responsible, borrower = irresponsible needs to be challenged. It’s true that German households were thrifty net savers. But a German household that saves isn’t engaged in a self-sacrificing pursuit, it’s getting paid interest. And the institutions paying the interest are doing it because they’re expecting to make a profit by offering loans. And when they offer the loans, they’re charging interest.

The entire claim of people in this line of work is that they’re good at making decisions about who to lend money to and what interest rate to charge them in light of default risk. When I got my mortgage it involved a phone call with a guy from Bank of America. The premise of the conversation was that of the two people on the call, one of us was a highly trained professional with expertise in mortgage lending and the other one was me. And it’s just the same with Irish borrowers and German banks. In that transaction it’s the Germans who are supposed to be the experts. When the whole thing goes sideways it’s the Germans who failed to be responsible stewards of the Eurozone’s capital.

There's a sense in which this right: lenders can be as reckless as borrowers, and frequently they're more reckless. But there's also a sense in which this confuses the German public with German banks. German banks were unquestionably reckless, but the German public is just....the German public. They acted perfectly prudently given the level of knowledge you'd expect a normal person to have. All they did was put money in the bank, assuming that the banks would then treat their deposits wisely.

Paul Krugman addresses this distinction directly in his column tonight:

What I’ve been hearing with growing frequency from members of the policy elite — self-appointed wise men, officials, and pundits in good standing — is the claim that it’s mostly the public’s fault. The idea is that we got into this mess because voters wanted something for nothing, and weak-minded politicians catered to the electorate’s foolishness.

So this seems like a good time to point out that this blame-the-public view isn’t just self-serving, it’s dead wrong.

The fact is that what we’re experiencing right now is a top-down disaster. The policies that got us into this mess weren’t responses to public demand. They were, with few exceptions, policies championed by small groups of influential people — in many cases, the same people now lecturing the rest of us on the need to get serious. And by trying to shift the blame to the general populace, elites are ducking some much-needed reflection on their own catastrophic mistakes.

There's no question that ordinary borrowers sometimes act irresponsibly. They run up their credit cards too much, they buy more house than they can afford, and they don't always save for rainy days. But Krugman is right: if you look at the fiscal and financial disasters of the past decade, they're emphatically the fault of political and financial elites far more than they're the fault of ordinary citizens. And yet, in the aftermath, it's been ordinary citizens who have borne the lion's share of the pain. For the most part, Wall Street and the wealthy have been asked to pay very little to make up for their mistakes.

Which gets us back to those German savers. It's entirely understandable, I think, that the German public doesn't feel like bailing out Ireland and Portugal and Greece. After all, they did nothing wrong. It was German banks and their creditors who acted irresponsibly, and yet they're being treated with kid gloves at every turn. Instead of nationalizing banks and forcing creditors to take haircuts, European elites are basically asking German taxpayers to bail out the German banks that took their deposits and made irresponsible loans with them. Is it any wonder that the German public is non-thrilled about this?

Krugman's whole column is worth a read. The public in both Europe and America has taken a considerable licking over the past few years. But the elites — well, in a lot of cases they've actually emerged from a disaster of their own making in better shape than before. This is, perhaps more than anything else, the most dispiriting result of the Great Collapse.

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Sunday Camel Blogging

| Sun May 8, 2011 3:42 PM EDT

Here's a pair of pictures from my trip to the Santa Ana zoo yesterday. On the left is the zoo's bald eagle, looking stern and patriotic.  On the right is one of the zoo's camels with Interstate 5 in the background. Impressive critters, no?

Termite Infestations in the Financial System

| Sun May 8, 2011 12:38 PM EDT

Should private equity shops be regulated by the SEC? Felix Salmon listens to a debate between two Democrats and comes away unimpressed with both of them:

The main reason for PE shops to be regulated, of course, has very little to do with fiduciary responsibility, and everything to do with the fact that leverage is a systemically-dangerous thing, and regulators need to know where it is and how it’s being put to use. But it can be hard to explain systemic tail risk to the kind of people who only really understand the meaning of a pie chart when they bake an actual pie.

Precisely. In fact, I'd go further: even if it were true that private equity funds don't generally operate with abusive levels of leverage today, the fact remains that Wall Street boffins are always on the lookout for new ways to overleverage themselves. If banks and hedge funds are regulated but PE funds aren't, then eventually some bright boy will figure out a way to leverage a PE fund at 50:1 while still making it look like it's an ordinary equity shop with modest leverage. The only way to have even an outside chance of preventing this is to regulate any entity with a substantial amount of money — and that most definitely includes PE funds. If they keep their leverage modest, the regulation will be light and little harm is done. But if they start to go overboard because someone figures out a new angle that no one's ever thought of before — and you know someone will eventually — a regulator who's already familiar with the operation has at least a fighting chance of catching it before it blows up the world.

Leverage is like a termite infestation: it swarms anywhere there's food, but you hardly even notice it's there until things get out of hand and your house starts to fall down. Substitute "money" for "food" and "the entire global economy" for "your house," and that's leverage. Constant vigilance is the only defense.

