Kevin Drum - May 2011

Germany's Revenge

| Sat May. 7, 2011 9:51 AM PDT

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.

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Friday Cat Blogging - 6 May 2011

| Fri May. 6, 2011 11:58 AM PDT

Domino was sunning herself in the doorway yesterday — it's been in the high 80s all week here — and I happened to have the camera out when Inkblot decided he wanted to go inside. What a hulking presence! Domino is obviously not excited by the idea of letting him by, but as it turned out, all went smoothly. Over on the right, however, we see how to make Inkblot look positively puny: just put him inside a gigantic garden pot. Perspective is everything.

Need more cats? Check out Slate's "The Cats of War." Good stuff.

No, We Will Never Be Oil Independent

| Fri May. 6, 2011 11:41 AM PDT

Republicans have lately ratcheted up their "Drill Baby Drill" rhetoric, and they can now frequently be found claiming that the United States has enormous oil reserves that could make us energy independent if only we opened up drilling everywhere within shouting distance of our borders. This came up yet again during last night's Republican debate and I briefly thought about mentioning how inane this has all become in a blog post. But it was only a few minutes until dinner time, so I skipped it.

Luckily, Michael McAuliff at the Huffington Post has done it for me. You can click the link for details, but the bottom line is that if we damned the torpedoes and drilled like maniacs in every single oil-bearing formation in the country, it would....barely make a dent. Global oil prices would hardly respond at all and we'd continue to import huge amounts of oil every day.

We do have lots of coal, and we also potentially have lots of natural gas depending on whether fracking can be done without destroying the environment. The jury is still out on that. But oil? Forget it. We just don't have very much no matter how crazy we go.

The bin Laden Announcement

| Fri May. 6, 2011 10:48 AM PDT

If President Obama had delayed the announcement of Osama bin Laden's death, it might have given the CIA more time to trawl through the data seized in the raid and track down other al-Qaeda leaders. So why announce it right away?

Following the operation, officials across U.S. government agencies told their Pakistani counterparts what had happened. As they did, the U.S. government was considering not immediately announcing that they had killed bin Laden, a U.S. official tells Time. But the Pakistanis, uncomfortable with having the information leak out slowly, “encouraged the United States to go public right away,” according to the U.S. official.

That's sort of interesting. Most likely, though, it wasn't so much that the Pakistanis "encouraged" us to announce the raid quickly as it was that they made it clear that the chances of keeping the raid secret were close to zero. Not only was there that downed helicopter in the middle of Abbottabad, but bin Laden's wife and daughter were in Pakistani custody, and word of that would almost certainly leak through ISI or other military sources almost instantly. At least, that's my best guess.

Old Hidden Fees, Meet New Hidden Fees

| Fri May. 6, 2011 9:56 AM PDT

David Lazarus writes about Bank of America's latest attempt to improve its bottom line via hidden fees:

In the past, BofA would charge 90 days worth of interest for early withdrawals from a CD good for 12 months or less. In other words, a $10,000, 12-month CD with an annual yield of 0.3% would entail an early withdrawal penalty of about $7 if you took out the entire amount.

Now BofA is charging a flat $25 plus 1% of the amount withdrawn for CDs with terms under 12 months and 3% for longer terms.

That means the early withdrawal penalty for that same $10,000, 12-month CD now runs $125 — a nearly 1,700% increase. The penalty for a five-year, $10,000 CD is $325 — a roughly 1,600% increase.

This is yet another example of a fee that (a) most people don't really know much about, (b) most people don't think they'll ever incur, and (c) generally gets paid by people in some kind of distress. In the modern banking industry, that makes it a perfect target for a huge increase. They will do anything — anything — to avoid charging simple, flat, open fees. That would require actual competition with other banks, after all.

Unfortunately, I don't really know what the answer to this is. I have a visceral aversion to doing business like this, but I also understand why they do it: any bank that charged simple, flat, annual fees would lose all of its good customers, who would migrate to banks that make most of their money from penalty fees that they'll never have to pay. Bad customers, conversely, would eventually migrate to the bank with flat fees as they came to realize that it was a better deal for them. So the nice bank would have lots of bad customers and the evil bank would have all the good customers.

If every bank charged simple, open fees, there would be an equilibrium of sorts. But how do you get there? And should we even try? I'd like to, but I can't pretend it's very likely to happen, or even that it's in the top 20 problems facing the poor. So here we stay.

Republicans and Medicare

| Fri May. 6, 2011 9:18 AM PDT

Proposing to gut Medicare has been politically disastrous for Republicans, and it was pretty obvious that it was going to be a disaster even before they voted on it. So why did they do it? Jonathan Bernstein and Jon Chait offer a few possible reasons:

  1. Fear of primary challenges.
  2. Didn't realize it would be unpopular.
  3. Incompetence.
  4. Creates leverage for budget negotiations.
  5. Helps their deficit narrative.
  6. Makes it easier to pass if they win the presidency in 2012.

