Kevin Drum

Friday Cat Blogging - 16 January 2009

| Fri Jan. 16, 2009 12:50 PM PST

FRIDAY CATBLOGGING....We're entering a cold snap here in Southern California, with temps forecast to plummet to a brisk 75 or so this afternoon. Time to bundle up!

Actually, Inkblot has been shedding for the past few days, as our Santa Ana-induced record warmth has fooled him into thinking that summer has come. Hopefully he'll figure out soon that it's just a trick. I wouldn't want him to lose his lovely winter coat too soon.

In other weather-related cat news (how's that for a smooth segue?), Danish reporter Ole K. sends along "Jörg Kachelmann und Lupin" for your YouTube viewing pleasure. Note hint of action to come at about the 0:17 mark. Very civilized, those German weather forecasters.

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Small Victory

| Fri Jan. 16, 2009 11:25 AM PST

SMALL VICTORY....Last week Citigroup dropped its opposition to "cramdown" legislation that would allow bankruptcy judges to rewrite mortgage terms for distressed homeowners. Robert Reich thinks they probably did this because they knew they'd need some additional bailout money in the near future:

In other words, the Wall Street bailout has had exactly the same effect for Congress that the proposed bankruptcy provision would have for homeowners — it has increased its bargaining power over those who ordinarily pull the strings. The massive tax-payer financed bailout of Wall Street...seems to be weakening the Street's ability to veto financial legislation it doesn't like. I'm not sure whether this is something we should be celebrating as a small victory for democracy, or condemning as an extortionate price for reducing Wall Street's grip.

I think "small victory" is probably the right way to look at it, with an emphasis on "small." Sure, the price was high, but after all, nationalizing Citi and other big banks would be pretty expensive too. (Sweden's bank nationalization in the early 90s probably resulted in direct costs of around 2% of GDP, equivalent to about $300 billion for the U.S.) Now let's see if we can sqeeze a few somewhat larger victories out of all this.

Quote of the Day - 01.16.09

| Fri Jan. 16, 2009 10:55 AM PST

QUOTE OF THE DAY....From Barack Obama, talking to the Washington Post about entitlement reform:

"Social Security, we can solve," he said, waving his left hand. "The big problem is Medicare, which is unsustainable. . . . We can't solve Medicare in isolation from the broader problems of the health-care system."

This is the right way to look at things. Social Security is no big deal: we can either leave it alone for now or else implement a few fairly modest and conventional fixes. Either way works. Medicare is by far the bigger problem, but this has little to do with the structure of the program itself. Medicare's problems only get solved if we tackle healthcare costs more broadly, and that means getting started on some kind of national healthcare plan.

Obama is a smart guy and obviously gets this. Still, it's good to see him making these points directly, especially to this particular audience. It would be nice to see the Post editorial board finally figure out this stuff too.

Leverage

| Fri Jan. 16, 2009 10:27 AM PST

LEVERAGE....Paul Volcker's Group of 30 has produced a report piled high with recommendations for regulating the banking system, including a suggestion that the size of banks be limited so that there's no longer any such thing as "too big to fail." Matt Yglesias likes that idea, but I'm pretty lukewarm about it myself since it's not clear to me that bailing out a hundred small banks is any better than bailing out a dozen big ones. Systemic failure is systemic failure, after all.

But I'll stay agnostic on that for the time being. Recommendation 8b, however, ought to be getting more attention:

Given the recurring importance of excessive leverage as a contributing factor to financial disruptions, and the increasingly complex ways in which leverage can be employed on and off balance sheets, prudential regulators and central banks should collaborate with international agencies in an effort to define leverage and then collect and report data on the degree of leverage and maturity and liquidity mismatches in various national systems and markets.

The rest of the report provides plenty of grist for conversation, but I honestly think that if regulators could figure out some reasonably robust way of defining and limiting leverage and limiting it everywhere (i.e., in the shadow banking system as well as the regular banking system), I'd trade that for all the rest of the rules combined. Put it together with this one, and you've got the skeleton of a serious regulatory overhaul:

Large, systemically important banking institutions should be restricted in undertaking proprietary activities that present particularly high risks and serious conflicts of interest. Sponsorship and management of commingled private pools of capital (that is, hedge and private equity funds in which the banking institutions own capital is commingled with client funds) should ordinarily be prohibited and large proprietary trading should be limited by strict capital and liquidity requirements. Participation in packaging and sale of collective debt instruments should require the retention of a meaningful part of the credit risk.

