Kevin Drum

Mark to Market

| Wed Apr. 1, 2009 1:34 AM EDT
The Wall Street Journal reports that FASB will vote soon on a proposal to loosen rules that force banks to value toxic assets at market prices:

The Financial Accounting Standards Board is proposing significant changes to its mark-to-market rules, allowing banks to set their own values for certain hard-to-value troubled mortgages, corporate loans and consumer loans. The new proposal, called FAS 157-e, is scheduled for a vote this Thursday.

The change was meant to assist U.S. banks after bankers complained current mark-to-market accounting rules forced them to undervalue their assets, by setting prices at deeply discounted, fire-sale values.

This is a complex issue, and it's true that mark-to-market can cause problems during financial panics as firms all start selling assets at once to cover losses, which in turn produces a spiral of plummeting prices, leading to losses, leading to more selling, leading to lower prices.  Rinse and repeat.  Unfortunately, the alternatives are generally worse, allowing banks to value assets using models that can be tweaked so egregiously that they bear only the vaguest relation to reality.  That's how IndyMac could claim it was "well capitalized" right up until the day it was taken over and shown to be a shell of its claimed self.

My tentative preference is to keep mark-to-market but soften its impact with a system of countercyclical regulatory forbearance.  The whole point of bank capital is to act as a cushion against losses, and in good times a bank might reasonably hold capital equal to, say, 8% of assets.  During a recession, as loans and other assets lose value, that capital is going to get eaten way, but then, that's the whole point of having it in the first place.  So why force asset sales in order to maintain arbitrary capital ratios when capital erosion is entirely predictable during recessions?  Why not instead require higher capital ratios in good times (which would reduce leverage and slow down credit expansion) and lower capital ratios in bad times (which would reduce fire sales and encourage banks to expand credit)?

Because banks are so good at lying about the quality and value of their assets, we're better off with a system that gives them as little leeway as possible when it comes to recognizing losses.  We're should force them to face the music honestly, but then allow a certain amount of capital forbearance during economic downturns.  Mark-to-market isn't appropriate for every asset, but it's appropriate for most.  It should be watered down as little as possible.

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Rachel Maddow Live!

| Tue Mar. 31, 2009 3:27 PM EDT
OK, it's not live.  She was live at a MoJo fundraiser on Saturday, though, and we taped her conversation with editors Clara Jeffery and Monika Bauerlein so everyone else could see it too.  The clip on the right is all about Maddow's secrets to ratings success, and there are more clips here.  View them all!

It was a packed event, and when it was over I was almost afraid Maddow was going to get trampled by the throngs of fans who wanted their picture taken with her.  Marian and I didn't stand a chance against the crowd, though, so no pictures of us I'm afraid. Maybe next time.

Can Obama Get Anything Done?

| Tue Mar. 31, 2009 3:18 PM EDT
John Dickerson says Obama has (justifiably) given up on working with Republicans:

At a recent lunch with reporters, Budget Director Peter Orszag was asked if he could name a useful idea submitted by Republicans. He couldn't — and didn't even pretend he'd considered many. When House Republicans put out a budget last week, Press Secretary Robert Gibbs said, "The party of no has become the party of no ideas."

Gibbs probably wouldn't have said that 40 days ago, when the White House was treating the issue of bipartisanship more carefully. But after party-line votes in the House and Senate and minimum flexibility from GOP leaders, Obama aides say that Republicans are not "acting in good faith." Which leads them to two conclusions: One, their acts of conciliation buy them nothing in negotiations with the GOP; two, and more important, they've decided they'll pay no political price for acting in a more partisan fashion.

Jon Chait says he's not getting much support from his own party either:

The last Democrat who held the White House, Bill Clinton, saw the core of his domestic agenda come to ruin, his political support collapse, and his failure spawn a massive Republican resurgence that made progressive reform impossible for a decade to come. The Democrat who last held the White House before that, Jimmy Carter, saw the exact same thing happen to him.

At this early date, nobody can know whether or not Barack Obama will escape this fate. But the contours of failure are now clearly visible. In Obama's case, as with his predecessors, the prospective culprit is the same: Democrats in Congress, and especially the Senate. At a time when the country desperately needs a coherent response to the array of challenges it faces, the congressional arm of the Democratic Party remains mired in fecklessness, parochialism, and privilege.

A landslide victory isn't what it used to be, I guess.  Opposition has made Republicans near monolithic, while victory has done nothing for Democrats except sharpen their longtime infatuation with the circular firing squad.  It's times like this that make me wish I were a heavy drinker.