Well, sure, I guess it could be any of those things. But Jon Chait almost certainly nails the real reason at the end of his post: "I think Republicans more likely just got caught drinking their own Kool-Aid about how the public agrees with their vision."

Yep. It's the nature of political parties to overreach now and again, but usually they learn from their overreaching. Democrats, for example, have wanted to pass universal healthcare for decades, but they've learned from their losses and introduced steadily more moderate plans each time around. Eventually they finally passed one. But Republicans never seem to get it. They win a big victory (or even a not-so-big victory) and then see sugar plums dancing in front of their eyes when they read the poll numbers. America is a conservative country! Now let's cement their support by being real conservatives!

But America, as always, is ideologically (moderately) conservative and operationally (moderately) liberal. This hasn't changed much since the Nixon era, but Republicans just can't seem to wrap their heads around it. So Ronald Reagan implodes over Social Security in 1982, Newt Gingrich implodes over Medicare in 1995, George Bush implodes over Social Security in 2005, and the tea party Republicans implode over Medicare in 2011. Americans, in the least surprising news ever, still don't trust Republicans to screw around with Medicare or Social Security. Even Republicans don't trust Republicans to do it. Probably it's because Republicans have hated both programs from the beginning and keep trying to wreck them every time they get their trigger fingers anywhere close to the levers of power.

What makes this even weirder is that in just the past decade Republicans have helped their political cause by standing up for Medicare: first in 2003 when they passed the prescription drug plan and then in 2010 when they won a big House majority by beating up Democrats for cutting Medicare. But despite all this, they still don't get it. They're still convinced that someday Americans are going to blink their eyes and suddenly agree that Social Security and Medicare are liberal boondoggles that need to be privatized and slashed. It's just an astonishing unwillingness to accept reality.

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Good News, Bad News

| Fri May. 6, 2011 8:27 AM PDT

Yesterday we had a slew of bad economic reports, including a huge rise in the number in new unemployment claims. Today we have good news: the number of new jobs is up strongly. Conclusion: who knows? Basically, we're undergoing a fragile, unsteady recovery, and I'm not sure you can say an awful lot more than that with any confidence. Steve Benen's chart showing the long-term trend is below.

Slumlord Millionaire

| Fri May. 6, 2011 3:00 AM PDT

A couple of days ago the Los Angeles city attorney's office sued Deutsche Bank. Why? Because it's a slumlord:

The Frankfurt, Germany-based bank has foreclosed on more than 2,000 homes over the last four years in neighborhoods across the city, according to the suit — many concentrated in the northeast San Fernando Valley, northeast Los Angeles and South Los Angeles.

Los Angeles officials say the bank has been a dreadful landlord and neighbor. Prosecutors say that during a yearlong investigation, they found evidence that Deutsche Bank had illegally evicted some tenants, let others live in squalor and allowed hundreds of unoccupied properties to turn into graffiti-scarred dens for squatters, gang members and other criminals.

Deutsche Bank, unsurprisingly, is passing the buck: they say the party responsible for keeping up foreclosed houses is the loan servicer, not the bank. But loan servicers, who make their money from the fees they collect during the foreclosure process, are notoriously unwilling to spend money once the foreclosure is finished, and they're also notoriously hard to prosecute. So Los Angeles is trying a different tack: holding the ultimate owner of the property—Deutsche Bank, in this case—responsible for the condition of their property. They're the ones who hired the slumlord, after all.

All I can say is: good for them. The foreclosure mess of the past three years has been one of the biggest black marks on both the banking industry and the Obama administration, which has essentially punted the entire issue, hoping that if it kicked the can down the road long enough the problem would just fade away as the economy improved. HAMP, its primary program for loan modifications, has not only been a miserable failure on its own merits but has failed to change the incentives in the housing industry, which are almost Dickensian in the way they reward the most egregious possible behaviors. As Mike Konczal put it a few months ago, "Obama's Treasury team took a system that had a terrible design and doubled-down on it."

The problem is simple: the HAMP program provides only modest incentives for banks to perform the kinds of loan modifications that might genuinely help distressed homeowners. Opposed to that are the lucrative fees that loan servicers make by stringing homeowners along—fees for insurance, appraisals, title searches, legal services, etc.—and then eventually allowing them to default anyway. Loan modifications, even with the HAMP incentives added in, are still net money losers. There's way more money to be made by offering homeowners a sliver of hope, collecting fees along the way, and then foreclosing after all. Peter Goodman lays out the gruesome details here.