Banks should be banks, not casinos. Now all we have to do is figure out how to implement these recommendations and then get Congress and the entire rest of the world to agree to phase them in. Should be a piece of cake.

Resurrecting the Investment Tax Credit

| Fri Jan. 16, 2009 9:39 AM PST

RESURRECTING THE INVESTMENT TAX CREDIT...Bruce Bartlett says Republicans need a stimulus plan of their own, and they need to offer up something more than just the same mindless tax cuts they always do. They need better tax cuts. Cleverly, he recommends an idea already promoted by a couple of Democratic economists in good standing:

In promoting investment, Republicans can even use the theories of economist John Maynard Keynes, which are much in vogue today. In the Keynesian model, investment spending provides just as much stimulus as consumption spending. But investment spending is really better, as common sense tells us.

....To stimulate investment, Republicans might consider resurrecting a Democratic tax idea from the Kennedy Administration — just as Jack Kemp did in 1977. This idea, named the Investment Tax Credit, reduced the cost of machinery and equipment by giving businesses a credit of 7% (later 10%) of the purchase price against their tax liability. In 1981, Kennedy adviser Walter Heller argued that the ITC really marked the beginning of supply-side economics.

Another political virtue of the ITC is that Obama economic adviser Larry Summers and Clinton Administration economist Brad DeLong are the principal advocates of the importance of machinery and equipment to long-run growth....In a 1992 study for the American Council for Capital Formation, DeLong estimated that a 10% ITC would boost economic equipment investment substantially and raise the rate of real economic growth by as much as 0.3 percentage points per year.

The ball's in your court, Brad. What do you say to that?

TARP Saves Bank of America

| Fri Jan. 16, 2009 12:28 AM PST

TARP SAVES BANK OF AMERICA....Bank of America received $20 billion in new capital from the Treasury today, along with $118 billion in asset guarantees. Why? Because after buying Merrill Lynch in September they discovered that Merrill's losses were a wee bit higher than expected. And when did they finally figure this out?

Bank of America said it learned of Merrill's losses after the Dec. 5 shareholder vote. And in the days following, both Federal Reserve Chairman Ben Bernanke and Mr. Paulson impressed upon [CEO Ken] Lewis the importance of closing the transaction for the firm's own sake and also warned of the consequences for the country's overall financial system, say people familiar with the discussions.

Bank of America spokesman James Mahoney said: "Beginning in the second week of December, and progressively over the remainder of the month, market conditions deteriorated substantially relative to market conditions prior to the Dec. 5 shareholder meetings. So Merrill wound up making adjustments for the quarter that were far greater than anticipated at the beginning of the month. These losses were driven by mark-to-market adjustments which were necessitated by changes in the credit markets, and those conditions change on a daily basis."

....By Dec. 17, Mr. Lewis went to Washington to discuss what he had already disclosed to Mr. Bernanke in an earlier phone call — that his bank was having trouble digesting Merrill's losses. Mr. Lewis described the losses as monstrous, according to a person familiar with the matter.

At that 6 p.m. meeting, Mr. Bernanke and Mr. Paulson both told Mr. Lewis that failing to complete the Merrill acquisition would be disastrous. The policy makers said abandoning the deal would further destabilize markets, and would hurt the bank, potentially setting off a ripple effect that would exacerbate a fragile situation.

Something here really doesn't add up. What happened in the final three weeks of December that could have caused such a massive change in Merrill's position? Those weeks were actually fairly quiet on the toxic waste front.

Not saying it couldn't happen, but there must be more to this story. Or, alternatively, it's just your standard Wall Street fuckup. I guess that's probably it.

POSTSCRIPT: By the way, does anyone else remember that fawning piece about Ken Lewis and Bank of America that 60 Minutes aired last October? I wonder if Lesley Stahl feels embarrassed yet?

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Waiting for Tuesday

| Thu Jan. 15, 2009 9:30 PM PST

WAITING FOR TUESDAY....Ramesh Ponnuru thinks the Obama celebrations have gotten a wee bit out of hand:

At least one segment of the economy is booming: the market in Obama kitsch. The dedicated supporter of the incoming President need not content himself with a T shirt or bumper sticker. Also available are Obama coasters, lava lamps, jigsaw puzzles, mugs, skateboards, toy trains, CDs, DVDs and, of course, commemorative dinner plates....Marvel Comics is running a special Inaugural issue of Spider-Man.

....There is no recent analogue to the madness — er, hopefulness — that has seized Obama's fans. Some journalists have been comparing him with F.D.R. and even Lincoln. To find a similar episode of enthusiasm for an incoming President, you might have to go back to 1829....The new President, Andrew Jackson, was his era's version of change....An unprecedented number of Americans trekked to see him take the oath of office. His Inaugural was a massive party at the White House, one that got so out of hand that Jackson was forced to lodge elsewhere.