Sending a Message

| Tue Mar. 31, 2009 1:55 PM EDT
Jeffrey Goldberg talks to Israel's new prime minister and reports back:

In an interview conducted shortly before he was sworn in today as prime minister of Israel, Benjamin Netanyahu laid down a challenge for Barack Obama. The American president, he said, must stop Iran from acquiring nuclear weapons — and quickly — or an imperiled Israel may be forced to attack Iran’s nuclear facilities itself.

....In unusually blunt language, Netanyahu said of the Iranian leadership, “You don’t want a messianic apocalyptic cult controlling atomic bombs. When the wide-eyed believer gets hold of the reins of power and the weapons of mass death, then the entire world should start worrying, and that is what is happening in Iran.”

....Neither Netanyahu nor his principal military advisers would suggest a deadline for American progress on the Iran nuclear program, though one aide said pointedly that Israeli time lines are now drawn in months, “not years.” These same military advisers told me that they believe Iran’s defenses remain penetrable, and that Israel would not necessarily need American approval to launch an attack. “The problem is not military capability, the problem is whether you have the stomach, the political will, to take action,” one of his advisers, who spoke on condition of anonymity, told me.

I don't believe Israel has the military means to take out Iran's nuclear facilities.  Hell, even the U.S. only barely has the means.  So why is Netanyahu bluffing like this?  To put pressure on Obama, obviously.  But to what end?  Why go out of his way to start off his relationship with Obama with warnings and threats?  This isn't a smart move on his part.

Keeping Banks Small

| Tue Mar. 31, 2009 1:19 PM EDT
Given all the problems caused by banks too big to fail, should we just put a cap on bank size and be done with it?  Rortybomb says big banks don't charge lower interest rates, Steve Waldman says big bank size is a proxy for a lot of other problems, and Felix Salmon agrees with all of the above even if it's true that "there are no good and politically-feasible answers" for putting American banks on a diet.

But let's say this is all true, and that somehow it did become politically feasible to cap bank size.  What would be the result?  What follows is a little scattered, but maybe some other people who understand the industry better than me can pick it up where I leave off and provide some better analysis.

Felix suggests a cap of $300 billion in assets.  Fine.  But a cap on assets necessarily implies a cap on liabilities, and that means deposits are effectively capped too.  Let's call the deposit cap $200 billion in round numbers.  That means the end of nationwide banking since no bank that size can serve the entire country, but maybe you're OK with that.  A small price to pay etc. etc.

So here's what I wonder: what happens when you have a whole bunch of banks all operating at their maximum allowed size?  Do they keep taking in money but just sitting on it?  Of course not.  Do they essentially shut down, not taking any new customers?  What about natural growth among existing depositors?  (For that matter, what about natural asset growth?)

Even more important, what happens when banks can't compete with each other by growing?  What would they compete on?  My guess is that they'd compete on keeping the biggest, most profitable customers and would pretty much lose interest in smaller customers.  So small depositors would find themselves increasingly unwelcome, paying higher fees and penalties, having a harder time securing loans, and so forth.  After all, what incentive would a capped bank have to treat small depositors decently if they don't really want them in the first place?

Now, it might be that none of this would be a problem.  Capped banks would still compete with other capped banks to some extent, and unhappy customers could presumably still leave for smaller banks, who would compete for their business.  This is where I'd be interested in hearing from more knowledgeable people.  If you game this out, what does the industry end up looking like?  A regulated electric company that's effectively limited by the size of its service area?  A monopoly cable company?  A bunch of networks of loosely affiliated midsize banks?  Or what?  Anybody have a good idea?

Our Century's Hoover

| Tue Mar. 31, 2009 12:15 PM EDT
Back when my mother was a girl, the house would be silenced whenever "Mr. Hoover" gave a speech on the radio.  Which he did.  Often.  Sure, he had been repudiated at the polls by historic margins, but he was bitter and angry over FDR's policies and insisted on making sure everyone knew it for years and years after his defeat.

Well, I guess every generation needs its own Hoover.  It looks like John McCain is ours.

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Has the Economy Bottomed?

| Tue Mar. 31, 2009 11:32 AM EDT
Atrios thinks any optimism about the economy is misplaced.  Homes prices are continuing to fall, plus this:

There's still a big wave of ARM resets* coming, and the CRE implosion has just begun.

