Kevin Drum

Kevin Drum Smackdown Watch

| Mon Jan. 19, 2009 1:28 PM EST

KEVIN DRUM SMACKDOWN WATCH....In case you missed my (fascinating!) posts over the weekend about the Swedish banking crisis of the early 90s — I said nationalization was a modest part of their eventual solution, Steve Waldman disagreed — John Hempton chimes in with this: "Having long followed the Scandinavian banks (and once having spoked for 2% ownership of Nordea — the former State Bank) I can confirm that Steve Waldman is closer to the truth."

Fair enough. But although I'm not wedded to my narrative, I think that if you're interested in this subject you'll probably get a better idea of what happened by reading both of our accounts, so here they are in order: me, Steve, me again. Nickel version: the Swedish solution involved some nationalization, a systemic bank guarantee, aggressive writedowns of bad assets, and an end to the early 90s recession. All of these things played a role. (Though, as Hempton points out, this was a Nordic banking crisis, not just a Swedish one, and Norway and Finland followed different paths than Sweden did. In particular, nationalization played a larger role in Norway than in Sweden.)

On a related noted, nationalization fan Felix Salmon wants to know why I'm so cautious about the notion of nationalizing Citigroup and Bank of America — and possibly other banks as time goes by. There's a fairly long post I could write about that, but I'll spare everyone that agony for the moment. (Short version: I prefer private ownership of just about everything unless there's a really compelling reason for state ownership. So I don't want to get stampeded into nationalizing banks. I want to hear a really compelling case for why we have to do it1.) Instead, I'll just respond to something Atrios said today: "All along there's been a general unwillingness to acknowledge that the banks lost a lot of money. It isn't a problem of liquidity, or a problem of temporarily mispriced assets. The problem is that they lost a lot of fucking money."

Right. I don't think there's a person on the planet who doesn't realize this. The question is, how much fucking money have they lost? Federal regulators presumably have access to bank balance sheets, but they haven't shared their findings with me, which means I don't know how much trouble Citi and BofA are in. If they're in big trouble, but not so big that they might not be able to work themselves out of it on their own, then I'd prefer a solution that allows that to happen. If their trouble is so deep that they're just kidding themselves about their future prospects, then we nationalize. John Hempton, who argues that nationalization carries some significant costs, suggests something he calls "nationalisation after due process." Picking up on Paul Krugman's column today about a hypothetical Gothamgroup bank that's in deep trouble, he proposes something like this:

It goes to the government. Under the Bush administration the government would make a set of rules up for Gotham over a disorganised weekend. The fait-acompli would be presented before Asian markets opened.

But it does not have to be that way. The government could inject some capital into the bank as a temporary subordinated loan. A third party could then be appointed (new management — or answerable to another arm of government) to produce fair accounts for Gotham. Ten weeks should do it. At the end of ten weeks Gotham will be found to have — as a middle estimate — say $150 billion in losses — it is thus negative capital by $50 billion or a full $150 billion short of its required regulatory capital.

The management of Gotham can go to the markets. If the management can raise $100 billion (something to get it back to half capitalisation) then the shareholders keep Gotham. Sure existing shareholders might get diluted — but at least they get to have a decent go at keeping their capital stake.

If they can't or won't fund the bank in full knowledge of its position then it is nationalised. It is in that case unambiguosly not theft — shareholders had the chance to keep the bank under fairly administered rules.

What I want is extreme government action (nationalisation) but with a process to ensure that existing property rights are honoured. I want the benefits of nationalisation (that it works) without the costs (that it is seen to be arbitrary to capital providers).

This is, roughly speaking, a proposal that I like. Enforce transparency, demand an aggressive writedown of bad assets, and then allow shareholders the option of holding on. If they don't — if the bank is in such deep trouble that no one thinks it can work its way back to solvency even with government assistance — then the shareholders are wiped out and the government takes over. And no one can complain that the process was in any way unfair or unnecessary. A real-life plan might not take precisely this shape, but to answer Felix, this is roughly the kind of thing it would take to convince me that nationalization is the right approach.