I'll grant there's something to this. But there's another side to it: this outpouring of excitement is based as much on relief that George Bush is finally leaving office as it is on optimism about Obama taking over. Obama is obviously a charismatic figure, but if he were succeeding Gerald Ford or Ronald Reagan or George Bush Sr., I don't think he'd be getting half the adulation he is. But Bush has been a lame duck for two long years now, and public weariness over his chronic and all-too-obvious ineptitude has reached depths seldom seen in a democracy. At this point, people would be relieved and hopeful if Mike Gravel were the one taking the oath of office on Tuesday.

It is both Obama's good fortune and his bad luck to be taking over from the most hapless president since Hoover. The t-shirts and coffee mugs and other nicknacks may be a little over the top, but they need to be because they're doing double duty: they're a celebration of George Bush's exit as much as they are of Obama's arrival.

Reaching Out

| Thu Jan. 15, 2009 6:26 PM PST

REACHING OUT....Roger Cohen got a bit of attention the other day for noting that Barack Obama's Middle East team has an awful lot of Jewish foreign policy heavyweights but no Arab-American or Iranian-American representatives. "They're knowledgeable, broad-minded and determined," he conceded. "Still, on the diversity front they fall short. On the change-you-can-believe-in front, they also leave something to be desired."

Today Laura Rozen reports that last week Obama had a quiet dinner at the Woodrow Wilson International Center for Scholars and met with a different group:

Among those who attended the off-the-record dinner: Iran scholar Haleh Esfandiari, Pakistan expert Ahmed Rashid (who had flown in from Lahore), Obama friend and foreign-policy advisor Samantha Power of Harvard University (who accompanied PEOTUS to the meeting), incoming White House chief of staff Rahm Emanuel, and a few others. Obama told the group, none of whom reached would discuss the details, that he already felt in the bubble and was trying his best to meet with independent experts.

This all comes through the good offices of Lee Hamilton, all-around Washington wise man and president of the Wilson Center. But why did the meeting have to be such a secret?

Mary Schapiro

| Thu Jan. 15, 2009 11:34 AM PST

MARY SCHAPIRO....The Financial Industry Regulatory Authority is a private regulatory body formed a couple of years by merging the enforcement arm of the NASD and part of the New York Stock Exchange's regulatory apparatus. The head of Finra is Mary Schapiro, who has been nominated to lead the SEC by Barack Obama. Today, the Wall Street Journal has a long story on its front page raising questions about whether she's tough enough for the job:

Last year, amid historic market convulsions and Wall Street scandals, Finra often filed tiny cases against small players. During the past few years of Ms. Schapiro's career as a regulator, which earns her over $3 million a year, enforcement fines against firms have plunged.

....Finra levied fines against financial firms totaling $40 million in 2008, according to a Wall Street Journal analysis. That was the third straight annual decline in fines levied by Finra or one of its predecessor agencies, the NASD.

....Finra also appears to have lagged behind in a Wall Street mess that affected thousands of individual investors in early 2008 — a freeze-up in the market for what are known as auction-rate securities.

....One of the biggest Wall Street disasters of 2008 was the September bankruptcy filing of Lehman Brothers Holdings Inc....Joseph Mays Jr., a consultant to small broker-dealers and a former NASD examiner, says Finra should have scrutinized the mortgage-backed securities at the root of the crisis. "If I had to assign blame, I'd blame Finra and the SEC, but I'd blame Finra first because it's the first line of defense," he said.

....At Citigroup, which has had huge mortgage-related write-downs and still struggles despite massive federal aid, Finra's largest 2008 action was a fine of $300,000 for failing to supervise commissions on stock and options trades.

Finra also failed to catch the Bernie Madoff ponzi scheme, which is probably the most defensible of its lapses but also, obviously, the most headline grabbing. Felix Salmon has more, and comes down against confirming Schapiro: "The SEC needs someone in charge who's committed to root-and-branch reform of the regulatory system. So far, there's no evidence whatsoever that the toothless and narrowly-focused Schapiro is that person, and I do wonder how committed the Obama transition is to her nomination." Her confirmation hearing bears watching.

Party News

| Thu Jan. 15, 2009 10:56 AM PST

PARTY NEWS....Sarah Palin won't be attending an inaugural dinner in honor of John McCain next week. But was she not invited? Or did she decide not to come? Turns out no one knows.