Kevin Drum

RSS Feed

| Thu Feb. 12, 2009 2:30 PM EST
RSS FEED....Just a quick note: we know our RSS feed is having some teething problems.  We're working on it.  Some of you are reporting that you're only getting headlines, others (like me) aren't getting any feed at all.  Once we've figured what's going on, full feeds will be restored.

There are other problems we're working on too.  Hopefully they'll all be taken care of in the next day or two.  In the meantime, feel free to leave comments to describe any bugs you're seeing.  Please let us know what OS and browser you're using since that will help us track things down.  Your help and patience is greatly appreciated.

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Stress Test

| Thu Feb. 12, 2009 1:25 PM EST
STRESS TEST....Matt Yglesias comments on today's Nick Kristof column on the economic meltdown:

As he says “the larger conundrum is that a bailout is both: A) urgent and essential; and B) unfair and unpopular.” Thus far, officials have attempted to resolve that conundrum with timidity, but ultimately that results in measures that fail on both counts. What’s needed is more boldness — really decisive action to clean up the financial sector combined with measures that are tough enough on CEOs and shareholders to give the effort political legitimacy.
OK, but here's the problem: you also have to do this in a way that's at least nominally fair.  And the process has to be fairly transparent.  If you ask Vikram Pandit right now if Citigroup is solvent, he'll tell you it is — and he'll then haul out a detailed PowerPoint presentation to prove it.  Citigroup's internal numbers suggest that they're well capitalized and in no need of being taken over.

Now, those numbers are almost certainly hooey.  Certainly investors don't believe them, and to register their disbelief they've driven Citigroup stock down to almost nothing.  Nonetheless, the numbers are there, and the government can't be in the business of taking over banks that swear on a stack of Bibles that they're perfectly healthy.  This, I assume, is the point of Tim Geithner's stress test.  In the same way that the Swedes set up a transparent process to evaluate their banking sector in the early 90s and ended up nationalizing two banks but not the others, Geithner needs to set up a process that does the same here.  If the process is seen as fair, there will be way less political blowback when some of the big banks are taken over and others aren't.

This, anyway, is the optimistic point of view: that Geithner and Obama, far from being unwilling to nationalize insolvent banks, are merely setting up the political and financial process to make it tolerable in the near future.  The pessimistic view is that they're just screwing around and don't really have any plan at all.  For the moment, then, I plan to take the optimistic point of view just for the sake of my own mental health.  Your mileage may vary, of course.

The Economy Up North

| Thu Feb. 12, 2009 12:45 PM EST
THE ECONOMY UP NORTH....The economy in Canada is doing pretty well.  Fareed Zakaria explains why:

So what accounts for the genius of the Canadians? Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers. Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1. Partly this reflects Canada's more risk-averse business culture, but it is also a product of old-fashioned rules on banking.
Canada has also been shielded from the worst aspects of this crisis because its housing prices have not fluctuated as wildly as those in the United States. Home prices are down 25 percent in the United States, but only half as much in Canada. Why? Well, the Canadian tax code does not provide the massive incentive for overconsumption that the U.S. code does: interest on your mortgage isn't deductible up north.
So there you have it.  Keep your housing bubble to merely huge but not gargantuan size, and keep the gearing in your banking sector to merely huge but not gargantuan levels, and you'll do OK.  Boring, isn't it?

Good News

| Thu Feb. 12, 2009 12:29 PM EST
GOOD NEWS....Some modestly good news today:
U.S. retail sales jumped 1% in January, reversing a six-month declining trend and defying economists' expectations by posting the biggest increase in 14 months.
What else?  For my local readers, a solar firm has signed yet another deal to provide Southern California with 1,300 megawatts of solar electricity.  The first plant should be operational in four years.

And the California legislature has supposedly reached a deal to "balance" the state budget.  It includes $15 billion in spending cuts, $15 billion in tax increases, and $12 billion in smoke and mirrors — which isn't a bad ratio considering how prevalent accounting tricks usually are.  Now all we have to do is round up two or three non-insane Republicans to vote for it.  Stay tuned.

Site Update

| Wed Feb. 11, 2009 9:37 PM EST
NEW SITE....This is it: our new site is now up and running.  Hooray!  However, there are almost certainly still some bugs in the system, so please be patient for the next couple of days as we work out the kinks and improve the performance.  If you find a bug, or have any kind of complaint, email it to:
web-feedback@motherjones.com
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Welcome to the new site!

The Textbook Ripoff

| Wed Feb. 11, 2009 9:21 PM EST | Scheduled to publish Wed Feb. 11, 2009 7:20 PM EST
THE TEXTBOOK RIPOFF....Andrew Gelman:

I received a free copy in the mail of an introductory statistics textbook; I guess the publisher wants me to adopt it for my courses....I showed the book to Yu-Sung and he said: Wow, it's pretty fancy. I bet it costs $150. I didn't believe him, but we checked on Amazon and lo! it really does retail for that much. What the....? I asked around and, indeed, it's commonplace for students to pay well over $100 for introductory textbooks.