There are plenty of ways we could change those incentives, but we haven't done any of them. So Los Angeles is trying to change them on its own. If banks are required to maintain foreclosed properties properly, that suddenly makes foreclosure a less appealing prospect and the financial incentives start to tip in the direction of making a loan modification. Sure, you take a small hit, but you avoid the cost of not being ultimately responsible for maintenance and upkeep.

Maybe it'll work. Given the bottomless legal resources of big banks, I wouldn't bet the ranch on it. But it's worth a try. Right now the foreclosure industry is practically designed to make as much money from people's misery as possible, and more misery means more money. Anything that can turn those incentives around is a step in the right direction. Here's hoping LA, as it's so often been in the past, is a trendsetter for the rest of the country.

Another Bubble Pops?

| Thu May. 5, 2011 4:17 PM PDT

So, um, we had a rough day in the commodity markets:

A surging dollar and a collapse in oil prices roiled commodity markets, as fears grow that high costs for energy and raw materials are undermining the global economic recovery....That lack of confidence was pivotal in spurring a hectic retreat by investors who had bought commodities—particularly silver and oil—as a hedge against a steadily weakening dollar.

The New York Times elaborates:

 “Pop goes the bubble,” said Michael Lynch, president of Strategic Energy and Economic Research, a consulting firm. “It seems unlikely you will see any tightening in the market in the coming months. The worst of the political threats have passed us.”

....For the day, crude oil for June delivery tumbled $9.44 a barrel, or 8.6 percent, to settle at $99.80 in New York trading. Almost all commodities prices took a tumble on Thursday. Gold for June delivery dropped 2.2 percent, or $33.90, to $1,481.40 an ounce, while silver lost 8 percent or $3.148, to $36.24 an ounce. Other metals — including nickel, copper, palladium and platinum — all fell sharply. Coffee, corn, cotton, wheal and soybeans also dropped.

There's a sense in which this is almost good news. If the oil/commodity bubble pops now, it will cause some damage but it will probably be manageable. But if it had gone on for another six months or a year, the damage to the global economy could have been much greater.

This is only a few days worth of data, so take it with a grain of salt. Still, it does make you wonder if we really do have a global economy these days that's inherently built on bubbles of one kind or another. Our financial rocket scientists seem almost incapable of making money in a normal economy — making enough money to satisfy themselves, anyway — so instead they spend their time seeking out smallish bubbles and then working overtime to supercharge them enough to spin out some temporary wealth before everything crashes back down to earth. One of these days we might actually get serious about regulating leverage enough to slow this down, but it hasn't happened yet. Maybe another half dozen bubbles will finally do the trick.

Domestic Terrorism No Longer a Very Big Deal

| Thu May. 5, 2011 3:21 PM PDT

Matt Yglesias on the possibility of retaliatory attacks from al-Qaeda in the aftermath of Osama bin Laden's death:

To me, the main thing we’ve learned about terrorism since 9/11 is that almost nobody living in the United States of America or any country from which you can travel to the USA without a visa (Canada, Western Europe, etc) actually wants to mount a terrorist attack. We’ve done a lot of homeland security since 9/11, but it’s obviously imperfect. You never see a terrorist detonate a bomb in an airport security line, you don’t see terrorists shooting up shopping malls, rogue drivers don’t plow their cars into crowds of pedestrians, etc. There are clearly lots of people eager to fight the United States in Afghanistan and other places, but those people either don’t want to come here or else they can’t. The idea that there’s some sleeper cell waiting for the right moment to strike was very plausible in September 2001, less so in October 2001, even less so in October 2002, and less and less and less and less plausible with every passing year.

Roger that. I think it's worth pointing out that strengthened security measures are probably partly responsible for this, since they make it a lot harder to pull off attacks of any significance. If you want to set off a bomb in an airplane, you either need to hide it in a toner cartridge or in your underwear or whatnot, and that's just inherently unreliable. Even car bombs are harder to make than you think, since the precursor elements are carefully tracked.

Still, the point stands. Obviously terrorists are always trying to think of new ways of creating havoc, and we have to respond to that. Broadly speaking, though, we have responded, and that response has been pretty effective. The United States doesn't have a lot of homegrown suicide bombers, and it's really, really hard for Afghan/Yemeni/Somali/etc. suicide bombers to get over here and do anything spectacular. We're almost certain to be attacked again, but it's equally certain that attacks will be infrequent and far less damaging than 9/11. We shouldn't orient our entire worldview around increased security, and we shouldn't scare ourselves into spending vast amounts of money on it.

At least, that's true for now. In the future, who knows? There might come a time when biological weapons become easy enough to make that our security calculus needs to change. But not right now.