Kevin Drum - December 2011

Chart of the Day: The Death of AAA Assets

| Mon Dec. 5, 2011 2:34 PM EST

Alphaville's Cardiff Garcia calls this the most important chart in the world, and maybe it is. (Though there are lots of competitors for that title these days.) It shows the precipitous drop in the stock of safe, AAA-rated assets from its 2007 peak of about $20 trillion to roughly $12 trillion this year. In one sense, you could say this is a good thing: at least we're no longer pretending that risky assets aren't, in fact, risky assets. Unfortunately, the availability of safe assets is pretty important to the smooth functioning of modern finance because they're necessary as collateral in the repo market:

When you hear concerns that the ECB has lost some control over monetary policy because of a liquidity-starved credit channel — or indeed when you hear Draghi himself say that he’s cognizant of the “scarcity of eligible collateral” — this is why.

....A somewhat obvious and related point here, but the loss of “safe” status for so much debt contributes to the deleveraging burden of European banks and their American subsidiaries; by definition it means higher risk weightings for these assets.

Declining asset quality is surely also one reason that European banks had trouble funding themselves in US repo markets, and the resulting stress in the currency basis swap markets as banks sought dollars elsewhere led to last week’s intervention.

This is bad for Europe, of course, and as we discussed a couple of weeks ago, there's reason to think that deleveraging among European banks could have a pretty serious impact on American credit markets too. We may or may not like much of what the shadow banking system does, but there's no question that it plays a key role in sustaining bank lending, and the repo market is its backbone.

In other words, just another thing to worry about. I wouldn't want this morning's semi-optimistic post about Europe to get you too excited or anything.

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Quote of the Day: "Ads are Agitprop"

| Mon Dec. 5, 2011 1:19 PM EST

A couple of weeks ago Mitt Romney ran an ad in which Barack Obama was heard telling an audience, "If we keep talking about the economy, we’re going to lose." The obvious implication was that Obama was desperate to avoid talking about his own dismal handling of the economy. But that was untrue. It was actually a clip from the 2008 campaign in which Obama said "Senator McCain's campaign actually said, and I quote, 'If we keep talking about the economy, we’re going to lose.' "

Today, Thomas Edsall gets the following defense of this lie from a "top operative" in the Romney campaign:

First of all, ads are propaganda by definition. We are in the persuasion business, the propaganda business....Ads are agitprop....Ads are about hyperbole, they are about editing. It’s ludicrous for them to say that an ad is taking something out of context....All ads do that. They are manipulative pieces of persuasive art.

I wonder if this guy actually believes what he's saying? He didn't have to talk to Edsall in the first place if he didn't want to, so I assume he does. He's genuinely aggrieved that anyone holds this against Team Romney.

Edsall's conclusion is that this spot is "the latest step in the transgression by political operatives of formerly agreed-upon ethical boundaries. What was once considered sleazy becomes the norm." The rest of his column is a history of such transgressions, and it's interesting reading. But this sort of thing strikes me as different from the changes in campaign financing and lobbying that he devotes his piece to, and it would have been even more interesting to read a column about the history of changing norms in how baldly you can lie on the campaign trail.

(My guess is that a real history of this would be U-shaped. Flat-out lies were quite common throughout the entire history of the nation but started to decline after World War II in favor of more subtle distortions. Then, over the last few decades, they've risen again as candidates began to learn that they could manipulate — or ignore — the mainstream media in ever more brazen ways without penalty.)

In any case, it would be nice to think that this episode has wakened the media a bit from its nonjudgmental stupor. It's true that campaigns engage in artful distortion and simplifications all the time. So do bloggers. I don't pretend to be writing austerely evenhanded and neutral posts here, and I'm certainly guilty of cherry picking my topics and my evidence on occasion. At the same time, I'm well aware of some boundaries here. It's one thing to present evidence in a way that helps me make my point, but it's quite another thing to flatly lie about what the evidence says or to flatly ignore evidence that I know perfectly well undermines my point entirely. Likewise, I might highlight a damaging quote from someone I dislike, but there's a bright line there: the quote has to be accurate and it has to be offered in its proper context. If it's still damaging, great! That's legitimate blog fodder. If it's not, then it's not.

The same is surely true of political campaigns, even if the stakes are massively higher than the integrity of someone's blog. If Romney and his people genuinely don't get that, or if they get it but they don't care, they shouldn't be allowed to pretend that this is just part of some normal evolution of political norms. It's not.