Andrew wants to know why textbooks are so expensive. Henry Farrell too. Add me to the list. I've heard various explanations for the skyrocketing cost of textbooks. They're bigger these days. They use more color. They include CDs and multimedia bells and whistles. Etc. But here's a data point. I only have one of my college textbooks still in my possession, but I just got it off the shelf to see if it had a price in it. It did: $17.25. That was in 1976, and adjusted for inflation it comes to $64 in today's dollars. So what does it currently cost on Amazon? Answer: $132. It is, as near as I can tell, the exact same book. Same binding, same number of pages, same charming lack of color. In fact, browsing through it, it looks as if it's being printed from the same plates as it was in 1976. This, then, is obviously a book that ought to be cheaper today than it was three decades ago. The costs of production have long since been paid back, there's a ton of competition from the used book market since the book hasn't changed in 30 years, and I imagine that author royalties are the same as ever. For reference, a similar size commercial hardback would run about $40 these days. So what is the deal? Why are textbooks such a ripoff?

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Chart of the Day - 2.11.2009

| Wed Feb. 11, 2009 6:04 PM EST | Scheduled to publish Wed Feb. 11, 2009 3:49 PM EST
CHART OF THE DAY.... This is from Brad Setser. Chinese exports are down 17.5%, but imports are down a stunning 43%:

What worries me the most? The possibility that the sharp y/y fall in imports doesn’t just reflect a fall in imported components or a fall in commodity prices, but rather a major deceleration in China’s domestic economy....At a time when the world is short demand, China seems to be subtracting from global demand not adding to it. The best solution: an absolutely enormous domestic stimulus in China.

A massive stimulus in the United States is probably necessary, but it's still a dicey proposition since we're running a big trade deficit and need to curtail our domestic consumption in the long run. But China is running a big trade surplus, which makes it unproblematic for them to increase domestic consumption, and their economic growth last quarter was perilously close to zero. They're the ones who really need to stimulate their economy. If the Chinese economy tanks, the rest of the world will get dragged down even further with it.

Middle East Update

| Wed Feb. 11, 2009 6:00 PM EST | Scheduled to publish Wed Feb. 11, 2009 2:54 PM EST
MIDDLE EAST UPDATE....It's hard to have even a shred of hope left these days for some kind of solution to the Israeli-Palestine dispute, and the combination of Hamas's rise following the Gaza war and Likud/Yisrael Beiteinu's rise in yesterday's Israeli election is just one more nail in the coffin. At this point, to have any kind of optimism at all, you would need to either have supernatural faith in Barack Obama's negotiating powers or else be the world's most fervent fan of "only Nixon can go to China" geopolitics. Aside from that, it's difficult to see even the possibility of moving forward.

For more, check out Ezra Klein here and Stephen Walt here. But don't bother if you're hoping to be reassured. That's just not in the cards right now.

Quote of the Day - 02.11.09

| Wed Feb. 11, 2009 2:01 PM EST | Scheduled to publish Wed Feb. 11, 2009 1:48 PM EST

QUOTE OF THE DAY....From Rep. Steve Austria (R–Ohio), explaining that FDR's deficit spending in 1933 was responsible for an event that began in 1929:

“When (President Franklin) Roosevelt did this, he put our country into a Great Depression. He tried to borrow and spend, he tried to use the Keynesian approach, and our country ended up in a Great Depression. That’s just history.”

Republicans really do have a unique definition of "history," don't they? Via Matt.

Valuing the Toxic Waste

| Wed Feb. 11, 2009 1:59 PM EST | Scheduled to publish Wed Feb. 11, 2009 1:38 PM EST

VALUING THE TOXIC WASTE....Part of the Geithner bank bailout plan is apparently a scheme to partner up with the private sector to buy up the toxic assets on bank balance sheets. Will this work? John Hempton thinks it might. Right now, he says, a lot of these assets are modestly underpriced by the market and might well make decent investment opportunities — but only if the feds provide enough low-priced leverage to turn a decent investment into a great one:

So how are those assets really? Underpriced but hardly exciting....No — to be exciting you need to borrow against them. You need to be able to use leverage. Cheap leverage. Lots of leverage. And it can’t be margin loans or the like — because the asset prices are so volatile that your funding might go away.

But — with permanent cheap funding at government rates it should be profitable to buy those assets. Seven to one levered at government rates (which are a couple of percent) the returns will be spectacular.

So if the Geithner plan is to attract say one hundred and fifty billion of private risk capital and allow it permanent and secure access to say a trillion dollars of government money at a government rates then hey — I am in. (I would require the interest rate risk be matched too.)

It would be a pretty big gift from the government — as nobody — a good bank or a bad bank — can borrow at the same (extraordinarily low) rate as the US Treasury. But as a plan it might just work. And because 150 billion of real private spondulicks is at risk there are some pretty strong incentives for the private sector manager to get it right.

Basically, the idea here is that private investors are better at ferreting out the true value of the toxic waste, while the feds are the ones with the money. And I guess maybe that makes some sense. But you still have a pretty serious problem on your hands: banks don't want to sell this stuff at honest prices. So even if you get both the valuation and the funding in place, how do you force banks to sell? And if you do force them to sell, are you just driving them into insolvency?

It's possible, I suppose, that this is the real point. Use private investors to figure out the valuation. Use the Fed's balance sheet to provide funding. Use Geithner's "stress test" to figure out which banks are bust, and force them to recognize the true value of their assets whether they sell them or not. Then let the private investors buy the junk and take over the remaining husk to be run as a nationalized bank.

But....if that's the plan, why not just nationalize in the first place, skip the process of valuing the junk, and set it aside to be sold off in a few years? And perhaps that's all this is: a piece of kabuki designed to get the private sector to make the determination that some of these banks are insolvent and have to be taken over. After all, if the private sector makes the valuation, no one can claim it was just some bureaucratic maneuver by a power-obsessed Obama administration.

Or something. Like everyone, I'm just guessing here.