1That is, I want to hear a compelling case for specific instances of nationalization (Citi and BofA in this case). The general case for nationalization is fairly well known. Among other things, you nationalize if a bank is too big to fail but in too much trouble to ever work its way back to solvency. You nationalize because it allows rapid reorganization and writedown of debts, just as in a normal bankruptcy. You nationalize because it's fair: it wipes out shareholders and provides taxpayers with an upside for their investment. You nationalize because it makes the selloff of toxic assets easier since they can be hived off and held onto for a while without having to value them first. The fundamental principle is that in a capitalist system, ownership and control of failed enterprises should reside in the hands of whoever buys up the corpse. If that's the government, then that means nationalization.

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Looking Forward

| Mon Jan. 19, 2009 12:25 PM EST

LOOKING FORWARD....In a way, I'm not surprised that Barack Obama's popularity has remained strong. He's a charismatic guy in the first place, he's handled the transition with very little rancor and an apparently sincere dedication to working across the aisle, and people are naturally hopeful about a new guy coming to office when times are bad.

Still, it's pretty eye-opening that optimism is running as far ahead of past precedent as this New York Times poll shows. Tellingly, though, people are considerably more optimistic about Obama's ability to fix the economy and withdraw from Iraq than they are about his ability to fix the healthcare system. Only a bare majority thinks he'll make any serious progress at all on healthcare in his first term. I hope the American public turns out to be less than prescient in that regard.

Obama's Agenda

| Sun Jan. 18, 2009 6:57 PM EST

OBAMA'S AGENDA....Hilzoy, noting that Barack Obama plans to meet with his military advisors on Wednesday to discuss Iraq, says this is hardly unexpected:

On This Week, George Stephanopoulos asked David Axelrod whether, in this meeting, Obama would ask those officers to come up with a plan to withdraw US combat forces in Iraq within sixteen months. Axelrod said, simply: "Yes."

This should not be surprising in view of the fact that Obama has consistently promised to do exactly this.

I'm not surprised either. In fact, so far Obama has given every sign — both for good and ill — of taking campaign trail promises unusually seriously. I know it's premature to say that with any authority, but on taxes and stimulus and DADT and Iraq and a slew of other issues, I've been impressed with how seldom he's given any indication of either backing down from promises or adding in lots of stuff he once said he was against.

Obviously Congress will force plenty of changes on him in the future, and so will events on the ground. But so far, despite the endless rounds of ungrounded rumors and speculation from the punditocracy, the betting man's line on Obama ought to be pretty simple: just take a look at what he said he was going to do during the campaign. More than likely, that's what he's going to do when the rubber meets the road in the Oval Office.

Nationalization Revisited

| Sun Jan. 18, 2009 6:28 PM EST

NATIONALIZATION REVISITED....Steve Waldman takes issue today with my contention that Sweden didn't actually nationalize very much of its banking industry during its credit crisis of the early 90s, and his rebuttal is worth a read. In the end, though, it turns out that we don't actually disagree about that much. We both agree that Gota was nationalized, and we both agree that Nordbanken was bailed out. However, we disagree a bit about whether Nordbanken was a "state bank." This is something of a judgment call: since the Swedish government was the majority owner, I think that's a fair description, but Waldman points out that it was publicly traded and "not actively controlled by the state prior to the nationalization." Fair enough. It's also a judgment call whether this was really a nationalization. If the state goes from majority ownership to full ownership, is that nationalization?

To some extent this is splitting hairs, of course, and you get into some of the same issues in the U.S. Fannie Mae and Freddie Mac, for example, have plainly been nationalized, but how about AIG? For some reason no one wants to call it nationalization, but what else should you call it when the feds own 80% of the company? But semantic arguments to one side, there's also this:

Nordbanken alone had an asset base of 23% of GDP. To put that in perspective, in US terms that's almost as large as Citi and Bank of America. (Citi and Bank of America together had an asset base of 26% of US GDP at the end of 2007.)

Again, fair point. It's one thing to say that "only" two banks were taken over, but if those two banks account for a third of your banking system, then you've nationalized quite a bit even if a big chunk of that third was state-owned in the first place.

Anyway, read the whole thing. Just to be clear, I'm not trying to make any kind of bulletproof argument against nationalization, only trying to point out that the story is more complicated than it's sometimes made out to be. Sweden did some nationalization, but it was the systemic banking guarantee in late 1992 that formed their biggest policy response to the crisis.

FWIW, I think it's wise to be wary of nationalization. It should be a last resort, and I've gotten a sense recently that a lot of people are talking about it awfully casually. Still, it's true that there are some benefits to nationalization, and one of them is that it allows us to avoid the problem of valuing and buying up toxic assets from troubled banks. If the government owns the whole bank, then the bad stuff can be easily hived off without any kind of valuation at all, and then left to sit for a while before it's sold off — which is what the Swedes did.