Having said that, though, I'd like to defend the practice of baking pies to understand the meaning of pie charts. It sounds like a delicious alternative to reading New York Times op-eds.

Quote of the Day: Western Civ and the Drive-Thru Window

| Sat May 7, 2011 2:19 PM EDT

From Karl Taro Greenfeld, writing in Bloomberg Businessweek:

It's as if the great advances of human civilization, in everything from animal husbandry to mathematics to architecture to manufacturing to information technology, have all crescendoed with the Crunchwrap Supreme, delivered via the pick-up window.

The rest of the story is all about how Taco Bell — which is headquartered just down the road from me — has revolutionized its drive-through business over the past ten years or so. Still, this part is a little dispiriting:

The program was so successful that in 2009 the brand was the first to finish in the top five in QSR magazine's Drive-Thru Performance Study in both speed and accuracy, averaging 164 seconds per vehicle with an accuracy rate of 93.1 percent...."They [i.e., the entire fast-food industry] have gotten to a place where it is probably as fast and accurate as it is going to be," says Blair Chauncey, of QSR magazine. "We got to the point where they were separated by a few seconds and everyone's accuracy was above 90 percent. Everyone has gotten so good." We are all of us, right now, living in the golden age of drive-thru.

So that's that. The pinnacle of Western achievement is an accuracy rate of about 90%, and it's not getting any better. That means that your order is going to be screwed up one time in ten when you go through a drive-through lane. I guess we'll have to wait for Star Trek-style food replicators in order to see further improvements.

Germany's Revenge

| Sat May 7, 2011 12:51 PM EDT

Tyler Cowen points us to a long but, typically for Morgan Kelly, worthwhile and entertainingly written column about Ireland's banking woes. You should read the whole thing, but here's a big chunk to get you started:

Ireland’s Last Stand began less shambolically than you might expect. The IMF, which believes that lenders should pay for their stupidity before it has to reach into its pocket, presented the Irish with a plan to haircut €30 billion of unguaranteed bonds by two-thirds on average. [Irish Finance Minister Brian] Lenihan was overjoyed, according to a source who was there, telling the IMF team: “You are Ireland’s salvation.”

The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.

....Given the political paralysis in the EU, and a European Central Bank that sees its main task as placating the editors of German tabloids, the most likely outcome of the European debt crisis is that, after two years or so to allow French and German banks to build up loss reserves, the insolvent economies will be forced into some sort of bankruptcy.

....Make no mistake: while government defaults are almost the normal state of affairs in places like Greece and Argentina, for a country like Ireland that trades on its reputation as a safe place to do business, a bankruptcy would be catastrophic....Worse still, a bankruptcy can do nothing to repair Ireland’s finances.

....National survival requires that Ireland walk away from the bailout. This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately.

First the banks....The original bailout plan was that the loan portfolios of Irish banks would be sold off to repay these borrowings. However, foreign banks know that many of these loans, mortgages especially, will eventually default, and were not interested. As a result, the ECB finds itself with the Irish banks wedged uncomfortably far up its fundament, and no way of dislodging them.

This allows Ireland to walk away from the banking system by returning the Nama1 assets to the banks, and withdrawing its promissory notes in the banks. The ECB can then learn the basic economic truth that if you lend €160 billion to insolvent banks backed by an insolvent state, you are no longer a creditor: you are the owner. At some stage the ECB can take out an eraser and, where “Emergency Loan” is written in the accounts of Irish banks, write “Capital” instead. When it chooses to do so is its problem, not ours.

I suppose this analogy is wrong in a hundred different ways, but I can't help thinking that this is a lot like the aftermath of World War I, except in reverse. This time it's Germany acting as the imperious victor, demanding that the citizens of Ireland (and Greece and Portugal) immiserate themselves for years to pay back loans that they will never be able to pay back. It's easy to see why this is happening — thrifty Germans rather predictably don't feel like they should have to bail out spendthrift euro countries on the periphery — but it's also easy to see that there's no way it can end well.2 Likewise, it's easy to see why Geithner and others don't want to force still-fragile French and German banks to eat huge losses that could destabilize the global banking system in hard-to-predict ways. But again, it's also easy to see that there's really no choice. One way or another, neither Ireland nor Greece will ever be able to make good on their debts, and that means that either creditors or taxpayers in the rest of Europe — or both — are going to take a bath.

Would it be better to take that bath now, or better to wait a couple of years for the economy to recover before doing what has to be done? I don't know. But if I had to guess, I'd say that another two or three years of uncertainty (at best) or disaster (at worst) isn't worth the risk. Like it or not, Europe's banks and its taxpayers are probably better off dealing with this problem now. And it's not as if Ireland or Greece would be getting off without any pain, after all. Part 2 of Morgan's plan is to bring the Irish budget into balance, which would cause even more wrenching austerity than they're going through now. There's plenty of pain to go around.

1NAMA is a "bad bank" set up a couple of years ago to hold the worst toxic waste of the Irish banking system.

2Edited to make clear that I'm not especially defending the German attitude, just noting that it's perfectly understandable.