Kevin Drum

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.

Travel Day Today....

| Mon Mar. 30, 2009 12:24 PM EDT
....so light blogging from me.  In fact, probably no blogging unless I have some time at the airport later this afternoon.  Otherwise, I'll be be back on the job tonight, and regular blogging will resume on Tuesday.

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Friday Cat Blogging - 27 March 2009

| Fri Mar. 27, 2009 3:10 PM EDT
Today is rolling around in the sun day.  On the left, Domino is rolling around in the wood-chippy dirt where the Jacaranda used to be, getting herself filthy beyond belief in the process.  But she sure enjoyed herself.  On the right, Inkblot prefers the cleaner approach of rolling around on the patio instead.  Either way, it's highly recommended therapy.  Weather permitting, you should try rolling around in the spring air yourself this weekend.  It can't hurt, and it might help.

Too Big To Fail

| Fri Mar. 27, 2009 2:58 PM EDT
Last night I made the argument that focusing on crude firm size wasn't the right way to look at our current banking crisis.  It's the overall industry size that's important, not the size of individual banks.

But if you disagree, James Kwak makes about the best case for the prosecution that I've seen yet, suggesting that a financial industry with lots of midsize companies would work just fine:

What would such a world look like? There would be a lot of small- and medium-sized banks that collected deposits and lent money to households and businesses. There would be brokerage and asset management firms that you used to invest your savings. There would be hedge funds and private equity firms that rich people and other institutional investors used to invest their money. There would be investment banks that helped companies issue equity and debt securities. There would be boutique firms that did research and other boutiques that M&A advising. For any financial service anyone wanted, there would be a company that provided that service; it just wouldn’t necessarily provide every other service, and it wouldn’t have $2 trillion in assets. It would look something like the 1970s.

What’s wrong with this picture? Some people would argue that it would limit financial innovation....Some would argue that costs would be higher, because smaller firms would be less able to capture economies of scale and scope....To some people, the idea of size caps will seem anti-capitalist (or even un-American)....

Kwak addresses all of these issues fairly persuasively.  But to me it still has the flavor of a solution that's clear, simple, and wrong.  After all, Bear Stearns was a quarter the size of Citigroup, and it was considered too big to fail.  So just what would the limit be on bank size?  $500 billion in assets?  $200 billion? Can a country the size of the United States even have nationwide banks with limits like that?  And what happens the next time around, when all these smallish banks overleverage themselves and collapse en masse?  Are we any better off than we are with a few big banks failing?

The whole post is worth reading, but I have a feeling that nostalgia for the 70s just isn't going to work.  Big companies are here to stay, and I suspect that any regulation stringent enough to keep banks small enough to fail won't be sustainable.  And unless we reign in overleverage and massive waves of credit expansion, it won't do any good anyway.  The same thing will happen again, just in a slightly different way.

Zero-Based Budgeting

| Fri Mar. 27, 2009 2:17 PM EDT
I didn't post about this when it happened, but yesterday the Republican brain trust in the House decided to show their seriousness about cutting the deficit by publishing a "budget" that contained no actual numbers.  The press mostly thought it was pretty comical, and today Eric Cantor and Paul Ryan tried to pretend that they had nothing to do with this project and were only bullied into supporting it.  Matt Yglesias isn't buying:

Reps Ryan and Cantor saw that the press was reacting poorly to the Boehner/Pence flim-flam “budget” and decided to throw their colleagues under the bus. And, frankly, I’m not surprised that Ryan and Cantor were surprised. I was surprised, too. I’ve never really seen political reporters get outraged before about the fact that a policy document makes no sense in the past. It was a curious outbreak of substance among the press corps that I don’t think was particularly foreseeable.

I guess that's a fair point: it is a little unusual for the press to call BS for what it is.  At the same time, it's also worth noting just how invisible this whole exercise was.  It got lots of mockery in the blogosphere, and it also showed up on political shows like Maddow and Olbermann, but aside from that it wasn't so much ridiculed as ignored.  If you get your news from the New York Times or NPR or Katie Couric, you'd barely even know this had happened, let alone that everyone thought it was ridiculous.

Global Capital Flows

| Fri Mar. 27, 2009 1:21 PM EDT
That's an exciting headline, isn't it?  But it's important.  One of the key bits of financial deregulation over the past three decades has been the dismantling of capital controls, allowing vast tidal waves of money to flow between borders without hindrance.  In general, this has been a plus: nobody in Britain wants to go back to the days of sleeping on continental friends' couches because they weren't allowed to take more than 50 pounds out of the country. On the other hand, the Asian currency crises of the late 90s were largely due to unsustainable amounts of unregulated foreign capital suddenly flowing into the region (and then just as suddenly stopping), and the current banking crisis in the U.S. is at least partly due to an overreaction to the Asian crisis.  For the past decade all that Asian money has been flowing into the U.S. instead, and a tsunami of cheap money was one of the factors that caused the credit and housing bubble of the past few years.  Megan McArdle examines her free trade beliefs on this score:

[This suggests] that global capital flows may be way more problematic than I have historically been willing to credit.  I don't want to blame all bubbles on foreign money.  But foreign money has two unpleasant characteristics:  there is so much of it that it can relatively easily swamp a nation's productive capacity, and it is relatively uninformed about the local market.

I'm not sure where that leaves me.  The capital controls of the mid-twentieth century were even worse, especially for emerging markets, where they became both focal points for, and sources of, massive corruption.  And one of the reasons America today is such a massively successful economy is that foreign money funded our industrialization.  Bubbles may simply be an inescapable side effect.  But perhaps it's time to rethink a commitment to global capital liberalization.

I'm not sure where it leaves me, either, especially since this has been an active subject of conversation for a decade already and hasn't produced anything even close to a consensus.  But this does seem like the kind of topic that lends itself to my "sand in the gears" theory: we don't need to reinstate capital controls, we just need to slow down the flow of global capital ever so slightly.  Even a tiny tax on foreign capital flows could have a significant impact.  Ideas welcome on this score.