If we have to nationalize, then we have to nationalize. But we should understand the precedents before we do, and go ahead only if we have to. No stampedes, please.

Team Obama

| Sun Jan. 18, 2009 1:34 PM EST

TEAM OBAMA....The New York Times magazine's main feature this week is a portrait gallery of Obama people, ranging all the way from superstars like Joe Biden and Hillary Clinton to people you've probably never heard of, like Marvin Nicholson (White House trip director) and Mark Lippert (NSC chief of staff). I'll confess that the (by now) ancient trope of taking a series of stark, harshly lit photos against a plain background leaves me a little cold, and I guess it left photographer Nadav Kander a little cold too because he decided to try to add something more to the shots:

We asked them to bring an item that would tell us a bit more about themselves and got a whole variation of things. The reason for doing it was that when you omit the context of time and place from a photograph, i.e. photographing them on a white background, the tiniest gestures really show.

So: what would you bring if you were asked to be part of this rogue's gallery? My obvious choice would be a cat, but that's probably not too practical. Maybe a rolled up copy of Mother Jones? A USC baseball cap? An orange? A laptop computer?

My favorite photograph is the one of Peter Orszag gloriously arrayed in full nerd pack. Do you think this is standard dress for him? Or did he ham it up a bit for the photographer?

My other favorite is Timothy Geithner, who, oddly enough given his background and reputation, seems to really know how to hold a camera's attention. That might come in handy during his confirmation hearing.

In other photos, Larry Summers looks like he's thinking "Just press the damn shutter button already." Samantha Power looks mesmerizing. Tom Daschle looks surprisingly friendly. David Axelrod looks like your favorite uncle. Ellen Moran looks like a wax replica. James Clyburn looks like he just won the lottery. Mark Lippert and James Jones look like they're in a police lineup. Desirée Rogers looks like she's stunning and she knows it. Carol Browner looks remarkably chic for a policy wonk. Ken Salazar looks like a mark on Leverage. Jim Messina looks like this is the first time in his life that he's ever had to wear a suit. Eric Shinseki looks like a general, dammit. Hilda Solis looks pensive and sad.

Chart Abuse of the Day

| Sat Jan. 17, 2009 2:53 PM EST

CHART ABUSE OF THE DAY...Matt Taibbi reviews Tom Friedman's Hot, Flat, and Crowded and notes that midway through the book Friedman starts doodling on a napkin and concludes that high oil prices retard the march of freedom in petrostates:

Friedman then draws his napkin-graph, and much to the pundit's surprise, it turns out that there is almost an exact correlation between high oil prices and "unfreedom"! The graph contains two lines, one showing a rising and then descending slope of "freedom," and one showing a descending and then rising course of oil prices.

Friedman plots exactly four points on the graph over the course of those 30 years. In 1989, as oil prices are falling, Friedman writes, "Berlin Wall Torn Down." In 1993, again as oil prices are low, he writes, "Nigeria Privatizes First Oil Field." 1997, oil prices still low, "Iran Calls for Dialogue of Civilizations." Then, finally, 2005, a year of high oil prices: "Iran calls for Israel's destruction."

....If you're going to draw a line that measures the level of "freedom" across the entire world and on that line plot just four randomly-selected points in time over the course of 30 years — and one of your top four "freedom points" in a 30-year period of human history is the privatization of a Nigerian oil field — well, what the fuck? What can't you argue, if that's how you're going to make your point? He could have graphed a line in the opposite direction by replacing Berlin with Tiananmen Square, substituting Iraqi elections for Iran's call for Israel's destruction (incidentally, when in the last half-century or so have Islamic extremists not called for Israel's destruction?), junking Iran's 1997 call for dialogue for the U.S. sanctions against Iran in '95, and so on. It's crazy, a game of Scrabble where the words don't have to connect on the board, or a mathematician coming up with the equation A B -3X = Swedish girls like chocolate.

I think I've mentioned this before, but I sure hope Taibbi never decides to take a sudden dislike to anything I've written.

Via Andrew Sullivan.