Finally, a Ray of Hope in Europe

| Mon Dec. 5, 2011 12:06 PM EST

It has — understandably — taken quite a bit of time to persuade the German public that it should bail out the periphery of Europe, but apparently German chancellor Angela Merkel thinks the time is finally right to propose changes to EU treaties that would trade fiscal consolidation (i.e., binding budget controls on every country) in return for more fiscal support (i.e., more money to rescue troubled countries). Here's the deal in a nutshell:

Under growing pressure from nervous financial markets, the leaders of France and Germany reached a compromise agreement Monday to seek mandatory limits on budget deficits among debt-laden European governments.

The limits--a “golden rule” of 3 percent of Gross Domestic Product--would be enforced by leaders of the European Community, according to explanations provided by President Nicolas Sarkozy of France and German Chancellor Angela Merkel at a joint news conference here.

Governments whose debts exceeded three percent of their GDP would be cited by the European Court of Justice, after which a super-majority of 85 percent of European governments would have to agree to impose some sort of sanction against the offending country.

I have mixed feelings about this. On the one hand, a more reliable backstop mechanism is important to stop runs on weak countries (and their banks), and it's hardly reasonable for the eurozone's core countries to agree to fund this without some say over the budgets of the countries they're guaranteeing. As it happens, this deal doesn't actually appear to be an awful lot more binding than the current rules, but still, it's probably a good first step if this is what it takes to get nervous Germans on board.

On the other hand, budget deficits have never been at the core of the eurozone's problems. Capital flows have. This deal doesn't appear to do much about that, so it's not clear to me that it's really a long-term solution.

Still, a medium-term solution will do the job for now, and perhaps the longer term will find its own solutions in the future. This is at least moderately promising progress, assuming that the necessary treaty changes can be approved in a fairly short time. It's the first time in a while that I've felt anything but gloom over Europe.

Not All Tax Cuts Are Created Equal

| Mon Dec. 5, 2011 2:20 AM EST

So are Republicans going to agree to extend the middle-class payroll tax cut that expires at the end of the year? The LA Times reports:

House Speaker John A. Boehner (R-Ohio) met behind closed doors with rank-and-file lawmakers Friday morning, but opposition to continuing the payroll tax break still runs high among conservatives in the House, showing the difficulty Boehner will face in drawing backing for the measure.

...."I'm just not sold on this payroll tax extension, this unemployment extension" said Rep. Allen West, a freshman Republican from Florida. Like many foes of the payroll tax break, he said he opposes the way it reduces the revenue stream to Social Security — even if those funds are replenished with spending cuts elsewhere in the budget.

I hope no one is really surprised about this. The modern Republican Party is interested in two things: tax cuts for the rich and spending cuts for the poor. This doesn't fit into either category.

Of course, there is one other thing they're interested in: anything that Barack Obama opposes. That's why Boehner has proposed a sweetener to the payroll tax cut bill: legislation that would advance the Keystone XL pipeline, which Obama recently postponed. Apparently, though, even the prospect of giving Obama the finger over the pipeline isn't enough to overcome Republican opposition to something that's neither a tax cut for the rich nor a spending cut for the poor. The rank and file still aren't biting.

Note to the middle class: the GOP is just not that into you. Maybe it's time to call off the relationship?

Newt Gingrich Is Sad That Politics Has Gotten So Nasty

| Mon Dec. 5, 2011 1:21 AM EST

National Review's Katrina Trinko attended one of Newt Gingrich's town hall meetings for local tea partiers today:

One thing that struck me was his earnestness in pushing bipartisanship, not a typical theme at Tea Party events....He spoke about having to attract Democratic votes to stay in Congress during his early years as House member in Georgia, and referred to working to get Democratic votes in the '80s to pass Reagan’s initiatives. "I grew up in politics learning a lot about how you build bipartisan coalitions," Gingrich observed.

…"There are a thousand small things that create bipartisanship even if you disagree about big things," Gingrich said. "And it's really important to remember that, all the little human things that a good leader can do to get the city of Washington to work again. Tragically, none of them are being done by the current team."

I read that with my mouth agape. If there's a single person in the country more responsible than Newt for the poisonous state of partisan politics in America today, I don't know who it is. Remember these gems down through the years?

1978, speaking to a group of College Republicans: "I think that one of the great problems we have in the Republican Party is that we don't encourage you to be nasty."

1989, speaking about the Democratic leadership in Congress: "These people are sick…They are so consumed by their own power, by a Mussolini-like ego, that their willingness to run over normal human beings and to destroy honest institutions is unending."

2011, speaking about the current Democratic president: "Obama is the most serious radical threat to traditional America ever to occupy the White House."

There's no cherry picking here. These are all workaday themes for the GOP's self-proclaimed philosopher king, one of the nastiest, most malignant pieces of work ever to grace American politics. Newt Gingrich extolling the virtues of bipartisanship is like Hannibal Lecter promoting the value of good nutrition.