*Regarding ARM resets, some suggest this won't be a problem because interests rates are so low. But the issue is option ARMS ("pick a payment!") loans, where people have been making interest-only or even neg-am payments on the loans.

For what it's worth (about what you're paying for it, I'd say), I agree. Home prices probably have another 9-12 months left to fall, commercial real estate is imploding, rising savings rates are going to continue to depress consumption, and beyond that there's the rest of the world to think about too.  Eastern Europe looks set to collapse sometime later this year, and if/when that happens it's going to have a huge impact on western European banks.  Plus there's hedge funds.  So far they've weathered the storm fairly well, all things considered, but I keep waiting for the other shoe to drop on that score.

Anyway, that's all pretty discouraging stuff.  Hopefully we're both wrong and things are going to start picking up this summer.  But I'm afraid I doubt it.

Public Service Announcement

| Tue Mar. 31, 2009 1:51 AM EDT
I'm home, but it's too late to do anything except plow through a weekend's worth of email right now.  Normal blogging will resume Tuesday.

In the meantime, though, a reminder: I like comments!  The more the better.  And if you want to comment hassle free, it's easy: at the top right of the screen click on "Sign In," choose "Create New Account" and then enter your name and email address.  You can use either a handle or your real name, whichever you like.  Your email won't be displayed, and we won't use it send you spam or anything.  That's it!  It takes 30 seconds, and after a few minutes you'll get a confirmation email.  Click the link, choose a password for your account, and you're done.

You can also personalize your account if you want to, but that's optional.  If all you want to do is comment, just choose a name and password and you can comment away without ever having to encounter the annoying captcha prompt again.

Cars vs. Cash

| Mon Mar. 30, 2009 2:48 PM EDT
In one sense, I was surprised and impressed by Barack Obama's auto bailout announcement this morning.  He was, appropriately I think, fairly tough.  From GM, he insisted that they fire their CEO and submit a tougher restructuring plan.  From Chrysler, he insisted that they consummate a deal with Fiat and said flatly that they'd be allowed to go under if they didn't.  This is appropriate: a private investor wouldn't treat Chrysler and GM identically, and there's no reason the federal government should either.

Still, it's hard not to do a double take at his actual words:

"We cannot, we must not, and we will not let our auto industry simply vanish. . . . It is a pillar of our economy that has held up the dreams of millions of our people. But we also cannot continue to excuse poor decisions. And we cannot make the survival of our auto industry dependent on an unending flow of tax dollars. These companies — and this industry — must ultimately stand on their own, not as wards of the state."

In the same way that GM is different from Chrysler, the banking industry is different from the auto industry.  Still and all, don't you wish that Obama were willing to treat bankers the same way he's treating the carmakers?  It's pretty much impossible not to compare his tough words this morning with the conciliatory tone and even more conciliatory actions he's taken with the financial industry.

As for the news that the stock market plunged on the news, spare me.  Investors are idiots if they think this is bad news.  A tougher restructuring plan is better in the long run for everyone but the auto industry's bondholders, and I'll bet that even most of them have either hedged their positions or else sold off their holdings at 70 cents on the dollar to speculators.  Save your tears for someone else.

The Blog Bubble

| Mon Mar. 30, 2009 2:01 PM EDT
Responding to a reader who suggests that a 95% tax rate on very high incomes would be like legally capping the number of words a blogger is allowed to write, Matt Yglesias says he'd welcome such a thing:

Personally, I would love a legal cap on the number of words a blogger is allowed to produce per day. I’m privileged to have a job that I really enjoy. But at the same time, I would prefer to write somewhat less — this pace is stressful and doesn’t leave me as much time to pursue other projects and interests. But though I would prefer to write somewhat less, I have a stronger second-order preference to produce a blog that’s competitive with other major offerings on the internet. And over the years competition between bloggers has led to escalating word-counts. The resulting situation isn’t terrible, there are lots of people you should cry for before you get to me, but basically we bloggers are engaged in a red queen's race where we all need to keep trying harder and harder just to maintain our positions. A cap would be helpful.

This is the mentality of the bubble.  Or cable news.  Or something.  Whatever it is, though, it's bad.  We already have plenty of news mediums that reward instant, unthinking reaction, and the last thing the world needs is another one.  The blogosphere would  be a better place if everyone took a deep breath and decided that quality was more important than boosting traffic by simply having a post — any post — on every news event of the day.  Slow down and think instead!

And as long as I'm in Andy Rooney mode, will all you kids get off my lawn?  Thanks.