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Get Some Sleep!

| Sat Jan. 17, 2009 2:05 PM EST

GET SOME SLEEP!....A new report in the Archives of Internal Medicine says you'll get fewer colds if you get more sleep. A team of researchers interviewed subjects for 14 days about their sleep the night before, then stuck them in hotel rooms and spritzed some rhinoviruses up their noses. The results:

Participants with less than 7 hours of sleep were 2.94 times [] more likely to develop a cold than those with 8 hours or more of sleep....Participants with less than 92% efficiency were 5.50 times [] more likely to develop a cold than those with 98% or more efficiency.

These relationships could not be explained by differences in prechallenge virus-specific antibody titers, demographics, season of the year, body mass, socioeconomic status, psychological variables, or health practices.

"Efficiency" is the percentage of your night that you actually sleep, as opposed to tossing and turning and getting up to pee. So take a hint from our feline friends: sleep early and often.

Nationalization

| Sat Jan. 17, 2009 3:08 AM EST

NATIONALIZATION....Is it time to start nationalizing the U.S. banking industry? Felix Salmon says yes:

Both Citigroup and Bank of America are down more than 20% in early trade today, and I imagine that Hank Paulson and Tim Geithner are starting work on yet another weekend deal of some description....I can't see a solution to this problem short of nationalizing both Citi and BofA, and summarily firing the hapless Vikram Pandit along with the overambitious Ken Lewis.

Matt Yglesias agrees:

"Nationalization," of course, is a dirty word in the United States. We're a very immature country, after all....But it's the right thing to do, and that's been clear for a while now. We can ill-afford to leave the health of the whole financial sector hostage to an ideological distaste for the concept.

The bandwagon for nationalization seems to be getting up a good head of steam, and whenever that happens it's worth slowing down a bit and articulating the opposing case. A lot of the sentiment in favor of nationalization appears to be driven by admiration for Sweden's "quick and decisive" action to clean up its own banking mess in the early 90s, so let's take a look at what Sweden did and didn't do. First off, here's what they didn't do:

  • They didn't act all that quickly. The real estate crash and the resulting credit losses began in late 1990, solvency problems started to become acute in late 1991, and a variety of treasury guarantees and capital injections were tried for another year after that. (Sound familiar?) It wasn't until late 1992 that the Swedish government finally took serious, systemic action.

  • They didn't nationalize the banking system. Only one bank, Gota, was taken over, and that happened only after it had collapsed. And aside from Gota, only one bank received a substantial amount of capital injection: the state bank, Nordbanken, which had much bigger problems than most of the private banks.

  • Generally speaking, they didn't fire existing bank management.

So what did the Swedes do? The main thing was simple: in late 1992 the Swedish government guaranteed all bank obligations throughout the system. They did this immediately for Gota after its collapse, and two weeks later for everyone else.

What else? Not too much, actually. An agency was formed to dig into the portfolios of nearly every major bank, and this resulted in a capital requirement guarantee for one bank that was never used. In addition, the shareholders of Gota and Nordbanken were mostly wiped out.

So what are the lessons for us? First, we don't necessarily need to nationalize. If we have to, then we have to, but with the exception of Gota that's not what the Swedes did.

Second, we could consider a systemwide guarantee of all bank obligations, instead of the one-offs we've (partially) applied to Citi and BofA.

Third, we still have to take care of the toxic assets clogging up bank balance sheets. The Swedes did this for Nordbanken and Gota by hiving off "bad banks" to handle the valuation and eventual sale of their bad assets. We could do the same thing here, which is basically what TARP was initially intended to do. But whether you call it "TARP" or a "bad bank," it's pretty much the same thing, and it presents pretty much the same main problem: figuring out how to value and eventually dispose of the toxic waste. Painful or not, though, it needs to be done, and I never entirely understood the mockery that was directed at this idea back when TARP was initially unveiled. Everyone agrees that recapitalization is essential, but one way or another the other side of the balance sheet needs to be addressed too. This mess won't get cleaned up until the toxic waste is cleaned up as well.

So is this what we should do? I don't have the financial chops to say — though certainly government ownership makes the "bad bank" idea a lot easier to implement. But if we think the Swedish model is worth taking guidance from, the path ahead includes systemic debt guarantees, capital injections, a bad bank for toxic waste, and nationalization only as a last resort.

Friday Cat Blogging - 16 January 2009

| Fri Jan. 16, 2009 3:50 PM EST

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.

Small Victory

| Fri Jan. 16, 2009 2:25 PM EST

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.