Quote of the Day: Why Europe is Still a Mess

| Sun Dec. 4, 2011 1:18 AM EST

From Prime Minister Jean-Claude Juncker of Luxembourg, explaining why it's so hard to fix the euromess:

We all know what to do, but we don’t know how to get reelected once we have done it.

That's from Jared Bernstein. More at the link.

UPDATE: This quote is actually from 2005 and has nothing to do with the current crisis. I'm not sure why Jared made it sound like Juncker said it last week, but in any case, I suppose it never hurts to recycle a good quote.

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Suspense Over Herman Cain Builds to Fever Pitch!

| Sat Dec. 3, 2011 1:34 PM EST

According to the Washington Post copy desk, "Republican campaigns pause as Herman Cain announcement looms." Really? The entire clown show is in suspended animation while it waits with bated breath for Herman Cain to tell us if he's planning to pull out of the presidential race? I guess stranger things have happened.

Anyway, since Cain was never remotely likely to win the nomination, I don't really care what he decides to do. The only thing I'm curious about is who he blames. There are several obvious choices:

  1. The lamestream media, which was determined from the start to tear down President Obama's biggest threat.
  2. The Democrat machine, which is terrified of facing a strong, conservative black man in November.
  3. Republican elites, who don't want an outsider breaking up their cocktail parties and power lunches.
  4. Our hypersensitive liberal culture, which always interprets "You want a job, right?" in the worst possible light.
  5. Gloria Cain, who continues to support him without reservation but would like Herman to spend more time with his family.

Vote in comments! Or add your own guess to the list. Personally, I'm voting for all five.

No, Republicans Are Still Not Willing to Raise Taxes

| Sat Dec. 3, 2011 1:08 PM EST

For reasons that escape me, the latest craze in conservative pundit circles is to claim that Republicans aren't, in fact, unalterably opposed to tax hikes on the rich. Charles Krauthammer made this case last week, and Reihan Salam has since picked up the ball and taken a run up the gut with it a few times recently. For example, here he is objecting to Ron Brownstein's latest column:

[Brownstein] suggests that the GOP is aiming for “a deficit plan that relies solely on spending reductions (particularly in entitlements) while preserving tax cuts for the affluent.” As Keith Hennessey has explained, congressional Republicans have made a strategic shift on taxes. Opposition to any net tax increase was a way to secure leverage in negotiations over the long-run fiscal trajectory. But leading Republicans have demonstrated an openness to net tax increases, and in particular to an increase in the average tax rates paid by the most affluent households, provided it is part of a package that secures structural, architectural Medicare reform.

This is just flatly untrue, and I'm a little surprised at how flagrantly it's been bandied about lately. The Toomey proposal in the supercommittee did indeed include about $300 billion in new taxes, some of which would have fallen on high-income earners. But Toomey's proposal explicitly tied this to a demand for permanent extension of the Bush tax cuts for the rich (those are the red bars on the right, the ones that fall exclusively on those earning more than $200,000). Unlike the other Bush tax cuts, these cuts are very much a matter of contention between the parties, so Toomey's proposal, in plain English, was this:

  • Republicans will agree to raise taxes on the rich by $300 billion
  • If and only if Democrats agree to permanently extend $700 billion in tax cuts for the rich.

Conservatives try to handwave this away by claiming it's "just a baseline game" or some such, but if it were just a game they wouldn't care about it. In fact, as they know quite well, we're talking about actual tax dollars paid by actual people that affect the actual budget deficit. Compared to the law as it stands now, Toomey's deal explicitly demanded that net taxes on the rich go down by about $400 billion after 2013. That was the only deal ever on the table.

If you want to claim that it's a breakthrough merely for Republicans to propose a reduction in the net size of the Bush tax cuts, that's fine. But a net increase? They've never even come close to offering that.

Friday Cat Blogging - 2 December 2011

| Fri Dec. 2, 2011 3:54 PM EST

On the left, this is surely what things would have looked like if Inkblot had lived in the Garden of Eden: Innocent, contented, free of all malice, and wanting nothing more than to commune with nature. Unless someone gets in the way of his food bowl.

And speaking of things horticultural, Marian recently constructed a square-foot garden, which I guess is all the rage these days. The one below has eight sections, and as you can see, Domino has her own personal square foot. Seriously. There's nothing planted there because Domino loves it so much she needed to be lured to a spot where she wouldn't crush the actual plants. Not only is it full of nice, lovely dirt, but during the late morning it's also the sunniest patch in the house. For a few hours each day, it's her home away from home.