Kevin Drum

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.

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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.

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.

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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.

Quote of the Day - 01.16.09

| Fri Jan. 16, 2009 1:55 PM EST

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 1:27 PM EST

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.